How to draft a Conflicts of Interest Policy

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This article looks at the requirements of a Conflicts of Interest Policy and tries to provide a basis on which a policy could be drafted.* Regulatory requirements may differ between jurisdictions and this article focuses on the UK and its framework.

 

The relevant legal sources in the UK are the Companies Act 2006 and the FCA/PRA High Level Standards – Senior Management Arrangements, Systems & Controls (SYSC), in particular SYSC 10.1: FCA Handbook SYSC 10

 

Based on this, a Conflicts of Interest policy must:

  • Identify, which situations, based on the respective firms specific services and activities, constitute or may give rise to a potential conflict of interest; and
  • Specify the procedures and measures to be taken to manage such conflicts.

With that in mind, it might be a good idea to start with a brief introduction to the policy, maybe something that describes the raison d’être for the document, that the firm generally tries to avoid conflicts of interest, that the policy will outline how the firm deals with conflicts of interest, and what it does when they are unavoidable as it is sometimes the case.

The policy should also make it clear whom it applies to.

It should then define a few things, starting with a description of what conflicts of interest are and between whom they may arise, e.g. between the bank and a client, between two or more clients of the bank and so on depending on the setup of the firm.

As mentioned above, for the UK the legal sources are the Companies Act and the FCA Handbook, so these documents give some guidance on the nature and types of conflicts of interest. The Companies Act under section 175 describes a director’s duty to avoid conflicts and under 177 and the disclosure requirement of a director’s interests in existing or proposed transactions and arrangements with the company. These sections obviously provide more detailed information on these topics and it might be worth having a look at them.

SYSC 10.1.4 outlines the minimum requirements a firm must take into account, like whether the firm is likely to make a financial gain at the expense of the client or has an interest that is contrary to the client’s interest in the outcome of a service provided because of other circumstances and so on.

Based on this section, which defines the nature of conflicts of interest on a more abstract level, the next section should give examples of potential conflicts of interest considering the actual activities and services of the firm. A typical example for an investment bank is the provision of research in relation to a company to which it also provides advisory services. The establishment of Chinese Walls also falls into this section in order to avoid the actual occurrence of a conflict.

 

The next section should describe what happens once a conflict of interest is identified and how it will be managed. The first step is the disclosure of the conflict to the business unit that deals with the management of conflicts, e.g. Compliance. Procedures need to outline how the conflicts is been dealt with, usually the recording of the conflict (which is mandatory), a disclosure to the client or the stepping aside of a conflicted person. Is the conflict reviewed by a specific committee of the firm? If so, the policy should describe the role of the committee and how it works

In case of disclosure to the client it might be an option to ask for the client’s consent to act.

 

Lastly, it might be a good idea to also add a few lines with regard to the on-going monitoring of conflicts of interest (if that is the case) and how often the policy is reviewed (on an annual basis).

The following documents do not necessarily need to be included in the policy itself, but they need to be at hand and available for inspection when requested:

  • Ad-hoc declaration of interest (to be used when a situation arises)
  • Form for declaration of interests (to be completed by every new joiner or on a regular basis for existing staff)
  • A detailed Conflicts of Interest questionnaire for Directors (to help identify conflicts of interest by every new joiner or on a regular basis for existing staff checking on previous directorships or company ownerships that may cause conflicts)

 

With regard to the last document, it is important to get the message across that the law on conflicts of interest applies to direct and indirect interests and therefore to the interests of persons connected to the employee of the firm, for example members of the family.

However, the best Conflict of Interest policy is not worth the computer it is written on without a bit of training and cooperation of the staff, but we hope this document helps with the drafting. If you have any questions, comments or suggestions, please do get in touch with us!

 

*This article and the suggestions regarding the elements of a Conflicts of Interest Policy cannot guarantee to be comprehensive or does not constitute legal advice, so for any specific legal questions you should consult a suitably qualified lawyer. Please also read our disclaimer: https://www.planetcompliance.com/disclaimer/