Conflicts of Interest

CII members are expected to conform their activities to the CII Code of Ethics and Conduct.

From time to time the CII will issue guidance as to the particular application of provisions of the Code.

Members should anticipate and deal proactively with conflicts of interest.

Members work in a variety of industry capacities. Some are senior managers and are in a position to influence the behaviour of firms. Firms should have in place a conflict management policy appropriate to the their business model, including size and organisational structure, the expertise of clients, the nature of the services or products sold or administered and the type of activities engaged in.

Senior management have a key role in setting the cultural standards of their organisation. The culture of a firm can be a key mitigating tool for the proper management of conflicts of interest. But the values and ethics of individuals who work in the firm in capacities other than senior management should also be given appropriate weight as a corrective to potential institutional malpractice.

Corporate governance should be structured in such a way that conflicts are highlighted and resolved.

Disclosure plays an important role in minimising the risk of conflicts of interest and should be full and accurate. Disclosure alone, however, is not enough and subsequent management of a conflict has equal importance. Particular attention should be paid to remuneration and bonus structures, gifts and hospitality.

A process for resolving ethical problems within a firm should be established.

A path is suggested in this paper for CII members to take should they be subject to problems which are beyond their own power of resolution.

Some key questions for CII members to ask themselves:

• Am I acting fairly towards this customer (or my employer)?
• Is what I am about to do or propose in the best interests of the customer?
• Am I being objective in giving opinions and statements?
• Am I being honest and truthful?
• Would I like to be treated in this way if I were a customer?
• If I act for this customer will it prejudice any obligations I owe to any other client?
• Why am I being asked to lunch (or to an event/function)?
• How would my actions look to, or be perceived by, a third party or my employer, and does this matter ethically?
• How would my actions look to the CII?
• Should I refer my actions to my line manager or another appropriate person or the CII?

Purpose

Individuals and institutions face potential conflicts of interest every day. This paper is not seeking to eradicate all situations where potential conflicts of interests may arise. Instead it focuses on the processes individuals and firms should put in place to ensure that where potential conflicts of interests could arise, they are either avoided or managed appropriately to minimise risk of detriment to customers.

In fulfilling the duties owed to the public and their employer, CII members are bound to observe high standards of conduct which may sometimes appear to be contrary to their personal self-interest. This guide is an aid to help members identify occasions when they might be at risk of failing to recognise or conform to any of those standards and to suggest ways of avoiding such exposure.

It is not practical or possible to establish ethical requirements or procedures which apply in all situations and circumstances. Each case and scenario will differ from the next and if members are in any doubt as to the correct course of action they should seek further advice and, if necessary, legal advice.

What does the Code of Ethics and Conduct say?

Specifically members should:

• Avoid conflict between personal interests, or the interests of any associated company, person or group of persons, and duties to customers;
• Avoid conflict between any competing interests of one or more customer, stepping aside if such conflicts cannot be resolved;
• Avoid conflict between personal interests, or the interests of any associated company or person, and duties to their employer;

Conflicts of Interest

The term ‘Conflict of Interest’, means any financial or other interest which conflicts with the service(s) an individual provides because it could:

• significantly impair the individual’s objectivity;
• create an unfair competitive advantage for any person or organisation.

The term ‘Conflict of Interest’ means something more than individual bias. There must usually be an interest (usually financial) that could directly influence an individual.

The term ‘Conflict of Interest’ applies only to current interests. It does not apply to interests which have expired, no longer exist and cannot reasonably affect current behaviour. Nor does it apply to possible interests that may arise in the future but do not currently exist because such future interests are speculative. For example, a pending formal or informal application for a particular job or contract is a current interest but the mere possibility that one might apply for such a job in the future is not.

The term ‘Conflict of Interest’ applies not only to the financial interest of the individual but also to the interest of others with whom the individual has substantial and common financial interests, if these interests are relevant to the functions to be performed, e.g. their employer, business partners, family members and any one else with whom they have a substantial common financial interest.

Ethics play a key role in managing conflicts of interest because they underline how conflicts of desire are resolved.

Members of the CII are obliged to comply with all relevant laws, including the requirements of any regulatory authorities. In the UK the high level regulatory obligation in respect of conflicts of interests is set out in FSA’s General Principle 8 which requires a firm ‘To manage conflicts of interest fairly, both between itself and its customers and between a customer and another client’.

What this means for firms

Conflict management policy

Firms should be able to demonstrate they have rigorous internal policies in place and procedures for identifying and managing conflicts of interest to avoid adversely affecting their customers. A list should be drawn up of the situations across the business where the duties individuals owe to their clients may be inconsistent with either their own interests or the interests of one or more clients. Employees should be trained to recognise conflicts. Having identified a list of potential conflict situations, appropriate systems need to be in place to manage them and employees trained in their use. These procedures need to be regularly tested and updated, where appropriate.

Conflict of interest requirements should be objective standards designed to eliminate certain specific potentially compromising situations from arising to protect the individual, other members of the firm and the public. Individuals and their employers should not be placed in a situation where others could reasonably question their integrity, or their work, because of the existence of any conflict of interest.

No individual or firm is alike and a business activity that may be acceptable to one may not be to another, depending on the individual circumstances and any arrangements in place to remove or mitigate the effect of the conflict. For example, it is not the value or nature of an inducement which necessarily matters; it is the manner in which individuals or parties are actually influenced by the inducement, if at all, to the detriment of the customer.

Conflicts of interest can arise because of the differing roles that an intermediary may undertake as an agent, at times for the customer, at others for a principal and in some instances for both at the same time. Under agency law, an intermediary is under an obligation to disclose to a client any relevant conflict of interest.

A conflict management policy must be appropriate to each firm’s business model, including its size and organisational structure, the expertise of its clients, the nature of the products it sells or administers and the type of activities it engages in. Larger organisations may consider appointing a conflicts officer to whom employees can refer matters to, confidentially, if necessary.

In addition to management controls and procedures employees should be able to recognise when their actions are, or are likely to, conflict with the interest of their employer or, more importantly, their customer. In all cases, where measures designed to manage potential conflicts in individual circumstances do not meet, adequately reduce or resolve the prospect of conflicts arising, consideration should be given to withdrawing those services from clients.

The role of senior managers

Senior managers should be fully involved in conflict identification and management. Although they do not need to be personally involved in every decision they need to assure themselves that decisions taken within the frameworks set up to identify and manage conflicts are consistent with their desired approach, for example, that complaints are being approached openly and independently by supervisors or staff involved in resolving them.

Senior management must view risks and consider mitigation across the full range of activities for which they are responsible. Mechanisms should be in place to allow them to assess the totality of conflict within the firm and how this is being managed. Regular review work conducted within a firm by a compliance or internal audit department should test conflict procedures.

To achieve consistent treatment of conflicts of interest throughout their organisation, senior managers should set clear guidelines for their business which set out the type of activities that generate conflicts which they feel cannot be adequately managed and should not be engaged in. Systems and controls should be designed to reflect the nature and seriousness of differing classes of conflict and be able to identify the persons accountable for making decisions at differing levels. Guidelines should include the types of conflict that should be escalated to senior management for a decision on whether the conflict can be mitigated.

Mitigating conflicts of interest

Methods of mitigation should be designed for the types of conflicts a firm has decided can be managed. Consideration should also be given to the level of risk mitigation that will be required to ensure that it is within the firm’s risk management capability. Managers should receive management information on the extent and mitigation of conflicts of interest and this information should be used by supervisors where appropriate.

Some examples of methods which can be used to manage potential conflicts include:

• a hospitality and/or gift register;
• restrictions on gifts and hospitality individuals may accept;
• information barriers or ‘chinese walls’ between different business units to prevent free flow of confidential information;
• changes to remuneration arrangements for the firm and individual staff to avoid incentives and targets which may encourage misuse of information or giving poor advice;
• increasing disclosure to clients and obtaining informed consents from them;
• information systems designed to provide timely and accurate information;
• reporting structures to build in checks and balances to promote objective judgement;
• recording of and justification for decisions when selecting products or suppliers;
• documenting why and how recommendations are being made to customers;
• complaints handling and claims settlement procedures.

Culture

The culture of a firm can be a key mitigating tool for the proper management of conflicts of interest. Culture is a combination of both formal structures and procedures (such as company policies on remuneration, complaints handling, appraisals, KPI’s, discipline and training and any reporting tools for these) and informal structures including the values and ethics of the firm and the individuals who work in it.

Corporate governance

Corporate governance plays an important role in the management of conflicts of interest. Problems arise when incentives drive the organisation to deliver shareholder value over customer satisfaction. Directors’ bonuses and share options are usually linked to financial performance rather than how well customers have been treated or compliance with regulation or codes of practice. This could mean customer interests are prejudiced in favour of shareholder interests. Public interest representation on boards or nonexecutive ‘user’ councils can assist in assessing whether policies are working and firms are delivering on their promises.

Outsourcing

Where work is outsourced, the firm’s obligations to manage and deal with any conflicts of interest remain, so the relationship with their outsourcers should ensure that they also meet these obligations.

What this means for the individual

CII members must ensure that they conform to the provisions of the Code of Ethics and Conduct. Below, we comment on the general principles of the Code which are also relevant.

Behaving with integrity

Members should behave with integrity in all their professional and business relationships. Integrity implies not only honesty but fair dealing and truthfulness. Any advice given or work undertaken must not be corrupted by self-interest or influenced to the detriment of personal integrity by the interests of other parties.

If members are instructed or encouraged to engage in any activity which is unlawful or improper (including where this is part of their contract of employment) they are entitled to and should decline. For example, members should not be party to the falsification of any record or knowingly or recklessly supply any information or make any statement which is false or deceptive in a particular matter.

If members become aware their employers have committed an unlawful act which could compromise them, every effort should be made to persuade them not to perpetrate the act and to rectify the matter.

Applying objectivity

In making professional/business judgements and in giving opinions, members should not allow prejudice or bias or the influence of others to override objectivity.

The interests of a member’s employer should not affect the objectivity of the member’s judgement.

Members should be aware of the difficulties which may arise from the offer or acceptance of any gift, favour or hospitality which may be intended to influence them or may be reasonably interpreted by a person being in full possession of the facts to be likely to have such effect. Inappropriate gifts or hospitality should not be offered or accepted.

Any report prepared for a customer or employer should be accurate, truthful and, within its scope, complete and balanced. It should not contain ambiguities or half-truths or be based on unreasonable assumptions. It should be objectively justifiable.

Respecting confidentiality

The opportunity to have access to confidential information, if abused or misused, may confer an unfair competitive advantage. If members use or intend to use confidential information not reasonably available to the public for their own direct and substantial economic benefit, such conduct constitutes a conflict of interest. The same principle applies if they disclose or intend to disclose information to other individuals or organisations in such a manner that a direct and economic benefit may be conferred on those individuals or organisations.

Any information acquired by a member from a customer should only be used or disclosed in the normal course of providing the service which the customer requires unless the consent of the customer has been obtained or information is required because there is a legal or regulatory obligation to disclose. When members change their employment they are entitled to use the experience they have gained in their previous employment but not confidential information of any description acquired or received by them. If members acquire or receive confidential information deliberately or accidentally in the course of their professional work, to which they would not otherwise have access, they should neither use, nor appear to use, that information for their personal advantage or the advantage of a third party.

Behaving honestly and fairly

Members should be honest and fair in the way they hold themselves out to customers either by means of advertising or in the description of their role or the service they can provide. When members give information in order to secure work, they should ensure that it is:

• factual and relevant;
• not misleading or unfair.

Members should ensure that any advice, solutions and recommendations are based on thorough, impartial consideration and analysis of all the available pertinent facts and their relevant experience and are realistic and clearly understood by the client. If members make a mistake they should not hesitate to admit the error, apologise and rectify matters promptly and fairly.

Being trustworthy

Members should take special care to uphold the best interests of clients at all times.

Members should not accept any financial or other incentive from whatever source that could be construed in any way as a bribe or solicitation or favour.

Members should always provide timely and accurate information to customers. They should make reasonable endeavours to ensure the truth and accuracy of every statement they make and any information provided to clients or to third parties and that they do not conceal any information which is pertinent.

Members should not misuse or abuse their power or position. They should act with courtesy and consideration and without discrimination towards any individual they encounter. This includes taking into account the likely level of understanding, financial or numeracy capabilities of customers.

Members should keep their promises.

Acting with due skill, care and diligence

Members should act only within the limits of their personal competence and any limits of authorisation. Members should undertake professional work only where they have the necessary competence required to carry out that work, supplemented if necessary by assistance and consultation.

Members should use their best endeavours to comply with the relevant standards or, where they do not, ensure the reasons for such non-compliance are stated truthfully, unambiguously and fairly.

Action for CII members to take

Members should take all reasonable steps to resolve ethical problems internally within their firm and if necessary consult the Institute in order to seek objective advice. To resolve an ethical conflict it is suggested that:

Members discuss the problem with their immediate supervisor.

If this does not result in a satisfactory resolution their supervisor should be notified of the decision to communicate with a more senior manager. Where an organisation has an agreed grievance procedure this should be used.

In circumstances where it appears the supervisor is involved in an unlawful act or a conflict, it may be necessary to go immediately to a higher level of management, the Board of Directors or the Audit Committee, if available.

If an ethical conflict still exists after fully exhausting all levels of internal review, members may consider ‘whistle blowing’ to FSA or another regulatory or professional body.

As a last resort members may conclude they have no alternative but to resign.

It sometimes takes great courage to ‘blow the whistle’ and risk alienation when members see another colleague or their employer doing something wrong. It takes even more determination to place principle above profit, especially if a bonus or even a job is at stake.

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