SME MLROs and Commercial Conflict 

We are a small jurisdiction and we have a lot of smaller firms, which means we are good at multitasking and getting the job done. It’s admirable, really, and in a lot of spheres, the Island punches above its weight. But it’s not all good, a “can do” attitude can spell danger.

In a lot of small Isle of Man firms, the MLRO might also be a director, and in some cases a shareholder.

The regulatory regime here is built on proportionality, and it explicitly accepts that smaller firms may need to combine roles that a larger institution would keep separate. Nobody is expecting a five person firm to have a standalone MLRO who touches nothing else.

That said, permitted and unproblematic are not the same thing. The reality of “too many hats” is that the person who brings the client in might also be managing the relationship and be responsible for compliance.  Nothing screams “potential conflict” louder than marking your own homework.

The MLRO's job, at its core, is to make calls that sometimes go against the prevailing commercial imperative. When the MLRO owns the relationship, benefits from the fee, or answers to a board that is really just themselves and one other person, the independence the role depends on is inherently compromised. Every firm regularly has to navigate the tension between commerciality and risk management, it’s the embodiment of the risk based approach, after all. It’s just more difficult when it’s embodied in one body.

Picture the periodic review that turns up a gap. The client's source of wealth information is three years out of date, and updating it means asking pointed questions of an important and often prickly client. The firm depends upon their fee revenue. There’s no hint of impropriety; there’s simply a data gap. The person deciding whether to press, escalate, or let it slide is the person who manages the client, is responsible for making sure revenue targets are met and has their head and hands full juggling their “hats” and obligations.

There is a way to manage the conflict safely and effectively.

A starting point, increasingly under the FSA’s spotlight, is to be able to demonstrate that the conflict has been properly identified and that a control framework has been built around it.

A proportionate framework can be effective even when simple. A deputy MLRO with documented authority to sign off specific categories of conflicted decision. A board member, perhaps a NED, designated as a direct line for anything the MLRO cannot decide on cleanly. A dual sign off or four-eyes system for new business, certain transactions or trigger event issues. Documenting each conflict as it arises and how it was managed, even when the outcome seems obvious, because the file is the only evidence that independence was tested. Where you can, lean on external assistance, either by way of ad hoc health checks or more regular quality assurance testing.

I’ve written elsewhere and continue to train boards about the governance “health benefits” and importance of challenge. Essentially consensus on a board and commercial decisioning siloed into one individual expose firms to the same sort of risk.

What should you do to address this in practice? Identify, assess and control.

Firstly, understand which of your MLRO's relationships or decisions carry a genuine conflict exposure between their gatekeeping role and their other interests or commercial pressure.  Properly understanding the nature of a conflict should very clearly signpost to strategies, like those listed above, that can help address the potential exposure.

Secondly; make sure you document, document, and document some more.  Set out your investigation, consideration and control methods. Keep documenting those controls as they are used so that you can evidence what you have done.

Finally, make sure you stress test and monitor. Don’t treat the controls as a “one and done” exercise.