A conflict of interest is when a company individual’s personal interests take precedence or could otherwise compromise their duty to the company or its clients. The conflict could be financial, familial or competitive.
When faced with a conflict of interest, the individual should remove themselves from the situation promptly to uphold integrity and ensure impartiality in business dealings. This proactive approach not only mitigates potential harm but also fosters trust and transparency within the organisational framework.
Corporate fiduciary duty
Under MiFID II, the corporate fiduciary duties to identify and prevent conflicts of interest encompass several key principles aimed at safeguarding the interests of both the company and its clients.
Loyalty
Loyalty is paramount, as all individuals within the corporate hierarchy are duty-bound to act in the best interests of their company, fostering a culture of commitment and integrity throughout the organisation.
Prioritising client interests
Financial firms are duty-bound to act in the best interest of the client. This includes offering appropriate investment advice, ensuring fair execution of orders and avoiding conflicts.
Disclosure
Disclosure mechanisms play a crucial role in fulfilling corporate fiduciary duties, as firms must establish robust methods to identify, manage, and transparently disclose conflicts of interest, promoting accountability and regulatory compliance.
Regulatory oversight
Firms must create and maintain strong conflict of interest policies and take measures to prevent them from harming client dealings.
Reporting
Financial firms can be asked to report their conflict of interest management and mitigation practices to regulatory authorities and clients.
Types of conflicts
Conflicts of interest can be categorised into four distinct types, each posing unique challenges and ethical considerations within the corporate landscape.
Financial
Financial conflict is when a company individual acts in their best interest for personal financial gain. This can include outsourcing projects where they have beneficial ownership at inflated prices or advising clients to make unsuitable investments to increase commissions.
Familial
Familial conflict of interest includes giving preferential treatment to a spouse or relative. Even if these individuals are not qualified, the person in power could award them with benefits or job opportunities based on the relationship.
Positional
Positional conflict of interest occurs when an individual uses their authority to act against their company and clients’ wishes. Due to their position, a company individual can use inside information to gain an unfair market advantage. They may also use their status to boost the value of owned securities.
Arising from external affiliations
This conflict occurs when an individual works in multiple companies. For example, they could award contracts from one organisation to another even if that was not the best option for the company.
Preventative measures
To effectively identify and address perceived conflicts of interest, organisations can implement various preventative measures aimed at promoting ethical conduct and maintaining the integrity of business operations:
- Establish transparent policies with a clear definition of a conflict of interest and the procedure to report possible conflicts
- Train employees regularly on perceived conflicts of interest
- Hold sessions to remind everyone of their responsibilities to the company and its clients, and the consequences of actively creating conflicts
- Regularly oversee employee financial disclosures and other related information to catch possible conflicts
- Update your conflict of interest policies regularly to identify and handle all unknown risks