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Client’s best interest rule: Difference between revisions
Client’s best interest rule (view source)
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[[File:TCB.jpg|450px|thumb|center|Taking care of business — I mean treating customers fairly — in Memphis Tennessee]] | [[File:TCB.jpg|450px|thumb|center|Taking care of business — I mean treating customers fairly — in Memphis Tennessee]] | ||
{{subtable|{{COBS Section 2.1}}}}}} | {{subtable|{{COBS Section 2.1}}}}}} | ||
''See also: European “[[FRANDT]]” regulations requiring [[clearing member]]s to be [[fair, reasonable, non-discriminatory and transparent]] in their dealings with clearing clients, which at first blush seem to qualify some of the bracingly spartan arguments below but, on closer inspection, don’t really.'' <br> | |||
The [[FCA]]’s much-talked-about, seldom understood, [[TCF]] provision. To be read in conjunction with the FCA’s “PRIN” general principles and, for those of you, my pretties, who like to dive ''deeper'', the [https://www.fca.org.uk/publication/feedback/fs19-02.pdf FCA’s discussion paper on conflicts of interest] published in April 2019. | The [[FCA]]’s much-talked-about, seldom understood, [[TCF]] provision. To be read in conjunction with the FCA’s “PRIN” general principles and, for those of you, my pretties, who like to dive ''deeper'', the [https://www.fca.org.uk/publication/feedback/fs19-02.pdf FCA’s discussion paper on conflicts of interest] published in April 2019. | ||
The general principles in play here are: | The [[JC]] has his own [[heuristic]] that gets you to much the same point, and he's translated it into Latin so it doesn’t set off your smut filter: [[non mentula esse]]. But anyway, in the [[FCA]]’s argot 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 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 6 '''Customers’ interests''' – A firm must pay due regard to the interests of its customers and treat them fairly. | ||
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So we start to put some parameters on it: a [[dealer]] must have ''legitimate'' grounds for not trading: [[credit]] appetite, [[market risk]], prevailing [[volatility]], reputational and so on, as legitimate grounds. No doubt imaginative risk managers could think of others. At some point, any old fool can contrive ''some'' plausible excuse for not trading, so in practice we are at the point the [[JC]] started with: ''you don’t have to offer the same product, on the same terms, to everyone''. But this is a bad intellectual ground for getting there. None of these putative grounds have anything to do with “fairness between clients” as such — they all speak to the [[dealer]]’s personal risk appetite. So if these reasons ''do'' trump an incoming client’s request to trade, then it stands to reason that the [[dealer]]’s own interest takes precedent over the (putative) client’s interest. If so, this is a either a transgression of the client’s best interest rule, or a situation in which the client’s interest doesn’t prevail. The [[JC]] says it is ''obviously'' the latter. | So we start to put some parameters on it: a [[dealer]] must have ''legitimate'' grounds for not trading: [[credit]] appetite, [[market risk]], prevailing [[volatility]], reputational and so on, as legitimate grounds. No doubt imaginative risk managers could think of others. At some point, any old fool can contrive ''some'' plausible excuse for not trading, so in practice we are at the point the [[JC]] started with: ''you don’t have to offer the same product, on the same terms, to everyone''. But this is a bad intellectual ground for getting there. None of these putative grounds have anything to do with “fairness between clients” as such — they all speak to the [[dealer]]’s personal risk appetite. So if these reasons ''do'' trump an incoming client’s request to trade, then it stands to reason that the [[dealer]]’s own interest takes precedent over the (putative) client’s interest. If so, this is a either a transgression of the client’s best interest rule, or a situation in which the client’s interest doesn’t prevail. The [[JC]] says it is ''obviously'' the latter. | ||
====It isn’t some kind of dealer-based [[doctrine of precedent]]==== | ====It isn’t some kind of dealer-based [[doctrine of precedent]].==== | ||
The same goes for close-outs and disputes. | The same goes for close-outs and disputes. When presented with any practical means of sorting out a specific dispute on a settlement failure with a client, [[Compliance]] will be sore pressed not to caution ''against'' doing so, again, on grounds it might not be [[treating customers fairly]]: the inequity in question being the resolution of this specific issue to the benefit of one client in a way you might not later offer to another client on another settlement or trading issue arising in a different market, with a different client at any time, if putatively analogous. | ||
Again, this ought not be the purpose of the [[TCF]] rule, if for no other reason it will have a “chilling” effect on a [[dealer]]’s appetite for settling any dispute with any client in any circumstances short of a final judgment of a competent court. Clearly that is not the regulator’s intention — to the contrary, the [[FCA]] has stiffened its expectations on the brisk and handling and resolution of complaints in recent times. [[TCF]] does not introduce the obligation to operate some kind of internal [[stare decisis]] policy, obliging a [[dealer]] to apply a [[doctrine of precedent]], binding it for all times to any practical accommodation it might make with any of its clients at any time for any reason. | |||
The intention is surely more limited: if ''two'' clients grumble about the ''same'' valuation the dealer makes on the ''same'' product at the ''same'' time, then a [[dealer]] who fixes the problem for one client should offer a corresponding resolution to the other. Be even handed. Treat your customers fairly. That is all. | |||
====And “client” means?==== | ====And “client” means?==== | ||
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It is true, Principle 8 extends to conflicts ''between different clients'' as well as between [[dealer]] and [[client]]. But surely these conflicts must arise as a result of some kind of direct interaction between the two clients, rather than the abstract fact that both of them happen to be on the demand side of the same resource for which there is limited supply. Again, regulatory rules here — [[best execution]] — are about the price at which you do trade, if you trade, and not whether you trade at all, and the conflict is between dealer and client and not between the clients. | It is true, Principle 8 extends to conflicts ''between different clients'' as well as between [[dealer]] and [[client]]. But surely these conflicts must arise as a result of some kind of direct interaction between the two clients, rather than the abstract fact that both of them happen to be on the demand side of the same resource for which there is limited supply. Again, regulatory rules here — [[best execution]] — are about the price at which you do trade, if you trade, and not whether you trade at all, and the conflict is between dealer and client and not between the clients. | ||
{{sa}} | |||
*[[FRANDT]] | |||
{{ref}} | {{ref}} | ||