COBS 2.3B Inducements and research

1This section applies to a firm carrying on MiFID, equivalent third country or optional exemption business.

Third party research that is received by a firm providing investment services or ancillary services to clients will not be an inducement under COBS 2.3A.5R, COBS 2.3A.15R or COBS 2.3A.16R if it is received in return for either of the following:

1. (1)

   direct payments by the firm out of its own resources; or

2. (2)

   payments from a separate research payment account controlled by the firm, provided that the firm meets the requirements in COBS 2.3B.4R relating to the operation of the account.

[Note: article 13(1)(a) and (b)(excl. (i) – (iv)) of the MiFID Delegated Directive]

The requirements referred to in COBS 2.3B.3R(2) for the operation of a research payment account are:

1. (1)

   the research payment account must only be funded by a specific research charge to clients, which must:

   1. (a)

      only be based on a research budget set by the firm for the purpose of establishing the amount needed for third party research in respect of investment services rendered to its clients; and

   2. (b)

      not be linked to the volume or value of transactions executed on behalf of clients;

2. (2)
   1. (a)

      the firm must set and regularly assess a research budget as an internal administrative measure as part of establishing a research payment account and agreeing the research charge with its clients; and

   2. (b)

      the research budget must comply with COBS 2.3B.7R, COBS 2.3B.8R(2) and COBS 2.3B.11R;

3. (3)

   the firm must be fully responsible for the research payment account; and

4. (4)

   the firm must regularly assess the quality of the research purchased, based on robust quality criteria, and its ability to contribute to better investment decisions for the clients who pay the research charge.

[Note: article 13(1)(b)(i-iv) and (2)(a) and (b) of the MiFID Delegated Directive]

A firm using a research payment account must provide the following information to clients:

1. (1)

   before the provision of an investment service or ancillary service to clients, information about the budgeted amount for research and the amount of the estimated research charge for each of them; and

2. (2)

   annual information on the total costs that each of them has incurred for third party research.

[Note: article 13(1) second subparagraph of the MiFID Delegated Directive]

A firm must ensure that:

1. (1)

   the total amount of research charges collected from clients under COBS 2.3B.4R(1) does not exceed the research budget established under COBS 2.3B.4R(2) (and, where relevant, amended under COBS 2.3B.8R(2)); and

2. (2)

   the research budget and research payment account are not used to fund research generated internally by the firm itself.

[Note: article 13(4) and (6) of the MiFID Delegated Directive]

1. (1)

   A firm must agree with clients, in the firm’s investment management agreement or general terms of business:

   1. (a)

      the research charge as budgeted by the firm; and

   2. (b)

      the frequency with which the specific research charge will be deducted from the resources of the client over the year.

2. (2)

   A firm must not increase its research budget unless it has provided, in advance, clear information to relevant clients about such intended increases.

3. (3)

   If there is a surplus in a research payment account at the end of a period, the firm must have a process to:

   1. (a)

      rebate those funds to relevant clients; or

   2. (b)

      offset it against the research budget and charge for relevant clients calculated for the following period.

   [Note: article 13(5) of the MiFID Delegated Directive]

4. (4)

   In calculating a rebate or offset as set out in (3), a firm must take reasonable steps to maintain a fair allocation of costs between clients.

For the purposes of COBS 2.3B.4R(2), a firm must ensure that:

1. (1)

   the research budget is managed solely by the firm and is based on a reasonable assessment of the need for third party research;

2. (2)

   the allocation of the research budget to purchase third party research is subject to appropriate controls and senior management oversight to ensure it is managed and used in the best interests of the firm’s clients; and

3. (3)

   the controls under (2) include a clear audit trail of:

   1. (a)

      payments made to research providers; and

   2. (b)

      how the amounts paid were determined with reference to:

      1. (i)

         the quality criteria required by COBS 2.3B.4R(4); and

      2. (ii)

         the firm’s policy for using third party research established under COBS 2.3B.12R.

[Note: article 13(6) of the MiFID Delegated Directive]

1. (1)

   A firm using a research payment account must establish a written policy that sets out how the firm will:

   1. (a)

      comply with all elements of COBS 2.3B.4R(4); and

   2. (b)

      address the extent to which research purchased through the research payment account may benefit clients’ portfolios, including, where relevant, by taking into account investment strategies applicable to various types of portfolios, and the approach the firm will take to allocate such costs fairly to the various clients’ portfolios.

2. (2)

   A firm must provide the policy established under (1) to their clients.

[Note: article 13(8) of the MiFID Delegated Directive]

If a firm uses an operational arrangement for the collection of the charge under COBS 2.3B.4R(1) where that charge is not collected separately but alongside a transaction commission, the firm must still indicate a separately identifiable research charge and ensure that the arrangements comply fully with the conditions in COBS 2.3B.4R and COBS 2.3B.5R.

[Note: article 13(3) of the MiFID Delegated Directive]

For the purposes of COBS 2.3B.3R and COBS 2.3B.4R, a firm may delegate the administration of the research payment account to a third party, provided that the arrangement facilitates payments to research providers, in the name of the firm, for the purchase of third party research, without any undue delay and in accordance with the firm’s instruction.

[Note: article 13(7) of the MiFID Delegated Directive]

1. (1)

   Where a firm operates a research payment account, it must provide on request to its clients a summary of:

   1. (a)

      the providers paid from this account;

   2. (b)

      the total amount they were paid over a defined period;

   3. (c)

      the benefits and services received by the firm; and

   4. (d)

      how the total amount spent from the account compares to the budget set by the firm for that period, noting any rebate or carry-over if residual funds remain in the account.

2. (2)

   A firm must also be able to provide the information in paragraph (1) to the FCA on request for all research payment accounts.

[Note: article 13(2) of the MiFID Delegated Directive]

A firm must only use monies in a research payment account established under COBS 2.3B.3R(2) to pay for research or to pay a rebate to clients in accordance with COBS 2.3B.8R(3)(a).