Pursuing a bone of contention

Anyone with management responsibility in a Financial Services Authority-regulated business should, by now, have got the message that conflicts of interest are back at the top of the FSA agenda. With two letters to chief executive officers in the space of a fortnight, there can be little doubt that a clear signal is being sent by the regulator. So what is going on?

Conflicts of interest have always been a key regulatory concern and, up to a point, they always will be. Just at the moment we are suffering the aftermath of Eliot Spitzer's actions in the US - remarkable, but true. The FSA is like a dog with a bone; it will not let go until it has evidence of satisfactory standards across the industry.

However, it would be a mistake to view this as a passing fad. Conflicts of interest appear in the principles precisely because they relate directly to the FSA's objectives of consumer protection and safeguarding market confidence, and possibly to the objective of minimising financial crime too.

By way of confirmation, the comments from no less than two of the FSA's managing directors show that the concerns are quite fundamental. As yet firms are not sufficiently clear about the extent of the conflicts that they face. And, if they are not clear about the conflicts, they are not clear about the management of those conflicts.

The FSA's message is a simple one: there is work to do. Proper handling of conflicts of interest is an obligation and every firm needs to put in place a robust structure for identification, management, review and recording of conflicts.

It is a near certainty that, on supervision visits, the FSA will look closely to see what has been done and will then set about testing its adequacy. They will look for two things in the main: has the job been done thoroughly and properly and has the theory also substantially become practice? This reflects the usual FSA suspicions that firms pay lip service to the obligation and, having written a policy, put it into the drawer to await the FSA's visit.

It would be unwise - very unwise indeed - to ignore the FSA's concern. Having made its position so publicly visible, the regulator will be determined to hunt it to ground.