Managing Conflicts of Interest

Managing conflicts of interest, is something no one (other than complete reprobates) objects to in principle. However, it is something that can be tricky to navigate in practice.

For FCA regulated firms it is a particularly important thing to get right and is covered by Principle Eight which states that “a firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client”.

Why conflicts of interest matter

“The most difficult thing to recognise is that sometimes we too are blinded by our own incentives. Because we don’t see how our conflicts of interest work on us.”

Dan Ariely, Professor of psychology and behavioural economics

Let’s go back to first principles. A conflict of interest is a situation in which someone in a position of trust to their client has competing professional or personal interests. Such conflicts matter because they make it difficult for individuals to fulfil their duties to their clients impartially. They can lead to a number of problems around:

• Impartiality: Conflicts of interest can compromise impartiality and objectivity in decision-making. 
• Integrity: They can damage an organisation's integrity and reputation. 
• Trust: Conflicts of interest can erode trust in individuals and organisations. 
• Ethical Issues: They raise ethical concerns and can lead to unethical behaviour. 

It is worth saying by the way that a conflict of interest may exist even if no unethical or improper act results from it and that even if someone is aware of the conflict they have and try to act with due care and consideration they might still be swayed by unconscious bias.

Types of conflicts

So, what might a conflict of interest look like? Well, there are three broad categories:

• Financial: A person's financial interests could influence their decisions in a professional context, such as choosing a business partner based on personal gain rather than the best interests of the company. 
• Relationships: A manager hiring a family member or friend for a position without disclosing the relationship could be considered a conflict of interest. 
• Competing loyalties: An employee working for two companies with conflicting goals might face a conflict of interest in choosing which one to prioritise. 

How to manage conflicts of interest effectively

There is a plethora of measures firms can take to manage conflicts of interest, not least the 4ds approach: disclose, distance, delegate and disassociate. In other words, disclose your interest, distance yourself from it, delegate responsibility to someone without an interest and disassociate yourself from an activity or involvement that causes the conflict.

However, this is really related to the personal responsibility and “management” of conflicts by the individual themselves not the corporate approach of the firm. From a firm’s perspective, while the 4ds principle is helpful, I believe it is a building block for a fully effective firm methodology not a strategy in itself. So, what are some of the potential underpinnings of a good conflict of interest strategy?

Clear policies and procedures: Have one specific policy that defines conflicts and the approach the firm mandates. Ensure everyone in the firm reads and understands it. In particular, make sure that any staff member who reads it can subsequently understand and recognise conflicts of interest. If necessary, put in place training for new joiners and/or refresher courses for everyone. As a final point make sure any policy works for the firm, as I may have said before, don’t write the policy you think the FCA would want to see, write a policy that works effectively for you!

Record: “Sunlight is the best disinfectant”, as the old saying goes, but it is about not just disclosure but recording disclosure. Thus, a firm should have and maintain a register recording all conflicts of interest that arise or have the potential to arise. The register should include the way the firm prevents and manages the particular conflicts and the person responsible for overseeing it. Make sure everyone updates their conflicts in real time and if they have none they attest to that fact. The register should also be provided to the Management body for review and oversight at least annually. Of course, the register is distinct from the policy.

The Need-to-Know principle: Need-to-know principle includes the obligation for staff to only share confidential and inside information where certain criteria are met to (i) mitigate the risks of market abuse and inside dealing, (ii) prevent or manage appropriately conflicts of interest and (iii) preserve clients’ interest and personal data.

Where sharing such data/information all staff have to ensure that: 

• The disclosure of confidential and inside information shall be accompanied by the imposition of confidentiality requirements on to whom the disclosure is made; and
• The disclosure is reasonable and shall enable the person to perform the proper functions of his/her employment, profession or duties; or
• The disclosure is reasonable, including for the purpose of facilitating any commercial, financial or investment transaction.

Clear reporting lines: Clear and established reporting lines are crucial for avoiding conflicts of interest in the workplace. These lines define who reports to whom, ensuring that individuals are not in a position to make decisions that could benefit themselves or a related party, while negatively impacting the organisation.

Remuneration: The remuneration of employees either through pay or bonuses should not be structured in such a way that could incentivise them to favour one client or business area over another, potentially compromising their duty to act in the best interests of all clients. This can happen when remuneration is linked to sales targets, revenue generation, or the success of specific products, even if those products are not the most suitable for all clients. This is not, of course, just about conflicts of interest it is a fundamental underpinning of the FCA’s conduct rules when it comes to remuneration.

Consequences: Ensuring that there is a clear understanding among staff and management of possible consequences should someone fail to act with due consideration for any conflicts they may have is an important part of preventing problems arising in the first place.

Disclosure to the client

As a last resort, where there is no other means of managing the conflict, or where the measures in place cannot  reasonably be expected to sufficiently protect the interests of clients, the conflict of interest should be disclosed to the client. This will enable an informed decision to be made by the client as to whether they wish to continue doing business with the firm in that particular situation. In disclosing to the client, the firm should make clear to the client the general nature or sources of conflicts of interest and the steps taken to mitigate those risks. These disclosures which should be in writing should also be recorded on the Conflicts of Interest Disclosure Register.

However, ultimately a firm may feel the best course of action is to decline to act for a client if it feels it is unable to mitigate the conflict adequately.

Conclusion

Although it is on the face of it a relatively easy concept to grasp, managing conflict of interests, as I hope this brief overview has demonstrated, is a multi-faceted process that will cut across other concepts (gifts and hospitality and remuneration policies for instance). Nonetheless, time invested ensuring that policies and procedures are up to date, “socialised” across the firm (not locked in a metaphorical bottom drawer) and adhered to is never wasted. 

If you would like to discuss your approach to managing conflicts of interest, and how Cosegic can support you please do get in touch using the button below. 

Contact us