Personal transactions and inducements

Updating authors: Nick Thorpe, Neil Johnston and Richard Kenyon

On this page:
Summary
Future developments
Practical example
Action point checklist
Key references
Questions and answers
Personal transactions
Gifts and inducements

Summary

10.800

• Under the Financial Services Authority's New Conduct of Business Sourcebook (COBS), firms must maintain adequate arrangements to ensure that the personal transactions of their employees do not conflict with their duties to their customers.
• Firms are no longer required to provide employees with a written policy on personal account dealing as part of their contract of employment. However, implementing and maintaining such a policy is still advisable.
• A firm must take reasonable steps to ensure that it, and any person acting on its behalf, does not offer, receive or solicit an inducement if it impairs compliance with the firm's duty to act in the best interests of the customer.
• A firm should have a policy on controlling gifts and inducements - both given and received - to avoid it or its employees being unduly influenced in carrying out its duties to customers.

Future developments

10.801There are no future developments.

Personal transactions

10.802 The rules regulating personal account dealing contained in the Financial Services Authority's (FSA) Conduct of Business Sourcebook (COB) were replaced on 1 November 2007 by rules contained in the New Conduct of Business Sourcebook (COBS). The new rules were introduced in the context of the FSA's obligation to implement the latest EU harmonising directive on investment services regulation, the Markets in Financial Instruments Directive (MiFID).

The rules introduced by MiFID are broadly similar to the old rules on personal account dealing under COB. These rules have now been 'copied out' into COBS (COBS 11.7). In copying out these rules, the FSA has discarded any requirements in COB that are not reflected in MiFID. In particular, firms are no longer required to provide employees with a written policy on personal account dealing, as part of their contract of employment. A firm must nevertheless implement and maintain adequate arrangements aimed at preventing employees, who are involved in investment activities that may give rise to a conflict of interest, entering into personal transactions that amount to market abuse or conflict, or are likely to conflict, with the firm's duties to its customers. Firms should therefore continue to maintain a policy on personal account dealing and should draw their employees' attention to it (COBS 11.7.4R).

Normally, all types of investment are covered in the policy, except collective investment schemes and transactions through trusts where the employee has no advance knowledge or control over them. A senior person in the firm should be responsible for issuing approvals/refusals to employees on behalf of the firm and should maintain a record of all personal transactions.

Firms should consider how much freedom they give employees. For example, because of the nature of the conflicts of interest that arise, a firm may decide that an investment analyst should be prohibited from carrying out any personal transactions, or it could prohibit personal transactions for a limited time covering a period before or after the publication of the investment research. Much will depend on potential conflicts of interest.

Firms must ensure that they are informed promptly by employees of any personal transactions they entered into (COBS 11.7.4R(2)(a)). Some firms ask new employees to list existing investments when they join the organisation to avoid conflicts of interest and to seek advanced approval of any transactions thereafter. It is also good practice to ask employees periodically to confirm that the firm's personal account dealing records concerning them are up to date. This is often done annually.

Firms must also make a record of all personal transactions notified to the firm or identified by it, including any authorisation or prohibition in connection with such a transaction (COBS 11.7.4R(3)).

Importantly, the new rules now extend to persons involved in providing investment services to a firm under an outsourcing arrangement. However, the outsourcing firm is required only to ensure that the firm to which the investment services are outsourced maintains a record of personal transactions and provides the information promptly on request (COBS 11.7.4R(2)(b)).

Gifts and inducements

10.803 Principles 1 and 6 of the Financial Services Authority's Principles for Businesses require a firm to conduct its business with integrity, to pay due regard to the interests of its customers and to treat them fairly. These Principles are relevant to the giving and receiving of gifts and inducements. There are also specific rules on the giving and receiving of gifts and inducements contained in the FSA's new Conduct of Business Sourcebook (COBS).

The old rules on gifts and inducements contained in the Financial Services Authority's (FSA) Conduct of Business Sourcebook (COB) have now been replaced by a new set of rules contained in COBS (COBS 2.3). These differ in a number of ways to the old rules.

Under the old rules, firms were permitted to offer, receive or accept a benefit provided that it was unlikely to conflict 'to a material extent' with any duty that the firm owed to its customers. However, the new rules are much wider in scope and apply to all payments, fees or non-monetary benefits regardless of materiality. Under the new rules, the payment of a fee, commission or non-monetary benefit is only permitted if it does not impair compliance with the firm's duty to act in the best interests of the customer (COBS 2.3.1).

Firms must take all reasonable steps to comply with this prohibition. Therefore, a firm should have a policy on controlling gifts and inducements - both given and received - to avoid it or its employees being unduly influenced when carrying out their duties to customers and acting in contravention of this prohibition.

The policy may be standalone or incorporated into the staff handbook or the compliance manual, but it must be clearly communicated to all employees. Policies usually focus on explaining the principle and describe the financial limits (eg no need to disclose gifts of less than £50, with increasing levels of approval required for larger amounts).

The FSA has confirmed in its policy statement PS07/6: Reforming Conduct of Business Regulation (on the FSA website), published on 31 May 2007, that small gifts and minor hospitality (non-monetary benefits) received by an individual in their personal capacity, and not on account of the firm, do not fall within the new rules. This is confirmed at COBS 2.3.8G. However, the FSA points out that a firm's conflicts of interest policy should address the potential issues that arise in such cases.

In addition to maintaining a policy on gifts and inducements, firms must also keep a record of each fee, commission or non-monetary benefit given to another firm and must keep that record for at least five years from the date on which it was given (COBS 2.3.17R).

More generally, COBS introduces a new requirement that a fee, commission or non-monetary benefit, where this is paid or provided to or by a third party, must be designed to 'enhance' the quality of the relevant service to the customer. Clarification was sought from the FSA by firms during the consultation exercise in 2007 as to what was meant by the 'enhancement test'. The FSA therefore provided guidance in PS07/6: Reforming Conduct of Business Regulation (on the FSA website). Further guidance is also set out in COBS 2.3.6G. This makes it clear that where an investment firm, for example, provides investment advice or general recommendations that are not biased as a result of the receipt of commission, then the advice or recommendations should be considered as having met the condition of being designed to enhance the quality of the service to the customer.

COBS also requires firms to disclose to the customer the existence, nature and the amount of the fee, commission or non-monetary benefit or the essential details in summary form (and to provide further information at the request of the customer). During the consultation exercise in 2007, some firms asked the FSA for clarification and guidance on the content of the summary form disclosure. In response, the FSA confirmed in its policy statement PS07/6: Reforming Conduct of Business Regulation (on the FSA website) that it is for firms to decide what information needs to be contained in the summary form disclosure. However, the FSA stated that firms must provide adequate information for the customer to make an informed decision as to whether to proceed with the investment service provided by the firm or whether to ask for full information. According to the FSA, a generic disclosure that the firm may or will receive a benefit will not be sufficient.

Practical example

10.805 Steven is a fund manager and is invited by a broker from a different firm to attend a seminar in Monte Carlo. The trip would be for three days, with all expenses paid. The seminar would last just half a day.

It would not be acceptable for Steven to attend the seminar on this basis. Even if the broker was trying to retain existing business from Steven, and Steven had suggested the idea to the broker, it would not be acceptable for Steven to attend the seminar as the other firm's contribution to his expenses would not be reasonable nor proportionate to Steven's participation at the seminar. However, if the seminar lasted for the full three days, would benefit the brokerage with other counterparts, and if Steven were to speak at a forum sponsored by the brokerage firm during the seminar, this may be acceptable depending on the firm's policy.

Action point checklist

10.806

• Establish and communicate in writing to all employees a clear policy on the restrictions on personal account dealing.
• Keep a record of all permissions and notifications of transactions made for a minimum of three years from the date that the permission or notification was made.
• Review existing outsourcing agreements for the provision of investment services to ensure that the firms to which the services are outsourced are required to maintain a record of theiremployees' personal transactions.
• Establish and communicate in writing to all employees a clear policy, ideally with set financial limits, on giving and receiving gifts.
• Keep a record or register of all gifts given and received by the firm or its employees.
• Remind employees periodically of the gifts and inducements policy.
• Provide clear information of the decision-making powers as to who can approve gifts and what level of gifts any one person can approve.

Key references

10.807

Legislation

Financial Services and Markets Act 2000
Markets in Financial Instruments Directive

Rules and guidance

FSA Handbook (in particular COBS)(on the FSA website)

Questions and answers

10.808

QXXX: Who is ultimately responsible for an employee who contravenes the personal account dealing rules?

The firm is ultimately responsible and must ensure that it has appropriate systems and controls in place to ensure that employees are aware of the restrictions on personal account dealing and the consequences of any contravention.

QXXX: What sort of records should be kept in relation to personal account dealing?

Firms must keep records of the restrictions on personal account dealing and the basis on which any permission to deal is made. Such records should be kept with sufficient detail in relation to each employee.

If a firm gives specific permission to an employee (rather than all employees), an individual record of that permission should be made and retained.

QXXX: Why should firms have a gifts and inducements policy?

Principles 1 and 6 of the Financial Services Authority's Principles for Businesses require a firm to conduct its business with integrity, to pay due regard to the interests of its customers and to treat them fairly. Therefore, by having an appropriately known and enforced gifts and inducements policy, the firm is taking reasonable steps to ensure that in the conduct of its business, it is making arrangements to ensure that there is a lesser risk of a conflict with its duty to its customers.