Conflicts of Interest

Current climate

Unlike some major international financial centres, Hong Kong has not recently experienced a huge Enron-type corporate failure or a high-profile court battle (such as the challenge that prevented a law firm acting for a bidder for UK retailer Marks & Spencer when it had previously advised the company) that has highlighted the regulation of conflicts of interest in financial institutions, auditing firms or law firms. In the latter case, that is partly because, by and large, hostile public takeover battles are few and far between. There is no real public demand for a wholesale re-examination of the law and practice relating to conflicts of interest, or for any significant new regulation.

None the less, Hong Kong is not immune to the conflicts of interest issues faced elsewhere. Anxious to maintain Hong Kong’s status as a major financial centre, both the government and regulators have reviewed the existing law and some changes have been made. For instance, in November 2004, the Securities & Futures Commission (SFC), the primary regulator of the securities and futures markets in Hong Kong, finalised paragraph 16 of the Code of Conduct for Persons Licensed by or Registered with the SFC (SFC Code of Conduct), which is designed to remove, reduce or manage analysts’ conflict of interest. However, most of the changes have not been substantial; they are, rather, intended to refine existing law and practice.

Events elsewhere have heightened the awareness of regulators and practitioners, not only of conflicts issues, but of corporate governance issues in general as they affect professional service firms and others owing a fiduciary duty to their clients. This has led to a more vigorous enforcement of the existing regime by regulators and to internal compliance being taken more seriously within professional firms. For example, in August 2004, the Securities and Futures Appeals Tribunal upheld the SFC’s decision to suspend the licence of a research analyst for 18 months for front-running his research report. In another instance, in March 2005, the SFC suspended for nine months the licence of a brokerage house representative who had become personally interested in clients’ transactions.

Most of the current concerns relating to conflicts relate to the practices of financial institutions and accountants. Although lawyers have carried out a review of their own professional conduct rules relating to conflicts of interest, their regime has not been changed as a result.

Sources of law and practice

The legal system in Hong Kong is modelled largely on the English system of common law and equity, because of recent historical/political ties. Under the Basic Law, which is Hong Kong’s “mini-constitution”, all laws in force in Hong Kong prior to 1 July 1997 (including the common law, rules of equity, ordinances and subordinate legislation) are maintained, except for any that contravene the Basic Law or have been amended by the legislature. The national law of the People’s Republic of China (PRC) does not (with very limited exceptions) apply in Hong Kong. Although English law cases decided after 1 July 1997 are not binding on the Hong Kong courts, they still carry persuasive authority in so far as they relate to similar legislative provisions or principles of common law or equity. In practice, English cases are still largely followed by the Hong Kong courts.

The rules on conflicts of interest are scattered among myriad sources. Most derive from the common law and regulation rather than statute. The principal sources of Hong Kong common law relating to issues of conflicts concerning auditors, lawyers and financial institutions, however, are broadly based on the English law principles of fiduciary duties.

The SFC, the Law Society of Hong Kong (the Law Society), the Hong Kong Institute of Certified Public Accountants (HKICPA) and the Hong Kong Monetary Authority (HKMA) all have codes of conduct governing issues of conflicts. Similarly, these codes are, for reasons of recent historical/political ties, largely modelled upon their English counterparts. The Australian model was also influential in the case of the regulation of the securities and futures markets. Before 2005, these codes laid down broad principles to be applied in connection with conflicts rather than detailed prescriptive provisions (ie the conceptual approach). One inevitable side-effect of the flexibility of the conceptual approach is that it makes the application of the rules to specific/new situations sometimes controversial. However, there appears to be a trend towards more prescriptive rules.

The form of regulation of professional services in Hong Kong has also generally been modelled on the UK form of self-regulation. Accordingly, rules relating to conflicts have predominantly taken the form of self-regulation, with failures to comply mainly left to the relevant self-regulatory body, or to redress through civil actions by persons with whom a fiduciary relationship can be established. The HKICPA actively publicises the successful conclusion of disciplinary actions against its members. Through the course of 2004, there were five such disciplinary actions, none of which was in relation to issues of conflicts. Case law in Hong Kong bears out a similar trend, there being no significant reported cases on conflicts of interest involving accountancy professionals (other than in their role as insolvency practitioners).

Definitions of conflicts of interest

The term “conflicts of interest” is not defined under Hong Kong law or regulation. For instance, in the SFC Code of Conduct, the section headed “Conflicts of interest” contains only 73 words. The section does not purport to define conflicts, but instead provides a high-level guideline of what to do in situations of conflict.

The Law Society’s Solicitors’ Guide to Professional Conduct (the Professional Conduct Guide) has a more elaborate chapter on “Conflict of interest between clients”, but again, there is no overarching definition of a conflict of interest. Instead, there is an attempt to give examples of what amounts to a conflict.

“Conflicts” is, in practice, interpreted by regulators in a similar manner as in the UK and other common law jurisdictions and is used to describe a situation in which a person has competing professional obligations and personal interests (whether financial or otherwise) that would make it difficult or impossible for such person properly to discharge such obligations or where such personal interests are otherwise incompatible with the discharge of such duties.

Hong Kong law provides that where it is established that a person is placed in the position of a fiduciary, then he must not allow himself to be put in a position where his fiduciary duties conflict with personal interests unless he has disclosed such conflict and the person to whom the duty is owed has consented. Further, the relevant regulatory regimes applicable to financial institutions, auditors and lawyers provide that such conflicts must be avoided or disclosed.

Sometimes referred to as a “conflict of duty”, there is a concurrent fiduciary duty of undivided loyalty which should be considered when defining the notion of conflicts of interest as it applies in Hong Kong. This fiduciary duty is particularly relevant in connection with the activities of equity analysts who have conflicting duties owed to their institutional clients (eg fund managers), on the one hand, to provide independent and objective research, and to their corporate clients, on the other, to help promote an issue of securities to the market or win investment banking business.

Background/environment

Historical background

While the sources of law and practice are primarily that of the English/common law system and the fundamental principles that underpin it, the people who work in this system are principally of Oriental background, and that makes the development of this branch of the law and practice at variance with what one has witnessed in the West. Indeed, there are still people claiming today that the concept of fiduciary is a Western concept and it is difficult to find in the Chinese vocabulary a perfect translation for it!

As a further illustration of how the concept of avoiding a conflict of interests has developed in the public life in Hong Kong, the Financial Secretary of the Hong Kong Government was forced to resign in 2003 over an alleged conflict of interests incident – the “Lexus-gate” that hit the headlines of many business pages.

In the main, the historical development of the regulation of conflicts of interest in Hong Kong has been characterised by phases of ad hoc crises management, with changes to and introduction of regulation in reaction to various local and global events. While Hong Kong has to adopt “best market practice” in order to stay ahead of the game, there have always been voices emphasising Hong Kong’s “unique circumstances”. Even the SFC, in its Consultation Conclusions on the Regulatory Framework for Addressing Analyst Conflicts of Interest, has stated that the new guidelines for analysts “took into account … Hong Kong’s unique market characteristics”.

The development of the stock market in Hong Kong has been inextricably linked to the development of the regulatory framework relating to conflicts of interest. The push towards better corporate governance has in turn led to the introduction of more rigorous regimes regulating issues of conflicts affecting the economic efficiency of Hong Kong and confidence in the proper functioning of the Hong Kong markets.

The current trend is increasingly prescriptive, while recognising Hong Kong’s laissez-faire tradition. The move towards a prescriptive approach was influenced by the Enron scandal and the combative approach towards financial services compliance adopted by New York Attorney-General Elliot Spitzer and to allow Hong Kong to maintain its prime position as an international financial centre. For instance, the new guidelines dealing with analysts’ conflicts of interest were introduced “in light of international developments”.

1. Interpretation and enforcement

Financial institutions, in so far as they carry on any regulated activities (which would include advising on corporate finance transactions and any dealing/broking activities), are regulated by the SFC. It has the primary responsibility for interpreting its own codes and regulations as they relate to conflicts of interest and the statutory power to enforce, primarily through disciplinary actions including fines and/or revocation of licence, the proper conduct, competence and integrity of licensed persons. Where a financial institution is also carrying out deposit taking and other general commercial banking business, it will also be regulated by the HKMA. The HKMA has the primary responsibility for interpreting and enforcing its own codes and regulations as they relate to conflicts. This chapter does not look at the position of insurers.

2. Impact of actions

There has been no wholesale inquiry into conflicts of interest with financial institutions comparable to those launched by the US authorities in 2002. Nor has there been any allegation against a financial institution of wholesale malpractice. (For details of the SFC’s action on addressing analysts’ conflicts of interest as a result of worldwide concern, see the General introduction above.) The arrest of an analyst in Hong Kong by the Independent Commission Against Corruption shortly before the release of the consultation focused further public attention on the conduct of analysts. The new guidelines came into effect on 1 April 2005.

3. Applicable law and regulation

Legislation governing conduct of financial institutions

(i) Securities and Futures Ordinance (SFO) Under the current regulatory framework, the SFO is the key piece of legislation governing the conduct of financial institutions. Financial institutions and the individuals they employ who are engaged in “regulated activities” are required to be licensed with the SFC.

There are nine types of regulated activities: dealing in securities; dealing in futures contracts; leveraged foreign exchange trading; advising on securities; advising on futures contracts; advising on corporate finance; providing automated trading services; securities margin financing; and asset management.

The SFC is empowered under section 399 of the SFO to publish codes and guidelines for the “the furtherance of any of its regulatory objectives”. Conflict of interest issues are primarily dealt with in the codes, guidelines and circulars published by the SFC (see section A.4 at Codes and guidelines below).

Under the SFO, the SFC has a wide discretion in determining whether licensed persons are fit and proper to remain licensed. Breach of the requirements of the codes, guidelines and circulars will, in the absence of extenuating circumstances, reflect adversely on a licensed person’s fitness and properness, and may result in disciplinary or other actions by the SFC. The SFC may conduct investigations under section 182(1)(e) of the SFO in relation to non-compliance with the codes, guidelines and circulars.

(ii) Banking Ordinance (BO) Financial institutions which are also a licensed bank, a restricted licensed bank or a deposit taking company are further governed by the BO, which is enforced by the HKMA.

Financial institutions governed by the BO are required to comply with code and guidelines published by the HKMA from time to time.

Case law

There are no significant cases involving conflicts of interest issues in the investment banking context in Hong Kong

4. The requirements

Codes and guidelines

Financial institutions’ handling of conflicts of interest is guided primarily by the following codes and guidelines.

(i) The SFC Code of Conduct The following sections of the SFC Code deal with the general principle that conflicts of interest should be avoided. And if that cannot be avoided, how the conflict should be dealt with.

(General Principle 6)

“A licensed or registered person should try to avoid conflicts of interest, and

when they cannot be avoided, should ensure that its clients are fairly

treated.”

(Section 10.1 of the SFC Code)

“where a licensed or registered person has a material interest in a transaction with or for a client or a relationship which gives rise to an actual or potential conflict of interest in relation to the transaction, it should neither advise, nor deal in relation to the transaction unless it has disclosed that material interest or conflict to the client and has taken all reasonable

steps to ensure fair treatment of the client.”

A discretionary account agreement should include “an explanation of the additional risks of giving discretionary powers to a licensed person to manage an account on [the client’s] behalf, including the total dependence by the client on the integrity and skill of the licensed person and the inherent risk of conflict of interest in that a licensed person may take the opposite position to a client’s order while acting for the client”.

(ii) The “Fit and Proper Guidelines” and the “Guidelines on Competence” These guidelines set out the matters that the SFC will normally consider in assessing whether a corporation is competent to carry on any regulated activity. Amongst other things, the SFC notes that:

(a)

The competence of a corporation is generally assessed with reference to its organisational structure and personnel. The SFC is unlikely to be satisfied that a corporation is competent if it lacks the infrastructure and internal control systems to manage or avoid conflicts of interest.

(b)

The SFC will look at the corporation’s policies and procedures dealing with conflicts of interest situations including “Chinese walls”, “wall-crossing procedure” and “other control procedures to address conflict of interest issues arising from carrying on more than one type of regulated activities concurrently (eg advising on corporate finance, securities research and asset management activities) in the corporation or its groups” or “employee dealing and client priority” situations.

(iii) “Guidelines to address analyst conflicts of interest” These guidelines are designed to remove, reduce or manage analysts’ conflicts of interest and to provide clearer and more specific guidelines to address potential and actual analyst conflicts. They are based on IOSCO’s Statement of Principles for Addressing Sell-side Securities Analyst Conflicts of Interest and take into account Hong Kong’s unique market characteristics. They apply to any “analyst”, any firm that employs an analyst and any firm that issues investment research on securities traded in Hong Kong or that has an influence on such securities.

The guidelines deal with such matters as analyst trading and financial interests, firm financial interests and business relationships, analyst reporting lines and compensation, firm compliance systems, outside influence, the clarity, specificity and prominence of disclosure and integrity and ethical behaviour of analysts.

The fundamental principles set out in the guidelines generally replicate those published by IOSCO, namely, that mechanisms should exist to ensure that analysts’ research and recommendations are not prejudiced by their own trading activities or financial interests or those of their employers or the business relationships of their employers; written internal procedures should be established and reporting lines structured to identify and to eliminate, avoid, manage or disclose actual and potential analyst conflicts of interest; the undue influence of securities issuers, institutional investors and other outside parties upon analysts should be eliminated or managed; and disclosures of actual and potential conflicts of interest should be complete, timely, clear, concise, specific and prominent.

An analyst who solicits or accepts any advantage as an inducement to or reward for or otherwise on account of writing a recommendation in a particular manner is also committing a criminal offence under section 9 of the Prevention of Bribery Ordinance. He is liable to imprisonment for up to seven years.

(iv) “Corporate Finance Adviser Code of Conduct” This code is primarily concerned with financial institutions engaging in corporate finance advisory work under the Listing Rules, the Takeovers Code or the Share Repurchase Code.

Financial institutions should “avoid engaging in work that is likely to involve conflicts of interest”, “take all reasonable steps to avoid situations that are likely to involve a conflict of interest”, “not unfairly place its interests above those of its clients” and to “withdraw from, or decline to accept, a mandate where a material conflict of interest arises with its client that cannot be resolved through its client giving its informed consent”.

The Code also deals with issues of conflicts relating to the independence of an IFA:

Chinese walls – Where a financial institution is part of a professional firm or group of companies undertaking other activities, eg banking, research, stockbroking and fund management, the adviser should ensure that there is an effective system of functional barriers (a Chinese wall) to prevent the flow of information that may be confidential or price-sensitive between the corporate finance activities and the other business activities. This system should include physical separation between, and different staff employed for, the various business activities.

Sponsors – A corporate finance adviser should ensure that, when giving a view as to whether an issuer is suitable for listing, it is capable of giving “impartial advice” before accepting the sponsorship role and that such view is given independently.

Contingency fees – A corporate finance adviser should disclose, upon request by the regulators, particularly if there is a conflict of interest concern, any fees or other benefits in kind that are contingent upon the success of a transaction.

Receipt or provision of benefits – A corporate finance adviser should: (a) not offer nor accept any inducements in connection with the business of, or a transaction involving, its client without first disclosing the particulars of the inducements to the client. If the client is a corporation, such disclosure should be made to the board of directors of the corporation; and (b) ensure that it develops and maintains written policies and procedures on the disclosure of the value of gifts given to, or provided by, its staff members above a certain monetary limit, and the circumstances in which they were offered or received.

Fiduciary duties

Being caught in a conflict of interest situation does not expose a financial institution to a civil liability per se. If, as in England, the conflict leads to the provision of negligent advice, then the financial institution may be liable for damages at law.

A financial institution, particularly an investment bank, could in certain circumstances assume an obligation of a fiduciary. If so, it must act in good faith; it must not make a profit out of its trust; it must not place itself in a position where its duty and its interest may conflict; it may not act for its own benefit or the benefit of a third person without the informed consent of its principal (Yook Lu Fong & anor v Lau Po Ching [2002] 2 HKLRD 395).

The law governing when a fiduciary relationship arises and what an investment bank should or should not do when acting as a fiduciary is similar to that in England (see, for greater detail, the chapter on England).

5. Outlook

The recent collapses of several newly listed companies, particularly some that joined the Growth Enterprise Market board over the last few years, have heightened the market’s concern about the quality of some of the sponsors. More sponsors are being put under the microscope to see if they have discharged their duty to the market to act impartially when sponsoring an issuer. The SFC issued a consultation paper on the regulation of sponsors in June 2005. It will not be a surprise if more regulations are issued targeting sponsors following hard on the heels of the guidelines to address analyst conflicts of interest.

6. Useful references

The SFO and the SFC’s codes, regulations and guidelines can be found at http://www.sfc.hk.

1. Interpretation and enforcement

The HKICPA has the primary responsibility for interpreting and enforcing its own codes and regulations as they relate to conflicts, principally through the statutory investigation and disciplinary powers including fines and/or removal from register. In this chapter, we focus on certified public accountants who are licensed to practice in Hong Kong.

Impact of actions

The spate of corporate failures that began with the auditing scandal at Enron prompted Hong Kong regulators to review the region’s regulations on auditors’ conflicts of interest. However, there was no general loss of public confidence in the independence and objectivity of auditors, and the US Sarbanes-Oxley legislation was not mimicked in Hong Kong. None the less, some changes were made and the consultation stage for a revised Code of Ethics has already ended.

Although the potential for conflicts of interest remains where an audit firm is also providing non-assurance services to a client, the HKICPA believes that this issue is capable of being regulated without the need for any absolute prohibitions or other restrictive legislation or regulation.

Hong Kong

2. Applicable law and regulation

Common law

As stated above, at common law, an auditor may owe its clients the following key fiduciary duties:

+

to avoid conflicts of interest;

+

to avoid misuse of property held in fiduciary capacity;

+

undivided loyalty; and

+ confidentiality. The HKICPA is the only statutory licensing body of accountants in Hong Kong. The HKICPA was established under the Professional Accountants Ordinance (PCO) and has as one of its statutory objectives the discouragement of “dishonourable conduct and practices by certified public accountants, and for this purpose … [can] … hold inquiries into the conduct of certified public accountants, firms and corporate practices” (section 7(h), PCO).

The HKICPA has a members’ handbook (the Handbook) which, though not of statutory force, is intended to act as self-regulatory guidance for accountancy professionals in maintaining their professional standards. These guidelines are modelled on the International Federation of Accountants’ (IFAC) Code of Ethics for Professional Accountants and the HKICPA’s approach is to implement fully the principles of the IFAC’s Code of Ethics in its Handbook.

Maintenance of professional standards by the HKICPA is conducted in five main ways: monitoring the professional standards of auditors of public listed companies; practice reviews of members; investigating complaints from members of the public; investigating the HKICPA member; and, if necessary, launching disciplinary proceedings. Failure to comply with the guidance in the Handbook may cause the HKICPA to use its statutory enforcement powers. If a Disciplinary Committee is satisfied, for instance, that an auditor has put himself in a conflict of interests situation, it may make one or more of the following orders:

+

Permanent or temporary removal of name from register.

+

Reprimand.

+ Fine not exceeding HK$500,000. The HKICPA regulation as regards conflicts takes an approach based on principles and proposed safeguards to be adopted by auditors (as they deem appropriate) in situations where a conflict arises rather than prescriptive mandatory rules. The emphasis in Hong Kong is on preserving the independence of the services provided by auditors, especially where a firm is providing non-assurance services to an audit or other assurance services client. However, Hong Kong has not introduced any mandatory requirements (as we have seen in the US) that would:

+

create an absolute prohibition of the provision of certain non-assurance services to audit clients;

+

require the rotation of the audit partner over a prescribed period; or

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restrict employment of auditor personnel by an audit client.

3. The requirements

The Handbook contains one statement on conflicts of interest generally. Statement 1.203 deals with, amongst other things, conflicts between and auditor’s interests and those of its clients; disclosure of business interests and conflict between interests of different clients.

4. Outlook

The current ethical requirements on conflicts of interest and independence may be changed. The HKIPCA will consider later in 2005 the adoption of the IFAC’s Revised Code of Ethics for Professional Accountants.

5. Useful references

The HKICPA’s website is http://www.hkicpa.org.hk.

1. Interpretation and enforcement

The Law Society has the primary responsibility for interpreting and enforcing its own codes and regulations as they relate to conflicts, principally through the statutory investigation and disciplinary powers including fines and/or striking off from the roll of solicitors. In this chapter, we focus on solicitors, as barristers are less likely to be affected by conflicts of interest issues.

Impact of actions

None of the events elsewhere has an impact on the law and practice governing solicitors’ handling of conflict situations.

2. Applicable law and regulation

There are four main sources of law on conflicts of interest affecting lawyers:

(a)

Solicitors’ Practice Rules (SPR);

(b)

Professional Conduct Guide;

(c)

Solicitors’ Disciplinary Tribunal Panel; and

(d)

case law.

Solicitors’ Practice Rules

Rule 2 of the SPR establishes a general principle that a solicitor shall not do or permit to be done on his behalf anything which compromises or impairs or is likely to compromise or impair his duty to act in the best interests of his client. However, rule 5C of the SPR lays down specific rules as to when a solicitor is allowed jointly to represent a vendor and a purchaser in a conveyancing transaction. The courts have expressed their disapproval of the joint representation practice (see Penlington J in Liu Man Bun v Li Yek Leung [1986] HKC 183, CA) as it inevitably involves a potential conflict of interest.

Professional Conduct Guide

The Professional Conduct Guide contains most of the detailed rules on conflicts of interest.

Solicitors’ Disciplinary Tribunal Panel decisions

Pursuant to section 13A of the LPO, the Law Society can publish disciplinary decisions made by the Solicitors Disciplinary Tribunal (SDT). These decisions are summarised by the Law Society and published in the Hong Kong Lawyer, the monthly journal of the Law Society of Hong Kong.

As the decisions of the SDT do not go to court unless they are appealed to the Court of Appeal under section 13 of the LPO, these extracts in the Hong Kong Lawyer are valuable for the insights they give practitioners as to how the SDT interprets the professional conduct rules. It should, however, be noted that these cases do not bind the SDT, and are only of persuasive value in future cases that reach the SDT.

Case law

It is worth noting the difference between conduct standards in the Professional Conduct Guide and those laid down by common law. The SDT enforces conduct rules in the Professional Conduct Guide, whilst a complainant bringing a civil claim against a solicitor will be required to prove elements of the cause of action to establish liability (eg proving duty and standard of care, causation and loss in a tort claim etc).

Rogers JA, in the case of Nishimatsu-Constain-China Harbour Joint Venture v IP Kwan & Co (a firm) [2000] 2 HKC 445, CA, laid down helpful guidance:

“Although the Solicitors’ Regulations (referring to the principles stated in the Guide) are not directly enforceable at the suit of a litigant, they do illustrate appropriate professional conduct such as may assist the court in deciding whether and how it may enforce its supervisory powers. In my view, an expression of professional standard in a code of ethics relating to a matter before the court should be considered an important statement of public policy … any departure from the approach laid down in the rules of a professional body should, in my view, be scrutinised with care.”

3. The requirements

Introduction

A breach of a provision of the LPO, a practice direction issued by the Law Society or a principle of professional conduct contained in the Professional Conduct Guide is potentially a disciplinary offence and may expose a lawyer to disciplinary action.

The LPO does not lay down specific conduct rules regarding conflicts of interest. The practice directions which concern conflicts of interest all relate to the narrow context of joint representation in conveyancing transactions. This leaves us with the guidelines laid down in the Professional Conduct Guide.

The general principle is to be found in Principle 5.07 of the Professional Conduct Guide, which provides that: “A solicitor must not act, or must decline to act further, where there is, or is a significant risk of, a conflict of interest.”

There are two broad categories of conflicts identified in Principle 5.07. They are:

(1)

conflicts of interest between a solicitor or his firm and a client; and

(2)

conflicts of interest between clients.

Conflicts of interest between a solicitor or his firm and a client

(i) General rules/requirements Fiduciary duty owed to client – A solicitor’s fiduciary duty to his client is recognised in Chapter 7 of the Professional Conduct Guide as the governing principle in dealing with situations where a solicitor’s own interests conflict with his duty to his client (such as the duty to act in the best interests of his client). Solicitors must therefore observe the general duties of a fiduciary at law, which are similar to those in England, as recently reiterated in Marks & Spencer plc v Freshfields Bruckhaus Deringer [2004] 1 WLR 2331.

Usually the retainer defines the scope of a solicitor’s fiduciary duty. In deciding the scope of fiduciary duty, the court normally adopts the approach that the matter depends on the particular facts (Nishimatsu-Constain-China Harbour Joint Venture v IP Kwan & Co (a firm) [2000] 2 HKC 445, CA).

“Conflicts” include both actual and potential conflicts. A solicitor’s “interests” extend to interests of the solicitor’s partner or a member of his staff.

A solicitor must consider whether his relationships (including family or other personal or emotional relationship; office, appointment or shareholding which he has) would inhibit his ability to advise his client properly and impartially (Principle 7.01(2)).

A solicitor must not act where his own interests conflict or are likely to conflict with the interests of a client or potential client, especially where there exists a significant risk of conflict of interest (Principle 7.01).

Perhaps of more interest are the requirements as to how a solicitor handles a conflict of interest between two or more clients

Conflict of interest between clients

(i) General rules/requirements A solicitor must not accept instructions to act for two or more clients where there is a conflict or a significant risk of conflict between the interests of those clients (Principle 9.01). He must refuse to act for the second client if he already acts for a first client and is asked to act for the second client where there is a conflict of interests (Principle 9.01(2)).

The basis of the rule lies in the duty of confidentiality owed to a client. A solicitor must not accept instructions where it is likely that his duty to disclose all relevant knowledge to his second client conflicts with his duty of not disclosing confidential knowledge acquired when he acts for a first client (Principle 9.02). The scope of the duty of confidentiality is not confined to the solicitor alone, but extends to the firm in general. “Knowledge” is a wide term which includes any information useful to the case, eg personality and character of a former client etc.

The duty of confidentiality can be waived if the client consents (Principle 9.02(1)). But relying on client’s consent may be risky as the client may later complain that he did so without an informed independent advice. This may lead to a subsequent negligence claim (Mills v Day Dawn Lock Gold Mining Co Ltd [1882] 1 QLJ 62). Also, waiver only applies to the retainer concerned but does not extend to another retainer. Consent is suggested to be limited in light of the dangers and risks known to the lawyer but not to the client.

A solicitor must not continue to act for two (or more) clients where a conflict of interests arises between those clients (Principle 9.03). In joint retainer situations, the solicitor must tell clients that any confidential information will not be treated as confidential between them, and if a dispute subsequently develops, the solicitor cannot continue to act for both or may have to withdraw completely (Principle 9.03(1)). Before accepting a joint retainer, if one client has a continuing relationship with the solicitor, this fact must be revealed to the second client at the outset with a recommendation that they take independent representation. Consent from the parties must be obtained in writing if the solicitor is still retained after such advice. Where it is reasonably obvious that the clients’ interests or obligations will diverge and a contentious issue may arise, the solicitor must guard against acting for the second client (Principle 9.03(2)). The solicitor can still continue to act for one of the parties if he can do so without embarrassment, and if there is consent from the other party at the outset or subsequent to the arise of the conflict (Principle 9.03(3), (4)).

(ii) Practical guide to Chinese walls Unlike the accountants’ Handbook, there is no discussion of the use of Chinese walls in the Professional Conduct Guide. The only Hong Kong case in which Chinese walls are mentioned is Cheng Chui Ping v the Chief Executive of the HKSAR and the USA [2002] 5 HKCU 1. And that case is not remotely connected with solicitors acting for two opposing clients in a commercial context.

Thus, on a practical level, the courts in Hong Kong are likely to be influenced by the development of the English judiciary’s attitude towards Chinese walls in the recent past, starting from Prince Jefri Bolkiah v KPMG (a firm) [1999] 2 AC 222 and Young v Robson Rhodes [1999] 3 All ER 524, through to the more recent decision in Koch Shipping Inc v Richards Butler (a firm) [2002] 2 All ER (Comm) 957 and Marks & Spencer plc v Freshfields Bruckhaus Deringer [2004] EWHC 1337 (Ch).

(iii) What can be done?

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Client’s written consent.

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If the client does not consent, a high standard to protect confidential information must be maintained. Elements of the Chinese wall may include (see Bolkiah):

(1)

physical separation of staff (including dining arrangements) to prevent mixing and communications. Separate departments are essential and separate buildings are an advantage;

(2)

providing education emphasising the importance of maintaining confidentiality;

(3)

strict procedures for ‘crossing the wall’ and maintenance of proper records;

(4)

monitoring of the wall by compliance officers; and

(5)

disciplinary sanctions for breaches of the wall. In addition, undertakings aimed at strengthening the wall can be given by the firm and the solicitors working on the file, such as an undertaking not to discuss, or permit to be discussed in their presence, the instructions, actions or affairs of the parties (including conducting telephone communications so as to minimise eavesdropping); an undertaking to mark all incoming correspondence “strictly confidential” and addressing it to only one person (the mailroom would be notified that he was the only one to open the mail); or an undertaking to lock computers of the solicitors working on a particular file whenever they are absent from their desk.

(iv)

Amalgamation of firms Where firms amalgamate, it must be ensured that the interests of the clients of the new firm do not conflict, and if they do, the firm must cease to act for both clients. The new firm must obtain consent from both clients to continue to act for both (Principle 9.03(6)).

Provided the new firm holds no relevant confidential information concerning the affairs of one client whom it has chosen not to continue to represent, it can continue to act for the other client. Where it holds relevant confidential information, it has to satisfy the court that there is no real risk of disclosure before it can continue to represent one client.

4. Outlook

It is understood that the Law Society currently has no plan to revise its rules relating to conflicts of interest.

5. Useful references

The Law Society’s website is http://www.hklawsoc.org.hk.