Conflicts of Interest (SYSC 10.1) – Requirements for FCA Authorised Firms

Significantly expanded for Insurance Intermediaries following the IDD

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

• the firm, including its managers, employees, appointed representatives or any other person directly or indirectly linked to them by control and a client of the firm; and
• one client of the firm and another client that arise or may arise including those caused by the receipt of inducements from third parties or by the firm’s own remuneration and other incentive structures.

The FCA requires firms to identify all potential or actual conflicts of interest and to put in place controls to manage those conflicts. These controls must include formal conflicts of interest policies and control procedures which are reviewed at least annually; records of actual conflicts; and formal reporting of conflicts to the governing body.

Types of Conflicts

Previously Guidance this is now a Rule for Insurance Intermediaries

Firms must assess whether in the course of their activities the firm or its employees/agents (or in the case of conflicts between clients, the other client) has as an interest which is distinct from the client’s interest and has the potential to influence the outcome of activities to the client’s detriment.

A firm must take into account as a minimum whether the firm:

1. is likely to make a financial gain, or avoid a financial loss, at the expense of the client;
2. has a financial or other incentive to favour the interest of another client or group of clients over the interest of the client;
3. carries on the same business as the client;
4. 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; or
5. is substantially involved in the management or development of policies, in particular where such a person has an influence on the pricing of those policies or their distribution costs.

Record of Conflicts

Previously Guidance this is now a Rule for Insurance Intermediaries

An Insurance Intermediary 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. An Insurance Intermediary must ensure that its management body receives on a frequent basis, and at least annually, written reports on these situations

Managing Conflicts

A firm must maintain and operate effective organisational and administrative arrangements with a view to taking all reasonable steps to prevent conflicts of interest adversely affecting the interests of its clients.

Proportionality – insurance distribution activities

N.B. Where a firm carries on insurance distribution activities, the arrangements must be proportionate to the activities performed, the policies sold and the type of insurance distributor the firm is or uses.

Disclosure of Conflicts

If arrangements made by a firm to manage conflicts 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 following to the client before undertaking business for the client:

• the general nature or sources of conflicts of interest, or both; and
• the steps taken to mitigate those risks.

The disclosure must:

1. be made in a durable medium;
2. clearly state that the organisational and administrative arrangements established by the firm to prevent or manage that conflict are not sufficient to ensure, with reasonable confidence, that the risks of damage to the interests of the client will be prevented;
3. include specific description of the conflicts of interest that arise in the provision of investment services or ancillary services;
4. explain the risks to the client that arise as a result of the conflicts of interest; and
5. 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.

A firm must treat disclosure of conflicts as a measure of last resort to be used only where the effective organisational and administrative arrangements established by the firm to prevent or manage its conflicts of interest are not sufficient to ensure, with reasonable confidence, that risks of damage to the interests of the client will be prevented.

Conflicts of Interest Policy

Previously Guidance now Rules for Insurance Intermediaries.

An Insurance Intermediary must establish, implement and maintain an effective conflicts of interest policy that is set out in writing and is appropriate to the size and organisation of the firm and the nature, scale and complexity of its business.

Where the insurance intermediary is a member of a group, the policy must also take into account any circumstances, of which the firm is or should be aware, which may give rise to a conflict of interest arising as a result of the structure and business activities of other members of the group.

Content of the Conflicts Policy:

1. (a) it must identify the circumstances which constitute or may give rise to a conflict of interest entailing a material risk of damage to the interests of one or more clients; and
(b) it must specify procedures to be followed and measures to be adopted in order to manage such conflicts.

2. The procedures and measures provided for must:

(a) be designed to ensure that the insurance distribution activities are carried out in accordance with the best interests of the client and are not biased due to conflicting interests of the insurance intermediary or another client; and (b) include the following,
(i) effective procedures to prevent or control the exchange of information between relevant persons engaged in activities involving a risk of a conflict of interest where the exchange of that information may harm the interests of one or more clients;
(ii) the separate supervision of relevant persons whose principal functions involve carrying out activities on behalf of, or providing services to, clients whose interests may conflict, or who otherwise represent different interests that may conflict, including those of the firm;
(iii) the removal of any direct link between the remuneration of relevant persons principally engaged in one activity and the remuneration of, or revenues generated by, different relevant persons principally engaged in another activity, where a conflict of interest may arise in relation to those activities;
(iv) measures to prevent or limit any person from exercising inappropriate influence over the way in which a relevant person carries out services or activities; and
(v) measures to prevent or control the simultaneous or sequential involvement of a relevant person in separate services or activities where such involvement may impair the proper management of conflicts of interest; and
(vi) a gifts and benefits policy which determines clearly under which conditions gifts and benefits can be accepted or granted and which steps are to be taken when accepting and granting gifts and benefits.

3. If one or more of the measures and procedure is not appropriate for the required purposes, an insurance intermediary must adopt such alternative measures and procedures as are necessary and appropriate.

4. The procedures and measures must be appropriate to an insurance intermediary’s size and activities, the group to which it may belong and to the risk of damage to the interests of the client.

There is also a new Rule

An insurance intermediary must assess and periodically review, on an at least an annual basis, the conflicts of interest policy and should take all appropriate measures to address any deficiencies (such as over reliance on disclosure of conflicts of interest)