Rule on Inducements - COBS Provision: Difference between revisions

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-{{nuts|COBS|2.3.1}}
+{{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).
-{{cobssnap|2.3.1}}
+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.
-====Commentary====
+Want to take your client to Wimbledon? Forget about it.
-See also
+{{inducements under cobs and perg}}
+===Research and benefits [[broker]]s provide to [[investment manager]] clients===
+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.
+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]
-{{cobsanatomy}}