Chapter 6: Conflicts of interest Flashcards
John Dlamini is an investment manager. CSC Stockbrokers offer overseas trips to the investment manager that refers the largest volume of business to them. John is keen to win the trip and refers all his clients to CSC Stockbrokers. The stock broking fee that John’s clients must pay is in line with market rates. Do John’s actions constitute a conflict of interest?
Yes, as there is an incentive other than normal client reward. He is not acting in the best interests of the client. Even if CSC Stockbrokers is not overcharging the client, the client may still be compromised by low service levels.
What rules with regard to soft commissions or inducements is followed by the FCA in the United Kingdom?
In the United Kingdom, Principle 8 of the Business Principles applicable to regulated firms, states that a firm must manage conflicts of interest fairly between itself and its customers and between a customer and another client. The Inducement rules in the Conduct of Business obligations (COBS) prohibit payments with respect to investment business that will impair a firm’s compliance with the duty to act in the best interest of a client. The nature and amount of the fee or benefit must also be disclosed to the client.
What is the position in South Africa regarding soft commissions?
The basic principle in South African common law is that a principal (the client) is entitled to the benefit of the care and skill, which the agent (the investment manager) undertook to exercise on his or her behalf. This right may be waived wholly or partially, but it must be done freely after all material facts have been disclosed to the client. The agent must account to the principal not only for a profit made or reward received, but also for any savings made. It is not necessary that loss or harm or damage be proved on the part of the principal. A secret profit may also not be made by using information obtained for the performance of the duties under the agreement or otherwise obtained during the course of the agreement. Should these requirements not be met, the principal may claim any profits from the agent and terminate the relationship. An agent may also forfeit his or her commission in connection with the transactions where he or she acted improperly. Provided adequate disclosure is made and the necessary consent obtained from the client, the receipt of incentives like soft commissions may, however, be legal in terms of common law.
What is the main purpose of the Financial Institutions (Protection of Funds) Act?
The main purpose of the Financial Institutions (Protection of funds) Act is to ensure that funds and trust property administered, invested and held in safe custody by financial institutions are protected and to make provision for adequate enforcement powers by the Registrar.
Define financial institution in terms of the Financial Institutions (Protection of Funds) Act.
A financial institution includes, for purposes of this Act, among others, an exchange, authorised user, clearing house, central securities depository, authorised financial services provider or representative (in terms of the FAIS Act).
Describe the main duties of and prohibitions applicable to a financial institution or nominee company or director, member, partner, official, employee or agent of the financial institution or of a nominee company controlled by a financial institution.
A financial institution or nominee company or director, member, partner, official, employee or agent of the financial institution or of a nominee company controlled by a financial institution must observe the utmost good faith and exercise proper care and diligence when making an investment, holding funds or trust property in safe custody, controlling or administering funds or trust property and selling of trust property. A financial institution or nominee company or director, member, partner, official, employee or agent of the financial institution or of a nominee company controlled by a financial institution may not sell, invest, pledge, hypothecate, or otherwise encumber the funds or trust property, or make
use of the funds or trust property; or furnish a guarantee in a manner calculated to gain directly or indirectly any improper advantage for any person at the expense of the institution, trust, beneficiary or principal concerned.
Any director, member, partner, official or employee or agent of a financial institution or of a nominee company controlled by a financial institution who takes a decision or who takes part in a decision to invest any of the funds of the financial institution or any trust property in a company or other undertaking in which he or she has a direct or indirect financial interest, must comply with which requirement in terms of the Financial Institutions (Protection of Funds) Act?
He or she must declare the nature and extent of the interest to the board of management or other governing body before the decision is made.
How should trust assets be invested in terms of the Financial Institutions (Protection of Funds) Act?
Trust property that is administered under any instrument or agreement must be invested as directed by the instrument or agreement. If there is no direction under the agreement or instrument, trust property must be invested in the name of the client, the financial institution in its capacity as administrator, trustee, curator or agent, or a nominee company.
Define invest for purposes of the Financial Institutions (Protection of Funds) Act?
The definition of invest includes the following:
purchasing of shares in a company or an interest in a close corporation or partnership;
granting a secured or unsecured loan to a company;
acquiring a financial interest in an agreement or other matter in which the financial institution or nominee company has a material interest.
Describe how client assets should be treated in terms of the Financial Institutions (Protection of Funds) Act?
A financial institution must keep trust property separate from assets that belong to the institution. Its accounting records must show assets as belonging to a specified principal (client). Despite anything to the contrary in any other law or the common law, trust property invested, held, kept in safe custody, controlled or administered by a financial institution or nominee will under no circumstances form part of the assets or funds of that financial institution or its nominee company. This also applies where these functions are exercised under an instrument or agreement jointly with another person.
