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 one 2of the following:

1. (1)

   direct payments by the firm out of its own resources;

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; or2

3. (3)

   2joint payments for third-party research and execution services, provided that the firm meets the requirements in COBS 2.3B.25R to COBS 2.3B.33G relating to the operation of such joint payments.

[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), and must use the separately identifiable research charge of joint payments for research and execution services under COBS 2.3B.3R(3) only to pay for research.2

2The requirements referred to in COBS 2.3B.3R(3) for the operation of joint payments for third-party research and execution services are:

1. (1)

   the firm must have a written policy on joint payments that:

   1. (a)

      describes the firm’s approach to joint payments, and how the firm will ensure compliance with the requirements in COBS 2.3B.25R(2) to COBS 2.3B.33G; and

   2. (b)

      specifies how the firm’s governance, decision-making and controls in respect of third-party research purchased using joint payments operate, including how these are maintained separately from those for trade execution;

2. (2)

   the firm must establish arrangements which stipulate the methodology for how the research costs will be calculated and identified separately within total charges for such joint payments;

3. (3)

   the firm must have a research provider payment allocation structure for the allocation of payments between different research providers, including:

   1. (a)

      third-party providers of research and execution services; and

   2. (b)

      research providers not engaged in execution services and not part of a financial services group that includes an investment firm which offers execution or brokerage services;

4. (4)

   the firm is fully responsible for:

   1. (a)

      the administration of accounts for purchasing research from joint payments;

   2. (b)

      ensuring that the operation of such accounts do not interfere with the compliance of the firm’s obligations under this chapter; and

   3. (c)

      ensuring timely payments to research providers;

5. (5)

   the firm must set a budget for the purchase of research using joint payments:

   1. (a)

      based on the expected amount needed for third-party research in respect of investment services rendered to its clients, and not linked to the expected volumes or values of transactions executed on behalf of clients; and

   2. (b)

      at least annually, and at a level of aggregation that is:

      1. (i)

         appropriate to its investment process, investment products, investment services, and clients; and

      2. (ii)

         does not compromise its ability to meet the requirements of COBS 2.3B.25R(6) and (8).

6. (6)

   the firm must allocate the costs of research purchased using joint payments fairly between clients;

7. (7)

   the firm must periodically, but at least annually:

   1. (a)

      assess the value, quality and use of research purchased using joint payments and its contribution to the investment decision-making process; and

   2. (b)

      ensure that the amount of research charges to clients is reasonable compared with those for comparable services; and

8. (8)

   the firm must disclose to its clients the items listed in COBS 2.3B.30R.

2If the amount of research charges to clients exceeds the budget set out under COBS 2.3B.25R(5), or the budget is increased, the firm’s policy must set out:

1. (1)

   the relevant actions to be taken in such circumstances; and

2. (2)

   the information to be disclosed to clients.

2Where a firm delegates the administration of a research provider payment allocation structure or joint payments research account, it retains responsibility for complying with the requirements for its administration under this chapter. The firm must ensure that the reconciliation and reporting for such accounts and structures is undertaken with an appropriate frequency and timeliness, and continue to monitor and manage risks from unspent surplus amounts and research provider concentrations of these surplus amounts.

2Research services must not be treated as an execution factor under COBS 11.2A.2R.

2For the purposes of COBS 2.3B.25R(8), the firm must disclose to relevant clients:

1. (1)

   the firm’s use of joint payments for research, including, where relevant, how the use of joint payments is combined with the use of other payments permitted under COBS 2.3B.3R;

2. (2)

   the key features of the firm’s policy on joint payments in COBS 2.3B.25R(1), or the policy itself, having regard to the information needs of its clients. This information must be communicated to them in a way which is clear, fair and not misleading;

3. (3)

   the expected annual costs to the client, provided as part of ex ante disclosures on costs and charges, and based on the most appropriate of either:

   1. (a)

      the budget-setting and cost allocation procedures set out in COBS 2.3B.25R(5), COBS 2.3B.25R(6) and COBS 2.3B.27G; or

   2. (b)

      the actual costs for prior annual periods disclosed under COBS 2.3B.30(5);

4. (4)

   the most significant of the items in (a) and (b), at a level of aggregation appropriate to the firm’s investment processes, investment products, investment services and clients:

   1. (a)

      benefits and services received from research providers (measured by total amounts paid); and

   2. (b)

      types of research providers from which such services are purchased;

5. (5)

   the total costs incurred by the client, disclosed on an annual basis, reflecting the total payments made for research purchased using joint payments over that period, and provided as part of ex post reporting on costs and charges; and

6. (6)

   where relevant, the disclosures set out in COBS 2.3B.26R(2).

2For the purposes of the disclosures in COBS 2.3B.25R(8), firms must make the disclosures in:

1. (1)

   COBS 2.3B.30R(1) to (4) before providing an investment service or ancillary service, and thereafter upon request, and at least annually;

2. (2)

   COBS 2.3B.30R(5) as part of the firm’s costs and charges disclosures, separately identifying joint payment research charges in such disclosures; and

3. (3)

   COBS 2.3B.30R(6) as soon as reasonably practicable, and in any case in the firm’s next periodic disclosure to clients on costs and charges.