COB 2.2 Inducements and soft commission
Application
This section applies to a firm that conducts designated investment business with or for a customer.
Purpose
Principles 1 and 6 require a firm to conduct its business with integrity, to pay due regard to the interests of its customers and to treat them fairly. The purpose of this section is to ensure that a firm does not conduct business under arrangements that might give rise to a conflict with its duty to customers.
Prohibition of inducements
A firm must take reasonable steps to ensure that it, and any person acting on its behalf, does not:
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(1)
offer, give, solicit or accept an inducement; or
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(2)
direct or refer any actual or potential item of designated investment business to another person on its own initiative or on the instructions of an associate;
if it is likely to conflict to a material extent with any duty that the firm owes to its customers in connection with designated investment business or any duty which such a recipient firm owes to its customers.
The purpose of COB 2.2.3 R (2) is to prevent the requirement in COB 2.2.3 R (1) being circumvented by an inducement being given or received by an unregulated associate. A firm may be able to demonstrate that it could not reasonably have knowledge of an associate giving or receiving an inducement. It should not, however, direct business to another person on the instruction of an associate if this is likely to conflict with the interests of its customers.
Investment research
3An offer or agreement to publish investment research which is, or to change a published recommendation so that it becomes, favourable to its subject (even if the subject is a customer of the firm), is an example of offering or accepting an inducement which is likely to conflict to a material extent with the firm's duties to its other customers. (See also COB 5.10 in relation to inducements related to corporate finance and COB 7.16 in relation to investment research.)4
Restriction in connection with packaged products
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(1)
A firm should not enter, and should take reasonable steps to ensure that no person acting on its behalf enters, into any of the following arrangements with another firm in relation to a packaged product if any commission is required to be disclosed to a customer:52
- (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;
- (b)
an arrangement to pay commission that is increased in excess of the amount disclosed to the customer, unless the increase is attributable to an increase in the premiums or contributions payable by that customer;
- (c)
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;
- (d)
an arrangement to pay commission other than to the firm responsible for a sale, unless:
- (i)
the firm responsible for the sale has passed on its right to receive the commission to the recipient; or
- (ii)
another firm has given advice on investments to the same customer after the sale; or
- (iii)
the commission is paid following the sale of a packaged product by the firm in response to a direct offer financial promotion communicated by that firm to a customer of the recipient firm.5
- (i)
- (a)
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(1A)
COB 2.2.5 E (1) does not apply to arrangements between firms that are in the same immediate group. In this situation COB 5.7.5 R will apply.
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(2)
Contravention of (1) may be relied upon as tending to establish contravention of COB 2.2.3 R.
5Financial assistance and product providers
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(1)
5This evidential provision applies in relation to a holding in, or the provision of credit to, a firm which holds itself out as giving advice on investments to private customers on packaged products except where the relevant transaction is between persons who are in the same immediate group.
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(2)
A product provider should not take any step which would result in it:
- (a)
having a direct or indirect holding in a firm in (1) of its capital or voting power ; or
- (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);5
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), having regard to (5).5
- (a)
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(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 (2)(b), unless all the conditions in (4) are satisfied.
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(4)
The conditions referred to in (2) and 5(3) are that:
- (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;
- (b)
the firm (or, if applicable, each of the firms) taking the step has reliable written evidence that (a) is satisfied;
- (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
- (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 advice on investments in relation to packaged products given by the firm.
- (a)
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(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.
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(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.
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(7)
Contravention of (2) or (3) may be relied upon as tending to establish contravention of COB 2.2.3 R.
Packaged products - guidance on indirect benefits
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(-2)
To comply with COB 2.2.3 R, neither a product provider nor any of its associates should give, and a firm should not receive from such persons , any indirect benefit, if the benefit is likely to conflict to a material extent with any duty owed by the receiving firm when giving advice on investments to private customers on packaged products. Such conflicts may arise, for example, where the gift might induce material bias as regards:5
- (a)
the choice of product provider whose products are recommended; or5
- (b)
the type of product which is recommended.5
- (a)
-
(-1)
The guidance in COB 2.2.7 G is not relevant to indirect benefits which may be given by a product provider or its associate to its own representatives.5
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(1)
The FSA will not regard a firm as being in contravention of COB 2.2.3 R if it gives or receives gifts, hospitality and promotional competition prizes of a reasonable value, providing they do not conflict with the duties that the recipient owes to its customers.5
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(2)
A product provider may assist another firm to promote its packaged products so that the quality of its service to customers is enhanced. Such assistance should not be of a kind or value that is likely to impair the other firm's ability to pay due regard to the interests of its customers, and to give advice on, and recommend, packaged products available from the recipient firm's whole range or ranges of packaged products. The recipient firm should be mindful of the requirements of COB 5.3.5 R (Requirement for suitability generally).5
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(3)
In relation to the sale of packaged products, COB 2.2.7 G indicates the kind of benefits which, in the FSA's view, a firm can give and receive without contravening COB 2.2.3 R.
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(4)
COB 2.2.6 G does not apply to indirect benefits provided by a firm to another firm that is in the same immediate group. In this situation COB 5.7.5 R will apply.5
Reasonable indirect benefits1
This Table belongs to COB 2.2.6 G.
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Reasonable indirect benefits |
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Joint marketing exercises |
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1 |
A product provider or its associate may provide generic product literature (that is, letterheading, leaflets, forms and envelopes) that is suitable for use and distribution by or on behalf of another firm if:5 |
5
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(a) |
the literature does not feature the recipient firm's name or features it less prominently than that of the product provider and is not used to promote the recipient firm'sbroker fund service; and5 |
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(b) |
the total costs (for example, packaging, posting, mailing lists) of distributing such literature to its customer are borne by the recipient firm.5 |
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2 |
A product provider or its associate may supply another firm with 'freepost' envelopes, for forwarding such items as completed applications, medical reports or copy client agreements , when these are made generally available to all firms from which the provider obtains business.5 |
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3 |
A product provider or its associate may supply product specific literature (for example, key features, minimum information, direct offer financial promotions) to another firm if:5 |
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(a) |
the literature is not designed to be used to promote the recipient firm's broker fund service; or5 |
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(b) |
the literature does not contain the name of any other firm; or5 |
5
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(c)5 |
the name of the recipient firm (if it is included) appears only incidentally in the literature and the supplying firm's name appears with greater prominence.5 |
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4 |
A product provider or its associate may supply draft articles, news items and financial promotion's for publication in another firm's magazine, only if in each case any costs paid by the product provider or its associate for placing the articles and financial promotions are not more than market rate, and exclude distribution costs.5 |
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Seminars and conferences |
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5 |
A product provider or its associate may take part in a seminar organised by another firm or a third party and may pay toward the cost of the seminar, if:5 |
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(a) |
its participation is for a genuine business purpose; |
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(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; and5 |
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(c) |
in the case of a seminar organised by a third party, the seminar is open to participation by other firms generally.5 |
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Technical services and information technology |
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6 |
A product provider or its associate may supply a 'freephone' link to which it is connected only if it is available to other firms generally.5 |
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7 |
A product provider or its associate may supply another firm with any of the following:5 |
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(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; |
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(b) |
access to data processing facilities, or access to data, that is related to the product provider's business;5 |
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(c) |
access to third party electronic dealing or quotation systems that are related to the product provider's business; and5 |
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(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).5 |
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7A5 |
A product provider may pay cash amounts or give 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 consumers.5 |
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8 |
A product provider or its associate may supply a broker fund adviser (and its customer ) with a periodic statement relating to the relevant broker fund if the broker fund adviser is unable to supply the periodic statement.5 |
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9 |
A product provider or its associate may supply another firm with information about sources of mortgage finance.5 |
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10 |
A product provider or its associate may supply another firm with generic technical information in writing, not necessarily related to the product provider's business, when this information:5 |
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(a) |
is made available generally to other firms which give or might give advice on the product provider'spackaged products; or5 |
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(b) |
(i) |
is of a specialist nature and is made available to a particular class of firm (that is, one that promotes itself as an expert in the same specialist area); and5 |
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(ii) |
states clearly and prominently that it is produced by the product provider or (if different) supplying firm.5 |
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Training |
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11 |
A product provider or its associate may provide another firm with training facilities of any kind (for example, lectures, venue, written material and software) only if these are made available generally to all other firms which give or might give advice on the product provider'spackaged products.5 |
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Travel and accommodation expenses |
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12 |
A product provider or its associate may reimburse another firm's reasonable travel and accommodation expenses when the other firm: 5 |
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(a) |
participates in market research conducted by or for the product provider; 5 |
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(b) |
attends an annual national event of a UK trade association, hosted or co-hosted by the product provider;5 |
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(c) |
participates in the product provider's training facilities (see 11);5 |
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(d) |
visits the product provider'sUK office in order to:5 |
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(i) |
receive information about the product provider's administrative systems; or5 |
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(ii) |
attend a meeting with the product provider and an existing or prospective customer of the receiving firm.5 |
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Requirements when using a soft commission agreement
Allowable benefits provided under a soft commission agreement
Prior disclosure
Periodic disclosure
Exceptions
Record keeping
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(1)
A firm must make records of the reports sent to its customers as required by COB 2.2.18 R and retain those records for at least three years from the date on which the soft commission agreement to which they relate is terminated.
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(2)
A firm must make a record of each payment of disclosable commission, and must retain that record for a period of at least six years from the date of payment.
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(3)
A firm must make a record of each benefit given to another firm in accordance with COB 2.2.6 G, and must keep that record for at least six years from the date on which it was given.5