Client’s best interest rule

The JC’s Reg and Leg resource™ UK Edition →Go uptown COBS 2.1.1: The client's best interests rule (1) A firm must act honestly, fairly and professionally in accordance with the best interests of its client (the client's best interests rule). (2) This rule applies in relation to designated investment business carried on: (a) for a retail client; and (b) in relation to MiFID or equivalent third country business, for any other client. (3) For a management company, this rule applies in relation to any UCITS scheme or EEA UCITS scheme the firm manages. Note: article 19(1) of MiFID and article 14(1)(a) and (b) of the UCITS Directive. Index: Click ᐅ to expand: Regulation Tell me more Sign up for our newsletter — or just get in touch: for ½ a weekly 🍺 you get to consult JC. Ask about it here.

the much talked-about, seldom iunderstood, TCF provision. To be read in conjuction with the FCA’s “PRIN” general principles and, for those of you, my pretties, who like to dive deeper, the FCA’s discussion paper on conflicts of interest published in July 2018.

The general principles in play here are:

• Principle 2 Skill, care and diligence – A firm must conduct its business with due skill, care and diligence.
• Principle 6 Customers' interests – A firm must pay due regard to the interests of its customers and treat them fairly.
• Principle 7 Communications with clients – A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading.
• Principle 8 Conflicts of interest – A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client.
• Principle 9 Customers: relationships of trust – A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment.

There is much general lofty aspiration here, but not much by way of flesh on the bones. This, generally, is how the JC likes regulations — self explanatory, and demanding the application of common sense — but it does lead nervous compliance officers, who, having been beaten and bloodied in the foregoing decade don’t always have much of a conceptualisation of common sense — to adopt a bunker mentality. So a few remarks about what the fairness requirement should not mean. You know how we like disclaimers, folks, and this being turf into which the better angels of the professional advisorate tend not to rush — consider our disclaimer absolute. Take the following as you find it, and don’t blame me if you wind up in jail.

It shouldn’t mean you have to offer the same product, on the same terms, to everyone.

That would be madness. But you see it advanced.

“If we offer this groundbreaking product — tranched synthetic collateralised emissions credit derivatives, denominated in bitcoin to one special client, then we will have to offer it to everyone”.

This cannot be right.

Firstly, treating customers fairly is generally tilted towards not offering flakey products to clients, rather than being forced to offer them to everyone.

Secondly, where you have offered a product — which isn’t ~ cough ~ flakey — it is about then ensuring that you exercise your rights with respect to the clients in that product (ceteris paribus) fairly. So, if you have 100 clients long the same delta-one equity swap and there is a market disruption affecting half your hedge, you close out all of the client positions pro rata, rather than closing out the small clients and keeping the juicy platinum client in the position and therefore happy.

Thirdly, trading any products with clients, whoever they are and however important, necessarily involves taking on risk. Dealers do not have an unlimited tolerance for this stuff. It is axiomatic that dealers don’t, without good reason and comprehensive verbiage commit to trade with their clients. That would be a trading facility. It might attract a capital charge for one thing. So let’s say dealer A has put on a big trade with client X in the process maxing out its appetite for bitcoin denominated cannabis futures. If client Y comes along and says, well you did 5 yards with him, so you can do five yards with me too it puts our poor risk manager in a pickle. Must she double her exposure? If clients P, Q, R and S arrive, must she quintuple her comfort level? If no, must she keep some risk headroom open when trading with X, so there is enough room pari passu for Y and Z, P, Q, R and S in case they decide they want to transact?