Introduction
Conflicts of interest are all-pervasive in the finance industry yet their effective management seems to be an area where many businesses struggle. The Codes of Practice set out the high-level requirements; to give the Fund Services Business requirement by way of example:
“A registered person must ensure that adequate procedures are implemented to either: avoid any conflict of interest arising or, where a conflict arises, keep adequate records of such conflicts and address them: through internal rules of confidentiality; by declining to act or otherwise as applicable which could include by disclosing the nature of the conflict to the Fund. Where appropriate, a registered person must seek written confirmation that it may continue to provide services to the Fund.”
Although an area on which the regulator typically focuses considerable attention during onsite examinations, they have issued little practical guidance on how to manage conflicts of interest, with just a “Dear CEO” letter published for the trust company business sector in 2010.
Cyan is to give a presentation to the Jersey Compliance Officers Association in June on this subject but, given the impossibility of cramming everything we could say into just one hour, we thought we would publish a series of articles each giving an example of a real-life conflict of interest and suggesting ways in which it may be addressed. If you have any comments or suggestions for conflicts to discuss, we would love to hear from you.
Identification of conflicts of interest
It seems logical to start our series of articles by considering how to identify conflicts of interest. One definition is:
“A conflict of interest is a situation that arises when an individual or organisation is involved in multiple interests, one of which could, possibly, have an adverse impact on the motivation for an act in the other.”
Some conflicts of interest are self-evident but others can be more indistinct, particularly where a client structure is multi-layered and complex. There is also the need to be aware of how the matter could be perceived by a third party – even if you don’t believe there is a conflict of interest, how would it be viewed by an outsider?
Asking the following questions may assist in determining whether a conflict of interest has arisen:
- Is the business or an individual connected to the business likely to make a financial gain, or avoid a financial loss, at the expense of the client?
- Does the business or an individual connected to the business have a personal interest in the outcome of the transaction or service provided to the client?
- Does the business or an individual connected to the business have a financial or other incentive to favour the interest of one client over another?
- Does the business or an individual connected to the business provide the same services/products as the client?
- Does, or will, the business or an individual connected to the business receive any financial or other incentive in respect of the transaction or service provided to the client, other than the agreed fee from the client?
If the answer to any of these questions is “yes”, there is likely to be a conflict of interest present.
Addressing a conflict of interest
It is important to remember that a conflict of interest is not necessarily a problem. If a conflict of interest can be addressed through the business taking steps in the normal course of management, the conflict does not preclude the business from acting. However, if the conflict cannot be addressed in the normal course of management, the business should seriously consider its position on whether it is able to act.
We have seen a number of instances where businesses have mistakenly believed that they need only record a conflict of interest in the relevant minute and log it in a register, to fulfil their responsibilities. It’s true that sometimes this is all that is required. However, there are a myriad of possible conflicts of interest which, due to their complexity or potential impact, require additional steps to be taken for the business to be able to demonstrate its objectivity.
In this series of articles, we will talk through a number of situations and consider how the associated conflicts of interest might be managed. In the next article, we will consider the conflict of interest presented when a client is also a shareholder of the business.
