The Regulator has published a consultation document containing draft guidance on how trustees should approach potential and actual conflicts of interest, both within their own ranks and amongst their professional advisers.
The draft guidance expounds five key principles in relation to conflict management:
- Understanding the importance of conflicts of interest. It is the responsibility of the existing trustees to ensure that new trustees are made aware of their duties and the legal requirements relating to conflicts of interest on their appointment. The trustee appointment procedures should require trustees to disclose any conflicts.
The draft guidance also highlights the importance of the chair of a trustee board in establishing robust conflict management arrangements. In particular, the chair should ensure that trustees are appropriately informed of their duties, are aware of the importance of declaring any conflicts and that any declared conflicts are documented and monitored. The guidance also suggests that the appointment of an independent trustee as chair of a trustee body might avoid many problems.
- Conflicts of interest policy. The Regulator suggests that it is good practice for trustees to have a documented policy on conflicts of interest in place, which includes the procedures adopted by the trustee board to enable conflicts to be identified and managed. Trustees should be familiar with this policy and should also put in place processes for monitoring compliance and for ensuring that the policy is subject to regular review.
Identifying conflicts of interest. In the draft guidance, the Regulator emphasises the need for the trustees to consider in advance any conflicts that may arise in future and notify the trustee board as soon as practically possible.
Trustee boards should maintain an up-to-date register of each trustee's interests (including, for example, financial interests and other appointments).
- Evaluation, management or avoidance of conflicts. The draft guidance states that trustees should, following legal advice, implement procedures for evaluating and, where possible, managing, conflicts that have been identified in a way that ensures that decisions are not compromised by the conflicted trustee.
Conflicts should be detailed clearly in the minutes of trustee meetings and independent legal advice should be sought where a material conflict of interest is identified. Trustees should also be aware that some conflicts, due to their acute nature, cannot be managed and, therefore, may determine that the resignation of the conflicted trustee and the appointment of an independent trustee is the preferred solution.
Effective ways of managing or avoiding conflicts of interest include:
- Establishing a sub-committee to deal with certain tasks;
- The conflicted trustee withdrawing from the decision making process;
- The appointment of an independent trustee.
The draft guidance also considers the impact of confidentiality on conflicts. This issue arises, in particular, where an employer-nominated trustee is privy to employer information relevant to the pension scheme that conflicts with his or her duty to share information with fellow trustees because of a duty of confidentiality to the employer. Whilst suggesting that trustees should seek independent legal advice, the Regulator comments that it is not clear that excluding a trustee from decision making would necessarily excuse the trustee from a duty to share information. The Regulator suggests that effective solutions could include the employer waiving confidentiality duties (perhaps on the basis that the trustees have signed a confidentiality agreement), or the trust deed absolving the trustee from sharing information in specified circumstances.
- Managing adviser conflicts. The draft guidance encourages trustees to actively manage their relationship with their advisers, to ensure that the advisers are able to provide independent advice.
Trustees should require their advisers to declare any conflicts that may arise in respect of their engagement. Such declarations have been regarded as standard practice by most categories of professional adviser for some time and, in any event, are often a legal requirement. The draft guidance reaffirms the importance of this disclosure as good practice.
Though deliberately light on legal principles, the Regulator's draft guidance is a useful practical guide to the issues faced by trustees in dealing with conflicts of interest; it also appends useful specimen documents, including a conflicts policy and a conflicts register. The deadline for submitting responses is 30 May 2008. The full consultation paper can be found here.