Themed Inspection highlights Conflict of Interest risks in investment firms

• Firms with a strong compliance culture demonstrated a high level of Conflict of Interest awareness.
• Best-in-class firms demonstrated a holistic approach to Conflict of Interest.
• Failure to recognise Conflicts of Interest exposes both firms and clients to unnecessary risk.

The Central Bank has completed a themed inspection (PDF 182.9KB)to examine the identification and management processes for conflicts of interest in investment firms.

Conflicts of interest are inherent risks to clients and businesses alike. Where they arise and are not managed properly, there is a risk that clients’ best interests may be undermined. The MiFID, UCITS and AIFMD regulations all have requirements for firms to manage conflicts of interest.

Director of Markets Supervision, Gareth Murphy said: “An awareness and understanding of potential conflicts of interest goes hand in hand with a culture of looking out for clients’ best interests. This culture of awareness must be driven from the top and embraced by all employees of investment firms.”

The themed inspection found that firms with a strong culture of client-focus and regulatory compliance managed the risks around conflicts of interest best. These best-in-class firms were aware of the potential for conflicts of interest to occur and ensured that they were mitigated accordingly.

The issues identified during the themed inspection have been followed up with the relevant institutions directly to ensure that specific remedial actions are taken. The Central Bank has also sent a letter to all investment firms providing feedback on the findings and highlighting good and poor practices. This letter outlines that, in order to identify and manage conflicts of interest, a strong culture of compliance is essential to ensure that the best interest of the client is not negatively impacted.

Gareth Murphy, added: “The identification of conflicts of interest is a key step to ensuring that client detriment does not occur. If a firm cannot identify potential conflicts of interest then it will not be able to prevent an actual conflict from harming clients.”

Notes:

Investment firms include MiFID investment firms and their branches, and UCITS Managers authorised to provide individual portfolio management. Issues identified are also relevant to firms authorised under the AIFMD.

Under the MiFID, UCITS and AIFMD requirements, firms must establish, implement and maintain a conflicts of interest policy and the policy must identify the circumstances which constitute or may give rise to a conflict and specify the procedure to manage such conflicts.

The MiFID, UCITS and AIFMD requirements also outline a number of potential conflict scenarios that firms should take into consideration.