This Rule Interpretation Bulletin provides information about the interpretation and application of the Conflict of Interest Rule in the FP Canada™ Standards of Professional Responsibility.
What is a Conflict of Interest?
A professional financial planner always has an obligation to place their clients’ interests first, but they may encounter situations where they have other loyalties, such as to a business partner, an employer, a family member of the client or their own personal interests.
A conflict of interest exists where the duties a QAFP® professional or CFP® professional owes to their client are in conflict with, or impacted by, their own interests or the loyalties they owe to a third party.
What is the difference between a Potential and an Actual conflict?
Conflicts of interest exist when the interest of a third party currently exists which could adversely affect a QAFP professional or CFP professional’s judgment or obligations to their client(s). With potential conflicts of interest, however, while the interests of the client and the QAFP professional or CFP professional may be currently aligned, a future conflict is a reasonable possibility. For instance, a financial planning professional providing planning services to his landlord is a situation where a conflict of interest could arise. While there is no conflict of interest at the outset, if the landlord/tenant relationship deteriorates, one can imagine that a change in the personal relationship could affect the professional engagement.
Actual and potential conflicts can also exist between clients, or between the financial planning professional and a third party. For example, in the case of a joint engagement involving spouses, a couple’s interests and financial goals may initially be aligned but always have the potential to diverge.
A potential conflict of interest can even exist when a professional financial planner’s duty to their client is perceived to be impacted by the duties or loyalty that they owe to a third party, or with their own interests. For instance, a professional financial planner is providing financial planning services to her spouse’s boss. Even if she is able to remain fully objective, a reasonable person could perceive that the duty she owes to her client could be impacted or influenced by her spouse’s interests.
What do I do if I identify a Potential Conflict of Interest?
Under the Conflict of Interest Rule, you have the duty to disclose to your client any potential conflicts of interest you have identified. You must do this in writing. You should describe the potential conflict and explain to the client how they could be affected if a potential conflict of interest turns into an actual conflict of interest.
As a matter of best practice, if you identify a potential conflict of interest that is likely to materialize in the future and that cannot be mitigated, you should decline to enter into the professional relationship.
You should also advise your client that you might not be able to continue the engagement if a conflict materializes in the future. For example, if your client refers her business partner to you, you must advise them both about potential conflict of interest. You should also inform them if an actual conflict develops in the future, for example, if there is a disagreement over the direction of the business that cannot be resolved, you would not be able to continue representing one or both.
It is important to always document the steps you take to identify potential conflicts, and to keep records of your written disclosure to clients and of any related conversations.
What do I do if I identify an Actual Conflict of Interest?
If the conflict exists at the start of the engagement
If you identify a conflict of interest at the beginning of the engagement, you cannot provide services to the client unless:
- You provide your client with written disclosure of the conflict of interest;
- Your client makes an informed decision to continue despite the conflict; and
- Your client provides written consent to proceed.
Similar to a situation with a potential conflict of interest, you should decline to enter into an engagement where there is an existing conflict of interest that cannot be mitigated, again as a matter of best practice.
If the conflict arises during the engagement
- If a conflict of interest arises during an ongoing engagement, you must take the following steps:
- Immediately inform your client about the conflict in writing; and
- Stop providing services (while acting in accordance with the provisions of the rules regarding Termination of Services) unless:
- Your client makes an informed decision to continue despite the conflict; and
- Your client provides written consent to proceed.
It is important to always document the steps you take to identify conflicts of interest, as well as any relevant conversations you have with clients, your written disclosure to clients describing the conflict, and their written consent to proceed.
Other Principles and Rules also relate to the obligation to disclose and mitigate conflicts of interest. For example, as a professional financial planner, you are obliged under the Rules of Conduct about Disclosure Requirements, to disclose material changes to your client as soon as possible, including potential or existing conflicts of interest. Further, you owe a duty of loyalty to your clients under the Client First Principle, which includes disclosing and mitigating conflicts in the client’s favour. Finally, you are required, under the Fairness Principle, to provide your clients with relevant information which includes disclosing conflicts of interest.
Professional financial planners can find additional guidance in the Standards of Professional Responsibility to increase their understanding of the Conflicts of Interest Rule.
