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Published Findings of the Conflicts of Interest Themed Inspection in Investment Firms by the Central Bank of Ireland
Themed inspection of conflicts of interest in investment firms
On February 29th, 2016 the Central Bank of Ireland (“Central Bank”) published a letter which was issued to the Chairpersons of all investment firms outlining the findings of a recent themed inspection undertaken by the Central Bank. The themed inspection was aimed at examining the identification and management processes for conflicts of interest in investment firms. While the themed inspection was restricted to MiFID investment firms, their branches and UCITS Managers authorised to provide individual portfolio management, the Central Bank has stated that the issues are also relevant to firms authorised under the AIFMD.
The primary message in the Central Bank’s publication was their identification of a direct correlation between firms with a strong culture of client-focus and regulatory compliance, and those firms that best manage risks around conflicts of interest. In the Central Bank’s letter to industry it references the Consumer Protection Outlook Report and recent speeches whereby it has identified culture as a key driver for firm’s behaviour and the behaviour of those individuals within the firm. During the themed inspection, the Central Bank found a lack of board ownership in relation to the identification and management of conflicts of interest and reminds Directors of the onus placed on them to “engrain in the culture of their firm a duty to act in the best interest of the client in all instances”.
The Central Bank letter outlines the key findings from the themed inspection, actions to be taken by firms to review their conflicts of interest practices and identified good and poor practices.
Summary of Overall Findings
The key findings arising from the themed inspection are as follows;
While policies and procedures were generally found to be in place, the Central Bank found that many firms had failed to adequately embed those policies and procedures. Firms had failed to sufficiently train staff and had not properly considered the scenarios outlined in the applicable regulations.
Personal Account Dealing
While the Central Bank was generally satisfied that PA dealing procedures and pre-trade checks on PA deals were in place and operative within the vast majority of firms, it found that very few firms undertook post-trade checks aimed at identifying areas such as front running client orders or front running investment research.
Gifts and Entertainment
In respect of incoming gifts, the Central Bank found that many firms failed to identify how expensive gifts may impact decision making of staff. In respect of outgoing gifts, the Central Bank has stated that there was a lack of a control process around such gifts and that these were not being adequately recorded.
The Central Bank identified that while firms generally deal with intragroup relationships on an arms-length basis in respect of possible conflicts, there was insufficient management of the potential conflicts of interest where a member of management or a Director takes a role in another group entity.
Best in class approach to conflicts of interest
The Central Bank stressed the link between good conflict of interest identification and management and firms taking a holistic approach and embedding conflict of interest awareness within the firm’s culture.
As part of its correspondence, the Central Bank provided for those good and poor practices identified across investment firms in respect of each of those themed findings outlined above and has requested firms to consider all good and poor practices against their own conflicts of interest procedures.
The Central Bank expects the Boards of firms to discuss, consider and minute the industry letter, before 30th June 2016.
Investment firms have also been set the task of reviewing their policies and procedures to ensure that they meet the relevant requirements. For MiFID firms this presents an ample opportunity to review existing arrangements against those more prescriptive requirements set out in MiFID II and to future proof their current conflict of interest arrangements and documentation. In addition, the Central Bank expects firms to review their current list of identified conflicts of interest to ensure that it remains up to date and relevant.
Issues raised in the letter may be considered by the Central Bank during the conduct of future inspections and its contents should be used to guide firms in undertaking an in-depth review of their existing arrangements.