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  2. Point in time
    2007-07-06

COB 7.1 Conflict of interest and material interest

Application

COB 7.1.1R
  1. (1)

    This section applies to a firm when it is conducting designated investment business with or for a customer.

  2. (2)

    COB 7.1.4 E (1) do not apply in relation to investment research (see COB 7.3 (Dealing ahead of investment research)).5

  3. (3)

    This section does not apply to a common platform firm if SYSC 10.1 (conflicts of interest) applies to the firm.6

Purpose

COB 7.1.2G

Principle 8 (Conflicts of interest) requires a firm to manage conflicts of interest fairly. This section aims to ensure that when a firm has, or may have, a conflict of interest between itself and its customer, or between one customer and another customer, the firm pays due regard to the interests of each customer and manages the conflict of interest fairly.

Fair treatment

COB 7.1.3R

If a firm has or may have:

  1. (1)

    a material interest in a transaction to be entered into with or for a customer; or

  2. (2)

    a relationship that gives or may give rise to a conflict of interest in relation to a transaction in (1); or

  3. (3)

    an interest in a transaction that is, or may be, in conflict with the interest of any of the firm's customers; or

  4. (4)

    customers with conflicting interests in relation to a transaction;

the firm must not knowingly advise, or deal in the exercise of discretion, in relation to that transaction unless it takes reasonable steps to ensure fair treatment for the customer (see COB 2.4.7 G (Attribution of knowledge)).

COB 7.1.4E
  1. (1)

    For the purposes of COB 7.1.3 R, a firm should manage a conflict of interest by taking reasonable steps in one or more of the following ways:

    1. (a)

      disclosing an interest to a customer; or

    2. (b)

      relying on a policy of independence; or

    3. (c)

      establishing internal arrangements (Chinese walls); or

    4. (d)

      declining to act for a customer.

  2. (2)

    Contravention of (1) may be relied on as tending to establish contravention of COB 7.1.3 R.

  3. (3)

    Compliance of (1) may be relied on as tending to establish compliance with COB 7.1.3 R.4

Disclosing an interest to a customer

COB 7.1.5G

The following are examples of material interest or conflicts of interest that a firm should disclose under COB 7.1.4 E (1):4

  1. (1)

    dealing in investments as principal (unless the firm is acting as a market maker);

  2. (2)

    dealing in investments as agent for more than one party;

  3. (3)

    a recommendation to buy or sell a designated investment in which one of the firm's customers has given instructions to buy or sell;

  4. (4)

    a recommendation to buy or sell a designated investment in which the firm has respectively a long or short position;

  5. (5)

    acting as a broker fund adviser.

COB 7.1.6E
  1. (1)

    In disclosing an interest to a customer, a firm should:

    1. (a)

      disclose to the customer, either orally or in writing, any material interest or conflict of interest it has, or may have, whether generally or in relation to a specific transaction, before it advises the customer about the transaction or before it deals on behalf of the customer in the exercise of discretion in relation to the transaction; and

    2. (b)

      be able to demonstrate that it has taken reasonable steps to ensure that the customer does not object to that material interest or conflict of interest.

  2. (2)

    Contravention of (1) may be relied on as tending to establish contravention of COB 7.1.3 R.

  3. (3)

    Compliance of (1) may be relied on as tending to establish compliance with COB 7.1.3 R.4

Relying on a policy of independence

COB 7.1.7G

COB 7.1.4 E (1)(b) recognises that a firm may demonstrate that it has taken reasonable steps to ensure fair treatment for its customers by relying on a policy of independence. If a firm relies on a policy of independence, that policy should:41

  1. (1)

    require the relevant employee to disregard any material interest or conflict of interest when advising a customer or dealing for a customer in the exercise of discretion;

  2. (2)

    be recorded in writing by the firm and made known to the relevant employee;

  3. (3)

    be disclosed to a private customer stating that the firm may have a material interest or conflict of interest relating to the transaction or service concerned.

Establishing internal arrangements

COB 7.1.8G

A firm may manage a conflict of interest by establishing and maintaining the arrangements set out in COB 2.4 (Chinese walls).

Declining to act for a customer

COB 7.1.9G

If a firm determines that it is unable to manage a conflict of interest using one of the methods described above, it should decline to act on behalf of the customer.

Broker fund advisers

COB 7.1.10R

In addition to COB 7.1.3 R, a broker fund adviser, acting for a private customer, must obtain an acknowledgement from the private customer stating that he understands the nature of the firm's dual role as adviser to the private customer and adviser to the long-term insurer, overseas long-term insurer or operator of the broker fund in question.3

COB 7.1.11G

COB 7.1.10 R is particularly relevant when any remuneration receivable by the firm or its associate, for acting in that dual capacity, would be greater than it would otherwise be when the firm is recommending to the customer a life policy or units in a regulated collective investment scheme.

COB 7.1.12R
  1. (1)

    A broker fund adviser must ensure that it does not effect, personally recommend or arrange (bring about) the issue to a customer of a life policy by a relevant insurance undertaking, under which contributions will be made to the adviser's broker fund, unless the relevant insurance undertaking is contractually responsible to that customer in writing for the acts and omissions of the broker fund adviser or its associate in its role as an adviser to that fund as if they were the acts or omissions of the relevant insurance undertaking and will remain responsible until the earlier of:

    1. (a)

      the broker fund adviser or its associate ceasing to be the adviser to the fund; and

    2. (b)

      the termination of the policy.

  2. (2)

    In (1), a relevant insurance undertaking is an insurance undertaking which does not have permission to effect or carry on long-term insurance business but which is authorised to carry on long-term insurance business in the Bailiwick of Guernsey, the Isle of Man, the Commonwealth of Pennsylvania, the State of Iowa or the Bailiwick of Jersey.

  3. (3)

    In (1), associate has the extended meaning given to it in the definition of broker fund adviser.

  4. (4)

    A firm must comply with the requirements in (1) where it effects, personally recommends or arranges (brings about) switching in relation to a broker fund for the customer.3

Product providers with broker funds

COB 7.1.13R

A product provider with a broker fund must not enter into a transaction with a customer in respect of a broker fund, unless there is a written agreement in force between it, the broker fund adviser and any other person having responsibility for the management of the broker fund to which the agreement relates, clearly establishing the responsibilities of each party to the agreement, the investment objectives of the broker fund and the policies and strategies that are to be followed to achieve those objectives.3

UCITS management company

COB 7.1.14R

In addition to COB 7.1.3 R, a UCITS management company which also manages investments (other than of collective investment schemes) must obtain prior general approval from the client before it invests all or part of the client's portfolio in the units of a UCITS it manages.2