Conflicts of interest at the heart of financial services

Conflicts of interest are endemic to the provision of financial services in a free-market capitalist system. On the one hand, the senior management of the bank are held accountable to shareholders to maximize profits yet, on the other hand, the core of the activities banks undertake in retail client segments involves acting in a fiduciary capacity: whether the nature of the service provided is custodial (safekeeping of client assets), advisory (recommending a course of action to a client) or discretionary (being empowered by the client to act on their behalf), there is a breach of trust, and possibly of contract, if the bank and its staff do not act in a way that is aligned to clients' best interests. At a high level, these two fundamental objectives of a bank – maximizing corporate profits and acting in the best interests of clients – are, if not irreconcilable, at least difficult to align.

In the long run, one would expect that acting in the best interests of clients would be intimately tied to the ability of a bank to remain profitable. As game theory predicts, because traditional banking is a business activity which generally involves relationship-building and continuous service, as opposed to one-off contact with consumers, a bank or investment firm which is not seen by actual or potential clients to be treating them fairly or effectively managing its conflicts of interest is essentially doomed to fail as its clients leave with their assets for another institution.