Managing Conflicts of Interest: The Avoid, Mitigate, Disclose Framework

At the heart of the FAIS framework is a simple expectation: a financial advisor must act in the client's best interests. But advisors do not work for free. They earn commission, receive incentives, and may have relationships with product suppliers. Whenever your own interest could influence the advice you give, a conflict of interest exists — and how you manage that conflict is one of the clearest tests of your professionalism.

Conflict of interest management is a core RE5 topic and a real-world discipline that separates trusted advisors from the rest. This guide explains the framework, the key definitions, and how conflicts of interest are tested in the exam.

What Is a Conflict of Interest?

A conflict of interest arises when a financial services provider or representative has an interest that may influence the objective performance of their obligations to a client, or that may prevent them from acting in the client's best interests. In practical terms, a conflict exists whenever there is a real or potential clash between:

• What is best for the client, and
• What benefits the advisor (financially or otherwise)

Common examples include earning higher commission on one product than another, being incentivised to hit sales targets, having an ownership interest in a product supplier, or receiving gifts and benefits from providers.

Importantly, a conflict of interest is not automatically wrong. Conflicts are inherent in a commission-based industry. What matters is that they are identified and managed honestly and transparently.

The Avoid, Mitigate, Disclose Framework

The General Code of Conduct requires every FSP to adopt and maintain a conflict of interest management policy. The logic of that policy follows a clear hierarchy:

1. Avoid

The first and best option is to avoid the conflict altogether. If a conflict can be eliminated — for example, by declining an incentive that would compromise objectivity — that is the preferred course. Avoidance removes the risk to the client entirely.

2. Mitigate

Where a conflict cannot reasonably be avoided, the FSP must mitigate it — reduce its impact so that it does not distort the advice. Mitigation measures might include internal controls, separating sales and advice functions, or capping incentives.

3. Disclose

Where a conflict cannot be avoided, it must be disclosed to the client. Disclosure must happen at the earliest reasonable opportunity and must be clear enough that the client understands the nature of the conflict and how it may affect the advice. Disclosure allows the client to make an informed decision.

The order matters: avoid first, mitigate where you cannot avoid, and disclose in any event. Disclosure alone does not cure a conflict that should have been avoided.

Financial Interest and Immaterial Financial Interest

Two defined terms are central to conflict of interest rules and frequently tested:

Financial interest means any cash, benefit, incentive, discount, or valuable consideration offered to an FSP or representative — other than the ordinary commission or fees for the service. Financial interests create obvious conflicts because they can pull an advisor toward recommending a particular product.

Immaterial financial interest is a small, defined exception. The Code permits certain low-value benefits provided they fall below a monetary threshold per product supplier in a calendar year and are not linked to achieving a sales target in a way that could bias advice. This is why advisors can accept a modest branded gift or attend a supplier's training event, but cannot accept lavish rewards tied to volumes.

Because the exact threshold and conditions can be amended, confirm the current figure applicable at the time — but understand the principle: small, non-target-linked benefits may be acceptable; anything that could reasonably influence advice is not.

Third-Party Relationships and Ownership Interests

Conflicts often arise from relationships between financial services providers. The Code places limits and disclosure obligations on:

• Ownership interests — where an FSP or its associates hold an interest in a product supplier, or vice versa
• Distribution arrangements and other associations that could influence which products are recommended

These relationships must be disclosed to clients so they understand the commercial context of the advice they receive.

Practical Conflict of Interest Management

Beyond the legal framework, good advisors manage conflicts through everyday habits:

• Recommend based on suitability, not remuneration. If two products are equally suitable but one pays more, the higher commission must not be the deciding factor.
• Disclose remuneration clearly. Clients are entitled to know how you are paid.
• Keep a gifts and benefits register so that the cumulative value of benefits from any supplier can be monitored.
• Document conflicts and how they were managed as part of your record-keeping.
• When in doubt, disclose. Transparency protects both the client and the advisor.

Why This Matters for the RE5 Exam

Conflict of interest is a rich source of exam questions because it combines rules, definitions, and ethical judgement. Expect to be tested on:

• The avoid, mitigate, disclose hierarchy and its correct order
• The definitions of financial interest and immaterial financial interest
• The requirement for a conflict of interest management policy
• When disclosure must be made (at the earliest reasonable opportunity)
• Scenario questions asking you to identify a conflict and the correct way to manage it

Many scenario questions describe a tempting benefit or a relationship and ask what the advisor should do. If you remember that the goal is always the client's best interests, and that avoidance beats disclosure, you will reason your way to the right answer.

Prepare with Regulatory Exams

Conflict of interest questions reward advisors who understand principles, not just rules. Practising realistic scenarios trains you to spot conflicts and respond correctly — the exact skill the RE5 measures.

• Practice exams present conflict of interest scenarios in the same format as the real RE5
• Quiz Builder lets you drill the definitions and the avoid-mitigate-disclose framework
• Weak areas analysis reveals whether ethics and conflict topics are dragging down your score

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