Khepri's A to Z: Interests (Conflicts of) - Buy and Sell-Side Compliance

What is a conflict of interest?

A Conflict of interest is a situation in which the concerns or aims of two different parties are incompatible or a situation in which a person is able to derive personal benefit from actions or decisions made in their official capacity.

The FCA expects firms to have robust policies and procedures in place to identify and manage conflicts of interest, and to ensure that they are acting in the best interests of their clients at all times.

How should they be managed?

Firms are aware they are required to identify and manage the conflicts of interest arising in relation to their various business lines and activities under a comprehensive Conflicts of Interest (COI) Policy.

The COI Policy which is required to reflect the size, organisation and the nature, scale and complexity of the Firm. However, many firms fail to document and provide training to employees on Potential Conflicts of interest circumstances which are relevant to their business, which could constitute or give rise to a conflict of interest entailing a risk of damaging their ability to act in their Clients best interest.  

Sources of potential conflicts of interest will change as the Firm grows, as new third- party relationships are established, and as macro-economic factors continue to change, it is important Governing Bodies review their conflicts of interest frameworks to ensure identifying potential conflicts of interest throughout the Firm is aligned with a requirement to consistently act in the client’s best interest.

What does the FCA say regarding conflicts in asset management?

The FCA’s discussion paper DP23/2 illustrates the difficulties UK Asset Management Firms have in navigating the rules on Conflicts of Interest.  The technical detail, for example on conflict-of-interest rules shows the current rule framework often leads to identical or broadly similar activities being regulated to a slightly different standard, with different rules apply depending on whether a firm is managing a segregated managed account for an individual client or an alternative investment fund.

The discussion paper seeks to create an aligned asset management regulatory structure, considering rules in EU legislation, The Undertakings for Collective Investment in Transferable Securities (UCITS) Directive, the Alternative Investment Fund Managers Directive (AIFMD), and the Markets in Financial Instruments Directive (MiFID). The FCA seeks to create a common framework that would provide a set of rules for all types of asset managers, simplifying and standardising requirements where possible.

For those of us who remember the thematic review of Conflicts of Interest in Asset Management Firms published by the then FSA in November 2012, the regulator found that many firms were not doing enough to identify and manage conflicts of interest, and highlighted a number of areas where improvements could be made. These included improving governance arrangements, enhancing disclosure to clients, and improving controls.   The significance of the paper at the time for asset managers made it clear the regulator wanted to see a change in how asset management firms managed conflicts with a duty to serving customers' best interests

Final thoughts

The FCA has always been committed to addressing conflicts of interest in financial services and ensuring that firms are taking appropriate steps to manage and mitigate these conflicts. Principle 6 and 8 require Firms to pay due regard to the interests of its customers, treat them fairly and manage conflicts of interest. The Principles are a fundamental obligation for all Firms. As the FCA considers the Future Regulatory Framework and their Asset Management Supervision Strategy, Asset Management Firms have a lot to consider…