SYSC 10.1 Application

1. (1)

   5This section applies to a firm which provides services to its clients in the course of carrying on regulated activities or ancillary activities or providing ancillary services (but only where the ancillary services constitute MiFID business).

2. (2)

   5This section also applies to a management company.

6This section also applies to:

1. (1)

   a full-scope UK AIFM of:

   1. (a)

      a UK AIF; 8

   2. (b)

      an EEA AIF managed or marketed from an establishment in the UK; and8

   3. (c)

      a non-EEA AIF; and8

2. (2)

   an incoming EEA AIFM branch which manages or markets a UKAIF .

A firm must take all reasonable steps to identify conflicts of interest between:

1. (1)

   the firm, including its managers, employees and appointed representatives (or where applicable, 2tied agents)2, or any person directly or indirectly linked to them by control, and a client of the firm; or

   2
2. (2)

   one client of the firm and another client;

that arise or may arise in the course of the firm providing any service referred to in SYSC 10.1.1 R.

[Note: article 18(1) of MiFID]

For the purposes of identifying the types of conflict of interest that arise, or may arise, in the course of providing a service and whose existence may entail a material risk of damage to the interests of a client, a common platform firm and a management company5 must take into account, as a minimum, whether the firm or a relevant person, or a person directly or indirectly linked by control to the firm:

1. (1)

   is likely to make a financial gain, or avoid a financial loss, at the expense of the client;

2. (2)

   has an interest in the outcome of a service provided to the client or of a transaction carried out on behalf of the client, which is distinct from the client's interest in that outcome;

3. (2A)

   in the case of a management company providing collective portfolio management services for a UCITS scheme, (2) also applies where the service is provided to, or the transaction is carried out on behalf of, a client other than the UCITS scheme;5

4. (3)

   has a financial or other incentive to favour the interest of another client or group of clients over the interests of the client;

5. (4)

   carries on the same business as the client; or in the case of a management company, carries on the same activities for the UCITS scheme and for another client or clients which are not UCITS schemes; or5

6. (5)

   receives or will receive from a person other than the client an inducement in relation to a service provided to the client, in the form of monies, goods or services, other than the standard commission or fee for that service.

The conflict of interest may result from the firm or person providing a service referred to in SYSC 10.1.1 R or engaging in any other activity or, in the case of a management company, whether as a result of providing collective portfolio management services or otherwise.5

[Note:

article 21 of MiFID implementing Directiveand article 17(1) of the UCITS implementing Directive]5

A common platform firm and a management company5 must keep and regularly update a record of the kinds of service or activity carried out by or on behalf of that5firm in which a conflict of interest entailing a material risk of damage to the interests of one or more clients has arisen or, in the case of an ongoing service or activity, may arise.

[Note:

article 23 of MiFID implementing Directiveand article 20(1) of the UCITS implementing Directive]5

A firm must maintain and operate effective organisational and administrative arrangements with a view to taking all reasonable steps to prevent conflicts of interest as defined in SYSC 10.1.3 R from constituting or giving rise to a material risk of damage to the interests of its clients.

[Note: article 13(3) of MiFID]

1. (1)

   If arrangements made by a firm under SYSC 10.1.7 R to manage conflicts of interest are not sufficient to ensure, with reasonable confidence, that risks of damage to the interests of a client will be prevented, the firm must clearly disclose the general nature and/or sources of conflicts of interest to the client before undertaking business for the client.

   3
2. (2)

   The disclosure must:

   1. (a)

      be made in a durable medium; and

   2. (b)

      include sufficient detail, taking into account the nature of the client, to enable that client to take an informed decision with respect to the service in the context of which the conflict of interest arises.

3. (3)

   This rule does not apply to the extent that SYSC 10.1.21 R applies.5

[Note:

article 18(2) of MiFID and Article 22(4) of MiFID implementing Directive]

3The obligation in SYSC 10.1.8 R (2)(a) does not apply to a firm when carrying on insurance mediation activity.

1. (1)

   A common platform firm and a management company5 must establish, implement and maintain an effective conflicts of interest policy8 that is set out in writing and is appropriate to the size and organisation of the firm and the nature, scale and complexity of its business.

2. (2)

   Where the common platform firmor the management company5 is a member of a group, the policy must also take into account any circumstances, of which the firm is or should be aware, which may give rise to a conflict of interest arising as a result of the structure and business activities of other members of the group.

[Note:

article 22(1) of MiFID implementing Directiveand article 18(1) of the UCITS implementing Directive]5

1. (1)

   The conflicts of interest policy must include the following content:

   1. (a)

      it must identify in accordance with SYSC 10.1.3 R and SYSC 10.1.4 R, by reference to the specific services and activities carried out by or on behalf of the common platform firm or management company,5 the circumstances which constitute or may give rise to a conflict of interest entailing a material risk of damage to the interests of one or more clients; and

   2. (b)

      it must specify procedures to be followed and measures to be adopted in order to manage such conflicts.

2. (2)

   The procedures and measures provided for in paragraph (1)(b) must:

   1. (a)

      be designed to ensure that relevant persons engaged in different business activities involving a conflict of interest of the kind specified in paragraph (1)(a) carry on those activities at a level of independence appropriate to the size and activities of the common platform firm or the management company5 and of the group to which either of them respectively5belongs, and to the materiality of the risk of damage to the interests of clients; and

      5
   2. (b)

      include such of the following as are necessary and appropriate for the common platform firm or the management company5 to ensure the requisite degree of independence:

      1. (i)

         effective procedures to prevent or control the exchange of information between relevant persons engaged in activities involving a risk of a conflict of interest where the exchange of that information may harm the interests of one or more clients;

      2. (ii)

         the separate supervision of relevant persons whose principal functions involve carrying out activities on behalf of, or providing services to, clients whose interests may conflict, or who otherwise represent different interests that may conflict, including those of the firm;

      3. (iii)

         the removal of any direct link between the remuneration of relevant persons principally engaged in one activity and the remuneration of, or revenues generated by, different relevant persons principally engaged in another activity, where a conflict of interest may arise in relation to those activities;

      4. (iv)

         measures to prevent or limit any person from exercising inappropriate influence over the way in which a relevant person carries out services or activities; and

      5. (v)

         measures to prevent or control the simultaneous or sequential involvement of a relevant person in separate services or activities where such involvement may impair the proper management of conflicts of interest.

3. (3)

   If the adoption or the practice of one or more of those measures and procedures does not ensure the requisite level of independence, a common platform firm and a management company5 must adopt such alternative or additional measures and procedures as are necessary and appropriate for the purposes of paragraph (1)(b).

[Note: article 22(2) and (3) of MiFID implementing Directiveand articles 18(2), 19(1) and 19(2) of the UCITS implementing Directive]5

3The rules relating to:

1. (1)

   types of conflict (see SYSC 10.1.4 R);

2. (2)

   records of conflicts (see SYSC 10.1.6 R); and

3. (3)

   conflicts of interest policies (see SYSC 10.1.10 R and SYSC 10.1.11 R);

also apply to a firm which is not a common platform firm when it produces, or arranges for the production of, investment research that is intended or likely to be subsequently disseminated to clients of the firm or to the public in accordance with COBS 12.2, and when it produces or disseminates non-independent research in accordance with COBS 12.3.

5A management company, when identifying the types of conflict of interests for the purposes of SYSC 10.1.4 R, must take into account:

1. (1)

   the interests of the firm, including those deriving from its belonging to a group or from the performance of services and activities, the interests of the clients and the duty of the firm towards the UCITS scheme or EEA UCITS scheme it manages; and

2. (2)

   where it manages two or more UCITS schemes or EEA UCITS schemes, the interests of all of them.

5A management company must be structured and organised in such a way as to minimise the risk of a UCITS scheme's, EEA UCITS scheme's or client's interests being prejudiced by conflicts of interest between the management company and its clients, between two of its clients, between one of its clients and a UCITS scheme or an EEA UCITS scheme, or between two such schemes.

5A management company must try to avoid conflicts of interest and, when they cannot be avoided, ensure that the UCITS schemes and EEA UCITS schemes it manages are fairly treated.

1. (1)

   5Where the organisational or administrative arrangements made by a management company for the management of conflicts of interest are not sufficient to ensure, with reasonable confidence, that risks of damage to the interests of the UCITS scheme or EEA UCITS scheme it manages or of its Unitholders will be prevented, the senior personnel or other competent internal body of the firm must be promptly informed in order for them to take any necessary decision to ensure that in all cases the firm acts in the best interests of the scheme and of its Unitholders.

2. (2)

   A management company must report situations referred to in (1) to the Unitholders of the UCITS scheme or EEA UCITS scheme it manages by any appropriate durable medium and give reasons for its decision.

6A collective portfolio management investment firm which manages investments other than for an AIF or UCITS for which it has been appointed as manager, must obtain approval from its client before it invests all or part of the client's portfolio in units or shares of an AIF or UCITS it manages.

6An AIFM must take all reasonable steps to identify conflicts of interest that arise, in the course of managing AIFs, between:

1. (1)

   the AIFM, including its managers, employees or any person directly or indirectly linked to the AIFM by control, and an AIF managed by the AIFM or the investors in that AIF; or

2. (2)

   an AIF or the investors in that AIF, and another AIF or the investors in that AIF; or

3. (3)

   an AIF or the investors in that AIF, and another client of the AIFM; or

4. (4)

   an AIF or the investors in that AIF, and a UCITS managed by the AIFM or the investors in that UCITS; or

5. (5)

   two clients of the AIFM.

6An AIFM must take all reasonable steps to avoid conflicts of interest and, when they cannot be avoided, manage, monitor and (where applicable) disclose those conflicts of interest in order to prevent them from adversely affecting the interests of the AIFs and their investors, and to ensure that the AIFs it manages are fairly treated.

6An AIFM must:

1. (1)

   maintain and operate effective organisational and administrative arrangements, with a view to taking all reasonable steps designed to identify, prevent, manage and monitor conflicts of interest in order to prevent them from adversely affecting the interests of the AIFs and their investors;

2. (2)

   segregate, within its own operating environment, tasks and responsibilities which may be regarded as incompatible with each other or which may potentially generate systematic conflicts of interest; and

3. (3)

   assess whether its operating conditions may involve any other material conflicts of interest and disclose them to the AIF's investors.

6If the organisational arrangements made by the AIFM to identify, prevent, manage and monitor conflicts of interest are not sufficient to ensure, with reasonable confidence, that risks of damage to investors' interests will be prevented, the AIFM must:

1. (1)

   clearly disclose the general nature or sources of conflicts of interest to the investors before undertaking business on their behalf; and

2. (2)

   develop appropriate policies and procedures.