Topic 10: Compliance & Ethics Flashcards
Role of Compliance Department
– Set regime
– Training
– Monitor
– Defend you
Sources of Rules
- Corporations Act and Regulations – ASIC – ASX and ACH – ATO – AUSTRAC – Privacy legislation – Industry codes (CFP, SDIA, IMCA, CFA etc.) – Employer policies/compliance dept
General Obligations
Consider (2)
General obligations
– Act honestly: self explanatory
– Efficiently: systems, workloads etc.
– Fairly – treat like clients equally
Misleading and Deceptive Conduct and statements (cf salesmanship)
Market manipulation, insider
trading
Act ethically (5)
- always put the client’s reasonable interests first
- New ‘best interests’ duty, ‘safe harbour’:
- Clients interests ahead of own (so must make due
inquiry to know client’s interests!) - Obviously do not take advantage of weakness
- Avoid else manage conflicts of interest (below)
Protections
- Additional protections for retail investors (FSG,
suitability, SOA if personal advice etc.) - But rich people sue more (breach of contract,
fiduciary duty, negligence etc.)
General vs Personal Advice
General Advice - Label as such
Personal Advice
– Reasonable inquiry (“know your client”, “know your product”)
– Only recommend appropriate products and strategies, link client circumstances to recommendation. Now must meet FOFA
“best interests” duty
– FSG, SOA, ROA
Conflicts of Interest
Conflict of Interest Different trails between external and internal products – Volume bonuses, equity offers – Lunches, holidays etc. from product produces, sponsorship of conferences – Brokerage incentivises to trade – Being restricted to APL?
Know Your Product
Relying on APL and Research: adviser time is better spent elsewhere
–Still need understand sufficiently so can apply to correct client (e.g. FOS & Basis Capital), cannot just rely on fact on APL et
–Lessons from Madoff
–Note at the moment product does not need to be the “best”, in best interests
–Must have a reasonable basis for recommendation, if mere rumour, client must be aware of that fact
Documentation and Record Keeping
A (6)
B
C
A Must make disclosures:
- Other than trivial advice must be written
- basis of advice (what research, distinguish opinion from fact, evidence supporting forecasts, how links to client goals)
- Allows clients to ponder and revisit
- Protects you so no misunderstanding
- Permits clear disclosure of fees, conflicts, complaint resolution procedures
- Product switch information
B Protects you from being sued
C Keep it all (file notes, transactions records, research material etc.)! Now electronic, forever
Complaints Resolution
Complaints will occur, treat as customer service issue
- Get management involved ASAP
- Regulators concerned well handled
- If handle well, can lead to loyal client
- If handle badly, time wasted, reputation….
- Must set out complaints resolutions procedures:
- Internal (must have)
- FOS (must be a member of such a body)
- ASIC
- Litigation
Other Requirements - Privacy Laws (3)
Privacy laws
- Professionalism anyway
- Even fact a potential client!
- Keep tight internally
- Collection, storing use & disclosure
Other Requirements - AML
AML (and meshing with Privacy laws)
- Must disclose suspicious activity, be alert for any type of client BS
- Firms now have AML programs
- Verify customer ID, identify source of funds, high risk people and transactions, no cash, keep records - Cannot alert suspect
- May be trying to rip you off, so be careful
Compliance and Ethics (7)
- Know your client & product
- Follow internal compliance procedures
- Stay up to date!!!! CPD is a minimum!
- Put your client first
- No BS
- Full and clear disclosure of all relevant information
- Obtain full & informed consent prior to all action
Lessons from Madoff
- Need for independent service providers (ie fund mgr needs independent checks)
- Use of reliable auditors
- Unusual fee structures (no perf fee / high trading comms)
- Strong family influence
- Disclosure in feeder fund IM
- Adequate staffing (MLMIS was 1 - 5)
- Registration with authorities
- Access to records (Madoff gave no electr access)
- Returns - too good to be true
- Due diligence
