What are examples of a conflict of interest in banking?

A lender with shares in a borrower. A credit officer reviewing a loan they helped write. A banker whose relative is a director of a customer. A relationship manager who accepts expensive hospitality from a customer whose application is pending. A broker paid only if a loan goes to one lender. At firm level, a bank that advises a company on a sale while lending to a bidder, or a bank whose sales targets reward products a customer may not need.

Is a conflict of interest illegal?

Not in itself. Conflicts arise in ordinary life and banking, and many can be managed. What creates the legal exposure is failing to manage one: acting on it undisclosed, breaching an employment contract or a bank's policy, breaching a duty owed to a client, or falling short of a regulatory obligation where one applies. A payment made to sway a decision can go further and be a criminal offence in its own right.

Do you have to disclose a conflict of interest at work?

In banking, usually yes. Banks generally require staff to declare outside interests, directorships and gifts, and treat failing to do so as a conduct matter, sometimes a dismissible one. The obligation normally lasts for as long as the job does, so a change in circumstances calls for a new declaration when it happens, without waiting for the next annual form. The bank's own policy and the employment contract set the detail, and they vary between banks.

Does disclosing a conflict of interest make it acceptable?

Not by itself. Disclosure is useful where the person told can act on it, by agreeing, asking questions or going elsewhere. It does not help a borrower who has no choice, or a bank whose decision is still being made by someone with a stake. Australia's regulator warns licensees that telling people will often fall short, and that a control, or stepping away, may serve better. Within a credit process the usual answer is to move the decision.

// WORKED EXAMPLEHOW THE CONTROL WORKS

Conflict of Interest: How a Bank Handles One

The form was true on the day it was signed.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-09 · 6 MIN READ

// THE SHORT ANSWER

A credit decision can be right and still unsafe if the person who made it had something riding on the answer. That is why banks treat a personal stake, a paid referral or a divided loyalty as a fault in the process even when the loan turns out well. A bank deals with such a conflict in three ways: it removes the person from the decision, it adds a check by someone independent, or it tells the affected party and lets them choose. Which fits depends on the conflict, and Australia's regulator cautions that telling people may not be enough.

BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

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PART OF How Banks Work

// 01 — THREE KINDS A LENDER WILL MEET

The first is personal: a shareholding in a borrower, a relative on its board, a gift from a customer awaiting a decision, a fee from a broker. The second is a conflict between two duties. One team advises a company on a sale while another lends to the buyer, or one banker looks after two competitors bidding for the same contract. The third belongs to the institution: a team asked to review its own earlier work, a sales target that rewards volume, a bank that has built the forecast it is now asked to lend against.

A lender cares for a practical reason. A judgement cannot be audited afterwards. Nobody can reconstruct what a person would have decided without the interest, so the only thing that can be checked is whether the process kept that person away from the decision.

// 02 — HOW A BANK HANDLES ONE

Banks build the same few controls. A register of outside interests and directorships, with a declaration at joining and then at intervals. A gifts and hospitality register, usually with a value limit and a rule against accepting anything from a party awaiting a decision. Separation of credit from sales, and the four-eyes principle on approvals. Pay that does not depend on one transaction closing.

Once a conflict is known, the responses are usually grouped as avoid, control and disclose. Avoiding means the person or the bank steps away: the file moves, the mandate is declined. Controlling means leaving the activity in place behind a check: an independent re-read, a second signature, an information barrier. Disclosing tells the affected party, and it works only where that party can actually do something with the knowledge. Inside a credit process, a banker's declaration to the bank is the trigger: it is how the file reaches someone with no stake in it.

// 03 — THE EXAMPLE

A maker of fire doors, constructed for this page like every figure in it, owes a bank US$3.2m. Its relationship manager's annual declaration, signed in March, says he has no interests to declare. In June his brother joins the fire-door maker's board and buys 5% of its shares for US$200,000. In July the manager supports a covenant waiver and a 0.25-point margin reduction. In September his credit paper recommends raising the loan by US$0.8m.

14 March Declaration signed: none day 0

2 June Brother joins the board and buys 5% day 80

9 September Paper recommends increase to US$4.0m day 179

Declaration accurate for 80 days

Interest undeclared for 179 − 80 = 99 days

Margin given up in that window US$3.2m × 0.25% = US$8,000 a year

Nothing in the numbers is false. The analyst processing the increase then notices the brother's name on the company register while confirming directors for the loan documents. The paper is withdrawn and the file moves to another manager, who re-reads it from the accounts. The July waiver and margin reduction are reviewed by someone who had no part in them. The increase goes to a fresh approval on a fresh paper. It may well be approved, and the fire-door maker has done nothing wrong; what has changed is that the decision no longer rests on someone with a family stake in it.

The cheap part of the fix is the form. A bank can ask for a declaration when circumstances change, as well as once a year, and can prompt for it whenever a credit paper is submitted.

// 04 — WHAT IT IS NOT, AND WHERE THE RULES REACH

A conflict in the bank is not the same as a related-party transaction in the borrower's accounts, though one relationship can be both. Nor is it a breach of confidence: an information barrier controls what people know, and can help manage a conflict without curing it.

Which rules apply depends on what the bank is doing. In Australia, the conflicts obligation in section 912A(1)(aa) of the Corporations Act attaches to financial services under an AFS licence. A plain business loan is generally a credit facility, which section 765A excludes from the definition of a financial product, though a swap written beside it is not. ASIC's 2025 guidance says the obligation does not require every conflict to be eliminated. New Zealand's Conduct of Institutions regime reaches bank lending through consumer credit contracts, so ordinary business lending generally sits outside it. In the UK, the FCA's conflicts rules in SYSC 10 attach to services a firm provides, and a loan to a company is generally not itself a regulated activity. For much commercial lending, the working rules are therefore the bank's own code and credit policy, with the Basel Committee expecting boards to oversee conflict policies.

DEFINED IN ONE PARAGRAPH → · INFORMATION BARRIER → · RELATED-PARTY TRANSACTIONS →

// 05 — WHERE IT DECIDES A FILE

An approval resting on a conflicted recommendation has to be repaired before anyone relies on it, and the cost of repair rises the longer the file has run. Most of that repair is procedural: a clean re-read, a fresh sign-off, a note that explains what happened. The decision itself may not change.

Some conflicts are built into ordinary banking. A bank that lends and also writes a swap holds two positions against one customer. A bank that agrees a workout may also choose the adviser reviewing the business, which is one reason an independent business review is commissioned at arm's length. A borrower's own adviser who earns a fee on completion has a stake in the deal closing. Reading a file includes asking who was paid for what.

HOW BANKS APPROVE BUSINESS LOANS → · THE FOUR-EYES PRINCIPLE →

// SOURCES

The documents the statements on this page rest on. Each was opened and checked when cited.

Australian Securities and Investments Commission, Regulatory Guide 181: AFS licensing: Managing conflicts of interest, December 2025 — RG 181.7, RG 181.78 — The obligation does not require every conflict to be eliminated, and disclosure alone may be insufficient — sections 02 and 04.
Financial Stability Institute (BIS), Corporate Governance Principles for Banks: Executive Summary — The board should oversee the implementation and operation of policies to identify potential conflicts of interest — section 04.
Financial Markets Authority (New Zealand), Key terms under the CoFI regime — Ties the credit limb of the regime to being a creditor under a consumer credit contract — section 04.

// QUESTIONS PEOPLE ASK

What are examples of a conflict of interest in banking?: A lender with shares in a borrower. A credit officer reviewing a loan they helped write. A banker whose relative is a director of a customer. A relationship manager who accepts expensive hospitality from a customer whose application is pending. A broker paid only if a loan goes to one lender. At firm level, a bank that advises a company on a sale while lending to a bidder, or a bank whose sales targets reward products a customer may not need.
Is a conflict of interest illegal?: Not in itself. Conflicts arise in ordinary life and banking, and many can be managed. What creates the legal exposure is failing to manage one: acting on it undisclosed, breaching an employment contract or a bank's policy, breaching a duty owed to a client, or falling short of a regulatory obligation where one applies. A payment made to sway a decision can go further and be a criminal offence in its own right.
Do you have to disclose a conflict of interest at work?: In banking, usually yes. Banks generally require staff to declare outside interests, directorships and gifts, and treat failing to do so as a conduct matter, sometimes a dismissible one. The obligation normally lasts for as long as the job does, so a change in circumstances calls for a new declaration when it happens, without waiting for the next annual form. The bank's own policy and the employment contract set the detail, and they vary between banks.
Does disclosing a conflict of interest make it acceptable?: Not by itself. Disclosure is useful where the person told can act on it, by agreeing, asking questions or going elsewhere. It does not help a borrower who has no choice, or a bank whose decision is still being made by someone with a stake. Australia's regulator warns licensees that telling people will often fall short, and that a control, or stepping away, may serve better. Within a credit process the usual answer is to move the decision.

// NEXT TO IT

// ON WHOSE DESK

The seats that read this term in an ordinary week. Each page says what the seat is for, who arrives in it, and the shape of the round it runs.

Compliance officerTranslates the rules the bank operates under into things the business can actually do, and checks that it does them.
Internal auditorThe third line: checks independently that the first two did what they said they did, and reports to the board when they did not.
Financial crime analystDetects and investigates money laundering, sanctions breaches and fraud moving through the bank.

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THE READING ROOMIN ONE PARAGRAPHConflict of interest What counts as a conflict of interest for a banker, and what does disclosure do?