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01 December 2011

Impact Amber traffic light

Medium impact- more compliance obligations in respect of the banning of third party inducements for portfolio management and provision of independent investment advice

Other areas to consider

Best interests of client; Conflicts of Interest

Current MiFID rules

A firm must not pay or be paid any fee or commission, or provide or receive any non-monetary benefit, in relation to MiFID investment services and activities provided to a client other than:

(a) a fee, commission or non-monetary benefit paid or provided to or by the client (or a person on the client’s behalf); or

(b) 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:

(i) 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, prior to the provision of the service (the “disclosure requirement”);

(ii) 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 (the “enhancement requirement”); and

(iii) 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; or

(c) proper fees which enable or are necessary for the provision by the firm of its MiFID services and activities, 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.

MiFID Level 1 Directive Art: 19(1)

MiFID Level 2 Directive Art: 26

FSA rules

COBS 2.3

Proposed changes
Draft Directive
Article 24(6)

 The draft Directive:

  • In the case of portfolio management, bans third party inducements altogether (because of the discretionary nature of this service and the possibility for the portfolio manager to take a decision without prior consent from the client).
  • Bans third party inducements for a firm providing independent advice (on the basis that third party inducements are incompatible with the independent nature of the advice provided).

The Commission consultation of December 2010 identified a number of other potential areas of reform, including:

  • A modification of the disclosure requirement to require detailed prior disclosure, abolish the possibility of disclosing inducements in summary form and introduce an ex-post reporting obligation. These proposals may be addressed in part of the Level 2 measures.
  • Clarifying the technical details to be disclosed and defining templates in order to harmonise the disclosures to clients.
  • Further convergence on how the enhancement requirement should be interpreted.

These proposals may be addressed as part of the Level 2 measures.

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