Insights / January 23rd, 2019

Conflicts of interest and conflicted remuneration – recommendations for change

The first public hearings for the Royal Commission commenced 13 March 2018 (details on the public hearings can be found in our earlier insights). The topics of conflicted remuneration and conflicts of interest were focused on consistently during the seven rounds of public hearings.

A conflict of interest will exist where there is a clash between professional responsibilities and personal interests. Conflicted remuneration is any benefit (monetary or non-monetary) given to a licensee or adviser that could reasonably be expected to influence the financial product advice given. In certain circumstances the two inevitably overlap.

The Royal Commission commissioned Professor Sunita Sah of Cornell University in New York to prepare a research paper into conflicts of interest and disclosure, which was released 1 November 2018 (“Research Paper”). Just a few days earlier, on 26 October 2018, the UNSW Centre for Law Markets and Regulation made a submission to the Royal Commission in response to the Royal Commission Interim Report making specific recommendations in relation to conflicted remuneration (“Submission”). Both the Research Paper and Submission highlight the widespread and often subconscious nature of biased advice, the detrimental sales culture in many financial institutions, the harmful effects on customers, and recommendations for the industry moving forward.

Research Paper

The Research Paper focuses on how conflicts of interest influence advisers, and the effect of disclosure on the behaviour of advisers when giving advice. Professor Sah demonstrates how conflicts of interest can lead to biased advice, often with the conflicted adviser being unaware of the influence. Drawing on multiple studies, Professor Sah notes that this can occur due to a form of ‘moral disengagement’ in which the adviser ignores or rationalises the conflict of interest. Further, the Research Paper emphasises that a belief in one’s invulnerability to influence does not protect one from subconscious bias, and may actually make things worse. Professor Sah ultimately finds that many people mistakenly believe that succumbing to conflicts is a ‘matter of corruption’. However, succumbing to conflicts and providing a client with biased advice is not usually the deliberate favouring of self-interest over professionalism, but typically occurs as a result of the subconscious and unintentional effect which conflicts of interest can inevitably have on advice.

The Research Paper finds that mandatory disclosure of conflicts of interest can have both positive effects as well as unintended consequences. Professor Sah found that instead of decreasing the risk of biased advice, disclosing a conflict can sometimes result in people thinking that it is less morally reprehensible to give biased advice intentionally after a conflict is disclosed. However, there are positive effects which also stem from the requirement to disclose conflicts, one of which is the fact that mandatory disclosure can deter advisers from accepting conflicts of interest, so that they can declare to their clients a complete absence of conflicts.

Interestingly, the Research Paper shows that teaching and training people on biases and conflicts of interest is not necessarily an effective method of removing the influence of conflicts. Education on bias usually increases awareness of bias in general, but often has the effect of convincing people that others are biased, but not oneself. Professor Sah instead recommends imposing sanctions or penalties for failing to place clients first and encouraging clients to seek second opinions from other advisers. Professor Sah also recommends introducing structural changes, such as incentives to reduce or eliminate conflicts of interest and organisational norms, or setting certain goals within the institution. One such goal which decreases the risk of conflicts of interest might be to incentivise advisers selling new products to clients.

UNSW Submission

The UNSW Submission examines and makes recommendations in relation to multiple topics from the Royal Commission’s Interim Report, including conflicted remuneration. When considering conflicted remuneration, the Submission firstly considers whether any ‘customer-facing employee’, managers or senior executives should be paid variable remuneration. Secondly, it considers whether intermediaries should be subject to rules generally similar to the conflicted remuneration prohibitions applying to the provision of financial advice, as well as whether any other changes should be made to remuneration practices of banks. In summary, the recommendations made are that:

  1. the statutory ban on conflicted remuneration should be extended to cover all customer-facing employees, as well as managers and executives in banks;

  2. intermediaries should be subject to a ban on conflicted remuneration;

  3. banks should consider an extension of malus and clawbacks for staff who continue to receive variable remuneration as a mechanism to incentivise long-term outcomes and customer wellbeing; and

  4. banks should continue to build on their application of the Sedgewick Report and develop more complete incentive schemes and remuneration practices to support sound risk-taking behaviour and customer outcomes.

The Submission emphasises the ways in which the misconduct exposed in the Royal Commission stemmed from sales culture within institutions. The Submission ultimately proposes that the best way to create long-term change will be through improving review of policies and culture in these businesses. The Submission finds that banning conflicted remuneration for some products or services but allowing others is illogical and creates confusion, and that simplifying the conflicted remuneration provisions by extending the ban to all bank staff and intermediaries would be the most appropriate solution to reduce conflicted remuneration.


Both the Research Paper and Submission to the Royal Commission demonstrate the need for structural and cultural change within financial services institutions, to ensure the interests of consumers are prioritised at all times. Measures such as extending the ban on conflicted remuneration and imposing sanctions or penalties for failing to place the interests of clients first, are some of the key recommendations which emerge from the Research Paper and Submission. The Royal Commission’s final report, which is due 1 February 2019, will likely address these topics in detail, considering the recommendations from both the Research Paper and UNSW Submission when making final recommendations for a more reliable and robust financial services industry going forward.