This section gives support to Principle 6 (Customers' interests) and Principle 7 (Communications with clients) which require firms to have due regard to the information needs of their customers and treat them fairly. The purpose of this section is to ensure that private customers are adequately informed about the nature of the advice on investments which they may receive from a firm in relation to packaged products. In particular firms need to be clear to private customers about the scope and range of the products and product providers on which their advice on investments is based.2

1. (1)

   2COB 5.1.6A R requires a firm when giving advice on investments to a private customer to do so on the basis that the scope of its advice on investments will involve a selection from the whole market (or from the whole of a sector of the market), or from a limited number of product provider or from a single provider and to adhere to such a scope during the advisory process unless the firm decides, and if necessary secures the customer's agreement, to widen the scope for the customer and, if necessary, any changes in the arrangements by which the firm will be remunerated (see COB 4.3.7 R). A firm can choose to offer both whole of market and more limited advice on investments. The scope of the advice which the customer subsequently receives should always however be made clear and explained in a way which is likely to be understood.

2. (2)

   The scope of advice on investments prescribed in each of COB 5.1.6AR (1)(a) will require different competencies on the part of a firm'srepresentatives to enable the firm to discharge its advisory functions.

3. (3)

   A firm selecting packaged products from a limited number of product providers or from a single provider may do so on the basis of a range of packaged products which comprises a selection of products available from those providers and accordingly a firm may have one or more such ranges. COB 4.3.3 R requires a firm to give each customer some initial disclosure information - an initial disclosure document - which must indicate the scope of the advice on investments which the customer can expect to receive. This initial information must also invite the customer to ask for a copy of the range of packaged productsfrom which the firm will make a selection. A firm which has several ranges of packaged products will need to ensure that each customer who asks for it is given information about the range which is appropriate for that customer.

4. (4)

   If a firm holds itself out as giving advice on investments to private customers on packaged products from the whole market (or the whole of any sector of that market; see (5)), the firm's selection for this purpose will need to be sufficiently large to enable the firm to satisfy the suitability requirement in COB 5.3.9 R (Requirement for suitability: whole-of-market advisers). One way in which such firm may wish to satisfy this requirement is by using "panels" of product providers which are sufficient for the purpose of giving advice from the whole market and which are reviewed on a regular basis. A firm which provides advice on investments from the whole market (or from the whole of a sector of the market) should ensure that its analysis of the market and the available packaged products is kept adequately up to date.

5. (5)

   References to a firm advising on packaged products from the whole of a sector of the market are to a firm which, though holding itself out as giving advice on investments from the whole market, advise on investments in practice only on a relatively limited selection of packaged products which are available to meet the needs of a specialist sector or niche market (for example pension annuities). In such circumstances the quality of the firm's analysis of the sector or niche market should be commensurate with that which a firm would apply for the purposes of selecting products from the market as a whole.

6. (6)

   IPRU(INS) 1.3 (Restriction of business to insurance) in practice restricts the range of packaged products that a long-term insurer may have and CIS 16.5.1 R (Managers of UCITS schemes) restricts the range of packaged products that a manager of a UCITS scheme may have.

7. (7)

   If a firm gives advice on investments to a private customer on a packaged product produced by another person, the key features must be "appropriate" (see COB 6.2.7 (Provision of key features: life policies) COB 6.2.22R (1) (Provision of key features: schemes) and COB 6.4.15 (Stakeholder pension schemes)). Therefore, if the terms of the packaged product are different from the terms of the product for which the key features was originally prepared by the product provider, for example there are additional charges, then the key features will need to be amended.

8. (8)

   There are restrictions on communicating and approving a financial promotion relating to a life policy produced by an unauthorised person (see COB 3.13.1 R (Additional requirements for financial promotions for an overseas long-term insurer)).

9. (9)

   When a firm gives advice on investments relating to a packaged product which is not produced by the firm, it is responsible for the advice on investments given. The product provider is responsible for the relevant terms and conditions of the packaged product.

10. (10)

    The rules in COB 5.1 are mainly concerned to ensure that firms can offer a wide range of advisory services in relation to packaged products. In the course of giving such advice a firm'srepresentative may also need to consider the merits of whether a customer should give up, surrender or cease contributing to an existing packaged product and the rules in this section do not place a restriction on this (subject always to such advice on investments being suitable having regard to the customer's circumstances).

2An appointed representative's range of packaged products may be defined by a particular category of packaged product or by individual product, as long as it is clear (for example, "all pension products of ABC Co Limited"). It may be set out in a document separate from the appointed representative's contract of appointment and should, in any event, be separate from the main body of the contract for clarity.

COB 5.1.7 R (1) does not inhibit the sale by a firm:2

1. (1)

   where the sale does not involve the provision of advice on investments to a private customer; a firm may act as an intermediary for a transaction in a packaged product where that transaction is an execution-only transaction (long-term insurers are reminded of IPRU(INS) 1.3 (Restriction of business to insurance) and managers of UCITS schemes are reminded of CIS 16.5.1 R (Managers of UCITS schemes); or2

2. (2)

   when the firm acts a discretionary investment manager.2

COB 5.1.7 R (1) applies to advice on investments given to private customers about the components of an ISA which are packaged products.

1. (1)

   2COB 5.1.11A R stipulates what a firm must do if it is to hold itself out to any particular client that it will act independently. Firms which wish to hold themselves out generally as acting independently should ensure that doing so (for example through a trading name or advertising) is consistent with the kind of service which private customers receive in relation to packaged products.

2. (2)

   A firm that carries on business both in relation to packaged products and regulated mortgage contracts can do so in relation to the whole market and therefore be "independent" for one but offer only a limited service for the other. If this is the case the firm should explain the different nature of the services in a way which meets the requirement for clear, fair and not misleading communications in COB 2.1.3 R (Clear, fair and not misleading communications).

3. (3)

   COB 5.1.11AR (1)(b) means that a firm wishing to hold itself out as independent will need to give customers a purely fee based option for paying for its services. Such a fee may be offered on a contingent basis so that it does not become payable if the customer does not acquire a product. A firm offering a fee-based service may, in addition, provide the customer with other payment options, such as by commission.

2Products subject to price caps within COB 5.1.14 R would include ISAs marketed as "CAT standard".

A firm that arranges an execution-only transaction for a private customer is not generally required to obtain any personal or financial information about that customer, except when the Money Laundering sourcebook applies. However, the Insurance Mediation Directive requires that a statement of the demands and needs of a client is provided to the client, whether advice is given or not. This is required whatever the status of the client. Accordingly the demands and needs provisions in COB 5.2.12 R to COB 5.2.17 G apply to all circumstances relating to life policies.3

When a firm provides limited adviceon investments to a private customer, the firm should not treat any resulting transaction as an execution-only one.

Principle 9 (Customers: relationships of trust) requires a firm to take reasonable care to ensure the suitability of its advice and discretionary decisions. To comply with this, a firm should obtain sufficient information about its private customer to enable it to meet its responsibility to give suitable advice. A firm acting as a discretionary investment manager for a private customer should also ensure that before acting in the exercise of discretion it has sufficient information about its private customer to enable it to act in a way which is suitable for that private customer.

A firm that advises a private customer, or exercises discretion for a private customer, on a continuing basis should keep its information about that customer under regular review. A firm that acts for a private customer on an occasional basis should undertake such a review whenever that customer seeks advice.

If a private customer declines to provide relevant personal and financial information, a firm should not proceed to provide the services described in COB 5.2.5 R without promptly advising that customer that the lack of such information may affect adversely the quality of the services which it can provide. The firm should consider sending written confirmation of that advice.

The information to be obtained and enquiries made to satisfy COB 5.2.5 R may vary significantly depending on the type of customer concerned. COB 5.2.11 G provides some guidance on the process of collecting personal and financial information.

1. (1)

   3A firm may provide the demands and needs statement as part of an application form so that the demands and needs statement is made dependent upon the customer providing personal information on the application form (including an application forming part of a direct offer financial promotion).

2. (2)

   For quotations (see COB 4.3.3AG), there is no requirement for the firm to provide a demands and needs statement, but one must be provided before the conclusion of the contract, unless the only contact between the firm and the client is by telephone, in which case COB 5.2.13 R applies.

3. (3)

   A key features document that complies with COB 6.1.4 (Requirement to produce key features) may be used as the statement of demands and needs required by COB 5.1.12R (1)(b).

3 COB 5.2.17 G contains guidance on the contents of the statement required by COB 5.2.12R (1).

3 Firms are reminded of the record keeping obligations under SYSC 3.2.20 R

This section does not apply to a firm in respect of a direct offer financial promotion, except in respect of a promotion of a personal pension scheme under COB 5.3.28 R.

Firms are reminded of the requirements of COB 3.9.6 R (Direct offer financial promotions: general requirements). A direct offer financial promotion must make it clear that, if a private customer is in any doubt about the suitability of the agreement which is the subject of the promotion, he should contact the firm, or another appropriate firm if the firm does not offer advice.97

Principle 9 (Customers: relationships of trust) requires a firm to take reasonable care to ensure the suitability of its advice and discretionary decisions. The purpose of this section is to amplify this requirement. The nature of the steps firms need to take will vary greatly, depending on the needs and priorities of the private customer, the type of investment or service being offered, and the nature of the relationship between the firm and the private customer and, in particular, whether the firm is giving a personal recommendation or acting as a discretionary investment manager.

1. (1)

   9If circumstances arise in which a firm reasonably concludes that there are several packaged products in the relevant range which would satisfy the test in COB 5.3.5 R (2), it will act in conformity with that rule if it recommends only one of those products.

2. (2)

   If a client does not wish to proceed in accordance with a recommendation, a firm may nonetheless make further recommendations providing any such recommendation is suitable for the client in accordance with the obligation in COB 5.3.5 R.

9 COB 5.3.8A R enables a firm to advise on packaged products from outside a particular range ofpackaged product. This will enable such advising on investments to be given on a one-off basis by firms which have only one range of packaged products and by other firms which may have more than one but without the firm needing to change the scope or range of the advice on investments which the client is expecting to receive.

1. (1)

   COB 5.3.20 R contains specific rules applicable to the suitability of broker funds.

2. (2)

   COB 5.3.21 R - COB 5.3.27 R contain specific rules applicable to the suitability of pension transfers and pension opt-outs.

3. (3)

   COB 5.3.28 R contains specific rules applicable to the promotion of personal pension schemes, including group personal pension schemes by means of direct offer financial promotions.

4. (4)

   COB 5.3.29 G contains guidance which is relevant for assessing the suitability of:

   1. (a)

      pension transfers and pension opt-outs;

   2. (b)

      personal pension schemes and free-standing additional voluntary contributions (FSAVCs) compared to stakeholder pension schemes;

   3. (c)

      hybrid products;

   4. (d)

      industrial assurance policies;

   5. (e)

      income withdrawals;

   6. (f)

      ISA, PEP or CTF transfers; and6

   7. (g)

      contracting out of SERPS; and6

   8. (h)

      borrowing to invest.68

A suitability letter is not required in respect of a personal recommendation made by a firm to buy or sell shares or units in a regulated collective investment scheme when the firm is acting as an investment manager for a private customer (see COB 5.3.19 R (1)).

COB 5.3.30 G provides guidance on the contents of suitability letters.

9A firm should take the following into account when explaining the reasons for a personal recommendation to an intermediate customer or a market counterparty in accordance with COB 5.3.18A R:

1. (1)

   the firm should explain why the client's demands and needs combine to make the recommended contract suitable for the client;

2. (2)

   the firm should not merely state what contract is being recommended with no link to the client's demands and needs;

3. (3)

   a firm that offers contracts from more than one insurance undertaking should include a statement of why a particular insurance undertaking has been recommended; reasons may include contract features not available anywhere else, price, or service levels.

Principle 7 (Communications with clients) requires a firm to pay due regard to the information needs of its clients and communicate information to them in a way that is clear, fair and not misleading. Principle 9 (Customers: relationships of trust) requires a firm to take reasonable care to ensure the suitability of its advice and discretionary decisions. The purpose of this section is to ensure that a firm takes reasonable steps to ensure that a private customer understands the nature of the risks inherent in certain transactions.

A securitised derivative (as defined in the Glossary) is a derivative, and COB rules relevant to derivatives therefore apply. An instrument listed under LR 197 which is not an option or contract for differences is not a securitised derivative for the purposes of COB.2

1. (1)

   A description provided under COB 5.4.6A E (1)(b):7

   277
   1. (a)

      may be included in the prospectus or the listing particulars for the securitised derivative;7

   2. (b)

      may explain, where applicable, the existence and extent of any factors that reduce the risks to which the private customer is exposed (for example, the fact that the securitised derivative is listed, or subject to some form of guarantee), but the firm should ensure that any such statement does not disguise, obscure or diminish the significance of the notice taken as a whole; and7

   3. (c)

      may use another term (such as "covered warrant") to describe a securitised derivative, if it is generally accepted market practice to do so.

2. (2)

   In relation to (1) (b) and (c) firms are also reminded of the requirements of COB 2.1 (Clear, fair and not misleading communication).7

   7

In relation to a transaction in a structured capital-at-risk product, if it is relevant, firms should comply with COB 5.4.7 E.5

Principle 7 (Communications with clients) requires a firm to pay due regard to the information needs of its clients and communicate information to them in a way that is clear, fair and not misleading. COB 5.5 aims to ensure that a firm provides its private customers with adequate information about the firm.

Firms are reminded of GEN 4.3 (Letter disclosure), which requires a disclosure in letters to private customers.1

GEN 4.4 (Business for private customers from non-UK offices), requires a firm to give information, similar to that in COB 5.5.7 R, in certain circumstances in connection with business conducted from an office outside the United Kingdom with both UK and non-UK private customers.1

1The obligation in COB 5.5.9 R is to "make information available". This does not require the firm to inform every client. A firm may make the information available in a number of ways, for example, by including it in explanatory literature or on the firm's website.

1This is an example of how a UK domestic firm, carrying on a regulated activity from a UK establishment, could present the information required by COB 5.5.9 R:COMPENSATIONWe are covered by the Financial Services Compensation Scheme. You may be entitled to compensation from the scheme if we cannot meet our obligations. This depends on the type of business and the circumstances of the claim. Most types of investment business are covered for 100% of the first £30,000 and 90% of the next £20,000, so the maximum compensation is £48,000. Further information about compensation arrangements is available from the Financial Services Compensation Scheme

Principle 6 (Customers' interests) requires a firm to pay due regard to the interests of its customers and treat them fairly. The purpose of this section is to ensure that the charges a firm makes to its private customer are not excessive. The obligation to disclose to a private customer the charges that a firm intends to make are set out in COB 4.3 (Disclosing information about services, fees and commission - packaged products) and COB 5.7 (Disclosure of charges, remuneration and commission).1

When determining whether a charge is excessive, a firm should consider:

1. (1)

   the amount of its charges for the services or product in question compared with charges for similar services or products in the market;

2. (2)

   the degree to which the charges are an abuse of the trust that the customer has placed in the firm; and

3. (3)

   the nature and extent of the disclosure of the charges to the private customer.

In appropriate cases it may be necessary for the basis of a valuation referred to in COB 5.6.5 R to be confirmed or approved by an independent expert.

Principle 7 (Communications with clients) requires a firm to pay due regard to the needs of its clients and communicate information to them in a way that is clear, fair and not misleading. The purpose of this section is to ensure that a private customer is made aware of the costs to him, directly or indirectly, of financial services, so that he is better able to make informed choices.

1. (1)

   A firm may make the disclosures required by COB 5.7.3 R in its terms of business, in a client agreement, or in a separate written statement. Disclosure should indicate any product-related charges that are deducted from the private customer's investment. If the product is a packaged product, product-related charges and expenses will be disclosed in the key features document, simplified prospectus5 or in the minimum information that the firm is required to provide to the private customer in accordance with COB 6.2 (Provision of key features or simplified prospectus5) and COB 6.4 (Product disclosure: special situations). When a firm is a broker fund adviser, disclosure should include any fees payable to the firm or its associate in connection with that activity by a provider firm. In the case of advice provided in connection with packaged products a firm should, in accordance with COB 4.3.3 R, have provided its customer with a fees and commission statement setting out the maximum rates of any fees which the customer will pay and/or with an indication of the maximum rates of commission (or equivalent) which it, or its representatives, may retain in connection with the sale of packaged products. COB 5.7.3 R does not require any further disclosure of a firm's fees if, in accordance with COB 4.3.5 R it has confirmed the exact amount or rate that it will charge.4

2. (2)

   In addition it is necessary that a private customer should, as soon as is practicable, be informed of the exact rate or the exact amount in cash terms of any commission (or equivalent) which the firm or its representatives will receive in respect of a specific transaction.4

3. (3)

   In the case of a packaged product, product related charges and expenses will be disclosed in the key features document, simplified prospectus5 or in the minimum information that the firm is required to provide to private customers in accordance with COB 6.2 (Provision of key features or simplified prospectus5) and COB 6.4 (Product disclosure: special situations). When a firm is a broker fund adviser, disclosure should include any fees payable to the firm or its associate in connection with that activity by a product provider.4

The disclosures required by COB 5.7.5 R should be made in a manner that is clear, fair and not misleading, as required by COB 2.1.3 R (Clear, fair and not misleading communication), and that indicates the timing of any payment. For example, when a firm exchanges its right to future commission payments for a lump sum, whether by way of a loan or other commercial arrangement, it should disclose the amount of commission receivable by it that has been exchanged for the lump sum.

If the precise rate or value of commission or equivalent is not known in advance, the firm should estimate the rate likely to apply to the representative in respect of the transaction.4

The disclosures required by COB 5.7.5 R should normally be made in writing. For example, if a specific key features document, simplified prospectus5 or projection is provided to a private customer, the required disclosures should either be contained in the projection or the key features document or simplified prospectus5, or be given to the private customer in a separate written statement at the time these documents are given to the private customer. When a private customer does not make a written application to enter into a transaction contemplated by COB 5.7.5 R, for example, when the transaction is a telephone deal for units in a regulated collective investment scheme, the firm may disclose the amount or value of commission or equivalent orally. In these circumstances, the firm should give written confirmation as soon as possible after the date of the transaction, and in any event within five business days. In preparing its written disclosure statement, a firm may wish to follow the guidance on content and wording set out in COB 5.7.17 G.4

The collection of premiums payable under a life policy by introducers acting as the appointed collecting agents of a product provider will not be treated by the FSA as a transaction for the purposes of COB 5.7.5 R.

This section should be considered by a firm that, in the course of carrying on designated investment business, acts as a clearing firm to which an introducingbroker or an overseas introducing broker introduces a transaction for its customer.

Principle 1 (Integrity) requires a firm to conduct its business with integrity and Principle 6 (Customers' interests) requires a firm to pay due regard to the interests of its customers and treat them fairly. This section supports and clarifies these requirements in respect of the relationship that exists between a clearing firm and a customer for whom the clearing firm executes and clears business, when the business has been introduced by a third party.

A clearing firm to which an overseas introducing broker has introduced a transaction on behalf of its customer should ensure that the customer is aware of the nature of the services that the clearing firm will be providing to that customer and that only these services, but not those of the overseas introducing broker, will be regulated under the Act.

As a matter of good practice, and preferably before accepting orders, a clearing firm should enter into a written contract with the introducingbroker or overseas introducing broker specifying that the clearing firm will be responsible for all dealing and settlement obligations to the customer. The contract should also specify that the introducingbroker or overseas introducing broker will act as agent for the customer in introducing transactions and will be responsible for advising the customer or managing his assets (or both).

A clearing firm should, by appropriate disclosures, ensure that the customer is aware of the nature of the services to be provided to him by the clearing firm.

When a clearing firm knows or suspects that the activities of an introducingbroker or an overseas introducing broker are or may be damaging to its customers, it should take reasonable steps to address the situation and, as far as possible, to protect its customers' interests.

When a clearing firm operates an omnibus account for an overseas introducing broker (that is, an account operated in the name of the overseas introducing broker for more than one underlying client) a clearing firm should:

1. (1)

   establish that the overseas introducing broker is authorised in his own country;

2. (2)

   where there is no formal regulatory regime in the overseas introducing broker's own country, take reasonable steps to establish that the overseas introducing broker is legally empowered to undertake the proposed business to be transacted; and

3. (3)

   have regard to the requirements of UK law on money laundering and financial crime.

The purpose of this section is to provide guidance on the management of conflicts of interest in particular situations arising in the context of corporate finance business. The FSA expects that in most corporate finance business Principle 1 (Integrity), Principle 2 (Due skill, care and diligence), Principle 5 (High standards of market conduct), Principle 6 (Customers' interests) and Principle 8 (Conflicts of interest), will be particularly relevant. The guidance in this section is not intended to be exhaustive, and is in addition to other provisions which apply to the firm (see COB 1.6 which specifies these). It also supplements other provisions in the Handbook (see, in particular, COB 2.2 (Inducements and soft commission), COB 7.1 (Conflict of interest and material interest) and COB 7.16 (Investment research)).12

The Principles referred to in COB 5.10.2 G are highly relevant to the management of an offering of a security by a firm. They require a firm to manage conflicts of interest which may arise in a way which ensures that all its clients are treated fairly and which ensures that the firm is conducting its business with integrity and according to proper standards of business.1

1The overriding responsibility of the firm is to have in place systems, controls and procedures to ensure that the duties which the firm owes to its clients are identified effectively and discharged appropriately. In particular, the firm's processes and procedures will need to take account of the following:

1. (1)

   when carrying out 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);

2. (2)

   a firm's responsibilities to provide services to the firm's investment clients (that is, those on the investment client side of the Chinese wall (see COB 5.10.5 G)) are unchanged, even if they have an interest in acquiring securities in the offering. The firm will need to ensure that it complies with the relevant regulatory obligations to its investment clients, such as COB 5.3 (Suitability).

1 Firms will need to have in place systems, controls and procedures, appropriate to its structure and business, and to the sorts of offerings in which they are involved, for identifying and managing conflicts of interest (and see SYSC 3 (Systems and controls)). Examples which the FSA considers that a firm should consider (not every example will be relevant or appropriate to every situation or firm) include:

1. (1)

   at an early stage, for example before it accepts a mandate to manage the offering, discussing or agreeing with its corporate finance client relevant aspects of the offering process, such as:

   1. (a)

      the process the firm proposes to follow in order to determine what recommendations it will make about allocations for the offering;

   2. (b)

      details of how the target investor group, to whom it is planned to offer the securities, will be identified;

   3. (c)

      the process through which recommendations on allocation and pricing are prepared, and by whom; and

   4. (d)

      (if relevant) that it may recommend placing securities with an investment client of the firm for whom the firm provides other services, with the firm's own proprietary book, or with an associate, and that this represents a potential conflict of interest;

2. (2)

   having internal arrangements designed to ensure that the firm will give unbiased and full advice to the corporate finance client about the valuation and pricing for an offering (the FSA accepts that valuation is a complex process and great precision may not always be possible in a security offering);

3. (3)

   having internal arrangements under which individuals or business units in the firm, whose responsibilities are ordinarily to provide services to the firm's investment clients (that is, those on the investment client side of the Chinese wall), are not involved directly in decisions about recommendations to a corporate finance client on pricing (although they might, for example, be permitted to provide information about likely investor interest to those advising the corporate finance client);

4. (4)

   ensuring that its systems, controls and procedures to identify and manage conflicts of interest also cover the allocation process for an offering of securities; for example:

   1. (a)

      having internal arrangements under which the allocation process and the development of recommendations on allocation (names and amounts proposed to be allocated) are made to the corporate finance client only by staff who do not have any responsibilities for servicing investment clients;

   2. (b)

      inviting the corporate finance client to participate actively in the allocation process so that its proper interests can be taken into account effectively, including making available to the corporate finance client appropriate information to support the proposed recommendations on allocation;

   3. (c)

      basing recommendations about allocation and pricing on objectives agreed with the corporate finance client;

   4. (d)

      making the initial recommendation for allocation to private customers of the firm as a single block and not on a named basis;

   5. (e)

      having internal arrangements under which senior personnel in the department (or equivalent business unit), who are responsible for providing services to private customers, make the individual allocation recommendations for allocation to private customers of the firm; and

   6. (f)

      disclosing to the issuer, after completion of the transaction, details of the allocations which were actually made; and

5. (5)

   having internal arrangements under which allocation recommendations are not determined by the level of business which a firm does or hopes to do with any other client (see also COB 2.2 (Inducements and soft commission)); for example:

   1. (a)

      any allocation to a private customer of the firm should be justifiable in terms of the process for developing allocation recommendations which was disclosed to the corporate finance client at the outset (as well as in terms of any other obligations which the firm may have - for example under COB 5.3 (Suitability) or COB 7.7 (Aggregation and allocation)); and

   2. (b)

      any recommendation for allocation to the proprietary trading desk of the firm or to an associate or affiliate of the firm should be justifiable in terms of the objectives of the allocation policy and should be consistent with the process for developing allocation recommendations disclosed by the firm at the outset.

1One control which a firm might use is a review by the compliance function after the event of how well the firm's conflicts of interest management processes worked in relation to an issue. This might be of particular use if there are significant differences between the recommendation on price and subsequent market behaviour. The review might examine how the recommendations of the firm on pricing were reflected in market dealings after the issue. If significant differences are observed, it may be appropriate to identify why, and what that discloses about the way in which the firm's systems and controls operated in relation to that offering. The frequency of any review is a matter for the firm, in the light of its business and structure.

1. (1)

   1For the avoidance of doubt, the FSA considers that the following would each be a breach of the Principles referred to in COB 5.10.2 G, and a breach of COB 2.2.3 R:

   1. (a)

      an allocation made as an inducement for the payment of excessive compensation in respect of unrelated services provided by the firm; for example, very high rates of commissions paid to the firm by an investment client, or an investment client providing very high volumes of business at normal levels of commission (which may also be a breach of COB 7.2 (Churning and switching));

   2. (b)

      an allocation made to a senior executive or a corporate officer of an existing or potential corporate finance client, or of a listed company, in consideration for the future or past award of corporate finance business; and

   3. (c)

      an allocation which is expressly or implicitly conditional upon the receipt of orders or the purchase of any other service from the firm by the investor, or any body corporate of which the investor is a corporate officer.

2. (2)

   A firm's systems, controls and procedures should, therefore, be designed to prevent these sorts of behaviour.