Balancing Integrity in Financial Services

Conflicts of Interest

Integrity at Stake: Understanding Conflicts in Financial Services

Conflicts of interest (COI) occur when a firm or individual’s obligations to different parties—such as clients, counterparties, or group entities clash in a way that could compromise impartiality, judgment, or integrity. In financial services, these conflicts are particularly sensitive due to the fiduciary responsibilities firms hold and the potential for financial harm or reputational damage.

When Interests Collide: Managing COI in a Shifting Financial Landscape

As financial services firms evolve and integrate across complex group structures, the potential for conflicts of interest (COI) becomes more pervasive and less predictable. These risks extend beyond board-level oversight to embedded intra-group practices, cross-referrals, shared governance, and fee arrangements that may subtly compromise the obligation to act in clients’ best interests. In this context, COI management is not merely a regulatory requirement but a strategic imperative for preserving trust and market integrity.

Regulators are sharpening their focus. The Financial Conduct Authority (FCA), through SYSC 10 and FG19/05, expects firms to embed COI controls into the fabric of their governance and operations proactively identifying, managing, and disclosing risks. Offshore regulators such as the Guernsey Financial Services Commission (GFSC) are echoing this stance in their recent Thematic on COI, signalling a broader shift toward transparency and accountability. Firms that treat COI as a compliance checkbox risk falling short of stakeholder expectations and regulatory scrutiny.

Navigating the Minefield: Moving forward with Confidence

Conflicts of interest occur when firms or individuals face competing obligations or incentives that may compromise their ability to act impartially. These risks become especially pronounced within group structures offering multiple services to the same client. To maintain integrity and trust, firms must be proactive in identifying and mitigating key threats, including undue influence from affiliated entities, financial incentives and cross-referrals that could skew judgment, weak information barriers that jeopardize confidentiality, and external perceptions of bias that may tarnish reputational credibility. Vigilance in these areas is essential to uphold ethical standards and foster client confidence.

Regulatory Landscape: Expectations 

The UK’s FCA requires firms to have written COI policies, maintain a conflict register, train staff, and ensure board-level oversight. Disclosure to clients is mandatory when conflicts can't be mitigated. The EU, under MiFID II and Financial Regulation rules, mandates transparency and governance to manage both actual and perceived conflicts, with oversight extending to national authorities and EU fund implementers. In the US, the SEC’s Reg BI and the Investment Advisers Act impose a fiduciary duty on firms to act in clients’ best interests, requiring identification, disclosure, and mitigation of conflicts, with strict rules on compensation and sales practices.

Safeguarding Trust: Strategic Best Practices for Compliance Excellence

To meet evolving regulatory expectations and maintain client confidence, firms must adopt a proactive and structured approach to managing conflicts of interest (COI). Key strategic practices include:

• Structural Segregation: Establishing distinct legal entities with independent governance for different service lines helps reduce potential conflicts and ensures operational clarity.
• Transparent Disclosure: Clearly communicating intragroup relationships and fee arrangements fosters trust and regulatory alignment.
• Governance Oversight: Diverse and independent boards play a critical role in overseeing COI management and reinforcing accountability.
• Conflict Registers: Documenting identified conflicts along with the controls implemented provides a clear audit trail and supports effective risk management.
• Compliance Monitoring: Integrating targeted COI tests into the Compliance Monitoring Programme ensures ongoing vigilance and responsiveness.

Turning Risk into Resilience: The Strategic Value of COI Management

Conflicts of interest are not merely compliance challenges—they are strategic risks that demand thoughtful governance and transparent practices. By aligning with FCA requirements and embedding conflict of interest (COI) management into their operational DNA, financial services firms can enhance trust, protect clients, and strengthen their market position.

As the regulatory landscape continues to evolve, financial services firms must proactively review their conflict-of-interest frameworks. Now is the time to assess whether your governance structures, disclosure practices, and compliance monitoring programmes are fit for purpose. Engage with experienced compliance professionals to strengthen your oversight, enhance transparency, and build lasting trust with clients and regulators alike.