FINRA Report Looks At Conflicts Of Interest
By Cyril Tuohy
Although financial services companies have done much to address conflict-of-interest issues since the financial crisis, companies can do more to strengthen their internal watchdog frameworks, according to the Financial Industry Regulatory Authority Inc (FINRA).
“While many firms have made progress in improving the way they manage conflicts, our review reveals that firms should do more,” said Richard G. Ketchum, chairman and chief executive officer of FINRA, an industry-financed regulatory organization.
Financial services companies can do more to tighten their conflict-of-interest policies across the board, from executive management to product development to distribution to codes of conduct, the report said.
In the areas of executive management, companies with an effective conflict-of-interest framework implement an “enterprise-level” approach and adopt a “tone from the top” that trickles down through the company’s structure, policies and processes, and training and culture, the report said.
The 44-page “Report on Conflicts of Interest” also recommends that companies consider “perspectives independent” from the business units proposing new products.
Within the wealth management units, managers and advisors need to make decisions free of pressure favoring proprietary products or products in which the broker-dealer has a “revenue-sharing” deal, the report also said.
Senior managers should restrict the distribution of financial products that “may pose conflicts that cannot be effectively mitigated,” and should conduct assessments of the products through “post-launch reviews,” the report also said.
The report said companies need to minimize conflicts in compensation structures between the interest of customers and the interest of brokers “where possible and include heightened supervision when conflicts remain.”
Transparency and disclosure are also important factors in helping buyers “understand the factors that may affect a product’s financial outcome,” the report said. A code of conduct around the best interest of the customer will only serve to improve investor trust, the report also said.
FINRA began its review of conflict-on-interest management practices in July 2012.
Regulators and watchdog agencies have pointed to conflicts of interests as one of the reasons financial services companies deliver mediocre advice at high costs. Cozy relationships between financial services companies and leaky firewalls within firms were also cited as reasons for the severity of the 2008 financial crisis.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].
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