A never-ending story? Conflicts of interest in the financial services sector (Part One)

According to this recent article, “UK asset managers are unable to demonstrate they are not putting their interests before those of customers or saddling them with unneeded costs, a survey of sector firms by” the Financial Services Authority suggested last week.  Among other things, “the FSA highlighted inadequate controls on how much money was paid to brokers for research and execution, casting doubt on the transparency and control of such commission payments. Other failings identified by the regulator included inadequate reporting of errors to customers while some ‘applied limited thinking’ to conflicts of interest arising from accepting gifts or entertainment.”

Meanwhile in the US, Carlo V. di Florio, Director, Office of Compliance Inspections and Examinations of the Securities and Exchange Commission, recently gave an important speech on Conflicts of Interest and Risk Governance to the National Society of Compliance Professionals   Among other things, he noted:

– Conflicts of interest are significant to the SEC because of the “long experience of [its] exam program that conflicts of interest, when not eliminated or properly mitigated, are a leading indicator of significant regulatory issues for individual firms, and sometimes even systemic risk for the entire financial system.”

– “Especially when combined with the wrong culture and incentives, conflicts of interest can do great harm. [Thus,] conflicts of interest are an integral part of [the SEC’s] assessment of which firms to examine, what issues to focus on, and how to examine those issues.”

– “Failure to manage conflicts of interest has been a continuing theme of financial crises and scandals since before the inception of the federal securities laws”; “[r]ecent decades have seen numerous examples of conflicts leading to crisis”; and “ [t]he financial crisis of 2008 could itself be the basis of a seminar on conflicts of interest….”

In subsequent posts, we’ll examine Di Florio’s suggested framework for managing conflicts of interest in the financial services industry – and speculate on what aspects of it might mean for firms in other industries.

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