Stopping the rot – 10 tips for addressing conflicts of interest

The recent IMF Working paper “Good Supervision: Lessons from the Field” considered the impact of supervision on recent bank failures, and identified the need for supervisors to be assertive, timely and prompt in decision-making to deliver meaningful intervention.

No surprise then that in the FCA’s recent Dear CEO letter for Wholesale Banks, the FCA confirmed they will ramp up their testing programme to assess how banks are controlling key conduct risks, including financial crime, market abuse and conflicts of interests.

It also interesting to note that the FCA thought it important to emphasise that they will test “outcomes (rather than solely policies)” and intend to be “data-led”.  You would hope that both would not need saying – who would deliver up to a regulator a policy alone as evidence of regulatory compliance?

But importantly, the letter notes that conflicts of interest will be a particular area of focus.

Why the focus on conflicts of interest?

How a firm manages conflicts is a bellwether for corporate governance. Conflicts of interest can arise across all the firm’s activities and affect every employee from the Board downwards.

Repeated failures of staff to identify a conflict, to escalate conflicts at the right time, or to manage conflicts properly once escalated, is a clear signal of a weak risk and control culture. If conflict risk management looks bad, other risks will be badly managed also.

Why is this the case?

  • Risk awareness: Sensitivity to conflicts is a good test of how sensitive employees are to risks generally and what risk means to them personally.
  • Risk management: to escalate a conflict, employees need to be sufficiently committed to risk management, knowing that escalation may give rise to more hassle or even some intrusion into personal circumstances.
  • Personal accountability: appropriate resolution of the conflict may be unpalatable – a deal turned down, an unhappy client, a new role or promotion now unavailable. But if employees don’t accept the right outcome, a compromise solution may double the risk – both the initial conflict, but now also the failure to handle it rigorously.
  • Continuous oversight: some conflicts can only be resolved with ongoing oversight, but in a weak culture, the actions supporting the resolution get forgotten. What is the system for ensuring the conflict doesn’t re-ignite when personnel have changed or some time has passed?

10 tips to consider

So if you’re preparing for an intense and assertive supervisory onsite to assess the management of conflicts of interests, here are 10 things to consider. (I haven’t covered the basic control room and information barrier procedures which are hopefully well-entrenched):

  • Assess the taxonomy of conflicts risk prepared and applied for each business – is it complete? When was it last reviewed? How does it tie into training on conflicts?
  • Review the register where the management of escalated conflicts are recorded. Is it well-maintained? Tyre-kick examples of managed conflicts on the register. Challenge the outcomes for signs of inappropriate compromise and check how long it took to manage after the initial escalation.
  • If ad hoc disclosure was deployed to manage a conflict, assess whether the recipient of the disclosure was given full facts to consent to the conflict? Was disclosure an appropriate method to manage the conflict?
  • Review cases where the conflict was managed by declining to act for a client. Are these cases examples of good culture and strong personal accountability?
  • Assess procedures to disclose conflicts identified in job applications. Are onboarding questions adequate? How many applications were turned down for conflict reasons? Check how new employee conflicts are managed through the employee lifecycle. Are new line managers made aware of employee conflicts already disclosed when an employee moves internally?
  • Review procedures for appointment of third parties and vendors. Check whether any vendors were appointed by staff previously employed at that vendor; or whether vendors employing recently departed staff were engaged. If so, was this escalated?
  • Do senior staff carry out more than one significant role? Do those roles give rise to conflict, actual or perceived? Who internally accepts this risk? Are any staff dual-hatted across the lines of defence?
  • Review procedures for disclosure of conflicts at Board level. How frequently do directors refresh their personal information? Look for examples where a director has recused themselves from a decision on a Board resolution. Are Board procedures more developed than for normal employees?
  • Assess the governance of conflicts risk management. Is the policy simple to understand? Are escalation paths and sign-offs clear? Does accountability for sign-off have the right level of independence? Are there nominated conflicts officers? How often is training conducted?
  • Review the data and metrics around conflicts risk. Are the conflict risk metrics adequate to give the Board a decent picture of whether conflicts risk management is in the DNA of the firm? Any recent disciplinary cases regarding failure to manage conflicts? What were the outcomes of the latest assessment of conflict risk in the Risk and Control Self-Assessment or equivalent?

Of course, conflicts of interest are not just an issue for financial institutions but for all areas of public life.

Ultimately, it’s all about doing the right thing. The organisation that handles conflicts well can be relied on to live its purpose and values and take an ethical and long-term approach.

Even if it means short-term revenue impact, the loss of a star performer or the uncomfortable disclosure of personal liaisons.

Feel free to DM me if you would like to discuss.

JULIAN GOODING

Independent Consultant, General Counsel | Regulatory Compliance | Corporate Governance | Conduct and culture

About Julian GOoding

Julian is an experienced regulatory lawyer and compliance professional working in the financial services industry.

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