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COBS 20 – Conflicts of Interest – Managing and Disclosing Conflicts
1. Chapter Summary
COBS 20 sets out the rules and principles firms must follow to identify, manage, and disclose conflicts of interest that arise in the course of their business. The purpose is to protect clients by ensuring firms take all reasonable steps to prevent conflicts from adversely affecting client interests. This chapter is a cornerstone of ethical conduct and investor protection, fostering trust and transparency in financial services.
2. Applicability
This chapter applies to all firms conducting MiFID business, including investment firms and ancillary service providers, that may encounter conflicts of interest between themselves, their employees, or other clients. It covers retail and professional clients but excludes eligible counterparties from certain disclosure requirements. The rules are broad and apply wherever conflicts could impact client outcomes.
3. Key Rules and Their Meaning
- COBS 20.1.1R – Identification of Conflicts Firms must have arrangements to identify conflicts of interest between the firm (including its management and employees) and clients, or between clients. In practice: Firms must systematically assess their business activities to detect potential or actual conflicts.
- COBS 20.2.1R – Management of Conflicts Firms must take all reasonable steps to manage conflicts to prevent adverse effects on clients. Meaning: This means implementing effective organizational and administrative measures, such as information barriers or process segregation.
- COBS 20.3.1R – Disclosure to Clients When organizational measures are insufficient to prevent risk of adverse client impact, firms must clearly disclose the nature and sources of conflicts and the steps taken to mitigate them. Nuance: Disclosure is a last resort and must be clear, specific, and timely.
- COBS 20.4.1R – Record Keeping Firms must maintain and regularly update a record of the types of activities and conflicts which have arisen or may arise. In practice: These records demonstrate compliance and help monitor emerging risks.
- COBS 20.5.1R – Senior Management Responsibility Senior management must ensure that effective arrangements are in place and that the conflict management framework is overseen at the highest level. Meaning: Accountability sits at senior levels to embed a culture of compliance.
4. Interpretation Notes / FCA Expectations
- FCA guidance stresses that firms must go beyond mere disclosure and focus on proactive conflict avoidance and management.
- The FCA expects firms to adopt a risk-based approach to conflicts, prioritizing those most likely to harm clients.
- Disclosure must be sufficiently detailed to allow clients to make informed decisions, not just boilerplate statements.
- Firms should regularly review their conflict policies and ensure training and awareness at all levels.
- FCA commentary notes that failure to manage conflicts adequately is a frequent source of enforcement actions.
5. Practical Considerations for Firms
- Develop and maintain a comprehensive conflicts of interest policy, regularly updated.
- Implement organizational measures such as segregation of duties, information barriers, and remuneration policies aligned to client interests.
- Establish a conflict register documenting actual and potential conflicts, reviewed by compliance and senior management.
- Provide clear client disclosures where conflicts cannot be fully mitigated, ensuring transparency.
- Conduct regular staff training and embed conflict awareness into business culture.
- Ensure senior management oversight with documented governance and periodic reporting.
6. Related Handbook References
- SYSC 10 – Systems and Controls (conflict governance)
- COBS 2 – General Conduct Rules (principles including acting with integrity)
- COBS 4 – Communications with Clients (disclosure requirements)
- PRIN 2A – FCA Principles for Business (integrity, client interests)
- COBS 19 – Execution of Orders (best execution impacted by conflicts)
7. Regulatory Focus / Enforcement Risk
- Conflict of interest breaches are a high enforcement priority due to the direct impact on client trust and market integrity.
- The FCA scrutinizes firms’ conflict registers and real-world management, not just policies on paper.
- Poor or generic disclosures without adequate mitigation measures often trigger FCA interventions.
- Firms lacking senior management accountability or failing to embed conflict controls face elevated enforcement risk.