ICOB 2.3 Inducements

Principles 1 and 6 require a firm to conduct its business with integrity, to pay due regard to the interests of its customers and to treat them fairly. The purpose of ICOB 2.3 is to ensure that a firm does not conduct business under arrangements that might give rise to a conflict with its duty to customers or to unfair treatment of them.

The purpose of ICOB 2.3.2 R(2) is to prevent the requirement in ICOB 2.3.2 R(1) being circumvented by an inducement being given or received by an unregulated associate. There may be instances where a firm is able to demonstrate that it could not reasonably have knowledge of an associate giving or receiving an inducement. It should not, however, direct business to another person on the instruction of an associate if this is likely to conflict with the interests of its customers.

An inducement is a benefit offered to a firm, or any person acting on its behalf, with a view to that firm, or that person, adopting a particular course of action. This can include, but is not limited to, cash, cash equivalents, commission, goods, hospitality or training programmes.

ICOB 2.3.2 Rdoes not prevent a firm:

1. (1)

   assisting an insurance intermediary so that the quality of the insurance intermediary's service to customers is enhanced; or

2. (2)

   giving or receiving indirect benefits (such as gifts, hospitality or promotional competition prizes);

providing in either case this is not likely to give rise to a conflict with the duties that the recipient owes to the customer. In particular, such benefits should not be of a kind or value that is likely to impair the ability of a firm to act in compliance with any rule in ICOB, for example the suitability requirements in ICOB 4.3 (Suitability).

The inducement offered does not need to be related to the sales process itself. For example, an insurance intermediary has a duty to its customers to act with due care, skill and diligence, where it is acting for them at the claims stage.

1. (1)

   ICOB 2.3.2 R states that an inducement will only be considered unfair if it conflicts to a material extent with any duty that the firm owes to its customers. This means that the circumstances surrounding an inducement may determine whether or not it is unfair. It is a firm's responsibility to determine this.

2. (2)

   A firm that is offered an inducement should consider whether accepting that inducement might cause it, or any person acting on its behalf, to act in a way which conflicts with the duty that the firm owes to its customers.

1. (1)

   Inducements that operate at a distance from the sales process may not be unfair, if they do not have an effect on the sales person's selling of a particular product.

2. (2)

   Incentives offered to staff should not encourage sales staff to sell products unsuited to customers' needs.

A firm should have in place its own internal procedures for identifying unfair inducements. For example, it should be able to identify situations where the existence of an inducement has caused a course of action to be adopted, that conflicts to a material extent with any duty that the firm owes to its customers, and which would not have been taken in the absence of the inducement. It should also have in place a mechanism for remedying such situations should they occur.