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 UK UCITS management company13.

[Note: The provisions in SYSC 10.1 also implement articles 27 and 28 of the IDD,12 articles 74(1) and 88 of CRD and as applied under the discretion in the third paragraph of article 95(2) of the UK CRR14, BCD article 22 and BCD Annex V paragraph 1]9

6This section also applies to:

1. (1)

   a full-scope UK AIFM of:

   1. (a)

      a UK AIF; 8and13

   2. (b)

      [deleted]13

      8
   3. (c)

      a non-UK AIF13; and8

2. (2)

   [deleted]13

15The requirements in this section apply to an SRD asset manager with regard to its engagement activities covered by the SRD.

[Note: article 3g(3) of SRD]

A firm must take all appropriate9 steps to identify and to prevent or manage9 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 10.1.1R including those caused by the receipt of inducements from third parties or by the firm’s own remuneration and other incentive structures.9

[Note: article 239(1) of MiFID and articles 27 and 28(1) of the IDD]12

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 9damage the interests of a client, 9a 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:9 article 17(1) of the UCITS implementing Directive]5

12For the purposes of identifying the types of conflict of interest that arise, or may arise, in the course of carrying on insurance distribution activities or funeral plan distributionsfuneral plan distributions16 and whose existence may damage the interests of a client (“A”), a firm must assess whether:

1. (1)

   the firm or a relevant person, or a person directly or indirectly linked by control to the firm; or

2. (2)

   (in the case of conflicts between A and another client) the other client,

has an interest in the outcome of the insurance distribution activities or funeral plan distribution16, which meets the following criteria:

1. (3)

   it is distinct from A’s interest in the outcome of the insurance distribution activities or funeral plan distributions16; and

2. (4)

   it has the potential to influence the outcome of the activities to the detriment of A.

12For the purpose of carrying out the assessment in SYSC 10.1.4BR, a firm 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 a financial or other incentive to favour the interest of another client or group of clients over the interest of the client;

3. (3)

   carries on the same business as the client;

4. (4)

   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; or

5. (5)

   is substantially involved in the management or development of policies, in particular where such a person has an influence on the pricing of those policies or their distribution costs.

A 9management company5, an 16insurance intermediary12 and a firm carrying on funeral plan distribution16 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:9 article 20(1) of the UCITS implementing Directive]5

12An insurance intermediary and a firm carrying on funeral plan distribution16 must ensure that its management body receives on a frequent basis, and at least annually, written reports on all situations referred to in SYSC 10.1.6R.

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 adversely affecting9 the interests of its clients.

[Note: article 169(3) of MiFID and article 27 of the IDD12]

12Where a firm carries on insurance distribution activities, the arrangements in SYSC 10.1.7R must be proportionate to the activities performed, the policies sold and the type of insurance distributor the firm is or uses.

[Note: article 27 of the IDD]

1. (1)

   If arrangements made by a firm under SYSC 10.1.7 R9 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 following9 to the client before undertaking business for the client:9

   3
   1. (a)

      the general nature or sources of conflicts of interest, or both; and9

   2. (b)

      the steps taken to mitigate those risks.9

2. (2)

   The disclosure must:

   1. (a)

      be made in a durable medium; 9

   2. (b)

      clearly state that the organisational and administrative arrangements established by the firm to prevent or manage that conflict are not sufficient to ensure, with reasonable confidence, that the risks of damage to the interests of the client will be prevented;9

   3. (c)

      include specific description of the conflicts of interest that arise in the provision of funeral plan distribution16, insurance distribution activities

      12

      investment services or ancillary services; 9

   4. (d)

      explain the risks to the client that arise as a result of the conflicts of interest; and9

   5. (e)

      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.9

3. (3)

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

[Note: 23(2) and (3) of MiFID and article 28(2) and (3) of the IDD12]

9A firm must treat disclosure of conflicts pursuant to SYSC 10.1.8R as a measure of last resort to be used only where the effective organisational and administrative arrangements established by the firm to prevent or manage its conflicts of interest in accordance with SYSC 10.1.7R are not sufficient to ensure, with reasonable confidence, that risks of damage to the interests of the client will be prevented.

1. (1)

   A 9management company5, an 16insurance intermediary12 and a firm carrying on funeral plan distribution16 must establish, implement and maintain an effective conflicts of interest policy89 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 9management company5, or 16insurance intermediary12 or firm carrying on funeral plan distribution16 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 18(1) of the UCITS implementing Directive]59

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, SYSC 10.1.4 R, SYSC 10.1.4BR and SYSC 10.1.4CR (as applicable),12 by reference to the specific services and activities carried out by or on behalf of the management company16, insurance intermediary12 or firm carrying on funeral plan distribution, 16 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

      95
   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 9management 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;

      512
   2. (aa)

      (for an insurance intermediary or a firm carrying on funeral plan distribution16) be designed to ensure that the insurance distribution activities or funeral plan distribution16 are carried out in accordance with the best interests of the client and are not biased due to conflicting interests of the insurance intermediary, the firm carrying on funeral plan distribution16 or another client; and12

      16
   3. (b)

      include, for an insurance intermediary or a firm carrying on funeral plan distribution16, where appropriate, the following, and for a management company,12 such of the following as are necessary and appropriate for the 9management 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;

      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; and 12

      6. (vi)

         (for insurance intermediaries or firms carrying on funeral plan distribution16) a gifts and benefits policy which determines clearly under which conditions gifts and benefits can be accepted or granted and which steps are to be taken when accepting and granting gifts and benefits.12

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 9management company5 must adopt such alternative or additional measures and procedures as are necessary and appropriate for the purposes of paragraph (1)(b).

4. (4)

   If one or more of the measures and procedures in paragraph (2) is not appropriate for the purposes of paragraph (2)(aa), an insurance intermediary or a firm carrying on funeral plan distribution16 must adopt such alternative measures and procedures as are necessary and appropriate.12

5. (5)

   The procedures and measures provided for in paragraph (1)(b) must be appropriate to the size and activities of 16 an insurance intermediary or a firm carrying on funeral plan distribution16, the group to which it may belong and to the risk of damage to the interests of the client.12

[Note:9 articles 18(2), 19(1) and 19(2) of the UCITS implementing Directive]5

12An insurance intermediary and a firm carrying on funeral plan distribution16 must assess and periodically review, on at least an annual basis, the conflicts of interest policy established in accordance with SYSC 10.1.10R and SYSC 10.1.11R and should take all appropriate measures to address any deficiencies (such as over reliance on disclosure of conflicts of interest).

12A common platform firm, in relation to its insurance distribution activities, must:

1. (1)

   take into account the factors set out in SYSC 10.1.4BR(4) and SYSC 10.1.4CR(5) when complying with article 33 of the MiFID Org Regulation (as applied as a rule by SYSC 1 Annex 1 3.2-AR or 3.2-BR(2)); and

2. (2)

   include the measure set out in SYSC 10.1.11R(2)(b)(vi) in the list of measures to be adopted, where necessary, when complying with article 34 (3) of the MiFID Org Regulation (as applied as a rule by SYSC 1 Annex 1 3.2-AR or 3.2-BR(2)).

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 public10, and when it produces or disseminates non-independent research,10 in accordance with COBS 12.210.

5A UK UCITS management company13, 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 scheme13it manages; and

2. (2)

   where it manages two or more UCITS schemes13, the interests of all of them.

5A UK UCITS management company13 must be structured and organised in such a way as to minimise the risk of a UCITS scheme's13 or client's interests being prejudiced by conflicts of interest between the UK UCITS management company13 and its clients, between two of its clients, between one of its clients and a UCITS scheme13, or between two such schemes.

5A UK UCITS management company13 must try to avoid conflicts of interest and, when they cannot be avoided, ensure that the UCITS schemes13it manages are fairly treated.

1. (1)

   5Where the organisational or administrative arrangements made by a UK UCITS management company13 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 scheme13it 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 UK UCITS management company13 must report situations referred to in (1) to the Unitholders of the UCITS scheme13it 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.