Principle 8 (Conflicts of interest) requires a firm to manage a conflict of interest fairly, both between itself and its customers and between a customer and another client. One of the methods by which a firm may manage conflicts of interest is to establish and maintain internal arrangements restricting the movement of information within the firm - Chinese walls. The purpose of this section is to set out the circumstances when the FSA would consider it appropriate for a firm to withhold or not to use information that it would otherwise have to disclose to, or use for the benefit of a client.
When a firm establishes and maintains a Chinese wall (that is, an arrangement that requires information held by a person in the course of carrying on one part of its business to be withheld from, or not to be used for, persons with or for whom it acts in the course of carrying on another part of its business), it may:1
withhold or not use the information held; and
for that purpose, permit persons employed in the first part of its business to withhold the information held from those employed in that other part of the business;
but only to the extent that the business of one of those parts involves the carrying on of designated investment business or related ancillary activities.
Information may also be withheld or not used by a firm when this is required by an established arrangement maintained between different parts of the business (of any kind) in the same group. This provision does not affect any requirement to transmit or use information that may arise apart from the rules in COB.
For the purpose of this rule, 'maintains' includes taking reasonable steps to ensure that the arrangements remain effective and are adequately monitored, and must be interpreted accordingly.
Section 147 of the Act enables the FSA to make rules ("control of information rules") about the disclosure and use of information held by a firm. COB 2.4.4 R (1) is the only control of information rule made by the FSA. This means that:
acting or engaging in conduct in conformity with COB 2.4.4 R (1) provides a defence against proceedings brought under section 397(2) or (3) of the Act (Misleading statements and practices) - see sections 397(4) and (5)(c);
acting in conformity with COB 2.4.4 R (1) provides a defence for a firm against FSA enforcement action, or an action for damages under section 150 of the Act, based on a breach of a relevant requirement to disclose or use information (this is likely to be relevant only for requirements in PRIN, COB and MAR 3 (Inter-professional conduct)). Acting in conformity with COB 2.4.4 R (2) has a similar effect but only in relation to such a requirement in COB.
When any of the COB rules or any of the CASS rules apply to a firm that acts with knowledge, the firm will not be taken to act with knowledge for the purposes of that rule if none of the relevant individuals involved on behalf of the firm acts with that knowledge as a result of arrangements established under COB 2.4.4 R.2