Conflicts of Interest in Financial Services: Judicial Development and Regulatory Rules
| Author | Dr Chizu Nakajima |
| Pages | 110-151 |
4
CONFLICTS OF INTEREST
IN FINANCIAL SERVICES
Judicial Development
and Regulatory Rules
Nature and Implications
is chapter looks at the ways in which Common Law jurisdictions
have developed rules in regard to conicts of interest in nancial
services, and discusses the diculties that may face multiple-function
nancial services rms in fullling their duties to their clients as a
result of the mismatch between the general law and regulatory rules. It
is appropriate to indicate, at the outset, that by a conict of interest,
the author is referring to the situation where a person, willingly or
otherwise, is placed in a position where the proper or, at least,
satisfactory discharge to another of a duty, which he has assumed or
been given, conicts with his own interests, in terms of either his own
self-advancement or in the protection of some interest. A conict of
duty will arise where a person nds himself in the position of owing
duties to two or more persons, the satisfactory discharge or execution
of which would neither fully account for, or possibly satisfy the due
expectations of one or, indeed, both. In each case, there is a need to
resolve the handling of transactions or perhaps more fundamentally
the management of situations at the outset, which may be capable of
producing conict situations.
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Conicts of Interest in Financial Services
e Categories of Conict
Conict of interest situations in commercial relationships can be
put into the following categories:1
1. A conict of interest arising from self-dealing. An obvious
example is a company director transacting personally with his
own company.
2. A conict of interest arising from an agent acting for two or
more principals in the same transaction, in other words, a dual
or multiple agency.
3. A conict may arise from a situation where one part of an
intermediary obtains information, which is of relevance to a
client of another part of the same rm or business entity.
In the latter two situations, imputation of knowledge from an
agent to his principal may well exacerbate the potential for conict.
In the case of a multiple function duciary, that is to say a person
acting in an agency-type capacity with two or more other persons, it is
conceivable that the intermediary may be unaware of the existence of
a conict, or even in certain instances the fact that it has entered into
a dual agency situation. For example, if two separate departments are
deemed to be one person in law, a company may be in a dual agency
capacity without this fact being obvious to those individuals, who are
employed in dierent departments of the same company, acting in the
same transaction, but on either side of it.2
e third situation raises the question, as to whether information
obtained by acting in a transaction for a client of one department, is
to be deemed to be that of the company as a whole, thereby obliging
another department when advising its client, to disclose, or at least
ensure, this information does not prejudice that client’s interest.
Arguably, a fourth category exists where the conict arises across a
temporal spectrum. us, a rm may face a conict of interest where
having acted for a client, it subsequently nds itself acting against the
same client in the same or a related matter. is type of conict, referred
to by some commentators as ‘former-client conict’,3 has become a
subject of litigation more often involving law rms.4
RISKY BUSINESS: Perspectives on Corporate Misconduct
112
Development of the Law5
e case law relating to conicts of interest has developed
essentially on an ad hoc basis and fastens upon specic relations,
usually of a bilateral nature. Historically these relationships have been
relatively simple involving matters of agency, and, in most instances, a
specic mandate. In a time when life was slower and transactions more
local, the rules that were developed for what were essentially agency
relationships, were relatively well-dened and of clear application. As
the markets developed, the law of agency was modied and specialised
through custom, usage and contract, and has been inuenced not only
by legislation, but also various self-regulatory obligations.
ere has been considerable discussion throughout the
Commonwealth, and particularly in Australasia and Canada, as to
the appropriateness of traditional rules to the changed conditions of
modern business life.6 us, developments have taken place in regard
to the law relating to directors of companies, who have traditionally
been thought of as being in the common case of agents. In the modern
world, it may not be appropriate to hold directors of companies to
the onerous obligations of a duciary agent without modication or,
at least, some regard to the factual circumstances. By the same token,
there is an ever-increasing recognition that the law must distinguish,
perhaps more than it has, between those in the way of a commercial
agency and those in a position of stewardship or trust, where the full
rigours of the duciary relationship may be more appropriate.7
erefore debate has centred on whether it is appropriate to
attempt to apply the strict rules of agency and duciary law, which
were developed at a time when business was very dierent in its nature
to the modern day world of highly complex and often transnational
transactions.8 When analysing various duties imposed on nancial
intermediaries, this dynamic aspect to the law should be borne in
mind. As judges have recognised, more in jurisdictions such as Canada,
Australia and New Zealand, than England, while the nature of the
rules might not change, their application to particular factual situations
may well have to be reconsidered. At the same time, as the Court of
Appeal of New South Wales pointed out in
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