- (1) 33
3The prohibition under (1) does not apply where:
the investment manager has reasonable grounds to be satisfied that the good or service received in return for the charges in (1)(b) will reasonably assist the investment manager in the provision of its services to its customers, on whose behalf the relevant customer orders are being executed;
the investment manager's receipt of that good or service in return for the charges in (1)(b) does not, and is not likely to, impair compliance with the duty of the investment manager to act in the best interests of its customers; and
that good or service either:
- (1) 3
linked to the arranging and conclusion of a specific investment transaction (or series of related transactions); and
provided between the point at which the investment manager makes an investment or trading decision and the point at which the investment transaction (or series of related transactions) is concluded.
- (2) 3
- (1) 3
- (a) 3
whatever form its output takes, represent3 original thought, in the critical and careful consideration and assessment of new and existing facts, and must3 not merely repeat or repackage what has been presented before;33
- (c) 33
- (d) 3
- (2) 3
An example of a good or service 3relating to the execution of trades that the FCA does not regard as meeting the requirements of the rule on use of dealing commission (COBS 11.6.3 R) is post-trade analytics. These would not meet the evidential criteria for a good or service to be directly related to the execution of trades under COBS 11.6.4E (1).33
Examples of goods or services that relate to the provision of research that the FCA does not regard as meeting the requirements of the rule on use of dealing commission (COBS 11.6.3 R) include price feeds or historical price data that have not been analysed or manipulated in order to present the investment manager with meaningful conclusions. These would not meet the evidential criteria for a good or service to amount to the provision of substantive research under COBS 11.6.5E (1)3.3
Examples of goods or services that relate to the execution of trades or the provision of research that the FCA does not regard as meeting the requirements of either evidential provisions COBS 11.6.4E (1) or COBS 11.6.5E (1)3 include:3
services relating to the valuation or performance measurement of portfolios;
connectivity services such as electronic networks and dedicated telephone lines;
subscriptions for publications;
travel, accommodation or entertainment costs;
order and execution management systems;
office administrative computer software, such as word processing or accounting programmes;
membership fees to professional associations;
purchase or rental of standard office equipment or ancillary facilities;
direct money payments;
publicly available information; and
3An investment manager intending to pass on to its customers any charges under the exemption at COBS 11.6.3R (3) should have regard to its duties under the client's best interests rule. For example, this means that:
an investment manager should not pass on a charge to a customer under the exemption at COBS 11.6.3R (3) that is greater than the cost charged by the broker or relevant person specifically for the relevant good or service falling under COBS 11.6.3R (3);
if an investment manager intends to pass on a charge to a customer under the exemption at COBS 11.6.3R (3), and the relevant good or service being offered in return for a broker's or other person's charges is not distinctly priced, the investment manager should make a fair assessment of the charge that it would be permitted to pass onto its customer under that rule. In making this determination, the investment manager may need to consider whether it can carry out a fact-based analysis of the unpriced good or service. For example, it may be appropriate to use other comparable priced goods or services (whether produced internally or procured from another person) or an estimate of the cost of providing a comparable good or service internally as an indication of a fair charge to pass onto a customer for the relevant good or service; and
where the investment manager is in a position to negotiate or itself dictate the price of a good or service it receives that is to be charged to a customer under the exemption at COBS 11.6.3R (3), it should act honestly, fairly and professionally in accordance with the best interests of its customer.
Where a good or service received by an investment manager comprises the provision of substantive research together with elements that are not substantive research (see COBS 11.6.7 G and COBS 11.6.8 G), COBS 11.6.3R (3) only applies for those elements that amount to the provision of substantive research. This means that the investment manager should disaggregate any such good or service received, to ensure that it only passes on charges under the exemption at COBS 11.6.3R (3) for the substantive research elements that it receives.
In disaggregating elements under (a), it may be useful for an investment manager to consider the amount that it would be would be willing, in good faith, to pay for those elements of a good or service that cannot be charged to a customer under COBS 11.6.3 R. Such an exercise can assist the investment manager, when determining the charges to be passed on to the customer under the exemption at COBS 11.6.3R (3) for the substantive research elements, to ensure that the customer will not subsidise the other elements that benefit the investment manager.
The guidance under (a) and (b) is equally relevant to situations where:
The considerations in (1) are equally relevant for any disaggregated good or service.
The reference to substantive 3research in the rule on use of dealing commission (COBS 11.6.3 R) is not confined to investment research as defined in the Glossary. Substantive research can potentially be or include investment research, but this is not part of the criteria under COBS 11.6.5 E.3 In addition, any goods or services that relate to the provision of research that the FCA regards as not acceptable under COBS 11.6.7 G or COBS 11.6.8 G3 should be viewed as not meeting the requirements of 3COBS 11.6.3R (3)3, notwithstanding that their content might qualify as investment research.3333
This section applies only to arrangements under which an investment manager receives from brokers or other persons a good or service that directly relates 3to the execution of trades or amounts to3 the provision of substantive 3research. It has no application in relation to execution and research generated internally by an investment manager itself.3
An investment manager that enters into arrangements under this section must make adequate prior disclosure to customers concerning the receipt of goods or services that directly relate to the execution of trades or amount to the provision of substantive research3. This prior disclosure should form part of the summary form disclosure under the rule on inducements (COBS 2.3.1 R).3
The prior disclosure required by this section should include an adequate disclosure of the firm's policy relating to the receipt of goods or services that directly relate to the execution of trades or amount to the provision of substantive research3 in accordance with the rule on use of dealing commission (COBS 11.6.3 R).3
The prior disclosure should explain generally why the firm might find it necessary or desirable to use dealing commission to purchase goods or services, bearing in mind the practices in the markets in which it does business on behalf of its customers. While the appropriate method of making such a disclosure is for the firm to decide, this could, for example, be achieved in a client agreement.
Adequate prior and periodic disclosure under this section must include details of the goods or services that directly relate to the execution of trades and, wherever appropriate, separately identify the details of the goods or services that are attributable amount to the provision of substantive research3.3
In assessing the adequacy of prior and periodic disclosures made by an investment manager under this section, the FCA will have regard to the extent to which the investment manager adopts disclosure standards developed by industry associations such as the Investment Management Association, the National Association of Pension Funds and the Association for Financial Markets in Europe.
Firms are also reminded of the general record keeping requirements in SYSC 3.2 and SYSC 9 (as applicable). An investment manager should keep appropriate records of the basis on which it concludes that a particular good or service may be received under the exemption at COBS 11.6.3R (3) in return for the charges in COBS 11.6.3R (1)(b).