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

SYSC 10.1 Application

SYSC 10.1.1RRP

1This section applies to a common platform firm which provides services to its clients in the course of carrying on regulated activities or ancillary activities or providing ancillary services (but only where the ancillary services constitute MiFID business).2

2

Requirements only apply if a service is provided

SYSC 10.1.2GRP

The requirements in this section only apply where a service is provided by a common platform firm. The status of the client to whom the service is provided (as a retail client, professional client or eligible counterparty) is irrelevant for this purpose.

[Note:

recital 25 of MiFID implementing Directive]

Identifying conflicts

SYSC 10.1.3RRP

A common platform firm must take all reasonable steps to identify conflicts of interest between:

  1. (1)

    the firm, including its managers, employees and appointed representatives (or where applicable, 2tied agents)2, or any person directly or indirectly linked to them by control, and a client of the firm; or

    2
  2. (2)

    one client of the firm and another client;

that arise or may arise in the course of the firm providing any service referred to in SYSC 10.1.1 R.

[Note: article 18(1) of MiFID]

Types of conflicts

SYSC 10.1.4RRP

For the purposes of identifying the types of conflict of interest that arise, or may arise, in the course of providing a service and whose existence may entail a material risk of damage to the interests of a client, a common platform firm must take into account, as a minimum, whether the firm or a relevant person, or a person directly or indirectly linked by control to the firm:

  1. (1)

    is likely to make a financial gain, or avoid a financial loss, at the expense of the client;

  2. (2)

    has an interest in the outcome of a service provided to the client or of a transaction carried out on behalf of the client, which is distinct from the client's interest in that outcome;

  3. (3)

    has a financial or other incentive to favour the interest of another client or group of clients over the interests of the client;

  4. (4)

    carries on the same business as the client; or

  5. (5)

    receives or will receive from a person other than the client an inducement in relation to a service provided to the client, in the form of monies, goods or services, other than the standard commission or fee for that service.

The conflict of interest may result from the firm or person providing a service referred to in SYSC 10.1.1 R or engaging in any other activity.

[Note:

article 21 of MiFID implementing Directive]

SYSC 10.1.5GRP

The circumstances which should be treated as giving rise to a conflict of interest cover cases where there is a conflict between the interests of the firm or certain persons connected to the firm or the firm's group and the duty the firm owes to a client; or between the differing interests of two or more of its clients, to whom the firm owes in each case a duty. It is not enough that the firm may gain a benefit if there is not also a possible disadvantage to a client, or that one client to whom the firm owes a duty may make a gain or avoid a loss without there being a concomitant possible loss to another such client.

[Note: recital 24 of MiFID implementing Directive]

Record of conflicts

SYSC 10.1.6RRP

A common platform firm must keep and regularly update a record of the kinds of service or activity carried out by or on behalf of thefirm in which a conflict of interest entailing a material risk of damage to the interests of one or more clients has arisen or, in the case of an ongoing service or activity, may arise.

[Note:

article 23 of MiFID implementing Directive]

Managing conflicts

SYSC 10.1.7RRP

A common platform firm must maintain and operate effective organisational and administrative arrangements with a view to taking all reasonable steps to prevent conflicts of interest as defined in SYSC 10.1.3 R from constituting or giving rise to a material risk of damage to the interests of its clients.

[Note: article 13(3) of MiFID]

Disclosure of conflicts

SYSC 10.1.8RRP
  1. (1)

    If arrangements made by a common platform firm under SYSC 10.1.7 R to manage conflicts of interest are not sufficient to ensure, with reasonable confidence, that risks of damage to the interests of a client will be prevented, the firm must clearly disclose the general nature and/or sources of conflicts of interest to the client before undertaking business for the client.

  2. (2)

    The disclosure must:

    1. (a)

      be made in a durable medium; and

    2. (b)

      include sufficient detail, taking into account the nature of the client, to enable that client to take an informed decision with respect to the service in the context of which the conflict of interest arises.

[Note:

article 18(2) of MiFID and Article 22(4) of MiFID implementing Directive]

SYSC 10.1.9GRP

Common platform firms should aim to identify and manage the conflicts of interest arising in relation to their various business lines and their group's activities under a comprehensive conflicts of interest policy. In particular, the disclosure of conflicts of interest by a firm should not exempt it from the obligation to maintain and operate the effective organisational and administrative arrangements under SYSC 10.1.7 R. While disclosure of specific conflicts of interest is required by SYSC 10.1.8 R, an over-reliance on disclosure without adequate consideration as to how conflicts may appropriately be managed is not permitted.

[Note: recital 27 of MiFID implementing Directive]

Conflicts policy

SYSC 10.1.10RRP
  1. (1)

    A common platform firm must establish, implement and maintain an effective conflicts of interest policy that is set out in writing and is appropriate to the size and organisation of the firm and the nature, scale and complexity of its business.

  2. (2)

    Where the common platform firm is a member of a group, the policy must also take into account any circumstances, of which the firm is or should be aware, which may give rise to a conflict of interest arising as a result of the structure and business activities of other members of the group.

[Note:

article 22(1) of MiFID implementing Directive]

Contents of policy

SYSC 10.1.11RRP
  1. (1)

    The conflicts of interest policy must include the following content:

    1. (a)

      it must identify in accordance with SYSC 10.1.3 R and SYSC 10.1.4 R, by reference to the specific services and activities carried out by or on behalf of the common platform firm, the circumstances which constitute or may give rise to a conflict of interest entailing a material risk of damage to the interests of one or more clients; and

    2. (b)

      it must specify procedures to be followed and measures to be adopted in order to manage such conflicts.

  2. (2)

    The procedures and measures provided for in paragraph (1)(b) must:

    1. (a)

      be designed to ensure that relevant persons engaged in different business activities involving a conflict of interest of the kind specified in paragraph (1)(a) carry on those activities at a level of independence appropriate to the size and activities of the common platform firm and of the group to which itbelongs, and to the materiality of the risk of damage to the interests of clients; and

    2. (b)

      include such of the following as are necessary and appropriate for the common platform firm to ensure the requisite degree of independence:

      1. (i)

        effective procedures to prevent or control the exchange of information between relevant persons engaged in activities involving a risk of a conflict of interest where the exchange of that information may harm the interests of one or more clients;

      2. (ii)

        the separate supervision of relevant persons whose principal functions involve carrying out activities on behalf of, or providing services to, clients whose interests may conflict, or who otherwise represent different interests that may conflict, including those of the firm;

      3. (iii)

        the removal of any direct link between the remuneration of relevant persons principally engaged in one activity and the remuneration of, or revenues generated by, different relevant persons principally engaged in another activity, where a conflict of interest may arise in relation to those activities;

      4. (iv)

        measures to prevent or limit any person from exercising inappropriate influence over the way in which a relevant person carries out services or activities; and

      5. (v)

        measures to prevent or control the simultaneous or sequential involvement of a relevant person in separate services or activities where such involvement may impair the proper management of conflicts of interest.

  3. (3)

    If the adoption or the practice of one or more of those measures and procedures does not ensure the requisite level of independence, a common platform firm must adopt such alternative or additional measures and procedures as are necessary and appropriate for the purposes of paragraph (1)(b).

[Note: article 22(2) and (3) of MiFID implementing Directive]

SYSC 10.1.12GRP

In drawing up a conflicts of interest policy which identifies circumstances which constitute or may give rise to a conflict of interest, a common platform firm should pay special attention to the activities of investment research and advice, proprietary trading, portfolio management and corporate finance business, including underwriting or selling in an offering of securities and advising on mergers and acquisitions. In particular, such special attention is appropriate where the firm or a person directly or indirectly linked by control to the firm performs a combination of two or more of those activities.

[Note: recital

26 of MiFID implementing Directive]

Corporate finance

SYSC 10.1.13G

This section is relevant to the management of a securities offering by a common platform firm.

SYSC 10.1.14G

A common platform firm will wish to note that when carrying on a mandate to manage an offering of securities, the firm's duty for that business is to its corporate finance client (in many cases, the corporate issuer or seller of the relevant securities), but that its responsibilities to provide services to its investment clients are unchanged.

SYSC 10.1.15G

Measures that a common platform firm might wish to consider in drawing up its conflicts of interest policy in relation to the management of an offering of securities include:

  1. (1)

    at an early stage agreeing with its corporate finance client relevant aspects of the offering process such as the process the firm proposes to follow in order to determine what recommendations it will make about allocations for the offering; how the target investor group will be identified; how recommendations on allocation and pricing will be prepared; and whether the firm might place securities with its investment clients or with its own proprietary book, or with an associate, and how conflicts arising might be managed; and

  2. (2)

    agreeing allocation and pricing objectives with the corporate finance client; inviting the corporate finance client to participate actively in the allocation process; making the initial recommendation for allocation to retail clients of the firm as a single block and not on a named basis; having internal arrangements under which senior personnel responsible for providing services to retail clients make the initial allocation recommendations for allocation to retail clients of the firm; and disclosing to the issuer details of the allocations actually made.

[Note: The provisions in SYSC 10.1 also implement BCD Article 22 and BCD Annex V paragraph 1]