Conflicts of Interest Examples & Cases in Financial Services

Companies in financial services have an elevated risk of encountering conflicts of interest, due largely to the influence and connections that come with the territory. This article will tell you how to identify and manage conflicts as they arise.

What is a conflict of interest?

In a conflict of interest, a person or organisation has multiple interests which relate to a situation, giving rise to the risk that by serving one of those interests, they will fail to properly serve another interest.

‘Interests’ are often financial in nature. For example, a person may have a financial interest in a company that pays them, in an asset they have invested in, or in gifts they expect to receive from a third party. Other types of interest include personal, family, professional, business and political.

Conflicts of interest can usually be considered as belonging to one of three categories:

• Actual conflict of interest: an employee or director’s private interests are currently in conflict with their public duties as a professional.
• Potential conflict of interest: it is foreseeable that an employee or director’s private interests could come into conflict with their public duties as a professional.
• Perceived conflict of interest: the public or a third party could perceive an employee or director’s private interests to have potential to come into conflict with their public duties as a professional.

While the definition of ‘conflict of interest’ is well understood internationally, there are regional differences in legislation. For instance, conflict of interest law in Australia may differ in its finer detail from conflict of interest law in Singapore. Financial services companies should be aware of the conflict of interest legislation in each jurisdiction they do business with, as conflicts of interest law may apply extraterritorially.

What is an example of conflict of interest in the financial services industry?

Financial services companies are prone to conflict of interest, due to the high likelihood of overlapping interests among directors and employees, and their associates.

Without proper management, these conflicts can expose companies to reputational harm and criminal sanctions. In one recent high-profile case, executives at China Rise Securities Asset Management Company were sanctioned by the Securities & Futures Commission of Hong Kong (SFC) for breaches including illegal short-selling activities by staff, lack of internal controls to monitor cross trades, and failure to report direct business transactions to the Stock Exchange of Hong Kong Limited. These were failings of education, oversight and accountability.

Multifarious examples of conflict of interest are reported around the world, day-to-day. Per the Center for Economic Policy Research, the following areas of financial services are especially prone to conflicts of interest:

• Underwriting and research in investment banking
• Auditing and consulting in accounting firms
• Credit assessment and consulting in rating agencies
• Universal banking

With that said, conflicts of interest can arise wherever professional and private interests overlap, including but not limited to:

• Conflicts between the employee and the client or firm and the client
• Personal Account Trading in Financial Services
• Market Abuse
• Employee Remuneration practices
• Close Personal Relationships
• Outside Business Interests
• Chinese Wall procedures
• MNPI Management
• Insider List Management
• Gifts and Entertainment

What happens when there is a conflict of interest?

Conflicts of interest can lead to reputational harm, and in extreme cases, criminal sanctions.

Reputational harm can occur when an actor such as a whistleblower, reporter or other interested third party makes public comments about a conflict of interest. This can lead to negative consequences for the parties involved in the conflict of interest, such as the worsening of public perceptions, falling sales and diminished hiring power.

If a conflict of interest is found to be unlawful, based on the regulations which apply to the parties involved, this may lead to criminal sanctions such as fines and debarments.

It is well understood that potential conflicts of interest are likely to exist within an organisation. So, financial services companies can prevent bad outcomes by monitoring for conflicts of interest, and taking appropriate action when they are identified, e.g. by not giving a team member sign-off to do something that would cause an actual conflict of interest.

Examples of situations which might be considered an actual conflict of interest at work include:

• A team member being involved in discussions relating to the career progression or pay level of a fellow team member with whom they are in a relationship
• A team member accepting excessive corporate gifts and entertainment from an interested third party
• A team member not reporting suspicious transactions or orders because of a personal interest
• The use of directly, or indirectly information that is not available to the rest of the market

How to monitor for conflict of interest in the workplace

Conflicts of interest are very likely to happen at a financial services firm, so companies should be well prepared to identify, monitor and manage conflicts as they arise.

We advise taking the following steps:

1. Write a Conflict of Interest Policy in line with applicable regulation. This document may include rules limiting how employees can use their professional position to their advantage, how they can engage in activities which may bring direct or indirect profit to competitors, and whether they may own shares of certain companies’ stock. Try to make the Policy as specific as you can. For example, put dollar values on the corporate gifts team members may give or receive. You should also include details of disciplinary consequences for breaches of the Policy.
2. Regularly train and educate team members on the Policy. Cover key points such as how to use the company’s systems to make a conflict of interest declaration. Support your message by informing staff about fresh, relevant conflict of interest case studies.
3. Implement technologies that help team members declare potential conflicts of interest, e.g. have a system to help with the monitoring of gifts, entertainment and hospitality activities, reviewing of employee personal trading, track and report outside business activities.

In our view, Step #3 is especially important. Writing a Conflict of Interest Policy and educating your team is a great start, but you need to have appropriate technology in order to see how team members are complying with that policy in real time. This helps make the company fully accountable.

MyComplianceOffice can assist you in automating and managing Conflicts of Interest, including Employee Conflict, Client, Third Party and Deal/Transaction Conflicts. Implementing our single integrated yet modular solution helps companies around the world to successfully identify and manage workplace conflicts. Contact us today or click here to learn more about our solutions.

Uncover the strategies you need to reduce risk and strengthen your overall compliance management process. Download your complimentary eBook, The Ultimate Guide to Conflicts of Interest.

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