How technology can help manage conflicts of interest

October 12, 2016 Stephen Mulrenan

There is perhaps no job description more closely associated with the phrase ‘conflicts of interest’ (COI) than that of the bank trader. Whether one thinks back to the seemingly crazy scenario of Nick Leeson operating both the front and back offices of Barings Bank Singapore in the early 1990s or, more recently, the phantom trades of convicted UBS trader Kweku Adoboli in London, traders seem to keep getting entangled with COI – and it could be argued that they have received little in the way of support either from financial institutions or from governments.

While it is true to say, in the wake of Barings’ demise, that financial institutions became far more attentive to the Chinese walls they erected to prevent exchanges that could lead to COI, the ability to hedge a position to satisfy a personal agenda was not properly scrutinised – in London at least – until recently (Adoboli was under great pressure to hit targets and booked phantom trades to give the appearance that he was hedging his positions).

Earlier this year, the United Kingdom’s FICC Markets Standards Board (FMSB) proposed its first set of standards around alerting traders to potential COI. Focusing on how bank traders work their orders into the market at the end of each day – also known as ‘reference-price transactions’ – the standards called for, among other things, more transparency to customers and better internal monitoring from banks.

Hedging should be “solely aimed at risk mitigation and is never performed for the purpose of influencing or manipulating the reference price,” said the standard.

Interim chair of the FMSB Elizabeth Corley was quoted by the Financial Times saying that the new standard was intended to “create greater clarity about what good market practice looks like and what types of practice should be avoided”. But is it sufficient compliance to simply hope that a well-meaning employee discloses a potential COI?

“No-one in finance ever realises how close they are to the imaginary, transitory line until they cross it and get smashed in the face by a million camera lenses,” said Adoboli after being released from prison.

Fortunately for organisations there are now technology solutions to effectively managing COI … if you know what you’re looking for.

User-friendly technology solutions

COI have been described by the United States Securities and Exchange Commission (SEC) as viruses that can threaten the wellbeing of an organisation. They are scenarios where a person or a firm has an incentive to serve one interest at the expense of another and, when not managed properly, can cause reputational risks that can be damaging or even fatal to organisations.

To successfully address COI, companies must have robust compliance and ethics programmes that include processes and solutions to identify, assess, mitigate and manage COI.

As mentioned earlier, many companies have traditionally approached this task by requesting that their employees disclose relationships that could present a COI through an organisation’s general hotline or by completing an online form. However, such channels can often seem complicated and intimidating, thus reducing the chances of receiving full and frank disclosure. This in turn reduces a company’s ability to effectively manage their COI and mitigate the reputational risks that could be presented to its business.

But what if organisations had access to a simple yet highly effective solution to receiving, approving and tracking actual and perceived COI? And what if software existed that allowed organisations to set up a series of rules and approval levels for all types of disclosures, either active or passive, providing them with a defensible framework to effectively manage COI?

Fortunately, companies can now avail themselves of user-friendly technology solutions to effectively manage COI. Such solutions should have very simple, easy-to-use interfaces that make it easy to collect, manage and address disclosures. They should also be highly configurable, meaning that companies can tailor the solution to their own risk profile. More specifically, companies should be able to configure different surveys for different employees depending on their role within the organisation (and out-of-date disclosures can easily be edited or deleted).

An effective technology solution should have integrated software that automates the question and approval workflow process, enabling companies to effectively record and address COI disclosures. And it should encourage employees to be open and honest when disclosing details of relationships by separating the disclosure interface from the more traditional case management interface – thereby removing the intimidation from disclosing.

Below are some other features that all companies should expect from technology solutions that claim to help manage COI. For example, companies should be able to:

  • create and configure as many disclosure formats as they need in whichever language is most appropriate
  • obtain disclosures of both external and internal COI proactively and via the regular circulation of online disclosure forms
  • automate the approval of annual disclosures where no issues are raised
  • analyse all questions and responses across internal and external respondents
  • set reminders for ongoing compliance in successive periods
  • have local-language notifications and communications
  • have dashboard reporting, with the ability to export the supporting data into a CSV file
  • have advanced reporting options by a number of criteria (declarer region, declarer country, disclosure name, approved date, submission date etc.) that can be generated in a number of formats, including CSV.

To learn more on how The Red Flag Group can help companies manage COI through its compliance technology platform, ComplianceDesktop®, please visit here.

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