There is plenty of theory about how to manage conflicts of interest. There are rules saying what you can and can’t do. The really practical stuff about how you should go about managing conflicts of interest in your business is often less tangible.
It can feel hard knowing where to start if you don’t have much by way of conflicts documentation as it is often a potentially vast and daunting exercise. We have experience of developing conflicts registers at large international banks.
Through this article we are sharing some of our expertise on how you manage conflicts in real life, including a few tweaks for those who don’t have the resources of a global bank. We have conflicts, restricted, and insider list templates with worked examples available in our shop if you need some help getting started.
1. It is all starts with your clients
Managing conflicts has to start with your client. What are they expecting from you? How are you meeting those expectations? When things go wrong it is often because an expectation hasn’t been met.
It is all about the conversation, the relationship and meeting expectations. If you look to some big cases, the client complained or sued because their expectations were not being met.
The key is to think through the lifecycle of your client with your firm and consider all that the client could experience along that journey. It helps to ask yourself is what we are proposing or doing fair to the client and would the client agree with our assessment of what is fair?
Remember that if you are an asset manager your fund is your client.
2. Don’t give it to Compliance
Sorry Compliance, but managing conflicts is one for the business. Sure, Compliance has a role in checking that controls to manage conflicts are effective. Compliance will also be monitoring transactions or accounts using your restricted and insider lists. Compliance will also be making sure that you have an audit trail.
But the real work in identifying and managing conflicts is done in the first line.
In our experience, you should be keeping a conflicts register on every desk or in every department. Only the small firms will have just one register.
3. Start somewhere
Building a conflicts register can be a big job. Not everyone can afford to take people away from their day jobs to spend hours brainstorming and mapping conflicts. Don’t use that as a reason to not have or do anything.
Start with something basic that you can grow organically. Update your register as and when conflicts arise and when the business is changing.
Above all make sure that you do have something. Don’t put yourself in a position of having nothing to show a regulator when they ask.
4. Don’t try and manage everything
It is tempting to try and manage every conflict that comes up. In practice managing conflicts can be harder than preventing or avoiding them in the first place.
Not every conflict can, or should, be managed. Some conflicts you should just avoid, others you can prevent or mitigate.
For example, the employee with a close personal relationship in another firm can simply be kept away from one transaction, or not manage that client relationship.
5. Be prepared to say no
This is perhaps one of the hardest things to do especially when your bottom line is under pressure. With hindsight it is often more obvious what should have been done.
Sure, turning business away may seem foolhardy in the short-term but good business is about nurturing long term relationships.
If you have a conflict and explain the nature of it to your client, you deepen the relationship. The client will remember that you were transparent and fair with them and the trust will increase.
Often clients understand the conflict when you explain it to them and agree not to proceed. So, you may find agreement is relatively easily reached once the client understands the nature of the conflict.
6. It’s a way of life and a mindset
Conflicts come up all the time in business. You can be holding a position in an instrument that your client starts dealing in. You can have two clients that come to you with a request for financing on the same transaction.
Even if you did spend hours thinking and documenting everything, things change. You can’t think of everything.
The answer here is to be able to quickly identify a potential conflict and agree action. So make sure everyone is alive to the nature of conflicts.
7. Training or awareness?
Training is important to teach people about conflicts of interest, how they arise, and how you identify and manage conflicts in your business. Learning of this nature is good to repeat so that people remain up to date and learn about any important changes or developments in how you work.
Awareness is arguably more important than training because you need people to know when they are looking at a potential conflict of interest. You may not need everyone to know what to do when they are looking at a potential conflict of interest but you do need them to recognise one and know who to talk to when they do.
One way to achieve this is to share examples internally. Take some actual conflicts that you’ve identified, anonymise them and share as examples. Do this regularly by email, on your intranet, at town halls, and people are more likely to recognise a conflict when they see one.