Conflicts of Interest in Asset Management

Coverage of Conflict Types
 

During our work in the industry, we observed a tendency of firms to focus on personal or employee related conflicts with a strong emphasis on personal account trading and gifts and entertainment related risks, while business or front office conflicts, external conflicts or internal conflicts were often less well developed. There is no definitive reference list for all conflict types and scenarios in asset management. Nevertheless, regulators set a high standard for this risk type and expect firms to establish a register of all relevant actual and potential conflict of interest types emerging from their specific business activities, not just of the material conflicts or of those conflicts that can be made subject to a control.

At a minimum, the following four categories of conflicts of interest should be included in the registers: Business, Personal, External and Internal conflicts of interest.

Use of Registers and Structured Data
 

A clear and consistent structure of the required registers reflecting conflict categories and types of conflicts should be supported by descriptions or scenarios for the conflicts as they emerge in the firm.

The detailed registers are the basis for the inherent and residual conflict risk assessments (see blog #2 on Risk Assessment and Risk Appetite). Mitigants and controls applicable to each risk can be mapped to each conflict type and relevant data from control used for management information.Since not all conflicts of interests can be mitigated or controlled, a complete register allows the identification of the material risks that may need to be subject to disclosure or mitigation.

With register data structured and integrated in the enterprise-wide risk assessment and in the production of management information, a firm can evidence effective identification and risk assessment of conflicts.

Software tools and Management Information (MI)
 

Once key conflicts of interest are identified, prioritised and monitored, the resulting metrics can be aligned to and used for reporting against the risk appetite firm and business level. Industry leaders are using dedicated software tools to integrate conflicts registers, risk assessment and control data to generate the management information instead of simple spreadsheets which entails more manual processing.

A common issue is that too much MI is available, unstructured and manually collated. A risk-based approach in selecting the metrics ensures that the MI is not excessive in volume but efficient and proportionate to the risk identified, with focus on the material conflicts. Aligned to the conflicts of interest risk appetite (see blog #2), metric thresholds for escalation and for consequence management can be established to decide on what MI is escalated to what level of seniority.

Where possible, a trend analysis displayed within the MI allows the detection of emerging conflicts and changes in conflicts risk profile. Internal and external benchmarking and differentiated thresholds within product or business lines allows for an effective transposition of the conflicts risk appetite into actionable MI.