Prudential Regulation Authority Rulebook

SYSC 10.1

SYSC 10.1.1

See Notes

1. (1) This section applies to a firm which provides services to its clients in the course of carrying on regulated activities or ancillary activities or providing ancillary services (but only where the ancillary services constitute MiFID business).
2. (2) This section also applies to a management company.

SYSC 10.1.2

See Notes

The requirements in this section only apply where a service is provided by a firm . The status of the client to whom the service is provided (as a retail client, professional client or eligible counterparty) is irrelevant for this purpose.

[Note: recital 25 of MiFID implementing Directive]

SYSC 10.1.3

See Notes

A firm must take all reasonable steps to identify conflicts of interest between:

that arise or may arise in the course of the firm providing any service referred to in SYSC 10.1.1 R.

[Note: article 18(1) of MiFID]

SYSC 10.1.4

See Notes

For the purposes of identifying the types of conflict of interest that arise, or may arise, in the course of providing a service and whose existence may entail a material risk of damage to the interests of a client, a common platform firm and a management company must take into account, as a minimum, whether the firm or a relevant person, or a person directly or indirectly linked by control to the firm:

1. (1) is likely to make a financial gain, or avoid a financial loss, at the expense of the client;
2. (2) has an interest in the outcome of a service provided to the client or of a transaction carried out on behalf of the client, which is distinct from the client's interest in that outcome;
3. (2A) in the case of a management company providing collective portfolio management services for a UCITS scheme, (2) also applies where the service is provided to, or the transaction is carried out on behalf of, a client other than the UCITS scheme;
4. (3) has a financial or other incentive to favour the interest of another client or group of clients over the interests of the client;
5. (4) carries on the same business as the client; or in the case of a management company, carries on the same activities for the UCITS scheme and for another client or clients which are not UCITS schemes; or
6. (5) receives or will receive from a person other than the client an inducement in relation to a service provided to the client, in the form of monies, goods or services, other than the standard commission or fee for that service.

The conflict of interest may result from the firm or person providing a service referred to in SYSC 10.1.1 R or engaging in any other activity or, in the case of a management company, whether as a result of providing collective portfolio management services or otherwise.

[Note: article 21 of MiFID implementing Directiveand article 17(1) of the UCITS implementing Directive]

SYSC 10.1.4A

See Notes

SYSC 10.1.5

See Notes

The circumstances which should be treated as giving rise to a conflict of interest cover cases where there is a conflict between the interests of the firm or certain persons connected to the firm or the firm's group and the duty the firm owes to a client; or between the differing interests of two or more of its clients, to whom the firm owes in each case a duty. It is not enough that the firm may gain a benefit if there is not also a possible disadvantage to a client, or that one client to whom the firm owes a duty may make a gain or avoid a loss without there being a concomitant possible loss to another such client.

[Note: recital 24 of MiFID implementing Directive]

SYSC 10.1.6

See Notes

A common platform firm and a management company must keep and regularly update a record of the kinds of service or activity carried out by or on behalf of that firm in which a conflict of interest entailing a material risk of damage to the interests of one or more clients has arisen or, in the case of an ongoing service or activity, may arise.

[Note: article 23 of MiFID implementing Directive and article 20(1) of the UCITS implementing Directive]

SYSC 10.1.6A

See Notes

SYSC 10.1.7

See Notes

A firm must maintain and operate effective organisational and administrative arrangements with a view to taking all reasonable steps to prevent conflicts of interest as defined in SYSC 10.1.3 R from constituting or giving rise to a material risk of damage to the interests of its clients.

[Note: article 13(3) of MiFID]

SYSC 10.1.8

See Notes

1. (1) If arrangements made by a firm under SYSC 10.1.7 R to manage conflicts of interest are not sufficient to ensure, with reasonable confidence, that risks of damage to the interests of a client will be prevented, the firm must clearly disclose the general nature and/or sources of conflicts of interest to the client before undertaking business for the client.
2. (2) The disclosure must:
1. (a) be made in a durable medium; and
2. (b) include sufficient detail, taking into account the nature of the client, to enable that client to take an informed decision with respect to the service in the context of which the conflict of interest arises.
3. (3) This rule does not apply to the extent that SYSC 10.1.21 R applies.

[Note: article 18(2) of MiFID and Article 22(4) of MiFID implementing Directive]

SYSC 10.1.8A

See Notes

SYSC 10.1.9

See Notes

Firms should aim to identify and manage the conflicts of interest arising in relation to their various business lines and their group's activities under a comprehensive conflicts of interest policy. In particular, the disclosure of conflicts of interest by a firm should not exempt it from the obligation to maintain and operate the effective organisational and administrative arrangements under SYSC 10.1.7 R. While disclosure of specific conflicts of interest is required by SYSC 10.1.8 R, an over-reliance on disclosure without adequate consideration as to how conflicts may appropriately be managed is not permitted.

[Note: recital 27 of MiFID implementing Directive]

SYSC 10.1.10

See Notes

SYSC 10.1.11

See Notes

SYSC 10.1.11A

See Notes

SYSC 10.1.12

See Notes

In drawing up a conflicts of interest policy which identifies circumstances which constitute or may give rise to a conflict of interest, a firm should pay special attention to the activities of investment research and advice, proprietary trading, portfolio management and corporate finance business, including underwriting or selling in an offering of securities and advising on mergers and acquisitions. In particular, such special attention is appropriate where the firm or a person directly or indirectly linked by control to the firm performs a combination of two or more of those activities.

[Note: recital 26 of MiFID implementing Directive]

SYSC 10.1.13

See Notes

SYSC 10.1.14

See Notes

SYSC 10.1.15

See Notes

Measures that a firm might wish to consider in drawing up its conflicts of interest policy in relation to the management of an offering of securities include:

1. (1) at an early stage agreeing with its corporate finance client relevant aspects of the offering process such as the process the firm proposes to follow in order to determine what recommendations it will make about allocations for the offering; how the target investor group will be identified; how recommendations on allocation and pricing will be prepared; and whether the firm might place securities with its investment clients or with its own proprietary book, or with an associate, and how conflicts arising might be managed; and
2. (2) agreeing allocation and pricing objectives with the corporate finance client; inviting the corporate finance client to participate actively in the allocation process; making the initial recommendation for allocation to retail clients of the firm as a single block and not on a named basis; having internal arrangements under which senior personnel responsible for providing services to retail clients make the initial allocation recommendations for allocation to retail clients of the firm; and disclosing to the issuer details of the allocations actually made.

[Note: The provisions in SYSC 10.1 also implement BCD Article 22 and BCD Annex V paragraph 1]

SYSC 10.1.16

See Notes

The rules relating to:

1. (1) types of conflict (see SYSC 10.1.4 R);
2. (2) records of conflicts (see SYSC 10.1.6 R); and
3. (3) conflicts of interest policies (see SYSC 10.1.10 R and SYSC 10.1.11 R);

also apply to a firm which is not a common platform firm when it produces, or arranges for the production of, investment research that is intended or likely to be subsequently disseminated to clients of the firm or to the public in accordance with COBS 12.2, and when it produces or disseminates non-independent research in accordance with COBS 12.3.

SYSC 10.1.17

See Notes

A management company, when identifying the types of conflict of interests for the purposes of SYSC 10.1.4 R, must take into account:

1. (1) the interests of the firm, including those deriving from its belonging to a group or from the performance of services and activities, the interests of the clients and the duty of the firm towards the UCITS scheme or EEA UCITS scheme it manages; and
2. (2) where it manages two or more UCITS schemes or EEA UCITS schemes, the interests of all of them.

[Note: article 17(2) of the UCITS implementing Directive]

SYSC 10.1.18

See Notes

SYSC 10.1.19

See Notes

A management company must be structured and organised in such a way as to minimise the risk of a UCITS scheme's, EEA UCITS scheme's or client's interests being prejudiced by conflicts of interest between the management company and its clients, between two of its clients, between one of its clients and a UCITS scheme or an EEA UCITS scheme, or between two such schemes.

[Note: articles 12(1)(b) and 14(1)(d) of the UCITS Directive]

SYSC 10.1.20

See Notes

A management company must try to avoid conflicts of interest and, when they cannot be avoided, ensure that the UCITS schemes and EEA UCITS schemes it manages are fairly treated.

[Note: articles 12(1)(b) and 14(1)(d) of the UCITS Directive]

SYSC 10.1.21

See Notes

1. (1) Where the organisational or administrative arrangements made by a management company for the management of conflicts of interest are not sufficient to ensure, with reasonable confidence, that risks of damage to the interests of the UCITS scheme or EEA UCITS scheme it manages or of its unitholders will be prevented, the senior personnel or other competent internal body of the firm must be promptly informed in order for them to take any necessary decision to ensure that in all cases the firm acts in the best interests of the scheme and of its unitholders.
2. (2) A management company must report situations referred to in (1) to the unitholders of the UCITS scheme or EEA UCITS scheme it manages by any appropriate durable medium and give reasons for its decision.

[Note: articles 20(2) and 20(3) of the UCITS implementing Directive]

SYSC 10.2

SYSC 10.2.1

See Notes

SYSC 10.2.2

See Notes

1. (1) When a firm establishes and maintains a Chinese wall (that is, an arrangement that requires information held by a person in the course of carrying on one part of the business to be withheld from, or not to be used for, persons with or for whom it acts in the course of carrying on another part of its business) it may:
1. (a) withhold or not use the information held; and
2. (b) for that purpose, permit persons employed in the first part of its business to withhold the information held from those employed in that other part of the business;
2. but only to the extent that the business of one of those parts involves the carrying on of regulated activities, ancillary activities or, in the case of MiFID business, the provision of ancillary services.
3. (2) Information may also be withheld or not used by a firm when this is required by an established arrangement maintained between different parts of the business (of any kind) in the same group. This provision does not affect any requirement to transmit or use information that may arise apart from the rules in COBS.
4. (3) For the purpose of this rule, "maintains" includes taking reasonable steps to ensure that the arrangements remain effective and are adequately monitored, and must be interpreted accordingly.
5. (4) For the purposes of section 118A(5)(a) of the Act, behaviour conforming with paragraph (1) does not amount to market abuse.

SYSC 10.2.3

See Notes

SYSC 10.2.2 R is made under section 147 of the Act (Control of information rules). It has the following effect:

1. (1) acting in conformity with SYSC 10.2.2 R (1) provides a defence against proceedings brought under section 397(2) or (3) of the Act (Misleading statements and practices) - see sections 397(4) and (5)(c);
2. (2) behaviour in conformity with SYSC 10.2.2 R (1) does not amount to market abuse (see SYSC 10.2.2 R (4)); and
3. (3) acting in conformity with SYSC 10.2.2 R (1) provides a defence for a firm against FSA enforcement action, or an action for damages under section 150 of the Act, based on a breach of a relevant requirement to disclose or use this information.

SYSC 10.2.4

See Notes

SYSC 10.2.5

See Notes