COBS 2.3 Inducements relating to business other than MiFID, equivalent third country or optional exemption business and insurance-based investment products

The rules governing fees, commissions and non-monetary benefits which may be paid or provided in respect of qualifying schemes are found in COBS 19.6.

12This section does not apply to the provision of independent advice or restricted advice on a retail investment product in the course of MiFID, equivalent third country or optional exemption business. A firm providing such a service should refer instead to COBS 2.3A (Inducements relating to MiFID, equivalent third country or optional exemption business) and COBS 6.1A (Adviser charging and remuneration).

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).

12A UCITS management company is subject to specific rules on inducements and research in COBS 18.5B when executing orders for financial instruments for, or on behalf of, the UCITS it manages (see COBS 18.5B.6R and COBS 18 Annex 1).

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.

5 COBS 6.1A (Adviser charging and remuneration), COBS 6.1B (Retail investment product provider and operator of an electronic system in relation to lending and platform service provider 10requirements relating to adviser charging and remuneration), COBS 6.1C (Consultancy charging and remuneration) and COBS 6.1D (Product provider requirements relating to consultancy charging and remuneration) set out specific requirements as to when it is acceptable for a firm to pay or receive commissions, fees or other benefits:6

1. (1)

   relating to the provision of a personal recommendation on retail investment products, pension transfers, pension conversions, pension opt-outs15 or P2P agreements10; or

   6
2. (2)

   for giving advice, or providing services, to an employer in connection with a group personal pension scheme or group stakeholder pension scheme.6

The fact that a fee, commission or non-monetary benefit is paid or provided to or by an appointed representative12 does not prevent the application of the rule on inducements.

1The following guidance and evidential provisions provide examples of arrangements the FCA believes will breach the client's best interests rule if a firm sells or arranges5 the sale of a packaged product for a retail client.

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.

5The following guidance and evidential provisions provide examples of arrangements the FCA believes will breach the client's best interests rule in relation to a personal recommendation of a retail investment product or P2P agreement10to a retail client.

5Where a retail investment product provider or operator of an electronic system in relation to lending, 10or its associate, provides credit to a retail client of a firm making personal recommendations in relation to retail investment products or P2P agreements10 or giving advice, or providing services, to an employer in connection with a group personal pension scheme or group stakeholder pension scheme6, this may create an indirect benefit for the firm and, to the extent that this is relevant, the provider of retail investment products or operator of an electronic system in relation to lending10may need to consider the examples in COBS 2.3.12E as if it had provided the credit to the firm.

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.

1. (1)

   1In relation to the sale of retail investment products,5 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.

   5
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 retail investment product provider5 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), the requirements on a retail investment product provider making a personal recommendation in respect of its own retail investment products (COBS 6.1A.9 R)5 or the requirements on a firm giving advice, or providing services, to an employer in connection with a group personal pension scheme or group stakeholder pension scheme produced by the firm (COBS 6.1C.8 R) 6 will apply.

1In interpreting the table of reasonable non-monetary benefits, retail investment product providers5 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 and that, where any benefits of substantial size or value (such as adviser training programmes or significant software) are made available to firms that are subject to the rules on adviser charging and remuneration (COBS 6.1A) or consultancy charging and remuneration (COBS 6.1C),9 these benefits should be made available equally across those firms if they are provided at all.5

5In interpreting the table of reasonable non-monetary benefits, a firm that provides a personal recommendation in relation to a retail investment product to a retail client or gives advice, or provides a service, to an employer in connection with a group personal pension scheme or a group stakeholder pension scheme6 should be aware that acceptance of benefits on which the firm will have to rely for a period of time is more likely to impair compliance with the client's best interests rule. For example, accepting services which provide access to another firm's systems or software on which the firm will need to rely to gain access to the firm'sclient data in the future, would be likely to conflict with the rule on inducements (COBS 2.3.1R).

12However, COBS 6.1A and COBS 6.1B do permit minor non-monetary benefits which meet the relevant requirements set out in COBS 6.1A.5AR(2).