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COBS 2.3B Inducements and research

Application

COBS 2.3B.1R
COBS 2.3B.2G
  1. (1)

    A firm providing independent advice, restricted advice or portfolio management services to retail clients in the United Kingdom, or which provides independent advice or portfolio management services to retail clients outside the United Kingdom or to professional clients is prohibited from receiving inducements (other than acceptable minor non-monetary benefits) in relation to those services under COBS 2.3A.15R and COBS 2.3A.16R. Compliance with COBS 2.3B allows such a firm to receive third party research without breaching that prohibition.

  2. (2)

    In addition, COBS 2.3B enables investment firms other than those in (1) to receive research without subjecting it to an assessment under the inducements rule in COBS 2.3A, as research acquired in accordance with this section will not constitute an inducement.

Receiving third party research without it constituting an inducement

COBS 2.3B.3R

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]

Conditions relating to the operation of the research payment account

COBS 2.3B.4R

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]

COBS 2.3B.5R

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]

COBS 2.3B.6G

In accordance with Principle 7 (communications with clients), a firm should inform clients in the annual information in COBS 2.3B.5R(2) that they are entitled to request the information set out in COBS 2.3B.20R(1).

COBS 2.3B.7R

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]

COBS 2.3B.8R
  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.

COBS 2.3B.9G

Information on increases in the research budget under COBS 2.3B.8R(2) should be provided to relevant clients in good time before such increases are to take effect.

COBS 2.3B.10G

A firm that operates arrangements for collecting research charges by deducting charges from those clients’ resources should ensure that those arrangements comply with CASS 8 (Mandates), as applicable.

Governance and oversight of research payment accounts

COBS 2.3B.11R

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]

COBS 2.3B.12R
  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]

COBS 2.3B.13G

A firm should retain control over the overall spending for research, the collection of client research charges and the determination of payments.

[Note: recital (28) to the MiFID Delegated Directive]

COBS 2.3B.14G

In setting a budget under COBS 2.3B.4R(2), and in light of the obligation to fairly allocate costs under COBS 2.3B.12R(1)(b), a firm may wish to consider setting a budget for a group of clients who would benefit from the same research, for example because they have portfolios that are managed according to similar investment strategies. It may be appropriate to operate a dedicated research payment account for such a group.

COBS 2.3B.15G

Where a firm charges a client under COBS 2.3B.4R(1), that charge should be for an amount of money owed to the firm. Therefore, provided it is collected by the firm only when that charge becomes due and payable, that money will not be client money held by the firm for the client who owed that charge (see CASS 7.11.25R).

Other operational arrangements for research payment accounts

COBS 2.3B.16R

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]

COBS 2.3B.17G

A firm should ensure that the cost of research funded by client charges is not:

  1. (1)

    linked to the volume or value of services or benefits that are not research; or

  2. (2)

    used to cover anything other than research, such as charges for execution.

[Note: recital 27 to the MiFID Delegated Directive]

COBS 2.3B.18R

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]

COBS 2.3B.19G
  1. (1)

    In order that a firm retains sufficient control, and is responsible for, a research payment account when relying on a third party to administer it, the firm should consider whether its arrangements with that third party will ensure that:

    1. (a)

      the firm can collect client research charges relating to a specific research budget into a separate research payment account for that budget, as cleared funds, without undue delay (and, in any event, no later than 30 days after deduction from the client’s account);

    2. (b)

      the firm retains sole, full and absolute discretion over the use of the account and the making of payments or rebates;

    3. (c)

      research payment account monies are ring-fenced and separately identifiable from the assets of the third party or, where the third party administrator is a bank, are held on deposit for the firm; and

    4. (d)

      the third party provider has, or its creditors on insolvency have, no right of access or recourse to the research payment account for its own benefit, for example to offset other fees owed by the firm or for use as collateral.

  2. (2)

    The firm remains fully responsible for discharging all of its obligations to its clients set out in COBS 2.3B regardless of any arrangements it makes with third parties, and should ensure it acts in the best interests of its clients when deducting research charges from their accounts and procuring research.

Disclosure on request of payments made from a research payment account

COBS 2.3B.20R
  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]

2Research for the purposes of research payment accounts and joint payments for research and execution services

COBS 2.3B.21R

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

COBS 2.3B.22G

A firm should also consider whether the goods or services it is looking to receive are acceptable minor non-monetary benefits under COBS 2.3A.19R or COBS 2.3A.22G, which can be received without breaching the inducements rules under COBS 2.3A.15R or COBS 2.3A.16R.

COBS 2.3B.23G

Examples of goods or services that the FCA does not regard as research, and as a result could not be paid for from research payment accounts or joint payments for research and execution services,2 include:

  1. (1)

    post-trade analytics;

  2. (2)

    price feeds or historical price data that have not been analysed or manipulated in order to present the firm with meaningful conclusions;

  3. (3)

    services relating to the valuation or performance measurement of portfolios;

  4. (4)

    seminar fees;

  5. (5)

    corporate access services;

  6. (6)

    subscriptions for publications;

  7. (7)

    travel, accommodation or entertainment costs;

  8. (8)

    order and execution management systems;

  9. (9)

    membership fees to professional associations;

  10. (10)

    direct money payments;2

  11. (11)

    administration of a research payment account; and2

  12. (12)

    2administration of:

    1. (a)

      an account for joint payments for research and execution services; or

    2. (b)

      a research provider payment allocation structure.

COBS 2.3B.24G

A firm should not enter into any arrangements relating to the receipt of, and payment for, third party research, whether acquired in accordance with COBS 2.3B.3R(1), (2) or (3)2, that would compromise its ability to meet its best execution obligations as applicable under COBS 11.2A.

COBS 2.3B.25R

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.

COBS 2.3B.26R

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.

COBS 2.3B.27G

2For the purposes of COBS 2.3B.25R(6), the firm should determine a cost allocation level appropriate to its business model. The specific cost of individual investment research items need not be discretely attributable to individual clients. The approach should be reasonable and its outcome fair across all clients, such that relative costs incurred are commensurate with relative benefits received. This includes:

  1. (1)

    across:

    1. (a)

      clients with which the firm has different payment arrangements for the purchase of research;

    2. (b)

      clients that are managed according to similar investment strategies; and

    3. (c)

      different clients or groups of clients that benefit from the same research; or

  2. (2)

    across other allocation levels provided that these are appropriate to a firm’s investment process, investment products, investment services, and clients.

COBS 2.3B.28R

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.

COBS 2.3B.29R

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

COBS 2.3B.30R

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).

COBS 2.3B.31R

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.

COBS 2.3B.32G

2For the purposes of disclosing the types of research providers from which services are purchased under COBS 2.3B.30R(4)(b), a firm may provide a breakdown (measured by total amounts paid) according to the research provider types specified in COBS 2.3B.25R(3).

COBS 2.3B.33G

2For the purposes of ensuring that research charges to clients are reasonable under COBS 2.3B.25R(7)(b), a firm may benchmark prices paid for research services purchased using joint payments against relevant comparators.