Conflicts of interests requirements under Principle 2 the Code of Practice for investment business

Issued: 31 October 2019

Glossary of terms

Defined terms are indicated throughout this document as follows:

Abbreviation	Full Name
FCA	Financial Conduct Authority (UK)
FSJL	Financial Services (Jersey) Law 1998
IB Code	Code of Practice for Investment Business
JFSC	Jersey Financial Services Commission
registered person	a person who is registered by the JFSC under Article 9 of the FSJL to carry on Investment Business as defined in Article 2(2) of the FSJL

1 Introduction

1.1 The Jersey Financial Services Commission (JFSC) consulted with the Investment Business sector on proposed enhancements to the Investment Business Regime during the course of 2018, and issued its feedback paper on that consultation in December 2018.

1.2 The majority of respondents were in favour of the enhancements to the Code of Practice for Investment Business (IB Code), but some did request guidance from the JFSC in order to clarify its expectations in several areas.

1.3 As such the JFSC is producing a number of Guidance Notes in order to outline its expectations for those areas.

2 Scope

2.1 This guidance note provides guidance on enhancements made to the IB Code in respect of the identification and management of conflicts of interest.

3 Code requirements

3.1 Conflicts of interest are dealt with under Principle 2 of the IB Code which requires that - A registered person must have the highest regard for the interests of its clients.

3.2 The IB Code has been enhanced, with the recent enhancements appearing in bold, with respect to Conflicts of Interest, to require in paragraph 2.11 that:

A registered person (or through an appropriate delegated sub-committee) is required to identify as well as manage any conflicts of interest and must endeavour to avoid any conflict of interest arising.

3.3 The existing and amended IB Code continues to outline in paragraph 2.12 that registered persons must have effective procedures in place in order to address any conflicts, and remains as:

Where conflicts do arise, a registered person must have effective procedures so as to address such conflicts by: disclosure; applying internal rules of confidentiality; declining to act; and/or otherwise as appropriate.

4 Guidance

4.1 The JFSC is of the view that, where possible, registered persons should be focusing on the avoidance of any conflicts of interest.

4.2 The JFSC expects registered persons conducting Investment Business to have policies and procedures in place, in respect of conflicts of interest, which are adequate for the complexity and size of the business and which are periodically reviewed to ensure that they remain sufficiently robust and are being adhered to.

4.3 Such policies and procedures should include the manner in which the registered person is identifying, managing and recording all conflicts of interest arising as a result of its business activities.

4.4 The JFSC would expect registered persons, as a result of the enhancements made to the IB Code, to undertake a full reassessment of the conflicts of interest arising within their businesses to ensure that all conflicts are appropriately identified and have corresponding ongoing mitigating measures in place.

4.5 A number of outcomes may arise as a result of conflicts of interest, and the JFSC would highlight the following non-exhaustive list, by way of example, to registered persons when considering their arrangements, and whether an activity or situation may give rise to a conflict. Consideration needs to be given to whether or not the registered person, or another entity or individual associated with that registered person:

4.5.1 Will make a financial gain, or avoid a loss, at the expense of a client;

4.5.2 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;

4.5.3 Has a financial or other incentive to favour the interest of another client or group of clients over the interests of the client; or

4.5.4 Receives or will receive from a person other than the client a commission in relation to a service provided to the client.

4.6 The JFSC is of the view that with regards to 3.3 above, disclosure alone should be seen very much as measure of last resort and the policies and procedures in place should be sufficiently robust to avoid the need to rely on disclosure alone.

4.7 In the event that a registered person is not reasonably confident that the risk to its client arising from a conflict of interest has not been avoided by the measures it has taken under its policies and procedures, then disclosure is to be made to its client. This should be provided in writing, in language which is easily understandable by all clients and sufficiently clear as to the exact nature of the conflict and the potential or actual risks arising, to enable them to make an informed decision as to whether or not to proceed with the activity in question.

4.8 The JFSC does not consider that if advice passes the suitability tests within Principle 2 of the IB Code, that this alleviates any concerns with respect to conflicts of interest.

4.9 Registered persons should ensure that periodic reviews are undertaken of conflicts which have arisen and reporting in this regard should be provided to the Board of the Directors/Governing body of the registered person at least annually.