COBS 2.3A Inducements relating to MiFID, equivalent third country or optional exemption business and insurance-based investment products4

1This section applies to a firm:4

1. (1)

   in relation to its MiFID, equivalent third country or optional exemption business; and4

2. (2)

   carrying on insurance distribution activities in relation to an insurance-based investment product.4

1. (1)

   Except where COBS 2.3A.6R applies, a firm must not:4

   1. (a)

      pay to or accept from any party (other than the client or a person on behalf of the client) any fee or commission; or4

   2. (b)

      provide to or receive from any party (other than the client or a person on behalf of the client) any non-monetary benefit.4

2. (2)

   (1)(a) and (b) only apply in relation to fees, commissions or non-monetary benefits paid or accepted, or provided or received, in connection with:4

   1. (a)

      the provision of an investment service or an ancillary service; or4

   2. (b)

      the distribution of an insurance-based investment product or an ancillary service.4

[Note: article 24(9) of MiFID, articles 22(3), 29(2) and 29(3) of the IDD4]

1. (1)

   COBS 2.3A.5R does not apply to:

   1. (a)

      a fee, commission or non-monetary benefit which:

      1. (i)

         is designed to enhance the quality of the relevant service to the client (see COBS 2.3A.8R and, also for an insurance-based investment product, COBS 2.3A.9AUK6); and

         4
      2. (ii)

         does not impair compliance with the firm’s duty to act honestly, fairly and professionally in the best interests of the client;

   2. (b)

      a payment or benefit which enables or is necessary for the provision of an investment service, or the distribution of an insurance-based investment product,4 by the firm, such as custody costs, settlement and exchange fees, regulatory levies or legal fees and which, by its nature, cannot give rise to conflicts with the firm’s duty to act honestly, fairly and professionally in the best interests of the client; or

   3. (c)

      (in relation to MiFID, equivalent third country or optional exemption business)4 third party research received in accordance with COBS 2.3B (see COBS 2.3B.3R).

2. (2)

   Where a firm pays, provides, accepts or receives, a fee, commission or non-monetary benefit which falls within (1)(a), the firm must clearly disclose to the client:

   1. (a)

      the existence and nature of the payment or benefit; and

   2. (b)

      the amount of the payment or benefit or, where the amount cannot be ascertained, the method for calculating that amount.

3. (3)

   That information must be disclosed:

   1. (a)

      prior to the provision of the relevant service; and

   2. (b)

      in a manner that is comprehensive, accurate and understandable (see also COBS 2.3A.10R (Disclosure of payments or benefits received from, or paid to, third parties)).

4. (4)

   Where applicable, a firm must inform a client of the mechanisms for transferring to the client the fee, commission, monetary or non-monetary benefit received in relation to the provision of the relevant service.

[Note: article 24(9) of MiFID, article 22(3) and 29(3) of the IDD4]

A firm which fails to comply with COBS 2.3A.5R is to be regarded as not fulfilling its obligations in relation to:

1. (1)

   conflicts of interest (see SYSC 3.3 (for insurers and managing agents) and SYSC 10 (for other firms)4); and

2. (2)

   acting honestly, fairly and professionally in accordance with the best interests of its clients (see COBS 2.1.1R).

[Note: article 24(9) of MiFID, article 29(2) and 29(3) of the IDD4

1. (1)

   For the purposes of COBS 2.3A.6R(1)(a)(i), a fee, commission or non-monetary benefit is designed to enhance the quality of the relevant service to a client only if :

   1. (a)

      it is justified by the provision of an additional or higher level service to the client and is proportional to the level of inducements received;

   2. (b)

      it does not directly benefit the recipient firm, its shareholders or employees without tangible benefit to the client;

   3. (c)

      it is justified by the provision of an ongoing benefit to the client in relation to an ongoing inducement; and

   4. (d)

      the provision of the service by the firm to the client is not biased or distorted as a result of the fee, commission or non-monetary benefit.

2. (2)

   A firm must fulfil these conditions on an ongoing basis as long as the firm continues to pay or receive the fee, commission or non-monetary benefit.

[Note: article 11(2) and (3) of the MiFID Delegated Directive]

A fee, commission or non-monetary benefit may be justified for the purposes of COBS 2.3A.8R(1)(a) where, for example, the firm provides:

1. (1)

   restricted advice on, and access to, a wide range of suitable financial instruments or insurance-based investment products5 including an appropriate number of financial instruments or insurance-based investment products5 from third party product providers having no close links with the firm; or

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2. (2)

   restricted advice combined with:

   1. (a)

      an offer to the client, at least on an annual basis, to assess the continuing suitability of the financial instruments or insurance-based investment products5 in which the client has invested; or

      4
   2. (b)

      another ongoing service that is likely to be of value to the client such as advice about the suggested optimal asset allocation of the client; or

3. (3)

   access, at a competitive price, to a wide range of financial instruments or insurance-based investment products5 that are likely to meet the needs of the client, including an appropriate number of financial instruments or insurance-based investment products5 from third party product providers having no close links with the firm, together with either the provision of added-value tools, such as objective information tools helping the client to take investment decisions or enabling the client to monitor, model and adjust the range of financial instruments or insurance-based investment products5 in which they have invested, or providing periodic reports of the performance and costs and charges associated with the financial instruments or insurance-based investment products5.

   4444

[Note: article 11(2) of the MiFID Delegated Directive]

2

COBS 2.3A.9AUK 6 applies as if it was a rule to firms in relation to insurance distribution activities to which the IDD Regulation does not apply.

1. (1)

   Prior to the provision of the relevant service, the firm must disclose to the client the information set out in COBS 2.3A.6R(2) and, where applicable, COBS 2.3A.6R(4).

2. (2)

   For these purposes, minor non-monetary benefits may be described in a generic way, but other non-monetary benefits received or paid by the firm in connection with a service provided to the client must be priced and disclosed separately.

[Note: article 11(5)(a) of the MiFID Delegated Directive]

Where a firm is unable to ascertain on an ex-ante basis the amount of any payment or benefit to be received or paid, and instead discloses to the client the method of calculating the relevant amount, the firm must also inform the client of the exact amount of the payment or benefit received or paid on an ex-post basis.

[Note: article 11(5)(b) of the MiFID Delegated Directive]

1. (1)

   Where inducements are received by the firm on an ongoing basis in relation to an investment service provided or in relation to the distribution of an insurance-based investment product4 to a client, the firm must inform, at least annually, that client about the actual amount of payments or benefits received.

2. (2)

   For these purposes, minor non-monetary benefits may be described in a generic way.

[Note: article 11(5)(c) of the MiFID Delegated Directive]

In implementing the requirements of COBS 2.3A.10R to COBS 2.3A.12R, a firm must take into account the costs and charges rules in6:

1. (1)

   (for MiFID, equivalent third country or optional exemption business) 4COBS 6.1ZA.11R and COBS 6.1ZA.12R6 and article 50 of the MiFID Org Regulation (see COBS 6.1ZA.14UK6); and

   4
2. (2)

   (for insurance-based investment products) 6COBS 6.1ZA.11R to COBS 6.1ZA.13R and COBS 6.1ZA.15AR.4

[Note: article 11(5) of the MiFID Delegated Directive]

Each firm involved in a distribution channel which provides an investment service, an ancillary service or distributes an insurance-based investment product4 must comply with its obligations to make disclosures to its clients.

[Note: article 11(5) of the MiFID Delegated Directive]

1. (1)

   This rule applies where a firm provides a retail client in the United Kingdom with:

   1. (a)

      independent advice; or

   2. (b)

      restricted advice; or

   3. (c)

      portfolio management services.

2. (2)

   The firm must not accept any fees, commission, monetary or non-monetary benefits which are paid or provided by:

   1. (a)

      any third party; or

   2. (b)

      a person acting on behalf of a third party,

   in relation to the provision of the relevant service to the client.

3. (2A)

   3Where the firm provides independent advice or restricted advice, the rule in (2) applies in connection with:

   1. (a)

      the firm’s business of advising; or

   2. (b)

      any other related service, where ‘related service’ has the same meaning as in COBS 6.1A.6R.

4. (3)

   Paragraph (2) does not apply to:

   1. (a)

      acceptable minor non-monetary benefits (see COBS 2.3A.19R in relation to the provision of investment services and COBS 6.1A.5AR in relation to the distribution of an insurance-based investment product4); or

   2. (b)

      third party research received in accordance with COBS 2.3B (see COBS 2.3B.3R).

[Note: see articles 24(7)(b) and 24(8) of MiFID; article 12(2) of the MiFID Delegated Directive]

1. (1)

   This rule applies where a firm provides independent advice or portfolio management services to:

   1. (a)

      a retail client outside the United Kingdom; or

   2. (b)

      (for investment services)4 a professional client.

2. (2)

   In relation to the provision of the relevant service to the client, the firm must not:

   1. (a)

      accept and retain any fees, commission or monetary benefits; or

   2. (b)

      accept any non-monetary benefits other than acceptable minor non-monetary benefits (see COBS 2.3A.19R and, in relation to the distribution of an insurance-based investment product, COBS 6.1A.5AR4) or third party research received in accordance with COBS 2.3B (see COBS 2.3B.3R),

   where these are paid or provided by any third party or a person acting on behalf of a third party.

3. (3)

   With regard to paragraph (2), the firm must:

   1. (a)

      return to the client as soon as reasonably possible after receipt any fees, commission or any monetary benefits paid or provided by any third party or a person acting on behalf of a third party in relation to the services provided to that client;

   2. (b)

      transfer in full to the client all fees, commission or monetary benefits received from third parties in relation to the services provided to the client;

   3. (c)

      establish and implement a policy to ensure that any fees, commission or any monetary benefits paid or provided by any third party or a person acting on behalf of a third party in relation to the provision of the services to the client are allocated and transferred to that client; and

   4. (d)

      inform the client about the fees, commission or any monetary benefits transferred to them, such as through the periodic reporting statements provided to the client.

[Note: articles 24(7)(b) and 24(8) of MiFID; article 12(1) and (2) of the MiFID Delegated Directive]

An acceptable minor non-monetary benefit is one which:

1. (1)

   is clearly disclosed prior to the provision of the relevant service to the client, which the firm may describe in a generic way (where applicable, in accordance with COBS 2.3A.10R)6;

2. (2)

   is capable of enhancing the quality of service provided to the client;

3. (3)

   is of a scale and nature that it could not be judged to impair the firm’s compliance with its duty to act honestly, fairly and professionally in the best interests of the client;

4. (4)

   is reasonable, proportionate and of a scale that is unlikely to influence the firm’s behaviour in any way that is detrimental to the interests of the relevant client; and

5. (5)

   consists of:

   1. (a)

      information or documentation relating to a financial instrument or an investment service, that is generic in nature or personalised to reflect the circumstances of an individual client;

   2. (b)

      written material from a third party that is commissioned and paid for by a corporate issuer or potential issuer to promote a new issuance by the company, or where the third party firm is contractually engaged and paid by the issuer to produce such material on an ongoing basis, provided that the relationship is clearly disclosed in the material and that the material is made available at the same time to any firms wishing to receive it, or to the general public;

   3. (c)

      participation in conferences, seminars and other training events on the benefits and features of a specific financial instrument or an investment service;

   4. (d)

      hospitality of a reasonable de minimis value, such as food and drink during a business meeting or a conference, seminar or other training events mentioned under paragraph (c);

   5. (e)

      research relating to an issue of shares, debentures, warrants or certificates representing certain securities by an issuer, which is:

      1. (i)

         produced:

         1. (A)

            prior to the issue being completed; and

         2. (B)

            by a person that is providing underwriting or placing services to the issuer on that issue; and

      2. (ii)

         made available to prospective investors in the issue;

   6. (f)

      research that is received so that the firm may evaluate the research provider’s research service, provided that:

      1. (i)

         it is received during a trial period that lasts no longer than three months;

      2. (ii)

         no monetary or non-monetary consideration is due (whether during the trial period, before or after) to the research provider for providing the research during the trial period;

      3. (iii)

         the trial period is not commenced with the research provider within 12 months from the termination of an arrangement for the provision of research (including any previous trial period) with the research provider; and

      4. (iv)

         the firm makes and retains a record of the dates of any trial period accepted under this rule, as well as a record of how the conditions in (i) to (iii) were satisfied for each such trial period;7

   7. (g)

      7research on listed or unlisted companies with a market capitalisation below £200m, provided that it is offered on a rebundled basis or provided for free. The market capitalisation is to be calculated with reference to the average closing price of the shares of the company at the end of each month to 31 October for the preceding 24 months. For companies newly admitted to trading, determination of the threshold should be based on the market capitalisation at the close of day one trading and apply until the date of the next re-assessment (i.e. 31 October). For these purposes, firms may reasonably rely on the assessment of a third party that the research is on a company with a market capitalisation below £200m;

   8. (h)

      7third party research that is received by a firm providing investment services or ancillary services to clients where it relates to fixed income, currency or commodity instruments;

   9. (i)

      7research received from a research provider where the research provider is not engaged in execution services and is not part of a financial services group that includes an investment firm that offers execution or brokerage services;

   10. (j)

       7written material that is made openly available from a third party to any firm wishing to receive it or to the general public. “Openly available” in this context means that there are no conditions or barriers to accessing the written material other than those which are necessary to comply with relevant regulatory obligations, for example requiring a log-in, sign-up or submission of user information by a firm or a member of the public in order to access that material; or

   11. (k)

       7corporate access services which relate to listed or unlisted companies with a market capitalisation below £200m in accordance with COBS 2.3A.19R 5(g).

[Note: articles 24(7)(b) and 24(8) of MiFID; article 12(2) and (3) of the MiFID Delegated Directive and article 72(3) of the MiFID Org Regulation]

A firm must hold evidence that any fees, commission or non-monetary benefits paid or received by the firm are designed to enhance the quality of the relevant service to the client by:

1. (1)

   keeping an internal list of all fees, commission and non-monetary benefits received by the firm from a third party in relation to the provision of the service; and

2. (2)

   recording how the fees, commission and non-monetary benefits paid or received by the firm, or that the firm intends to use, enhance the quality of the services provided to the relevant clients and the steps taken in order not to impair the firm’s compliance with the duty to act honestly, fairly and professionally in the best interests of the client.

[Note: article 11(4) of the MiFID Delegated Directive]

In relation to the equivalent business of a third country investment firm and MiFID optional exemption business, information disclosed to the client in accordance with COBS 2.3A.6R(2), (3) and (4) and COBS 2.3A.10R to COBS 2.3A.12R must be retained in a medium that allows the storage of information in a way accessible for future reference by the FCA, and in such a form and manner that:

1. (1)

   the FCA is able to access it readily and to reconstitute each key stage of the processing of each transaction;

2. (2)

   it is possible for any corrections or other amendments, and the contents of the records prior to such corrections or amendments, to be easily ascertained;

3. (3)

   it is not possible for the records otherwise to be manipulated or altered;

4. (4)

   it can be exploited through information technology or any other efficient method of exploitation when analysis of the data cannot be easily carried out due to the volume and nature of the data; and

5. (5)

   the firm’s arrangements comply with the record keeping requirements irrespective of the technology used.