FCA Handbook - COBS 18 Annex 1 Research and inducements for collective portfolio managers

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COBS 18 Annex 1 Research and inducements for collective portfolio managers

1	Application
1.1	G	This section applies to:
		(1)	a small authorised UK AIFM and a residual CIS operator , in accordance with COBS 18.5.2R ;
		(2)	a full-scope UK AIFM , in accordance with COBS 18.5A.3R ;
		(3)	a UCITS management company , in accordance with COBS 18.5B.2R .
1.2	G	In accordance with COBS 18.5.3CR and COBS 18.5A.7R , this section does not apply in relation to an AIF or CIS which in accordance with its core investment policy:
		(1)	does not generally invest in financial instruments that can be:
			(a)	registered in a financial instruments account opened in the books of a depositary ; or
			(b)	physically delivered to the depositary ; or
		(2)	generally invests in issuers or non-listed companies to potentially acquire control over such companies either individually or jointly with other funds .
1.3	G	Where a rule or guidance in COBS 2.3B contains a cross-reference to another provision in COBS 2.3B which is applied by virtue of this Annex, the cross-reference is to the provision as modified or amended, unless the contrary intention appears (see GEN 2.2.11R and GEN 2.2.12G (Application of the Interpretation Act 1978)).
2	Rule on research and inducement
2.1	R	When executing orders, or placing orders with other entities for execution, that relate to financial instruments for, or on behalf of, the fund , a firm must not:
		(1)	accept and retain any fees, commissions or monetary benefits; or
		(2)	accept any non-monetary benefits,
		where these are paid or provided by any third party or a person acting on behalf of a third party.
2.2	R	A firm must:
		(1)	return to the fund as soon as reasonably possible after receipt any fees, commissions or any monetary benefits paid or provided by any third party or a person acting on behalf of a third party in relation to the services provided to that fund ; and
		(2)	inform the investors in the fund about the fees, commissions or any monetary benefits transferred to them (see paragraph 2.4G).
2.3	R	Paragraph 2.1R does not apply to:
		(1)	minor non-monetary benefits that are:
			(a)	capable of enhancing the quality of service provided to the fund (see paragraph 3.1R); and
			(b)	of a scale and nature such that they could not be judged to impair the firm’s compliance with its duty to act honestly, fairly and professionally in the best interests of the fund ; and
		(2)	research if the requirements of COBS 2.3B (Inducements and research) as modified by paragraph 4 are met.
2.4	G	A firm may inform investors in the fund about the fees, commissions or monetary benefits transferred to them through:
		(1)	the periodic reporting statements provided to participants in an unregulated collective investment scheme in accordance with COBS 18.5.11R for a small authorised UK AIFM or a residual CIS operator ; or
		(2)	the annual reports provided on request to investors, for a small authorised UK AIFM in relation to an authorised AIF , a full-scope UK AIFM , or a UCITS management company .
3	Acceptable minor non-monetary benefits
3.1	R	A firm must not accept a non-monetary benefit unless it is a minor non-monetary benefit which is reasonable, proportionate and of a scale that is unlikely to influence the firm’s behaviour in any way that is detrimental to the interests of the fund , and which consists of:
		(1)	information or documentation relating to a financial instrument that is generic in nature; or
		(2)	written material from a third party that:
			(a)	is either:
				(i)	commissioned and paid for by a corporate issuer or potential issuer to promote a new issuance by the company; or
				(ii)	produced on an ongoing basis, where the third party is contractually engaged and paid by the issuer ;
			(b)	clearly discloses the relationship between the third party and the issuer ; and
			(c)	is made available at the same time to any firm wishing to receive it, or to the general public; or
		(3)	participation in conferences, seminars and other training events on the benefits and features of a specific financial instrument ; or
		(4)	hospitality of a reasonable de minimis value, such as food and drink during a business meeting or another training event mentioned under (3); or
		(5)	research relating to an issue of shares , debentures , warrants or certificates representing certain securities by an issuer , which is:
			(a)	produced by a person that is providing underwriting or placing services to the issuer on that issue;
			(b)	made available to prospective investors in the issue; and
			(c)	disseminated before the issue is completed; or
		(6)	free sample research provided for a limited trial period where:
			(a)	the trial period lasts no longer than three months;
			(b)	the trial period is not commenced with a provider within 12 months from the termination of an arrangement for the provision of research (including a previous trial period) with that provider;
			(c)	the research provider offering the free trial has no existing relationship with the recipient firm for the provision of research or execution services; and
			(d)	the recipient firm keeps records of the dates of any trial periods, and sufficient records to demonstrate compliance with the conditions in (a) to (c) above; or
		(7)	[deleted]
		(8)	third party research that is received by a firm providing investment services or ancillary services to clients where it relates to fixed income, currency or commodity instruments; or
		(9)	research received from a research provider where the research provider is not engaged in execution services and is not part of a financial services group that includes an investment firm that offers execution or brokerage services; or
		(10)	written material that is made openly available from a third party to any firm wishing to receive it or to the general public. “Openly available” in this context means that there are no conditions or barriers to accessing the written material other than those which are necessary to comply with relevant regulatory obligations, for example requiring a log-in, sign-up or submission of user information by a firm or a member of the public in order to access that material; or
		(11)	corporate access services which relate to listed or unlisted companies with a market capitalisation below £200m; or
		(12)	short-term trading commentary that does not contain substantive analysis, and bespoke trade advisory services intrinsically linked to the execution of a transaction in financial instruments .
3.2	G	An acceptable minor non-monetary benefit consisting of information or documentation relating to a financial instrument that is generic in nature may include material provided by a third party that:
		(1)	consists of:
			(a)	short term market commentary on the latest economic statistics; or
			(b)	company results or information on upcoming releases or events;
		(2)	contains only a brief unsubstantiated summary of the third party’s own opinion on such information; and
		(3)	does not include any substantive analysis (for example, where the third party simply reiterates a view based on an existing recommendation or substantive research).
3.3	G	A non-monetary benefit that involves a third party allocating valuable resources to the firm is not a minor non-monetary benefit.
3.4	G	In relation to paragraph 3.1R(8) above, since the particular features of the fixed income, currency and commodity markets, whereby portfolio managers and independent investment advisers transact with counterparties based on competitive pricing processes, the pricing of transactions in fixed income, currency and commodity instruments will typically not take into account research services.
4	Inducements and research
4.1	R	A firm must comply with COBS 2.3B , as modified by this section, when executing orders, or placing orders with other entities for execution, that relate to financial instruments for, or on behalf of, the fund .
	General modifications
4.2	R	The application provision in COBS 2.3B.1R (Application) and associated guidance in COBS 2.3B.2G do not apply.
4.3	R	Where COBS 2.3B applies to a firm , the following modifications apply:
		(1)	in COBS 2.3B.3R :
			(a)	the reference to “providing investment services or ancillary services to clients ” is to be construed as a reference to “ executing orders, or placing orders with other entities for execution, that relate to financial instruments for, or on behalf of, the fund ”;
			(b)	the reference to “ COBS 2.3A.5R , COBS 2.3A.15R or COBS 2.3A.16R ” is to be construed as a reference to COBS 18 Annex 1 2.1R ; and
			(c)	in COBS 2.3B.3R(3) , after the reference to “ COBS 2.3B.25R to COBS 2.3B.33G ” insert “(as applied and modified by COBS 18 Annex 1 ) and the related rules in COLL ”;
		(2)	in COBS 2.3B.4R(1)(a) , the reference to “third party research in respect of investment services rendered to its clients ” is to be construed as a reference to “third party research in respect of scheme management activity or, for an AIFM , AIFM investment management functions ”;
		(3)	in COBS 2.3B.11R(3)(b)(ii) , the reference to “the firm’s policy for using third party research established under COBS 2.3B.12R ” is to be construed as a reference to “the firm’s written statement made in accordance with COBS 18 Annex 1 4.8R ”;
		(4)	in COBS 2.3B.22G :
			(a)	the reference to “ COBS 2.3A.19R or COBS 2.3A.22G ” is to be construed as a reference to “ COBS 18 Annex 1 3.1R or COBS 18 Annex 1 3.2G ”; and
			(b)	the reference to “ COBS 2.3A.15R or COBS 2.3A.16R ” is to be construed as a reference to “ COBS 18 Annex 1 2.1R ”; and
		(5)	in COBS 2.3B.24G , the reference to COBS 11.2A is to be construed as a reference to:
			(a)	COBS 11.2 for small authorised UK AIFMs and residual CIS operators ;
			(b)	COBS 11.2B for UCITS management companies ; and
			(c)	articles 27 and 28 of the AIFMD level 2 regulation for full-scope UK AIFMs .
4.4	R	COBS 2.3B.8R(1) and the reference to “agreeing the research charge with its clients ” in COBS 2.3B.4R(2)(a) only apply if the fund has its own governing body which is independent of the firm .
4.5	G	(1)	An example of a fund that has its own governing body which is independent of the firm is a fund that is a body corporate where the firm is not a director of the fund .
		(2)	An example of a fund that does not have its own governing body which is independent of the firm is a fund that is a body corporate where the firm is the sole director of the fund .
4.6	G	In accordance with COBS 18.5.3R(1) , COBS 18.5A.5R and COBS 18.5B.4R(1) , references to client are to be construed as references to any fund in respect of which the firm is acting or intends to act.
	Disapplication of disclosure provisions
4.7	R	The following provisions do not apply and references to them in COBS 2.3B are to be ignored:
		(1)	COBS 2.3B.5R ;
		(2)	COBS 2.3B.6G ;
		(3)	COBS 2.3B.8R(2) ;
		(4)	COBS 2.3B.9G ;
		(5)	COBS 2.3B.12R ;
		(6)	COBS 2.3B.20R ; and
		(7)	COBS 2.3B.31R (but see COBS 18 Annex 1 4.24G to COBS 18 Annex 1 4.28G ).

4.7A	R










			[deleted]
4.7B	R

			[deleted]
	Prior disclosure of the research account to investors
4.8	R	A firm using a research payment account must set out in writing:
		(1)	how the firm will comply with the elements of COBS 2.3B.4R(4) ;
		(2)	how research purchased through the research payment account may benefit the fund , taking into account its investment objective, policy and strategy;
		(3)	the approach the firm will take to allocate the costs of research fairly among the funds it manages;
		(4)	the manner in which, and the frequency at which, the research charge will be deducted from the assets of the fund ; and
		(5)	a statement as to where up-to-date information on the matters covered in COBS 18 Annex 1 4.11R can be obtained.
4.9	R	[deleted]
4.10	G	(1)	A full-scope UK AIFM of an unauthorised AIF may wish to publish the information in paragraph 4.8 with the information to be made available about AIFs in accordance with FUND 3.2.2R(9) (Prior disclosure of information to investors).
		(2)	A small authorised UK AIFM of an unauthorised AIF or a residual CIS operator may wish to publish the information in paragraph 4.8 with the information to be made available about AIFs in accordance with COBS 18.5.5R (Scheme documents for an unauthorised fund ).
		(3)	The authorised fund manager of an authorised fund is required to publish the information in paragraph 4.8 in the fund’s prospectus under the relevant rules in COLL .
4.11	R	(1)	A firm using a research payment account must publish:
			(a)	the budgeted amount for research ; and
			(b)	the amount of the estimated research charge for each fund .
		(2)	a firm must not increase its research budget or research charge unless it has provided clear information about the increase in good time before it is to take effect.
		(3)	The information in (1) and (2) must be made available to investors and potential investors in the fund .
	Periodic disclosure of the research payment account to investors
4.12	R	A firm using a research payment account must, for each fund it manages, provide information to investors on the total costs the fund has incurred for third-party research in the most recent annual accounting period.
		[deleted]

4.13	G	(1)	A full-scope UK AIFM of an unauthorised AIF may wish to publish the information in paragraph 4.12 with the information to be made available about AIFs in accordance with FUND 3.3 (Annual report of an AIF).
		(2)	The authorised fund manager of an authorised fund is required to publish the information in paragraph 4.12 in the annual long report of the authorised fund under the rules in COLL .
4.14	R	A firm using a research payment account must, on request, make available a summary of the following information to investors for the most recent annual accounting period:
		(1)	the providers paid from the account;
		(2)	the total amount each provider was paid;
		(3)	the benefits and services received by the firm ; and
		(4)	how the total amount spent from the account compares to the budget set by the firm , noting any rebate or carry-over if residual monies are held in the account.

	Additional modifications relating to joint payments for third-party research and execution services
4.15	R	(1)	The following modifications to the rules and guidance in COBS 2.3B apply where a firm falls within (2):
			(a)	COBS 18 Annex 1 4.3R(1)(c) ;
			(b)	COBS 18 Annex 1 4.7R(7) ; and
			(c)	COBS 18 Annex 1 4.17R to COBS 18 Annex 1 4.28G .
		(2)	A firm falls within this paragraph where it:
			(a)	executes orders relating to financial instruments , or places orders relating to financial instruments with other entities for execution, where those orders are executed or placed for, or on behalf of, a fund ; and
			(b)	uses, or intends to use, joint payments for third-party research and execution services.
4.16	G	(1)	This Annex applies where a firm carries on scheme management activity or AIFM management functions in respect of a fund . A firm to which this Annex applies may also carry on MiFID, equivalent third country or optional exemption business for other clients and be subject to the provisions of COBS 2.3B in respect of such business.
		(2)	The intention of the rules in COBS 2.3B as amended by this Annex is to allow firms to set research budgets at an appropriate level of aggregation across relevant funds and the clients of their MiFID, equivalent third country or optional exemption business .
4.17	R	COBS 2.3B.25R is modified as follows:
		(1)	for COBS 2.3B.25R(1) , substitute
			“(1)	the firm must have a written policy on joint payments for each fund (irrespective of whether the policy also applies with or without modifications to other funds ) which:
				(a)	describes the firm’s approach to joint payments, and how the firm will ensure compliance with the requirements in:
					(i)	COBS 2.3B.25R(2) to COBS 2.3B.33G , excluding COBS 2.3B.31R ; and
					(ii)	COBS 18 Annex 1 4.24G to COBS 18 Annex 1 4.28G ; and
				(b)	specifies the operation of the firm’s governance, decision-making and controls in respect of third-party research purchased using joint payments, including how these are maintained separately from those for trade execution;”;
		(2):	in COBS 2.3B.25R(4)(b) , omit “under this chapter”;
		(3)	for COBS 2.3B.25R(5) , substitute
			“(5)	(a):	at least annually, the firm must set a budget for the purchase of research using joint payments based on the expected amount of third-party research needed to manage.
					(i)	the investments of the fund ; or
					(ii)	the investments of more than one fund ; and
				(b)	the budget must:
					(i)	be set at a level of aggregation that is appropriate to the firm’s processes for managing the investments of the fund or funds ;
					(ii)	not be linked to the expected volumes or values of transactions executed on behalf of the fund or funds ; and
					(iii)	not compromise the firm’s ability to meet the requirements of COBS 2.3B.25R(6) and (8);”;
		(4)	for COBS 2.3B.25R(6) , substitute:
			“(6)	the firm must allocate fairly the costs of research purchased using joint payments to the relevant fund or funds ;”;
		(5)	for COBS 2.3B.25R(7) , substitute:
			“(7)	(a)	(in relation to an unauthorised AIF or an unregulated collective investment scheme ) the firm must periodically, and at least annually:
					(i)	assess the value, quality and use of research purchased using joint payments and its contribution to the investment decision-making process; and
					(ii)	ensure that the amount of research charges to clients is reasonable compared with those for comparable services; and
				(b)	(in relation to an authorised fund ) the firm’s must assess, as part of an assessment of value under COLL 6.6.20R (Assessment of value), COLL 8.5.17R (Assessment of value), or COLL 15.7.17R (Assessment of value) the value, quality and use of research purchased using joint payments and its contribution to the investment decision-making process; and”; and
		(6)	in COBS 2.3B.25R(8) the reference to “disclose to its clients ” is to be read as a reference to:
			(a)	(if the fund is a collective investment scheme ) “disclose to unitholders in the fund ”; and
			(b)	(if the fund is not a collective investment scheme ) “disclose to investors in the fund ”.
4.18	R	COBS 2.3B.26R is modified as follows:
		(1)	in the opening words, for “If the amount of research charges to clients exceeds the budget” substitute “If the amount of research charges incurred exceeds a budget”;
		(2)	in COBS 2.3B.26R(1) , the “relevant actions” to be included in the firm’s policy must include at least:
			(a)	in relation to the any fund to which the budget applies, a requirement to inform the governing body of such fund if the body is independent of the firm (see COBS 18 Annex 1 4.5G );
			(b)	a requirement for the firm to consider whether the increase in research charges is in the best interests of any fund to which the budget applies and the fund’s unitholders or investors;
			(c)	a requirement that the additional charges for research are fairly and appropriately allocated between any funds to which the budget applies; and
			(d)	a requirement to ensure that (where applicable) the increase in research charges is assessed as part of:
				(i)	the assessment of value under COLL 6.6.20R (Assessment of value), COLL 8.5.17R (Assessment of value), or COLL 15.7.17R (Assessment of value); or
				(ii)	the value assessment under PRIN 2A.4 (Consumer Duty: retail customer outcome on price and value);
		(3)	in COBS 2.3B.26R(2) , the reference to “disclosed to clients ” is to be read as a reference to (as applicable):
			(a)	where a fund to which the budget applies is a collective investment scheme , “disclosed to unitholders in the annual report for the fund (if there is one), a periodic statement or similar notification to unitholders ”; or
			(b)	where a fund to which the budget applies is not a collective investment scheme , “disclosed to investors in the fund in the annual report for the fund (if there is one), a periodic statement or similar notification to investors”; and
		(4)	where a fund to which the budget applies is an authorised fund , the information to be disclosed to unitholders under COBS 2.3B.26R(2) includes the following in the annual report for the fund :
			(a)	if the amount of research charges exceeds the budget set under COBS 2.3B.25R(5) , at least:
				(i)	the fact that the amount of research charges has exceeded the budget;
				(ii)	the proportion of the increase over the budgeted amount; and
				(iii)	the reason for the excess; and
			(b)	if the budget for research is increased, at least:
				(i)	the fact that the budget has been increased;
				(ii)	the proportion of the increase over the previous budget; and
				(iii)	the reasons for the increase.
4.19	G	For COBS 2.3B.27G substitute:
		“(1)	For the purposes of COBS 2.3B.25R(6) , the firm should determine a cost allocation level appropriate to its business model. The specific cost of individual investment research items need not be discretely attributable.
		(2)	Where a budget applies to:
			(a)	more than one fund ; or
			(b)	one or more funds and other clients for which the firm carries on MiFID, equivalent third country or optional exemption business ,
			the approach should be reasonable and its outcome fair such that relative costs incurred are commensurate with the relative benefits received by the fund , funds or clients .
		(3)	The approach to allocation levels in (2) includes across:
			(a)	funds with which the firm has different payment arrangements for the purchase of research ;
			(b)	funds that have similar investment strategies;
			(c)	different funds or groups of funds that benefit from the same research ; and
			(d)	other allocation levels that are appropriate to the firm’s investment processes for the fund or funds and other clients for which the firm carries on MiFID, equivalent third country or optional exemption business .”.
4.20	R	In COBS 2.3B.28R , omit “under this chapter”.
4.21	R	In COBS 2.3B.29R , the reference to “ COBS 11.2A.2R ” is to be read as a reference to:
		(1)	(for a small authorised UK AIFM and a residual CIS operator ) “ COBS 11.2.1R (Obligation to execute orders on terms most favourable to the client)”;
		(2)	(for a UCITS management company ) “ COBS 11.2B.5R (Obligation to execute orders on terms most favourable to the scheme)”; and
		(3)	(for a full-scope UK AIFM ) “article 27(2) of the AIFMD level 2 regulation (Execution of decisions to deal on behalf of the managed AIF)”.
4.22	R	COBS 2.3B.30R is modified as follows:
		(1)	in the opening words, the reference to “relevant clients ” is to be read as a reference to (as applicable):
			(a)	(where the fund is a collective investment scheme ), “ unitholders in the fund ”; or
			(b)	(where the fund is not a collective investment scheme ), “investors in the fund ”;
		(2)	in COBS 2.3B.30R(1) , after “the firm’s use of joint payments for research ” insert “in relation to the fund ”;
		(3)	in COBS 2.3B.30R(2) :
			(a)	after “the firm’s policy on joint payments”, insert “in relation to the fund ”; and
			(b)	the reference to “the information needs of its clients ” is to be read as a reference to (as applicable):
				(i)	(where the fund is a collective investment scheme ), “the information needs of unitholders in the fund ”; or
				(ii)	(where the fund is not a collective investment scheme ), “the information needs of investors in the fund ”;
		(4)	in COBS 2.3B.30R(3) , in accordance with COBS 18.5.3R , COBS 18.5A.3R and COBS 18.5B.4R , the reference to “ client ” is a reference to the relevant fund ;
		(5)	for COBS 2.3B.30R(4) , substitute:
			“(4)	the most significant of:
				(a)	the benefits and services received from research providers (measured by total amounts paid); and
				(b)	the types of research providers from which such services are purchased,
				at an appropriate level of aggregation;”; and
		(6)	in COBS 2.3B.30R(5) :
			(a)	in accordance with COBS 18.5.3R , COBS 18.5A.3R and COBS 18.5B.4R , the reference to “ client ” is a reference to the relevant fund ; and
			(b)	omit “, and provided as part of the ex post reporting on costs and charges”.
4.23	R	In COBS 2.3B.33G , the reference to COBS 2.3B.25R(7)(b) is to be construed as a reference to COBS 2.3B.25R(7)(a)(ii) .
	Prior disclosures relating to joint payments for research
4.24	G	In accordance with COBS 18 Annex 1 4.7R(7) (Disapplication of disclosure provisions), COBS 2.3B.31R does not apply to a firm that is subject to COBS 18 Annex 1 . The specific prior disclosure and periodic disclosure provisions that apply where such a firm uses, or intends to use, joint payments for third-party research and execution services are set out in COBS 18 Annex 1 4.25R to COBS 18 Annex 1 4.28G .
4.25	R	For the purpose of making the disclosures required by COBS 2.3B.25R(8) , a firm must provide the information specified in COBS 2.3B.30R(1) to (3) before a person becomes a unitholder or investor in the fund .
4.26	G	(1)	(a)	The rules in COLL require the authorised fund manager of an authorised fund to publish the information referred to in COBS 18 Annex 1 4.25R in the fund’s prospectus .
			(b)	Where the research budget of an authorised fund is increased, the firm will need to consider such an increase in accordance with the requirements of the Act , the OEIC Regulations and the rules on changes to schemes in COLL 4.3 (Approvals and notifications), COLL 8.3 (Investor relations) and COLL 15.5 (Annual report and investor relations).
		(2)	A full-scope UK AIFM of an unauthorised AIF may wish to publish the information in COBS 18 Annex 1 4.25R with the information to be made available in accordance with FUND 3.2.2R (Prior disclosure of information to investors).
		(3)	A small authorised UK AIFM of an unauthorised AIF or a residual CIS operator may wish to publish the information in COBS 18 Annex 1 4.25R along with the information to be made available about AIFs or CISs in accordance with COBS 18.5.5R (Scheme documents for an unauthorised fund).
	Periodic disclosures relating to joint payments for research
4.27	R	(1)	For the purpose of making the disclosures required by COBS 2.3B.25R(8) , a firm must provide:
			(a)	the disclosures in COBS 2.3B.30R(4) and (5); and
			(b)	in addition to (a), where the fund is an authorised fund and if relevant, the information in COBS 2.3B.30R(6) (see COBS 18 Annex 1 4.18R(4)(b) ).
		(2)	The information in (1) must be provided:
			(a)	on request; and
			(b)	on a periodic basis.
4.28	G	(1)	The rules in COLL require the authorised fund manager of an authorised fund to provide the disclosures in COBS 18 Annex 1 4.27R in the annual long report of the authorised fund .
		(2)	A full-scope UK AIFM of an unauthorised AIF may wish to publish the information in COBS 18 Annex 1 4.27R with the information to be made available about AIFs in accordance with FUND 3.3 (Annual report of an AIF).
		(3)	A small authorised UK AIFM or a residual CIS operator may wish to publish the information in COBS 18 Annex 1 4.27R in the periodic statement to unitholders or investors in the fund pursuant to COBS 18.5.11R (if applicable).