SECTION A: FINANCIAL INSTITUTIONS
1. General introduction
The law on conflicts of interest is perhaps best summed up as: “the principle that a [person] shall not place himself in a position whereby [their] paramount duty to the [client] comes into conflict with [their] own personal interests …”1
Under Irish law there is no general prohibition on persons having a conflict of interest, either under the common law or legislation. However, specific classes of activity, such as the provision of financial services and the provision of audit and legal services, have come under regulation, because of a perceived inherent lack of bargaining power or knowledge of one party.
A succession of financial scandals at home and abroad has resulted in further action. The recently published report into the activities of the National Irish Bank 2 (NIB) highlighted the need for clear and effective rules governing the activities of financial services providers. The report was the product of the investigation by two High Court-appointed inspectors, Mr Justice Blayney and Tom Grace FCA, into the activities of NIB during the period to 30 March 1998.
NIB had been accused of systematically levying various improper charges on clients and encouraging and facilitating tax evasion on the part of their clients through improperly held non-resident accounts and investment products. The lessons learned from the NIB investigation have no doubt influenced the objectives of Ireland’s new financial services regulator and are evidenced in a regime seeking to strike the balance between imposing exacting standards while facilitating the market.
2. Background/environment
Financial services providers are regulated by the Irish Financial Services Regulatory Authority (IFSRA). IFSRA came in to being on 1 May 2003 under the Central Bank and Financial Services Authority of Ireland Act 2003. IFSRA is responsible for the regulation of financial services providers.3
3. Applicable law, regulation, codes, case law etc
The regulatory regime is comprised of the twin prongs of initial authorisation and subsequent supervision of the regulated entity. Financial services providers are subject to specific rules under the regulatory regime in respect of conflicts of interest. These rules are found in the applicable legislation and the codes of conduct to which financial services providers are subject. Furthermore, distinct from the more modern statutory regime, there is also common law regarding the special limitations placed on fiduciaries in respect of their clients.
Some of the pertinent legislation is as follows:
The Central Bank Acts 1942–1997 and in particular the Central Bank Act 1989.
The Central Bank and Financial Services Authority of Ireland Act 2003.
The Central Bank and Financial Services Authority of Ireland Act 2004.
The Investment Intermediaries Act 1995.
The Stock Exchange Act 1995.
The Insurance Acts 1909–2000 and in particular the Insurance
Act 2000.
7. The Consumer Credit Act 1995. There is no definition of what is a conflict of interest, although the courts have commented on whether a particular set of circumstances under scrutiny in a case constituted a conflict of interest, as have legal writers and commentators. For instance, in the English case of Woods v Martin Bank Ltd,4 a bank manager advised one of his retail customers (the plaintiff) to invest in a company (also a customer of the bank) in the knowledge that the company was already heavily overdrawn at the bank. When the company subsequently failed the bank manager was held to have owed fiduciary obligations (the avoidance of conflicts of interest is one of the key characteristics of a fiduciary) to the plaintiff in respect of the investment advice. This is a clear example of where a conflict arises between the bank’s interest and that of its client, which was in effect using the plaintiff’s money to reduce the company’s overdraft and accordingly the bank’s exposure.5
The legislation mentioned above and the codes of conduct in particular are peppered with references to the need to identify and control conflicts situations. It is clear that there is a general requirement on financial services providers to behave in a fashion that is in the best interest of their clients, which includes avoiding conflicts if possible. However, given the nature of the services being provided and the structure of the industry, outright avoidance is probably impossible and so there is an element of discretion, exercisable by the services provider, built into the regime. In this respect if a financial services provider does become conflicted it is up to it to identify this fact and subsequently ensure that the end user is fairly treated, an end that can usually be achieved by full disclosure and the client’s consent if necessary.
Personal Retirement Savings Accounts – providers of these services are regulated by the
Pensions Board set up pursuant to the Pensions Act 1990) and money transmission
services.
4. The requirements
Fiduciary obligations
A fiduciary is a person who carries out a task for another person (the beneficiary) – be it selling property or advising on purchasing securities – on the basis that the fiduciary will carry out that task to the best advantage of the beneficiary. At the core of this relationship is the trust and reliance that the beneficiary places on the skill and bona fides of the fiduciary.
Fiduciary obligations do not arise in every circumstance where a beneficiary puts their trust in someone. The existence or not of fiduciary obligations is a matter of fact, although certain types of relationship do create a strong presumption that the beneficiary is entitled to fiduciary obligations. For instance, a solicitor generally owes fiduciary obligations to a client in carrying out a client’s instructions. Where financial services are concerned, where a bank or other financial services provider is providing asset management and investment advice and related services, the bank is likely to owe fiduciary obligations to clients. It is possible for a financial services provider to provide multiple services to a client and only some of the services provided may result in a fiduciary relationship. This creates a significant element of ambiguity and operational risk for multifunctional financial services providers.
Traditionally, when it is possible to establish on the facts that a financial services provider owes someone a fiduciary duty, the courts have taken a hard line when it is shown that the fiduciary has contravened its obligations to its client. In such circumstances the fiduciary will be liable in damages and may also have to account for any profit made to the aggrieved client. There is also the possibility that the fiduciary will be subject to remedies such as tracing, constructive trustee liability and restitution of unjust enrichment. Due to the nature and extent of the remedies available, many claimants are aware of the benefits of having their claims upgraded to one based on the contravention of a fiduciary obligation. The courts, however, have on the whole shown themselves to be reluctant to spread the net in respect of who can be considered a fiduciary.6
Although the nature and extent of the obligations owed by a fiduciary to a beneficiary are not set in stone, the prudent fiduciary should be aware of:
“1. The duty to avoid conflicts of interest i.e. a conflict between the fiduciary’s own interest and that of the beneficiary, and a conflict between the interests of two beneficiaries for whom the fiduciary acts;
The duty to act with ‘undivided loyalty’ to the beneficiary;
The duty not to profit from acting for the beneficiary without his
consent;
The duty to treat all information gained in relation to the beneficiary in the course of the fiduciary relationship on a confidential basis.” 7Where it can be shown that a financial services provider is in a fiduciary position vis-à-vis its client in respect of the services it is providing then where a conflict arises between the financial services provider and its client or between different clients of the same financial services provider, then the services provider will be under an obligation to manage the conflict to protect itself from an action resulting from a breach of its fiduciary duties.
Codes of conduct
Development and enforcement of codes of conduct is the responsibility of the regulator, using the statutory powers available to it in carrying out its functions as regulator. These powers are located in different statutes. Which code or codes of conduct will apply to a financial services provider will depend on what piece or pieces of legislation the financial services provider is regulated under and what services it provides.
Section 117(1) of the Central Bank Act 1989 empowers IFSRA (after consultation with the Minister for Finance) to:
“… draw up, amend or revoke, in relation to any class or classes of licence holders or other persons supervised by … [IFSRA] under this or any other enactment, one or more than one code of practice concerning dealings with any class or classes of persons and every such code shall be observed by the licence holders, or other persons so supervised, to whom they relate.”
To date a number of codes of conduct have been issued pursuant to section 117, in respect of credit institutions,8 insurance undertakings and mortgage intermediaries.
Section 117(1) is widely drafted, essentially allowing IFSRA to issue codes of conduct in respect any entity regulated by IFRSA.
The Investment Intermediaries Act 19959 (the Investment Intermediaries Act) and the Stock Exchange Act 1995 (the Stock Exchange Act) implemented the EU Investment Services Directive (93/22/EEC) in Ireland. The Investment Intermediaries Act deals with the regulation of “investment business firms”.10
IFSRA is responsible for the regulations of a wide range of such non-banking firms, whose activities include the provision of a wide range of investment services relating to an equally wide range of investment instruments which include broking, trading, discretionary portfolio management and investment advice, while the instruments involved include equities and bonds and complex derivative products.
The Stock Exchange Act designates IFSRA as the competent regulatory authority for authorising stock exchanges and member firms11 of stock exchanges in Ireland. The Stock Exchange is authorised to carry out the activities of a recognised stock exchange in Ireland and is regulated by IFSRA. Part of the Stock Exchange’s functions is admitting and monitoring member firms in operating on the Stock Exchange although the member firms also come within the regulatory remit of IFSRA. The Stock Exchange is responsible for monitoring member firm’s compliance with the “Conduct of Business” requirements (the Conduct of Business Rules), which are contained in chapter 4 of the Rules of the Irish Stock Exchange (the Stock Exchange Rules). IFSRA retains responsibility for authorising member firms and ensuring that member firms of the Stock Exchange maintain adequate capital, books and records including client monies, advertising and other miscellaneous matters.12
Section 37 of the Investment Intermediaries Act and section 38 of the Stock Exchange Act deal with codes of conduct in relation to entities authorised under those acts respectively in the provision of financial services. Sections 37(1) and 38(1) are identical and stipulate that such codes should contain certain minimum requirements, including a requirement that the regulated entities make reasonable efforts to avoid conflicts of interest and, when they cannot be avoided, ensure that their clients are fairly treated. IFSRA is responsible for the administration and enforcement of the existing codes conduct and for the development of new codes of conduct in respect of those financial services providers regulated directly by it, whereas the Stock Exchange has responsibility for the administration and enforcement of the Stock Exchange Rules. The majority of the exiting codes were inherited by IFSRA from the Central Bank, although IFSRA has issued certain interim codes (ie the Interim Code of Practise for Insurance Undertakings). The aim of the codes of conduct is to create a level playing field for all participants and ensure that customers get a consistently high level of service regardless of what type of regulated entity they deal with. Each of the codes is a stand-alone document which applies to a specific type of financial services provider in providing a specific class or classes of service or product to a specific class of client. However, the requirements under each of the codes in respect of conflicts of interest are largely similar. The key requirements of the various codes can be summarised as follows. The regulated entity shall:
make a reasonable effort to avoid conflicts of interest and, when they cannot be avoided, ensure that its clients are fairly treated;
act honestly, fairly and reasonably in providing financial services and products;
act with due skill, care and diligence in providing financial services and products;
on request, assist a client in understanding the services or product that the client has chosen from its product range;
make adequate disclosure of relevant material information in its dealings with clients, including the disclosure to a client of material interests or conflicts of interest, when recommending a transaction to a client or executing a transaction for a client; and
ensure that there are effective Chinese walls in place between the different business areas of the firm, and between the firm and connected parties in relation to information which could potentially give rise to a conflict of interest or be open to abuse.
The Consumer Protection Code
IFSRA intends to revamp and replace the existing codes of conduct and handbooks. It is hoped that in so doing a rationalisation and simplification of the existing dispersed requirements will be achieved. A new Consumer Protection Code (the New Code) will supersede all existing codes of conduct in so far as they apply to consumers.
The provisions of the New Code will apply to financial services providers13 in so far as they are providing services to “private customers”. Private customers are essentially customers seeking to do business with a financial services provider who are not professional customers. Professional customers are customers who have sufficient knowledge and expertise to make their own financial decisions and properly assess the risk. The decision to use the term customer as opposed to consumer is a conscious one on the part of IFSRA and it is intended that the New Code should have the possibility of applying to businesses and companies as well as natural persons.
The New Code has been developed in consultation with interested parties. The New Code will apply to all financial services providers operating in the Ireland, including those operating in Ireland but regulated primarily from another EU or EEA member state. It will not contain any prudential rules on issues such as authorisation, solvency or reporting requirements. These issues will be dealt with separately. At present some of the codes and handbooks do contain such prudential rules whereas others do not. Furthermore the New Code will adhere to the concept of a principles-based regulator. Responsibility for compliance, as in the case of the codes of conduct, rests with the board and management of the financial services provider.
The New Code will represent a further departure from the existing codes of conduct regime in so far as it will apply equally to all providers of financial services in their dealing with consumers. At present the codes are broken down by regulated entity type and product or service class and accordingly the requirements are dispersed and poorly rationalised, with some financial services providers having to comply with multiple codes. While this is inconvenient for financial services providers, they are at least familiar with the system and of what is required of them. The real drawback to this structure is in respect of consumers who are faced with multiple codes which reflect a complicated and obscure regulatory regime. It was clear from the consultation process that the existing system of different codes was something that the financial services providers wanted changed.
The New Code will be structured to reflect the fact that there will not be separate codes for the different classes of financial services provider and different product classes.
Under the New Code it is a general principle that a regulated financial services provider shall seek to avoid conflicts of interest, but when a conflict cannot be avoided the financial services provider must fully disclose the potential conflict and ensure that customers are treated fairly. The New Code goes on to state in the common rules section that where a conflict of interest cannot be reasonably avoided, the financial services provider may only undertake business with or on behalf of a customer where it has directly or indirectly a conflicting interest, where that customer has acknowledged, in writing, that they are aware of the conflict of interest and that they still want to proceed with the transaction.
It is intended that the New Code will come into full effect by October 2005. There will be a transitional period until 31 March 2006 to allow financial services providers to develop new systems and procedures and to train staff. During this time, however, the financial services provider will still be required fully to adhere to the requirements of the existing codes and handbooks. IFSRA will have the administrative sanction regime at its disposal to the extent that financial services providers fail to implement or contravene the New Code.
Licensing and Supervision Standards for Credit Institutions (the Standards)
IFSRA has primary responsibility for the authorisation and subsequent supervision of financial services providers. It is useful to look at how IFSRA approaches this function and deals with conflicts of interest.
For instance IFSRA is charged with the licensing (authorisation) and supervision of credit institutions. IFRSA’s powers in this respect are inherited from the Central Bank and are derived from several pieces of legislation (which deal with the licensing and supervision of credit institutions generally) including not only the Central Banks Acts 1942–1997, the various statutory instruments that have implemented the EU Banking Directives, the Building Societies Act 1989 but also other stand-alone Acts that relate to specific banks (such as the ACC Bank Act 1992). The legislative framework is complex and in need of consolidation.
The various pieces of legislation contain extensive provisions and relate to (amongst other things): the granting of licences (authorisation); the obtaining of information from credit institutions; on-site inspections; solvency requirements and the supervision generally of the activities of credit institutions. Many of the statutory provisions are of a discretionary nature and are widely dispersed throughout the statutes. The Standards document is essentially a round-up of the requirements and standards, which IFSRA (and the Central Bank before it) uses to guide it in its assessment of applications for the authorisation of credit institutions and in the ongoing supervision of the business carried on by credit institutions. Most of the supervision requirements covered are prudential in nature. The Standards were originally published in the Central Bank of Ireland, Quarterly Bulletin, Winter 1995 (the 1995 version was a revision of the 1987 version of the same document). In so far as it applies to specifically to conflicts of interest the Standards state as follows:
“A credit institution must satisfy the Bank, in regard to possible conflicts of interest arising in the conduct of different types of activity under its control, that adequate arrangements have been made to protect the interests of its clients. All credit institutions will be required to comply with any prudential rules or codes of practice drawn up by the Bank in relation to their investment business in accordance with the EU Investment Services Directive (93/22/EEC).”
This is an important document for credit institutions. It is designed to provide an accessible document that centralises and abridges the various authorisation and supervision requirements applicable to credit institutions.
The Conduct of Business Rules
The Stock Exchange Rules were issued by the Stock Exchange and are designed to ensure the integrity of the market and the protection of investors. The Stock Exchange monitors compliance by member firms with the Stock Exchange Rules.
The Conduct of Business Rules oblige member firms to make all reasonable efforts to avoid conflicts of interest and where they cannot be avoided, ensure that their clients are fairly treated. The Conduct of Business Rules also provide more detailed requirements in relation to the terms of business of member firms and disclosure in relation to conflicts of interest as well as rules in relation to conflicts of interest between the research and trading functions of member firms and the use of Chinese walls in such cases.
5. Outlook
IFSRA has been and is likely to remain a proactive regulator. The control of conflicts of interest is essential for the protection of consumers, which the IFSRA has made central to its activities. Financial services are necessarily complex products and consequently their intricate workings are difficult for many retail and business customers to understand fully. If the rules regarding the provision of financial services are clear and are observed to be stringently enforced this should have a positive effect overall on the sector and help to restore the equilibrium between provider and customer. It would be hoped that the New Code will go some distance to achieving this goal.
It is clear that financial services regulation in Ireland will develop beyond the traditional licensing and prudential supervisory role previously taken on by the Central Bank and that IFSRA is likely to be more proactive in enforcing the codes and standards that form the core of the principles-based approach to financial services regulation. Key to this has been the strengthening of IFSRA’s enforcement mandate under new provisions introduced by the Central Bank and Financial Services Authority Act 2004 (the 2004 Act). The 2004 Act introduces an administrative sanction regime, which will give IFSRA greater powers than its predecessor, the Central Bank, to enforce compliance and punish non-compliance through fines. It also provides for the establishment of a Financial Services Ombudsman for consumer complaints against financial services providers. The Ombudsman has extensive power of investigation and the power to award damages to aggrieved consumers.
The inclusion of provisions in the New Code and in the existing codes of conduct dealing specifically with conflicts of interest demonstrates that IFSRA is aware that the occurrence of conflicts of interest is a commercial reality inherent to the nature and structure of the financial services industry. IFSRA’s response has been pragmatic, which is evidenced by the fact that the New Code and the other codes provide a method of approaching conflicts where they do arise and a remedy in the form of disclosure. The use of Chinese walls is sanctioned as long as proper and verifiable procedures are in place.
6. Useful references
Irish Financial Services – all legislation and codes of conduct applicable to
financial services providers regulated by IFSRA can be found on the IFSRA
website, http://www.ifsra.ie.
Irish Stock Exchange – the Conduct of Business Rules and other in
formation relating to listings and the regulation of member firms can be
found on the Irish Stock Exchange website, http://www.ise.ie.
SECTION B: AUDITORS
1. General introduction
Auditing standards are set to change thanks to recent audit failures in the US and in Europe. The auditing profession has suffered problems revolving mainly around high-profile disclosures such as Enron (in the US) and Parmalat (in Europe).
In Ireland, audit firms tend to be multi-disciplinary, providing an array of non-audit services to the same company to include tax advice, corporate finance, management consultancy advice etc. The actual market is primarily made up of small companies being audited by a variety of smaller audit firms.
2. Background/environment
Section 187 of the Companies Act 1963, as amended, sets out the criteria for appointment as a public or company auditor. The primary requirement is that a person wishing to hold himself out as and practise as an auditor must first be a member of a recognised body of accountants and hold a valid practising certificate from such a body. Recognition of the accountancy bodies for the purposes of auditing is a function of the Minister for Enterprise, Trade and Employment.
The accountancy bodies in Ireland have agreed to be bound by the ethical standards issued by the UK’s Auditing Practices Board (the APB) (an operating body of the Financial Reporting Council). In March 2004 the APB declared its intention that new International Standards on Auditing (ISAs) relating to audit risk, fraud and quality control should apply in both Ireland and the UK in relation to audits commencing on or after 15 December 2004. By December 2004 a series of ISAs (UK and Ireland) were issued by the APB which replaced Statements of Auditing Standards (SASs).
Various practice notes giving guidance on the application of auditing standards were developed which were endorsed by the APB. These practice notes currently need to be revised in light of the publication of ISAs in December 2004.
It should also be noted that the APB published Ethical Standards (ES) for Auditors in December 2004. The APB also issued Provision Available for Small Entities (PASE) which provides relief from certain requirements for UK auditors of small entities. From an Irish perspective, a definition of small entity for the purpose of audits in Ireland has recently been reached, thereby achieving consistency in the application of the APBs Ethical Standards between the UK and Ireland.
The Companies (Auditing and Accounting) Act 2003 (the 2003 Act) establishes the Irish Auditing and Accounting Supervisory Authority (IAASA) whose main function is to supervise how accountancy bodies regulate and monitor their members and to promote adherence to professional standards within the auditing and accountancy profession. IASSA is empowered to investigate possible breaches of a prescribed accountancy body’s standards by a member and to conduct inquiries into whether a prescribed accountancy body has complied with its investigation and disciplinary procedures in relation to such a breach. Its powers can be exercised on the basis of a complaint received or on its own initiative.
3. Applicable law, regulation, codes, case law etc
Currently auditors, accountants and solicitors face reporting obligations under tax, company and criminal law. In addition, there are reporting obligations to regulatory bodies like IFSRA not dealt with directly in statute law.
4. The requirements
All companies must have an auditor, subject to section 160(1) of the Companies Act 1963. Section 187 of the Companies Act 1963, as modified by the Companies Act 1990 (Auditors) Regulations 1992, and amended by section 72 of the Company Law Enforcement Act 2001 and section 35 of the Companies Auditing and Accounting Act 2003, sets out the criteria for appointment as a public auditor or a company auditor. Only persons who comply with the requirements of section 187 of the Companies Act, as amended are qualified to act as auditors to a company. The primary criterion is that the person must be a member of a body of accountants recognised by the Minister for Enterprise, Trade and Employment for this purpose and hold a valid practising certificate from the body. The following accountancy bodies have been recognised by the Minister for this purpose:
+ The Institute of Incorporated Public Accountants. Details of those members of the recognised accountancy bodies who are qualified to act as an auditor in Ireland are retained in the Companies Registration Office and are available for public inspection. The data is required to be updated on an annual basis. At each annual general meeting a company must appoint an auditor to hold office for the coming year. Section 160(2) states that a retiring auditor, however appointed, shall be reappointed without any resolution being passed unless:
Audit exemption
The Companies (Amendment) (No 2) Act 1999 provides that certain private companies may avail of an exemption from the requirement to have accounts audited for financial years commencing on or after 21 February 2000. The turnover threshold required to avail of the exemption from having audited accounts has been increased from £250,000 to €1,500,000.
The standard of care and obligations of auditors
There is no statutory definition in Irish law of the standard of care which an auditor should apply to his task. Instead, the courts have generally accepted the following descriptions from UK case law of the standard of care which an auditor should apply to his task:
“It is the duty of an auditor to bear on the work he has to perform that skill, care and caution which a reasonable competent, careful and cautious auditor would use. What is reasonable skill, care and caution must depend on the particular circumstances of each case.”
More modern cases have also been suggested that in addition to complying with statutory requirements, auditors have a duty to maintain close adherence with their professional guidelines and standards. The courts have recognised that these may evolve and change over time and that the courts are bound to take account of these developments when assessing the standard of care required of auditors.
Section 193 of the Companies Act 1990 is the key piece of law relating to the auditors’ obligation to report. This section requires that the auditors to a company must report to the members (shareholders) on every set of accounts laid before the company in general meeting. It further goes on to say that the auditors’ report shall be read at the annual general meeting and shall be open to inspection by any member. The law requires the auditors to report on:
whether they have obtained all of the information and explanations which, to the best of their knowledge and belief, are necessary for the purpose of their audit;
whether, in their opinion, proper books of accounts have been kept by the company;
whether, in their opinion, proper returns adequate for their auditor have been received from branches of the company not visited by them;
whether the company’s balance sheet and profit and loss account are in agreement with the books of account and returns;
whether, in their opinion, the company’s balance sheet and profit and loss account have been properly prepared in accordance with the provisions of the Companies Acts and give a true and fair view; and
whether, in their opinion, there existed at the balance sheet date, a financial situation which, under section 40(1) of the Companies (Amendment) Act 1983, would require the convening of an extraordinary general meeting of the company.
Section 15 of the Companies (Amendment) Act 1986 also requires the auditors to consider the constituency of the information in the director’s report with the company’s accounts and to report whether, in their opinion, such information is consistent.
Quite apart from their statutory duty in relation to proper books of account, if, at any time, the auditors form the opinion that the company is failing materially to keep proper books of account, they must serve a notice on the company stating their opinion, and notify the Registrar of Companies within seven days of the notice to the company unless the directors of the company have taken the necessary steps to keep proper books of account. The auditors may form the opinion that proper books of account are not being kept while involved in planning or conducting audit work.
Under the Companies Act 1990 if an auditor by virtue of carrying out an audit receives information which leads him or her to form the opinion that the company or any officer has committed an indictable offence, the auditors have to notify the Director of Corporate Enforcement (the Director). The auditor’s obligations in such instances are extended under the 2003 Act and an auditor must now (in addition to informing the Director), if requested by the Director, furnish such further information relating to the matter as is within their control as the Director may require; give access to the Director to books and documents relating to the matter; and give the Director such access and facilities for taking copies of or extracts from the books and accounts.
Conflicts of interest
The Code of Ethics drawn up by the Institute of Certified Public Accountants of Ireland (CPA Ireland) identifies a number of situations which, because of actual or apparent lack of independence, would give a reasonable observer grounds for doubting the independence of a certified public accountant in practice. These situations include a personal or family relationship or a situation where an auditor has been involved with a company as an employee or officer. Such scenarios have been contemplated by section 187 of the Companies Act 1963, as amended, which contains details of persons who are excluded from appointment as auditor of a company. The following persons are excluded:
The 2003 Act has extended the excluded categories set out in section 187 of the Companies Act 1963 so that the following is also excluded from appointment as auditors:
“a person in whose name a share in the company is registered, whether or not that person is the beneficial owner of the share.”
A nominee shareholder in a company would thus be excluded from acting as an auditor in such company.
The CPA Ireland Code of Ethics also indicates that “financial involvement”, whether direct or indirect, with a client affects independence and may lead a reasonable observer to conclude that it has been impaired.
A further threat to the independence of auditors enumerated in the CPA Ireland Code of Ethics is the risk of performing management functions in carrying certain other non-audit services in addition to an audit or reporting function. The Code of Ethics advocates that care is taken to avoid such a situation given that management should remain with the board of directors. In this regard, the 2003 Act contains provisions on the reporting of remuneration for non-audit work carried out by the auditors. Under the 2003 Act, companies (both private and plcs and certain unlimited companies) must now disclose in the notes to annual accounts relating to each financial year and the preceding financial year:
Where remuneration required to be disclosed for non-audit work exceeds the aggregate remuneration required to be disclosed for that year for audit work and audit-related work, the audit committee must state in its report that it is satisfied that the carrying out of the non-audit work by the auditor has not affected the auditors’ independence from the company and if it is satisfied to that effect, the reasons for the decision to have non-audit work carried out by the auditor. If there is no audit committee then the statement must be made by the directors in the Directors’ Report.
Further threats to independence identified in the CPA Code of Ethics include the receipt of recurring fees from a client or group of connected clients, representing a large proportion of the total gross fees of a certain auditor or of the practice as a whole. The dependence on that client or group of clients should inevitably come under scrutiny and could raise doubts as to independence. Furthermore, the use of the same senior personnel on audit engagement over a prolonged period of time is identified as a potential threat to independence.
5. Outlook
In practice, successful professional relationships frequently take time to develop and greater efficiency may result from continuity in the personnel used and the range of services rendered. However, these same factors may diminish the independence of the auditors of the company. Certain changes introduced in more recent Irish legislation highlight the importance of such independence and the need to put monitoring measures in place. Under the 2003 Act, each large private company (meaning a private company for which in the most recent financial year and preceding financial year the balance sheet total exceeds €25 million and turnover exceeds €50 million) and certain unlimited companies have the option to establish an audit committee. If such companies choose not to establish an audit committee then the directors must state in the Directors’ Report the reasons for deciding not to establish a committee. Large private companies can decide that the audit committee may only have some of the responsibilities set out in the 2003 Act.
Importantly, the audit committee’s responsibilities may include:
6. Useful references
Institute of Certified Public Accountants in Ireland,
http://www.cpaireland.ie.
SECTION C: LAWYERS
1. General introduction
Apart from the professional duties owed by solicitors in the context of the client-solicitor relationship (which includes the proper management of client accounts, competency and communication), two of the most commonly enforced and well-known ethical obligations of solicitors are their duties in terms of confidentiality and the avoidance of conflicts of interest.
In today’s society, clients have become increasingly aware of their consumer rights in terms of what to expect from their professional advisers. Law firms must deal not only with the letter of the law, but must also be receptive to the perception of their clients as to what constitutes the ethical rules of the relationship.
2. Background/environment//839-+56..
In Ireland, the only exact rules with regard to professional conduct which have the force of law are those contained in legislation and regulations enacted as part of that legislation. The publication A Guide to Professional Conduct of Solicitors in Ireland (2002)14 sets out the various principles of good conduct whilst also identifying specific situations. Although this Guide is not law, it is certainly of persuasive authority.
3. Applicable law, regulation, codes, case law etc
The rules with regard to professional conduct are contained in the Solicitors (Professional Practice, Conduct and Discipline) Regulations 199715 and the Law Society’s professional standards and rules relating to conflicts of interest are set out in its Guide to Professional Conduct of Solicitors in Ireland (2002).
Phelan Holdings v Poe Kiely Hogan16 is a leading case. The defendant solicitor, as beneficial owner of a company, was selling a strip of land in a residential development to the plaintiff. Legal proceedings arose in relation to local residents and the company and the plaintiff was joined as a party. The solicitor who acted for the company and the plaintiff in the action failed to disclose this fact to counsel, thus compromising the case, which was settled from the plaintiff’s perspective on unfavourable terms. The High Court ruled that there had been a real conflict of interest throughout. The defendant solicitor was held liable in damages to the plaintiff.
Since English decisions carry persuasive authority in Ireland, such case law as Marks & Spencer plc v Freshfields Bruckhaus Deringer,17 Prince Jefri Bolkiah v KPMG18 and the recent decision of Hilton v Barker Booth & Eastwood19 should also be borne in mind.
4. The requirements
Fiduciary obligations
A solicitor owes his client a vast range of duties and at a very minimum owes his current client the traditional fiduciary duties of acting in good faith and for the benefit of his client. The law takes a wide view of when these duties will be deemed to exist. This can be further extended by the principle of imputed knowledge where one partner’s knowledge is assigned to the law firm in general.
A duty can also arise in relation to non-client situations such as the making of a will and the situation in relation to beneficiaries thereunder. As well as this, solicitors are officers of the court and therefore owe a duty in the administration of the justice and as well as to the public. A duty to former clients can also be deemed to exist, particularly where a solicitor undertakes a particular retainer.
Certain situations will arise where the law will seek to protect the interests of clients and also in order to avoid any indications of impropriety on the part of the solicitor which might bring disrepute to the profession. Typically these areas include the following.
(iii) Solicitor making a profit from his fiduciary position A solicitor is under a duty not to make a profit in relation to his role as fiduciary. Any such profit must again be fully disclosed to the client with failure to do so resulting in the setting aside of the transaction.22
The second edition of A Guide to Professional Conduct of Solicitors in Ireland (2002) sets out the Law Society’s professional standards and rules relating to conflicts of interest.
Apart from setting out specific instances where conflicts of interest arise, the Guide also states that a solicitor should be open, frank and honest in all dealings with clients.26
Where a conflict of interest arises between the interests of a solicitor and the interests of his client the Guide stipulates that the solicitor must cease to act for the client.27
In cases where a conflict of interest arises between clients in relation to a matter in which a firm is acting, the firm must not act for either client.28 An exception arises where one client consents to the other client remaining. This exception can only occur once the solicitor has satisfied himself that he is not in possession of information that might prejudice the position of the other party, or that the party perceives such a conflict. In circumstances where the solicitor forms the view that the party would be better served instructing a different solicitor then this must be communicated. This may be done on a case-by-case basis factoring in the solicitor-client relationship and the cost that might have to be borne by the client. The Guidance and Ethics Committee of the Law Society has issued a practice note in this regard.29 This note states that a solicitor is permitted to act for a passenger in a vehicle irrespective of the fact of having already acted for the driver, once any litigation in relation to the driver and/or third parties has been settled with no liability established on the driver’s part. However, in these instances, written confirmation from or on behalf of the third party that liability is not an issue is required.
In general, a solicitor should not act for the vendor and purchaser in a transfer of property. There are exceptions to this rule such as where the vendor and purchaser are associated companies; related by blood, adoption or marriage; established clients who have been advised that separate independent legal advice would be preferable and have given their agreement that the solicitor act for them both; and finally that two associated firms or offices of a firm subject to certain provisos may act, ie the offices are in different locations, the referral to the firm did not come from an associated firm and the work carried out would be dealt with by a different solicitor in full-time attendance at each firm or office.
In the case of voluntary transfer, where a solicitor acts for both parties, and where the transfer is for consideration other than for market value, it is preferable to provide written advice to the transferor that independent advice be sought.
A recently published practice note,30 again from the Guidance and Ethics Committee, indicates that where the builder of an estate pays the fees of one solicitor representing all purchasers, the solicitor may be placed in an unfeasible situation, irrespective of the fact that this practice does not contravene the 1997 Regulations.31 It should be borne in mind that a solicitor’s duty is to his client, and this duty must be presented without consideration of the builder’s interest. Such practices as set out above may result in the solicitor encountering difficulties demonstrating professional independence.
The Guide also sets out the position in relation to a state solicitor,32 stating that the state solicitor, his partner or qualified assistant should not appear for a defendant in criminal proceedings within the state solicitor’s area once a summons has been issued by the Garda Siochana, the Director of Public Prosecutions, the Attorney-General or a government department.
28 | Chapter 3.2. |
29 | Practice Note “Potential conflict of interest where a Solicitor is acting for both a driver and |
|
| nger of the One Vehicle”, July 1998. |
30 | “Purchasers’ Solicitor’s fee paid by the Vendor: Conflict of Interest?” Law Society Gazette, |
|
| July 2004. |
31 | Solicitors (Professional Practice, Conduct and Discipline) Regulations 1997, SI 85/1997. |
32 | Chapter 3.4. |
In cases where the personal finances of a solicitor come into conflict with those of a client, the law seeks to protect the interests of the client. The Guide prohibits the borrowing of money from a client unless the client receives independent advice or is part of the business of the client to lend money.33
The Guide also deals with wills and bequests to solicitors.34 Where a client intends on making a gift or bequest under a will to his solicitor, then the solicitor should advise the client to obtain independent legal advice. It is insufficient for the will or bequest to the solicitor, partner, staff member or member of the solicitor’s family to be attested by an independent solicitor. Further to advising the client to receive independent advice, there should also be a written attendance taken of such advice and confirmation that independent legal advice was received. This confirmation should preferably be written confirmation by an independent solicitor that advice was given. In the case of law firms, the principal or partners in charge should ensure that no clauses are inserted into a will whereby an assistant solicitor or member of staff receives benefit without the express consent of the principal or partners in the firm. Irrespective of the above, token gifts for services rendered by the solicitor are permitted without the need for independent legal advice to be given.
In relation to situation whereby solicitors are asked to draft wills for parents, then a conflict of interest may arise if the solicitor is to benefit under that will irrespective of the fact if the will divides the estate equally among siblings; benefits granted during the lifetime of the parents can be taken into account. However, the Law Society, in a practice note,35 states that it is for the solicitor to decide whether independent legal advice is essential in such circumstances.
The Solicitors (Professional Practice, Conduct and Discipline) Regulations 199736
These Regulations are reinforced by the Guide to Professional Conduct but as mentioned above, unlike the Guide, are enforceable as a matter of law. Regulation 4 restricts solicitors from acting in a conveyance on behalf of both the builder and purchaser in respect of residential units. Breach of the 1997 Regulations amounts to misconduct and will be dealt with by the Law Society of Ireland.
Competition Authority Guidelines
The Competition Authority has published guidelines to resolve any potential conflicts of interest as regards legal representation of those appearing before the Authority. The guidelines deal with the integrity of the process of investigation which the Authority wishes to avoid compromising when the same lawyer represents more than one person. The guidelines indicate that the Authority will not permit the same lawyer to represent more than one person where it is of the opinion that the integrity of the process may be compromised.
In order for a solicitor to be able to assist his clients, he needs to be to sure that the information he receives is both accurate and complete. Clients need to be assured that any information they provide will be held with the strictest of confidence and will not reach a third party or, worse, an opponent some time in the future. Therefore, a solicitor must ensure that he does not provide this connection by inadvertently allowing a conflict of interest to arise. Firms should conduct checks or ensure that a conflict of interest procedure is put in place. In the smaller firms, such checks should not be too burdensome. In larger firms, information technology can play a vital role.
6. Useful references
The Law Society’s website, http://www.lawsociety.ie, contains its rules.
Footnotes
1 See T B Courtney The Law of Private Companies (2nd edn, 2002) para 10.048.
2 The Report of the Inspectors into the affairs of National Irish Bank Ltd. and National IrishBank Financial Services Ltd., published by order of the High Court, Friday, 30 July 2004.
3 Banks, building societies, credit unions, bureaux de changes, insurance undertakings and intermediaries, reinsurers (in so far as re-insurance activities are regulated at present), investment business firms, exchanges (including the Irish Stock Exchange) and their members, funds, consumer credit (including money lenders and mortgage intermediaries) electronic money institutions, pensions (but not occupational pensions and IFSRA has taken a principles-based approach and minimises the use of rules by relying instead on principles which set out IFSRA’s expectations as to how financial services providers should interact with their customers. Other bodies such as the Irish Stock Exchange Limited (the Stock Exchange), which is concerned with its members and listed entities, and the Pensions Board also have an input into regulation and supervision.
4 [1959] QB 55.
5 In the absence of Irish case law, decisions of courts in England and other common law jurisdictions are persuasive for Irish practitioners and the Irish courts alike.
6 See Dr John Breslin BL, “Bank as Fiduciaries” (1998) Commercial Law Practitioner,
February.
7 Dr John Breslin BL, Conflicts of Interest and Chinese Walls (Dublin: Law Society of
Ireland, 2004).
8 “Credit institution” means an undertaking whose business is to receive deposits or other repayable funds from the public and to grant credits for its own account (in general in the Irish context this can be taken to refer to banks and building societies).
9 The Insurance Act 2000 made insurance undertaking subject to the Investment
Intermediaries Act in so far as they provide investment advice.
10 “Investment business firm” is defined as any person, other than a member firm within the meaning of the Stock Exchange Act, who provides one or more “investment business services” (as defined in the Investment Intermediaries Act) or “investment advice” (also defined in the Investment Intermediaries Act) to third parties on a professional basis.
11 “Member firm” means any person who is a member of an approved stock exchange and whose regular occupation or business is the provision of “investment services” (as defined in the Stock Exchange Act).
12 These matters are dealt with in the Central Bank’s Handbook for Investment and Stockbroking Firms (November 2000).
13 The Consumer Protection Code will have limited application to moneylenders. IFSRA is also in the process of carrying out a programme of regulatory enhancement in respect of Credit Unions – until this programme is completed the New Code will not apply to credit unions in relation to the provision of their core services (savings and loan services). The Stock Exchange supervises compliance of its member firms with the Conduct of Business Rules contained in the Stock Exchange Rules. This will continue to be the case and only the advertising section of the New Code will apply to such firms.
14 A publication of the Law Society of Ireland.
15 SI 85/1997.
16 15 October 1996, unreported, HC.
17 [2004] 1 WLR 2331.
18 [1999] 2 AC 222.
19 [2005] 1 WLR 567
20 Demarara Bauxite Co v Hubbard [1923] AC 673.
21 Maguire v Makaronis (1997) ALJR 781.
22 Boardman v Phipps [1967] 2 AC 46.
23 Willis v Barron [1902] AC 271
24 Carroll v Diamond (31 July 2002, unreported), HC.
25 Re a Firm of Solicitors [1992] 2 QB 959.
26 Chapter 2.2.
27 Chapter 3.1.
28 Chapter 3.2.
29 Practice Note “Potential conflict of interest where a Solicitor is acting for both a driver and passenger of the One Vehicle”, July 1998.
30 “Purchasers’ Solicitor’s fee paid by the Vendor: Conflict of Interest?” Law Society Gazette, July 2004.
31 Solicitors (Professional Practice, Conduct and Discipline) Regulations 1997, SI 85/1997.
32 Chapter 3.4.
33 Chapter 3.7.
34 Chapter 3.4
35 “Wills for Parents” Practice Note Gazette, August/September 1997.
36 SI 85/1997.
