Rule on Inducements - COBS Provision: Difference between revisions

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-{{quote|A firm must not pay or accept any fee or commission, or provide or receive any non-monetary benefit, in relation to designated investment business or, in the case of its MiFID or equivalent third country business, another ancillary service, carried on for a client other than:
+{{a|cobs|In a {{nutshell}}<br>{{subtable|{{Nutshell COBS 2.3.1}}}}}}This is the {{tag|FCA}}’s general {{cobsprov|Rule on Inducements}} —and more to the point, avoiding them — and as you’ll see it is cast with an eye to the {{fcaprov|client}}’s best interests. Compare with specific rules on [[Use of dealing commissions - COBS Provision|use of dealing commissions]], which some might say are no more than an articulation of these, but others would say are quite a lot more restrictive, but which relate only to {{cobsprov|firm}}s which act as {{cobsprov|investment manager}}s — potentially a key difference, because it would not catch a [[broker]] or [[dealer]] where it accepts orders from an [[investment manager]] who was not an FCA regulated {{cobsprov|firm}} (i.e., a foreigner).
-:(1) a fee, commission or non-monetary benefit paid or provided to or by the client or a person on behalf of the client; or<br>
-:(2) a fee, commission or non-monetary benefit paid or provided to or by a third party or a person acting on behalf of a third party, if:<br>
+To be clear, in this case the general {{cobsprov|rule on inducements}} would continue to apply to the [[broker]]: just not the more detailed {{cobsprov|use of dealing commissions}} rules.
-::(a) the payment of the fee or commission, or the provision of the non-monetary benefit does not impair compliance with the firm's duty to act in the best interests of the client; and<br>
-::(b) the existence, nature and amount of the fee, commission or benefit, or, where the amount cannot be ascertained, the method of calculating that amount, is clearly disclosed to the client, in a manner that is comprehensive, accurate and understandable, before the provision of the service;<br>
+Want to take your client to Wimbledon? Forget about it.
-:::(i) this requirement only applies to business other than MiFID or equivalent third country business if it includes giving a personal recommendation in relation to a3 retail investment product, or giving advice, or providing services, to an employer in connection with a group personal pension scheme or group stakeholder pension scheme;<br>
+{{inducements under cobs and perg}}
-:::(ii) where this requirement applies to business other than MiFID or equivalent third country business, a firm is not required to make a disclosure to the client in relation to a non-monetary benefit permitted under (a) and which falls within the table of reasonable non-monetary benefits in COBS 2.3.15 G as though that table were part of this rule for this purpose only;<br>
+===Research and benefits [[broker]]s provide to [[investment manager]] clients===
-:::(iii) this requirement does not apply to a firm giving basic advice; and <br>
+Leaving aside the terribly [[tedious]] topic of research unbundling for a moment (I know — can you bear to?) a broker giving discounts and free research to an investment manager for whom it is accepting orders does not breaching the rule on inducements because the investment manager is its client. The investment manager’s clients are not, so there is no third party action here, at least not from the [[broker/dealer]]’s perspective.
-::(c) in relation to MiFID or equivalent third country business or when carrying on a regulated activity in relation to a retail investment product,5 the payment of the fee or commission, or the provision of the non-monetary benefit is designed to enhance the quality of the service to the client; or <br>
-:(3) proper fees which enable or are necessary for the provision of designated investment business or ancillary services, such as custody costs, settlement and exchange fees, regulatory levies or legal fees, and which, by their nature, cannot give rise to conflicts with the firm's duties to act honestly, fairly and professionally in accordance with the best interests of its clients.}}
+But the [[investment manager]] in turn has its own inducement rules (see {{cobsprov|2.3A.15}}), which make it clear that the [[investment manager]] must pass all the inducements on to its clients unless they are “acceptable minor non-monetary benefits” or third party research which is provided in accordance with the terribly tedious unbundling rules in COBS 2.3B.
+===Retrocessions for fund aggregators===
+If you are a {{tag|MiFID}} entity there are these categories:
+*Those providing portfolio management services or independent advice;
+*Those not providing independent advice (basically anyone else)
+For the first two there is an outright prohibition on retaining rebates under {{tag|MiFID II}}. Everything must be passed in full through to the ultimate client. These entities therefore tend to opt for non-[[retrocession]] share classes open only to aggregators offering a certain volume that have a net management fee (so in other words the benefit of the discount naturally flows through to ultimate client and can’t be retained by the intermediary, and there’s no need for the brain damage of divvying up the rebate).
+For others it isn’t prohibited but the firm would need to demonstrate (per COBS {{cobsprov|2.3A.3}} that the payment “enhances the quality of the service” it provides to its our client, and fully disclose it. The level 2 regulations interpret this strictly, and impose more procedural requirements, than many firms currently apply to third party payments and benefits.
+====A bit like [[PFOF]]?====
+[[Payment for order flow]] is the practice of an [[investment firm]] that executes client orders (typically a [[broker]]) receiving a [[fee]]/[[commission]] not only as an [[agent]] from the client originating the order but also from the [[counterparty]] with whom the trade is then executed. [[PFOF]] is not allowed because it does not satisfy the [[rule on inducements]].
+The read across is instructive:  Some (but not all) of the points the {{tag|FCA}} highlighted for {{tag|PFOF}} prevail here, if you substitute “firm” for “broker” and “MMF provider” for “[[market maker]]”
+*It creates a conflict of interest between the firm and its clients because the firm is incentivised to pursue payments from “MMF providers” rather than to act in the best interests of its clients.
+*Forcing MMF providers to ‘pay-to-play’ can distort competition and create barriers to entry and expansion.
+{{sa}}
+*FCA’s [[Perimeter Guidance Rules]]
+*COBS {{cobsprov|11.6.3}} et seq. regarding ({{cobsprov|Use of dealing commission}}), and also [[corporate access]].
+*{{cobsprov|2.3.1}} - the {{cobsprov|Rule on Inducements}}
+*[http://www.kwm.com/en/uk/knowledge/insights/the-mifid-ii-inducements-regime-20161026  Good article on rebates and retrocessions]