How must an investment firm identify, manage and disclose conflicts of interest?

A firm must take all appropriate steps to identify and to prevent or manage conflicts of interest between the firm, its managers, employees, tied agents or anyone linked to it by control, and its clients, or between one client and another. The duty expressly covers conflicts caused by third-party inducements and by the firm's own pay and incentive structures.

To identify conflicts that may damage a client, the firm considers at least whether it or a relevant person could profit, or escape a loss, at the client's expense; has a stake in how a service or transaction turns out that differs from the client's stake; has a financial or other reason to put another client or group of clients first; is in the same business as the client; or gets money, goods or services from someone other than the client as an inducement. Since 2 August 2022 the test also covers conflicts that could damage a client's sustainability preferences.

The firm needs an effective conflicts of interest policy in writing, suited to its size and organisation and to how complex its business is, and taking account of any conflicts arising from its group. The policy identifies the situations that give rise to conflicts and the procedures and measures to manage them, such as barriers controlling the exchange of information between staff in conflicting activities, separate supervision, removing any direct link between the pay of people in one activity and the revenues of another, preventing inappropriate influence, and preventing people from being involved in several services at the same time or one after another where that impairs proper management of conflicts.

Only where these arrangements are not enough to ensure, with reasonable confidence, that clients will not be harmed does the firm disclose the conflict. Disclosure is a measure of last resort: it is made on a durable medium before acting, states that the arrangements are insufficient, and describes the conflict, the risks to the client and the steps taken to mitigate them in enough detail for an informed decision. The firm reviews the policy at least annually, and over-reliance on disclosure counts as a deficiency. It keeps a record of the services in which conflicts have arisen or may arise, and senior management receives written reports on them at least annually.

Investment research is research or other material that recommends or suggests an investment strategy for financial instruments or issuers, intended for distribution channels or the public, that is labelled or presented as investment research or as objective or independent, and that would not amount to investment advice if given to a client. A recommendation that does not meet this test is a marketing communication: it must be clearly identified as such and carry a prominent statement that it was not prepared under the rules promoting the independence of research and is not subject to any ban on dealing ahead of its dissemination.

Firms producing research must manage conflicts around it. Among other safeguards, issuers, staff other than analysts and outsiders may not review a draft that contains a recommendation or target price, other than to check that the firm complies with its legal obligations. Benefits from third parties are inducements even when no money changes hands: they are allowed only if designed to enhance the quality of the service, consistent with acting in the client's best interests and disclosed beforehand (payments that enable or are necessary for the service, such as custody costs, settlement and exchange fees, regulatory levies or legal fees, fall outside this test), and a firm giving independent advice or managing portfolios may not keep any third-party fees or monetary benefits (they must be passed on to the client in full as soon as possible) and may accept only minor non-monetary benefits, which it must clearly disclose. Cyprus still applies the 2022 rule that lets firms pay for research jointly with execution services where the issuers covered had a market capitalisation of no more than €1 billion over the 36 months before the research was provided, the firm has agreed with the research provider which part of the charges is for research, and clients are told about the joint payments; the 2024 EU Listing Act changes applicable from 6 June 2026 had not been transposed when this note was reviewed.