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Status: You are viewing the version of the handbook as on 2009-03-31.

COBS 2.3 Inducements

Rule on inducements

COBS 2.3.1 R RP

A firm must not pay or accept any fee or commission, or provide or receive any non-monetary benefit, in relation to designated investment business or, in the case of its MiFID or equivalent third country business, another ancillary service, carried on for a client other than:

  1. (1)

    a fee, commission or non-monetary benefit paid or provided to or by the client or a person on behalf of the client; or

  2. (2)

    a fee, commission or non-monetary benefit paid or provided to or by a third party or a person acting on behalf of a third party, if:

    1. (a)

      the payment of the fee or commission, or the provision of the non-monetary benefit does not impair compliance with the firm's duty to act in the best interests of the client; and

    2. (b)

      the existence, nature and amount of the fee, commission or benefit, or, where the amount cannot be ascertained, the method of calculating that amount, is clearly disclosed to the client, in a manner that is comprehensive, accurate and understandable, before the provision of the service;1

      1. (i)

        this requirement only applies to business other than MiFID or equivalent third country business if it

        includes giving a personal recommendation in relation to a packaged product;1

      2. (ii)

        where this requirement applies to business other than MiFID or equivalent third country business, a firm is not required to make a disclosure to the client in relation to a non-monetary benefit permitted under (a) and which falls within the table of reasonable non-monetary benefits in COBS 2.3.15 G as though that table were part of this rule for this purpose only;1

      3. (iii)

        this requirement does not apply to a firm giving basic advice; and31

        3
    3. (c)

      in relation to MiFID or equivalent third country business, the payment of the fee or commission, or the provision of the non-monetary benefit is designed to enhance the quality of the service to the client; or31

      3
  3. (3)

    proper fees which enable or are necessary for the provision of designated investment business or ancillary services, such as custody costs, settlement and exchange fees, regulatory levies or legal fees, and which, by their nature, cannot give rise to conflicts with the firm's duties to act honestly, fairly and professionally in accordance with the best interests of its clients.

[Note:

article 26 of the MiFID implementing Directive]

[Note: The Committee of European Securities Regulators (CESR) has issued recommendations on inducements under MiFID]1

COBS 2.3.2 R RP

A firm will satisfy the disclosure obligation under this section if it:

  1. (1)

    discloses the essential arrangements relating to the fee, commission or non-monetary benefit in summary form;

  2. (2)

    undertakes to the client that further details will be disclosed on request; and

  3. (3)

    honours the undertaking in (2).

[Note: article 26 of the MiFID implementing Directive]

Guidance on inducements

COBS 2.3.3 G RP

The obligation of a firm to act honestly, fairly and professionally in accordance with the best interests of its clients includes both the client's best interests rule and the duties under Principles 1 (integrity), 2 (skill, care and diligence) and 6 (customers' interests).

COBS 2.3.4 G RP

1 COBS 11.6 (Use of dealing commission) deals with the acceptance of certain inducements by investment managers and builds upon the requirements in this section. Investment managers should ensure they comply with this section and COBS 11.6.

COBS 2.3.5 G RP

For the purposes of this section, a non-monetary benefit would include the direction or referral by a firm of an actual or potential item of designated investment business to another person, whether on its own initiative or on the instructions of an associate.

COBS 2.3.6 G RP

For the purposes of this section, the receipt by an investment firm of a commission in connection with a personal recommendation or a general recommendation, in circumstances where the advice or recommendation is not biased as a result of the receipt of commission, should be considered as designed to enhance the quality of the recommendation to the client.

[Note: recital 39 of MiFID implementing Directive]

COBS 2.3.7 G RP

The fact that a fee, commission or non-monetary benefit is paid or provided to or by an appointed representative or, where applicable, by a tied agent,2 does not prevent the application of the rule on inducements.

COBS 2.3.8 G RP

The rule on inducements is applicable to a firm and those acting on behalf of a firm in relation to the provision of an investment service or ancillary service to a client. Small gifts and minor hospitality received by an individual in their personal capacity below a level specified in the firm's conflict's of interest policy, will not be relevant for the purpose of the rule on inducements.

Packaged products evidential provisions and guidance on inducements1

COBS 2.3.9 G RP

1The following guidance and evidential provisions provide examples of arrangements the FSA believes will breach the client's best interests rule if it sells, personally recommends or arranges the sale of a packaged product for a retail client.

COBS 2.3.10 E RP
  1. (1)

    1If a firm is required to disclose commission (see COBS 6.4) to a client in relation to the sale of a packaged product (other than in relation to arrangements between firms that are in the same immediate group) the firm should not enter into any of the following:

    1. (a)

      volume overrides, if commission paid in respect of several transactions is more than a simple multiple of the commission payable in respect of one transaction of the same kind; and

    2. (b)

      an agreement to indemnify the payment of commission on terms that would or might confer an additional financial benefit on the recipient in the event of the commission becoming repayable.

  2. (2)

    Contravention of (1) may be relied upon as tending to establish contravention of the rule on inducements (COBS 2.3.1 R).

COBS 2.3.11 G RP
  1. (1)

    1If a firm enters into an arrangement with another firm under which it makes or receives a payment of commission in relation to the sale of a packaged product that is increased in excess of the amount disclosed to the client, the firm is likely to have breached the rules on disclosure of charges, remuneration and commission (see COBS 6.4) and, where applicable, the rule on inducements in COBS 2.3.1R (2)(b), unless the increase is attributable to an increase in the premiums or contributions payable by that client.

COBS 2.3.12 E RP
  1. (1)

    1This evidential provision applies in relation to a holding in, or the provision of credit to, a firm which holds itself out as making personal recommendations to retail clients on packaged products, except where the relevant transaction is between persons who are in the same immediate group.

  2. (2)

    A product provider should not take any step which would result in it:

    1. (a)

      having a direct or indirect holding of the capital or voting power of a firm in (1); or

    2. (b)

      providing credit to a firm in (1) (other than commission due from the firm to the product provider in accordance with an indemnity commission clawback arrangement);

    unless all the conditions in (4) are satisfied. A product provider should also take reasonable steps to ensure that its associates do not take any step which would result in it having a holding as in (a) or providing credit as in (b).

  3. (3)

    A firm in (1) should not take any step which would result in a product provider having a holding as in (2)(a) or providing credit as in paragraph (2)(b), unless all the conditions in (4) are satisfied.

  4. (4)

    The conditions referred to in (2) and (3) are that:

    1. (a)

      the holding is acquired, or credit is provided, on commercial terms, that is terms objectively comparable to those on which an independent person unconnected to a product provider would, taking into account all relevant circumstances, be willing to acquire the holding or provide credit;

    2. (b)

      the firm (or, if applicable, each of the firms) taking the step has reliable written evidence that (a) is satisfied;

    3. (c)

      there are no arrangements, in connection with the holding or credit, relating to the channelling of business from the firm in (1) to the product provider; and

    4. (d)

      the product provider is not able, and none of its associates is able, because of the holding or credit, to exercise any influence over the personal recommendations made in relation to packaged products given by the firm.

  5. (5)

    In this evidential provision, in applying (2) and (3) any holding of, or credit provided by, a product provider'sassociate is to be regarded as held by, or provided by, that product provider.

  6. (6)

    In this evidential provision, in applying (3) references to a "product provider" are to be taken as including an unauthorised equivalent of a product provider; that is, an unauthorised insurance undertaking or an unauthorised operator of a regulated collective investment scheme or of an investment trust savings scheme;

  7. (7)

    Contravention of (2) or (3) may be relied upon as tending to establish contravention of the rule on inducements (COBS 2.3.1 R).

COBS 2.3.13 G RP

1In considering the compliance of arrangements between members of the same immediate group with the rule on inducements (COBS 2.3.1 R), firms may wish to consider the evidential provisions in COBS 2.3.10 E and COBS 2.3.12 E, to the extent that these are relevant.

Reasonable non-monetary benefits1

COBS 2.3.14 G RP
  1. (1)

    1In relation to the sale of packaged products, the table on reasonable non-monetary benefits (COBS 2.3.15 G) indicates the kind of benefits which are capable of enhancing the quality of the service provided to a client and, depending on the circumstances, are capable of being paid or received without breaching the client's best interests rule. However, in each case, it will be a question of fact whether these conditions are satisfied.

  2. (2)

    The guidance in the table on reasonable non-monetary benefits is not relevant to non-monetary benefits which may be given by a product provider or its associate to its own representatives. The guidance in this provision does not apply directly to non-monetary benefits provided by a firm to another firm that is in the same immediate group. In this situation, the rules on commission equivalent (COBS 6.4.3 R) will apply.

Reasonable non-monetary benefits1

COBS 2.3.15 G RP

1This table belongs to COBS 2.3.14 G.

Reasonable non-monetary benefits

Gifts, Hospitality and Promotional Competition Prizes

1

A product provider giving and a firm receiving gifts, hospitality and promotional competition prizes of a reasonable value.

Promotion

2

A product provider assisting another firm to promote its packaged products so that the quality of its service to clients is enhanced. Such assistance should not be of a kind or value that is likely to impair the recipient firm's ability to pay due regard to the interests of its clients, and to give advice on, and recommend, packaged products available from the recipient firm's whole range or ranges.

Joint marketing exercises

3

A product provider providing generic product literature (that is, letter heading, leaflets, forms and envelopes) that is suitable for use and distribution by or on behalf of another firm if:

(a)

the literature enhances the quality of the service to the client and is not primarily of promotional benefit to the product provider; and

(b)

the total costs (for example, packaging, posting, mailing lists) of distributing such literature to its client are borne by the recipient firm.

4

A product provider supplying another firm with 'freepost' envelopes, for forwarding such items as completed applications, medical reports or copy client agreements.

5

A product provider supplying product specific literature (for example, key features documents, minimum information) to another firm if:

(a)

the literature does not contain the name of any other firm; or

(b)

if the name of the recipient firm is included, the literature enhances the quality of the service to the client and is not primarily of promotional benefit to the recipient firm.

6

A product provider supplying draft articles, news items and financial promotions for publication in another firm's magazine, only if in each case any costs paid by the product provider for placing the articles and financial promotions are not more than market rate, and exclude distribution costs.

Seminars and conferences

7

A product provider taking part in a seminar organised by another firm or a third party and paying toward the cost of the seminar, if:

(a)

its participation is for a genuine business purpose; and

(b)

the contribution is reasonable and proportionate to its participation and by reference to the time and sessions at the seminar when its staff play an active role.

Technical services and information technology

8

A product provider supplying a 'freephone' link to which it is connected.

9

A product provider supplying another firm with any of the following:

(a)

quotations and projections relating to its packaged products and, in relation to specific investment transactions (or for the purpose of any scheme for review of past business), advice on the completion of forms or other documents;

(b)

access to data processing facilities, or access to data, that is related to the product provider's business;

(c)

access to third party electronic dealing or quotation systems that are related to the product provider's business; and

(d)

software that gives information about the product provider'spackaged products or which is appropriate to its business (for example, for use in a scheme for review of past business or for producing projections or technical product information).

10

A product provider paying cash amounts or giving other assistance to a firm not in the same immediate group for the development of software or other computer facilities necessary to operate software supplied by the product provider, but only to the extent that by doing so it will generate equivalent cost savings to itself or clients.

11

A product provider supplying another firm with information about sources of mortgage finance.

12

A product provider supplying another firm with generic technical information in writing, not necessarily related to the product provider's business, when this information states clearly and prominently that it is produced by the product provider or (if different) supplying firm.

Training

13

A product provider providing another firm with training facilities of any kind (for example, lectures, venue, written material and software).

Travel and accommodation expenses

14

A product provider reimbursing another firm's reasonable travel and accommodation expenses when the other firm:

(a)

participates in market research conducted by or for the product provider;

(b)

attends an annual national event of a United Kingdom trade association, hosted or co-hosted by the product provider;

(c)

participates in the product provider's training facilities (see 13);

(d)

visits the product provider'sUnited Kingdom office in order to:

(i)

receive information about the product provider's administrative systems; or

(ii)

attend a meeting with the product provider and an existing or prospective client of the receiving firm.

COBS 2.3.16 G RP

1In interpreting the table of reasonable non-monetary benefits, product providers should be aware that where a benefit is made available to one firm and not another, this is more likely to impair compliance with the client's best interests rule.

Record keeping: inducements

COBS 2.3.17 R RP
  1. (1)

    A firm must make a record of the information disclosed to the client in accordance with COBS 2.3.1R (2)(b)4 and must keep that record for at least five years from the date on which it was given.

    4
  2. (2)

    A firm must also 4make a record of each benefit given to another firm which does not have to be disclosed to the client4in accordance with COBS 2.3.1R (2)(b)(ii),4 and must keep that record for at least five years from the date on which it was given.1

    4

[Note: see article 51(3) of the MiFID implementing Directive]