Most professionals whose job it is to advise or to make arrangements for others will come across occasions when their duty to a client conflicts with an interest that they themselves have in the transaction.
Some conflicts of interest are obvious and easily avoided but others are less so. But it is important to recognise the conflict when it arises and to deal with it properly.
The duty to avoid conflicts of interest is deeply embedded in the law. An IFA acts for his or her client in respect of transactions carried out on behalf of the client. In other words, the IFA is the agent for the client.
The relationship of principal and agent is one of trust and confidence and the law describes such a relationship as a “fiduciary” one. The law imposes on the agent a duty so that the principal is entitled to the single-minded loyalty of the agent. One of the consequences of that duty of loyalty is that the agent must always act in good faith towards the principal, he must not make a secret profit out of his position and he must not put himself in a position where his duty to the principal conflicts with his own interests.
If he finds himself in the position where there is such a conflict which cannot be avoided, the agent must disclose it fully and get the principal’s fully informed consent. Without that consent, the agent must not act in the transaction.
A common conflict of interest occurs when the agent takes a secret commission paid by the other party to the transaction with the principal.
Thus, in the days before the compulsory disclosure of commission, it was common for an insurance intermediary to take a commission paid by the insurance company when arranging an insurance contract between his client and the insurance company.
The intermediary could reasonably say that the client knew or should have known that the intermediary was being remunerated with a commission paid by the insurance company but the client would often not know how much the commission was. Thus, the FSA’s rules on commission disclosure simply back up what the law requires anyway.
Conflicts also arise in other ways. There are, unfortunately, many cases in which a solicitor has acted in breach of his or her duty of trust and confidence owed to a client by ignoring the conflict of interest that arose in the circumstances.
In a case that the House of Lords described in 2005 as “particularly shocking”, a firm of solicitors acted for both the buyer and the seller in a property deal. The seller, Mr Hilton, was a small property developer. The buyer, a Mr Bromage, had recently been released from prison for a number of offences, one of which involved fraudulent trading and nine others related to obtaining credit whilst an undischarged bankrupt. The firm of solicitors knew of Mr Bromage’s convictions and prison sentence because it had acted for him in the criminal proceedings.
Both parties instructed the firm to act for them and the deal was negotiated in the solicitors’ offices. The deal involved Mr Hilton building six flats on a site, and Mr Bromage buying them as each was completed. The firm arranged the bank loan that Mr Hilton needed to fund the building work. He also wanted a cash deposit of £35,000 from Mr Bromage. The firm then negotiated the deposit down to £25,000 and lent the money to Mr Bromage.
As Lord Walker said in giving judgment: “Mr Hilton was not told that his own solicitors were advancing the entire deposit to a convicted fraudster so as to clothe him with the appearance of a man of substance.”
In due course, after the flats had been built, Mr Bromage refused to complete the purchase. Mr Hilton asked the solicitors to take steps to rescind the contract.
At that point, the solicitors told Mr Hilton that there was a conflict of interest, that they should not have acted, and advised him to consult another firm of solicitors.
The transaction ruined Mr Hilton and it was 15 years before the case got to the House of Lords and he got judgment in his favour.
Lord Walker went on to say: “The solicitor’s duty of single-minded loyalty to his client very frequently makes it professionally improper and a breach of his duty to act for two clients with conflicting interests in the transaction in hand.”
In this case, the solicitors had irreconcilable duties to each client. They owed Mr Bromage a duty not to disclose his criminal past and they owed Mr Hilton a duty to tell him the facts about Mr Bromage’s past and the fact that they had a personal financial interest in the transaction, having lent Mr Bromage the money for the deposit. In the circumstances, the only proper thing they could have done was to refuse to act for Mr Hilton when he first approached them.
The House of Lords ordered that the damages suffered by Mr Hilton should be assessed by a judge if they could not be agreed. Lord Walker ended by saying: “But it is now 15 years since Mr Hilton suffered a grievous wrong for which he has not been compensated. For the good name of the solicitors’ profession, his compensation should be agreed, on a generous scale, without further delay”.
As Lord Millett said in a different case which reached the House of Lords: “A fiduciary cannot act at the same time both for and against the same client…his disqualification has nothing to do with the confidentiality of client information. It is based on the inescapable conflict of interest which is inherent in the situation.”
Not all cases are about such clear conflicts. The conflict can be subtle and those involved do not always find it easy to spot. Where there has been concern that the FSA has not acquitted itself well in relation to a high-profile failure, the regulator has itself carried out an internal investigation into its own performance and then published the conclusions.
The investigations it carried out in relation to the closure to new business of Equitable Life in 2000 and the investigation into the failure of Northern Rock are examples.
But there is an inescapable conflict of interest in any situation in which a public body seeks to investigate its own alleged wrongdoing or failure to perform properly.
Those investigations cannot be relied on to the same extent that they could have been if they had been carried out by a truly disinterested and respected outsider. How do we know whether or not every point has been properly considered and investigated?
For a long time before the establishment of the independent police complaints commission, the police used to investigate complaints against themselves. The public did not accept the results.
By the same token, investigations into the failures of the FSA should be fully investigated by a truly independent body reporting to, for example, Parliament.
Peter Hamilton is a barrister specialising in financial services at 4 Pump Court