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Small businesses need to have legal documentation in place, including Employment Contracts, Confidentiality Agreements and Shareholder Agreements. One legal document you may not have considered putting in place is a Conflict of Interest (COI) Policy.

Below we’ll explain what a COI Policy is, the different types of COI policies and whether your business needs one.

What is a conflict of interest?

Conflicts of interest arise when an individual's personal concerns, (such as relationships, employment, financial status, social position) impede their ability to make unbiased judgments or decisions in a professional or business context. 

It’s a situation where personal interests clash with professional responsibilities. For small businesses in the UK, it’s important to understand the implications of conflicts of interest.

Are conflicts of interest illegal?

Conflicts of interest are not inherently illegal. However, they can lead to illegal or unethical actions, making it essential to manage them effectively. When a COI arises, it's crucial to handle it transparently and ethically to avoid legal issues.

What are the 4 types of conflict of interest?

Conflicts of interest come in various forms, but they typically fall into four categories:

1. Financial interests 

When an individual's financial interests could interfere with their professional judgment. For instance, a small business owner investing in or working for a competitor.

2. Personal relationships

This occurs when a personal relationship, such as a friendship or family ties, influences a business decision, potentially to the detriment of the business itself.

3. Business interests

In cases where a staff member has a stake in a competitor or another company, it can create a COI.

4. Accepting gifts and perks

Accepting gifts, perks, or favours from parties your business deals with can create a perceived conflict of interest. The appearance of impropriety can be damaging, even if no influence is exerted.

What are examples of conflict of interest?

Understanding conflicts of interest can be easier when you see real-life examples. In March 2022, the Financial Conduct Authority (FCA) fined asset manager Gam International Management £9.1 million 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, as they had received gifts and entertainment, including travelling on a Greensill private aircraft, but failed to promptly record them. While there was no evidence to suggest that the former bond fund manager made investment decisions based on these gifts, the poor management of this COI raised concerns.

This case shows the strong financial penalties that can be imposed if a regulator identifies a COI in a business. Unfortunately, business owners cannot manage COI risks without a clear COI Policy that sets a code of ethics.

How to determine a conflict of interest?

Determining a conflict of interest isn't always straightforward. It requires careful consideration of the specific situation. Here are some steps to help you identify conflicts of interest in your small business:

  • Define conflicts of interest – start by defining what constitutes a conflict of interest within your business (this definition should be comprehensive and cover various scenarios)
  • Evaluate relationships and interests – regularly assess your employees' personal relationships and financial interests (identify situations where these could potentially influence their professional roles)
  • Create a disclosure process – establish a clear process for employees to report any potential conflicts of interest (encourage a culture of transparency)
  • Record and monitor – keep detailed records of disclosed conflicts of interest (regularly review these records to ensure they are managed appropriately)
  • Consider external assistance – for complex cases, seek legal assistance to ensure you handle conflicts of interest correctly within the bounds of English law

Discuss Conflicts of Interest with a lawyer

Conflicts of Interest Policy

Your COI policy should be a cornerstone of your business's ethical framework. It should clearly outline:

  • The definition of a COI
  • Factors that are taken into account when deciding if a COI exists
  • Situations where a conflict of interest may arise
  • The process for disclosing conflicts
  • How conflicts will be managed, reported, and recorded
  • Possible disciplinary actions for failing to adhere to the policy

A well-drafted Conflict of Interest Policy will ensure that everyone in your business understands that you have procedures in place to recognise, disclose and manage potential COIs.

Make all your employees, including line managers, aware that when it comes to COI, the best policy is: if in doubt, disclose.

How to avoid a conflict of interest

Preventing conflicts of interest should be a top priority for all businesses. Here are some strategies to help you avoid them:

  • Promote transparency – encourage open and honest communication within your business (make sure employees understand the importance of disclosing potential conflicts)
  • Establish clear policies – develop a comprehensive COI Policy that outlines what is considered a conflict, how to report it and the consequences of not doing so
  • Training and education – provide training to your staff to help them recognize and manage conflicts of interest effectively
  • Regular reviews – continuously review and update your Conflict of Interest Policy to ensure it remains relevant to your business's changing dynamics
  • Seek legal advice – consult with legal experts like LawBite to ensure your policy complies with English law and best practices

Get legal assistance from LawBite

Understanding and managing conflicts of interest is crucial. A well-crafted COI Policy isn’t just a legal requirement; it's a tool to protect your business's reputation and financial stability. By promoting transparency, setting clear policies and seeking legal advice when necessary, you can effectively navigate the complex landscape of COIs, avoiding potential legal issues and preserving your business's integrity.

At LawBite, we understand that legal matters can be intimidating, but we’re here to simplify them for you. We believe in doing law differently, making legal services more accessible for entrepreneurs, startups and small to medium-sized businesses.

To talk to one of our solicitors about drafting or reviewing a Conflict of Interest Policy, book a free 15 minute video consultation or call us on 020 3808 8314.

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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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