• Startups
  • April 13, 2022

Understanding Conflict of Interest (COI)

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One thing our lawyers consistently emphasise to our clients is the importance of having well-considered and expertly drafted documentation, for example, employment contracts, confidentiality agreements, shareholder agreements, and business plans. One document you may not have thought of but is extremely important is a conflict of interest policy.

But what is a Conflict of Interest (COI) - and why does your business need a robust conflict of interest policy? We unpack this along with a few suggestions of what you should include in your policy.

What is a conflict of interest?

A conflict of interest occurs when a person’s private interests, which can include their family, friendships, financial, or social standing could be shown to compromise their independent judgment, decisions, or actions they are required to take in a professional capacity. A common example is when an SME director’s spouse or other family members have an interest in a company that competes with the SME.

Conflict of interest example

In late March 2022, the Financial Conduct Authority (FCA) fined asset manager Gam International Management £9.1m for failing to manage conflicts of interest arising from transactions linked to Greensill Capital

The financial watchdog also fined a former bond fund manager at Gam £230,037, after concluding that they received gifts and entertainment, including travelling on a Greensill private aircraft, but had failed to promptly record them.

Although there was no evidence to suggest that the former bond fund manager had made any investment decisions based on receiving the gifts and entertainment, because the conflict of interest was not managed properly by the company, there was a heightened risk that the manager may have been incentivised to make certain investments for his own personal interest.

The above case illustrates the enormous financial penalties that can be levied if a regulator rules that a conflict of interest exists in a business. Unfortunately, SME owners cannot manage conflict of interest risks if they do not have a clear conflict of interest policy in place, that sets codes of ethics.

Why have a conflict of interest policy?

A Conflict of Interest Policy (COI Policy) demonstrates to customers, suppliers, regulators, and investors that your small business takes avoiding conflicts of interest seriously. Not only can accusations of conflicts of interest damage your brand’s reputation, but if your business is investigated and prosecuted by a regulator, you could face crippling financial penalties. Having a clear-cut conflict of interest policy in place means everyone in your business has a document to refer to if they are unsure whether or not a particular situation does represent a conflict.

What should be included in a conflict of interest policy?

Your conflict of interest policy should set out:

  • The definition of a conflict of interest
  • The factors you consider when deciding whether or not a conflict of interest exists
  • Situations where a conflict of interest may arise
  • The disclosure process
  • How conflicts will be managed
  • How conflicts will be reported and recorded
  • Possible disciplinary actions

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A well-drafted conflict of interest policy will ensure that everyone who works in or deals with your business understands that you have procedures in place to recognise, disclose, and manage potential conflicts of interest.

Furthermore, make all your employees, including line managers aware that when it comes to conflicts of interest, the best policy is – if in doubt, disclose, disclose, disclose.

To talk to our commercial solicitors about drafting a conflict of interest policy, just click 'Get started' below.

 

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Additional resources

In closing

Nothing in this article constitutes legal advice on which you should rely. The article is provided for general information purposes only. Professional legal advice should always be sought before taking any action relating to or relying on the content of this article. Our Platform Terms of Use apply to this article.



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