What the Rules Require

Principle 8 of the FCA’s Principles for Businesses requires firms to manage conflicts of interest fairly, both between themselves and their customers and between different customers. The detailed requirements for many firms are in SYSC 10, which requires firms to take appropriate steps to identify and to prevent or manage conflicts of interest, and to maintain an effective conflicts of interest policy.

Where arrangements aren’t sufficient to prevent the risk of damage to clients’ interests, disclosure may be required, but the FCA treats disclosure as a last resort, not a substitute for managing the conflict. The Consumer Duty adds a further layer: firms must avoid causing foreseeable harm to retail customers, which includes harm arising from conflicts.

Where Accountability Sits

Under the Senior Managers and Certification Regime, each Senior Manager is responsible for managing conflicts in their area. The compliance oversight function typically owns the firm’s conflicts policy and register and monitors how conflicts are managed. The board sets the firm’s approach and oversees the most significant conflicts, particularly those involving the firm’s strategy, ownership or senior people.

Senior Managers also face personal conflicts. Their own interests, directorships, investments and relationships must be disclosed and managed, and the Senior Manager Conduct Rules require them to act with integrity.

Common Types of Conflict

Firm Versus Customer

The firm’s commercial interest may differ from the customer’s: selling in-house products over better alternatives, earning higher margins on certain products, or benefiting from customers’ inertia.

Customer Versus Customer

Where a firm acts for several clients, their interests may conflict, for example in allocating limited investment opportunities or handling orders.

Remuneration and Incentives

Pay linked to sales volumes or product types can encourage staff to act against customers’ interests. Incentive schemes are one of the most common sources of conduct problems.

Third-Party Payments

Commissions, fees or benefits received from product providers or other third parties can influence recommendations.

Group Conflicts

In groups, the interests of the parent or other group companies may conflict with those of the regulated firm or its customers.

Personal Conflicts

Staff and Senior Managers may have outside interests, directorships, personal investments or relationships that conflict with their roles.

What Good Management Looks Like

• A living conflicts register that identifies actual and potential conflicts across the business and is regularly updated.
• Controls matched to each conflict, such as information barriers, separate reporting lines, independent reviews or restrictions on certain activities.
• Remuneration reviewed for conflicts, with incentives that don’t reward behaviour harmful to customers.
• Personal interests declared by staff and Senior Managers, and reviewed regularly.
• Board oversight of significant conflicts, particularly those involving the firm’s senior people or ownership.
• Monitoring by compliance to test whether controls work in practice.

Conflicts Firms Often Miss

• Conflicts created by growth. New products, distribution channels or partnerships that create conflicts nobody assessed.
• Conflicts in outsourcing. Providers whose interests differ from the firm’s customers’.
• Conflicts within the senior team. Senior Managers holding roles in other companies, or with financial interests affected by the firm’s decisions.
• Control function conflicts. Compliance or risk staff whose pay or reporting lines depend on the business areas they oversee.
• Conflicts from ownership. Private equity or group owners whose priorities, such as short-term returns, differ from customers’ interests.

Personal Conflicts and Senior Managers

When a firm appoints a Senior Manager, it should understand their other roles and interests, and consider whether any create conflicts. This is part of assessing whether the individual is fit and proper, and many firms ask candidates to disclose other directorships and interests at an early stage. SMF Capital’s guide to the fit and proper test explains what the regulator considers.

Fractional and interim Senior Managers need particular attention, because they often hold roles at several firms. Firms should understand those other roles and how the individual will manage any conflicts between them.

Conflicts in Finance Functions

Finance leaders face their own conflicts: pressure to present results favourably, decisions about provisions or valuations that affect bonuses, and intragroup charges in group structures. A finance director with the independence and standing to resist that pressure is an important safeguard. FD Capital, a sister practice of SMF Capital, places finance directors and CFOs in regulated firms where that independence matters.

Conflicts in Practice: Examples by Sector

The conflicts that matter most vary by business. In wealth management and advice, they often involve in-house funds and platforms, ongoing advice charges and payments from product providers. In investment management, they include allocation of trades and investment opportunities between clients, personal account dealing and the firm’s own trading. In insurance distribution, commission levels and payments across the distribution chain are the main concern, especially where they could affect the value customers receive. In consumer credit, conflicts can arise from broker commissions and from incentives for collections staff. In group structures, intragroup charges, dividends and shared services frequently raise questions.

Senior Managers should understand the specific conflicts in their own area rather than relying on a generic register. A useful test is to ask: where could this firm, or the people in it, benefit at a customer’s expense, and what stops that from happening?

Recording and Evidencing Decisions

When a significant conflict arises, the firm should record how it was identified, what options were considered, how it was managed and who made the decision. That record shows the firm acted fairly, and protects the Senior Managers involved if the decision is later questioned. Board minutes should capture how directors with a personal interest in a decision were excluded from it.

Training and Culture

Policies only work if staff recognise conflicts when they see them. Regular, practical training, using real examples from the firm’s own business, helps people spot conflicts early and know how to escalate them. A culture in which staff feel able to raise a potential conflict without fear of being seen as obstructive is one of the most effective controls a firm can have.

Questions for Boards

• Is our conflicts register current, and does it reflect our actual business?
• Are our incentive schemes reviewed for conflicts with customer outcomes?
• Do we rely on disclosure where we should be managing the conflict?
• Have our Senior Managers declared their outside interests, and are they reviewed?
• Do our control functions have the independence to challenge conflicts?
• Do new products and partnerships go through a conflicts assessment?

The Bottom Line

Conflicts of interest can’t be eliminated from financial services, but they can be managed. Firms that identify conflicts honestly, put real controls in place, review incentives and treat disclosure as a last resort are far better placed with their customers and their regulators. Senior Managers who manage conflicts in their own areas, and are open about their own interests, set the tone for the rest of the firm. For more on the Senior Manager Functions involved, see SMF Capital’s Senior Manager Functions guide.