On 25 February 2016, the Central Bank provided feedback following its inspection of the management of conflicts of interest in investment firms. The feedback, in the form of a ‘Dear CEO’ letter, highlights the key findings from the inspection and the good practices observed but also highlights poor practices which should be changed or reformed.
The Central Bank expects the letter to be considered and minuted by the boards of investment firms before 30 June 2016. This applies to MiFID, UCITS Managers and AIFMs with individual portfolio management.
Investment firms are obliged to establish and maintain an effective organisational model to actively monitor, on a day-to-day basis, conflicts of interest (“COI”) to ensure that the best interests of the clients are protected.
COI are to be avoided. If they cannot be avoided, it is essential that they are managed appropriately.
There is an onus on the boards of investment firms to instil a strong compliance culture to ensure COI are avoided.
The Central Bank of Ireland (the “Central Bank”) found that the majority of firms reviewed were not operating in a COI-aware environment. Such firms could not demonstrate that they had ensured the best interests of clients were protected.
Appendix 1 of the Dear CEO Letter (the “Letter”) highlights the key findings. For example, many of the firms did not consider how the acceptance of gifts and entertainment could compromise their duty to act in the clients’ best interests. Also, some firms did not have a control process around outgoing gifts.
Appendix 2 outlines the good practices observed, while also highlighting the poor practices the Central Bank wishes to reform.
The Central Bank maintains that the list of practices is not exhaustive. It is essential that firms are at all times evaluating their own COI, how their COI are evolving and how they are best managed and mitigated.
The Central Bank requires investment firms to:
- review their COI policies and procedures;
- consider all good and poor practices listed in Appendix 2 against their own COI procedures; and
- review their current list of identified COI to ensure it remains up-to-date and relevant.
Below is a list of takeaways to consider prior to 30 June 2016:
- A holistic approach to COI should be taken.
- A COI-aware environment is essential.
- Detailed COI logs should be maintained, even if no COI arise.
- All employees are responsible for COI.
- All staff should be trained and kept up-to-date in respect of their obligations.
- At a minimum, consider all the applicable COI scenarios in the various regulations.
- Non-observance may result in enforcement.
For a copy of the Letter, please click here.