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Appendix 2/1
LAUTRO and FIMBRA Conduct of Business Rules
LAUTRO Conduct of Business Rules
As of July 1990)
The LAUTRO Conduct of Business Rules incorporate a Code of Conduct for Members and Company Representatives. The tenets of this Code have an important bearing on the interpretation of the Conduct of Business Rules, the following extracts from the paragraphs of the Code being most relevant.
Policy of Code
(From paragraph 1 of the Code) The Code of Conduct was made for the purpose of ensuring that Members and their company representatives in the course of carrying on any relevant investment business, comply with the Principles as defined in Schedule 8 of the U.K. Financial Services Act 1986 (these have already been related in Section 2.5.1), and the Code is to be construed as giving effect to that purpose.
Best advice to be given
(From paragraph 6 of the Code) A company representative who, in the course of any relevant investment business, has dealings with an investor shall give the investor all information relevant to those dealings and that information shall in particular include a general description of the contract, including, if it is the case, the fact that, in the early years of the contract, the surrender value will be less than the total value of the premiums paid up to the time of surrender.
A company representative shall not advise an investor on the purchase of any investment contract, or on any matter, unless he is competent to advise on that matter.
(From paragraph 8(1) of the Code) A company representative shall, in advising an investor as to the suitability for that investor of any investment contract, have regard, in particular, to the investor’s financial position generally………. and he shall use his best endeavours to ensure
| (a) |
that he recommends only that contract or those contracts which are suited to the investor; and |
| (b) |
that there is no other contract available from the Member, or, if the Member belongs to a marketing group, from any member of that group, which would secure the investor’s objectives more advantageously. |
Note! Remember the investor’s / potential investor’s ‘financial position generally’ will include whether he is burdened, or will be burdened (i.e. is likely to be burdened), with the repayment of a loan (any loan). The Code of Conduct requires the company representative to have knowledge of such financial circumstances (such knowledge being the result of proper enquiry), and to take cognisance of same when Giving Advice.
Note! A person, who is a tied agent of a Financial Institution, represents that Financial Institution in various financial product dealings with the consumer and, in such matters, is a company representative of that Financial Institution.
Note! Clearly the LAUTRO Code of Conduct with respect to the Giving of Advice takes its maxims from the precedent duties of Common Law.
For example: the Code recognises that whenever the relation between the parties to a contract is of a confidential or fiduciary nature, the person in whom the confidence is reposed cannot hold the other party to the contract unless he satisfies the Court that it is ADVANTAGEOUS to the other party AND that he has disclosed all material facts within his knowledge. (See Section 2.3.4 (a): Where a Fiduciary Relationship or a Special Relationship exists.]
The Code also recognises that to expose an investor to a Risk of financial harm for a disproportionate Object is unreasonable and would constitute Negligence. (See Section 2.3.3.)
It will become clear from the specifics of the Rules, as set out below, that the genesis of the Conduct of Business Rules is, in fact, precedent set by Common Law.
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THE RULES
The Independent Intermediary
Within the context of the LAUTRO Conduct of Business Rules an ‘independent intermediary’ means a person authorised under the U.K. Financial Services Act 1986, but does not include a Member of LAUTRO or any person eligible to be a member of LAUTRO. When an independent intermediary gives advice to his client by recommending a particular financial product, he acts as an Independent Financial Adviser on behalf of his client and, as such, is deemed to have used his expertise to choose the best product for his client from the ranges of products available from all the companies that make up the financial market place.
Product bias and Polarisation
(Rule 3.2)
A Member shall ensure that the remuneration paid or payable to its company representatives is so structured that none of them (when acting in the course of his duty as such) is likely to be so influenced in recommending investment contracts to investors by the expectation of receiving more remuneration if one kind of investment contract is recommended and less if one of a different kind is recommended that he will fail to comply with his duty under paragraph 8(1) of the Code of Conduct. (See above.)
Also, a Member shall ensure that the structure of remuneration payable by the Member to its marketing associates (if any) or to its appointed representatives, or any scheme, arrangement, project or other thing, is not such as to be likely to lead the associate or representative to influence any company representative to recommend a contract to an investor otherwise than in compliance with his duty under paragraph 8(1) of the Code of Conduct. (See above.)
Note! This Rule must be construed as giving effect, in accordance with the Code of Conduct, to the disclosure of potential conflicts of interest requirements within the Principles defined in Schedule 8 of the U.K. Financial Services Act 1986 (see Section 2.5.1). The operative word is potential. The remuneration payable by, or any other beneficial arrangement between, the Member/Financial Institution and any of its Management Personnel must be so structured that none of them is likely to influence any company representative or any independent intermediary (see below) to recommend a contract to an investor by the expectation of receiving more remuneration or greater benefit if one kind of investment contract is recommended and less if one of a different kind is recommended.
Commission and the Independent Intermediary
(Rules 4.2 and 4.3)
‘Commission’ includes any payment made in respect of services rendered by an independent intermediary.
‘Commission’ does not include anything done, given or made by or on behalf of a Member or omitted to be done, given or made by or on behalf of a Member to, by or in respect of a company representative of that Member, an appointed representative (which is not a company representative) of that Member or an employee of that Member. In other words, ‘commission’, under the LAUTRO Conduct of Business Rules, does not include any form of remuneration payable to its Members’ employees or agents (for example, as in the context of Rule 3.2 above).
Note! (For clarification to Irish consumers.) The statutory interpretation of ‘commission payment’ under Irish Statute (i.e. under the Irish Insurance Act 1989) is not limited to payments to an independent intermediary, but includes any type of payment made by or on behalf of the Insurance/Life Assurance Company, either to an insurance agent of that Company or to an independent broker, in connection with insurance/assurance business.
A Member shall not offer or give any commission to an independent intermediary in respect of an investment contract unless that intermediary took any part in the making of the contract or has given advice relating to that contract to the investor with whom the contract is made.
A Member shall not offer or give commission to an independent intermediary on any such basis as might reasonably be expected to induce that person to offer advice to an investor which is not the best advice for that investor having regard to his particular circumstances. (Again, such particular circumstances would obviously include whether the investor/potential investor is burdened with a loan, or is, to the knowledge of the independent intermediary subsequent to his enquiry as to the investor’s financial circumstances, likely to be burdened with a loan.)
IMPORTANT NOTE!
The questions may well be asked:
Why would a Member of LAUTRO pay commission to an independent intermediary?
What is the Member receiving in return for payment of this commission?
It can be seen from the LAUTRO Rules (as related above) that this payment is either for taking part in the making of the contract or giving advice relating to the contract to the investor.
But these two ‘reasons for payment’ cannot be interpreted as being mutually exclusive or as being, in any way, apportionable.
IF an investor has received advice relating to a contract from an independent intermediary, and a Member (or any Financial Institution) subsequently pays the independent intermediary a commission, THEN such commission must be interpreted as being for the ‘Giving of Advice’, notwithstanding the fact that the independent intermediary may also have taken part in the making of the contract.
Where an independent intermediary gives advice relating to the contract, the payment of commission is for a service rendered by a professional person authorised under the U.K. Financial Services Act 1986 to Give Investment Advice.
This payment is for the independent intermediary’s exposure to the liabilities pursuant to the Giving of Investment Advice, this ‘exposure to liability’ being the service rendered by the independent intermediary to the Financial Institution (Lautro Member).
It is therefore reasonably to be implied that any Member of LAUTRO (or, for that matter, any Financial Institution) would ensure that an independent intermediary paid by the Member (or Financial Institution) for such services carries, and maintains, professional indemnity cover.
It is reasonable, therefore, for the investor to expect that such payment by the Member (or Financial Institution) to the intermediary implies that this ‘safeguard’ exists.
Also, while the Member (or Financial Institution) does not owe a duty of care to the investor with respect to the actual advice given, by paying commission to the independent intermediary for giving that advice, it is reasonable to educe that the Member (or Financial Institution) owes a duty of care to the investor with respect to ratifying that the independent intermediary carries professional indemnity cover. In application of Lord Atkin’s ‘neighbour principle’ (described in Section 2.3.3), failure to so ratify must be seen as constituting Negligence by omission.
Information provided through an Independent Intermediary
(Rule 4.5)
A Member may provide literature to or for distribution on behalf of the independent intermediary which relates wholly or mainly to the investment contracts offered by the Member, provided either—
| (a) |
that the literature does not contain the name of any independent intermediary; or |
| (b) |
the name of the intermediary is only overprinted on the literature and the Member’s name appears on the literature more prominently than the intermediary’s. |
A Member may provide an independent intermediary with quotations and projections relating to its investment contracts.
A Member may provide an independent intermediary with software which is wholly directly and specifically related to the provision of quotations for the Member’s investment contracts.
Note! Even though the Independent Intermediary is wholly responsible for advice given by him, it is clear from the above that the entirety of the financial information provided on a particular investment product may have emanated from the Financial Institution and that his advice will have placed reliance on the veracity of that information.
Product Particulars and other Material Information
(Rules 5.10A and 5.10B)
Product Particulars
In any case where an investor buys an investment contract from a Member, the Member shall give the investor a document headed ‘PRODUCT PARTICULARS’ providing information relevant to the contract.
| (1) |
Product Particulars shall state how the amount of the benefit will be calculated and, if the amount of the benefit is linked to units in a unit trust or in an investment fund of an insurance company where the price of the units or the amount of any income distributions can go down as well as up, that fact shall be made clear. |
| (2) |
Product Particulars shall, where the benefit is payable under a policy, state the nature and amount or rate of any charges which will be made on the investor (whether directly by the Member or indirectly by the manager of any unit trust in which any funds of the policy in question are invested) and what, if any, variations in the amount of these charges will or may take place before any benefit under the contract is payable. |
| (3) |
Product Particulars shall describe the consequences for the investor if at any time he or any person on his behalf stops making payments under the contract. |
| (4) |
Product Particulars shall include a projection of the surrender value of the contract on each of the first five anniversaries of the commencement of the contract, or a Table of Specimen Surrender Values set out next to the total amount of the premiums paid prior to that anniversary so as to enable the investor to deduce the approximate surrender values of the contract in question which would be appropriate to him. |
| (5) |
Product Particulars shall include, under the heading ‘EFFECT OF CHARGES AND EXPENSES’, the effect of any charges or expenses on the investment potential of the premiums payable under the contract, this effect being shown as a reduction in yield. |
| (6) |
Product Particulars shall include, under the heading ‘COMMISSION’, the commission in respect of which is payable by the Member to an independent intermediary. (This requirement is from Rule 5.14.) |
Material Information
In addition to any information required to be given under the Product Particulars, the Member shall give the investor such other information as may be necessary to enable him to understand the nature of the investment concerned and what it is that will determine the ultimate value of his investment.
Without prejudice to the generality of the previous paragraph, where the progression of surrender values or the value of benefits payable under the contract at the maturity date contains a material discontinuity which is not approximately equal to the amount of the premium payable at the time the discontinuity will occur or to a payment of or on account of any benefit payable at that time, that fact shall be disclosed as part of the information to be provided in compliance with that paragraph (if it is not otherwise disclosed).
NOTE! This ordered provision (though couched somewhat esoterically) requires that, where the monthly premium payment into a policy does not result in a corresponding monthly increase in the surrender value of the policy that is approximately equal to the amount of the monthly premium payment, such a fact must be disclosed to the investor. This provision clearly acknowledges that such a fact constitutes material information necessary to an informed decision by the investor.
A Member of LAUTRO may give the Product Particulars to an investor either with or at any time (whether before or after the contract is made) before the Cancellation Notice, as defined in the Cancellation Rules (see below), is given to the investor.
The Cancellation Rules
The Securities and Investments Board, in exercise of its powers under Section 51 of the U.K. Financial Services Act 1986, made rules (Cancellation Rules) whereby a person who has entered into or offered to enter into an investment agreement has a right to cancel that agreement. This right to cancel applies to certain specified categories of investment agreement and these include regular premium life policies, such as: endowment; whole life; linked benefit; annuity; convertible term assurance.
Any firm which enters into an agreement that can be cancelled under these Cancellation Rules must send by post to the investor notice of his right to cancel (the Cancellation Notice). This notice must be sent within 8 days of entering into the agreement if the investor could have to pay money when cancelling, and within 15 days if there is no such risk. The investor then has a defined period (the Cooling-Off Period) from receipt of the Cancellation Notice, typically 14 days, within which to exercise his right to cancel.
The Cancellation Rules also require that a statement, of the basis on which the remuneration of the member firm in connection with the investment agreement will be determined, must be included with the Cancellation Notice.
Note! The fact that the Cancellation Rules allow a period of up to 15 days after the time of contract for the Financial Institution to send to the investor the stipulated information on Product Particulars, commission and remuneration, in no way vitiates the Conduct of Business Rules’ requirements regarding disclosures and explanations prior to the contract. More importantly, nothing within the Conduct of Business Rules or the Cancellation Rules can be seen to interfere with the Common Law precedents with respect to disclosures and explanations required prior to or at the time of contract, or with the burden of proving that such disclosures and explanations were in fact made. (See Section 2.2.2, Section 2.2.3 and Section 2.3.4.) Remember, all these Statutory Rules and Regulations, while themselves manifest applications of the Common Law, exist in addition to your rights under the Common Law!
Advertisements
(Rules 6.3, 6.6 and 6.12)
Within the context of the Conduct of Business Rules governing advertisements, a reference to an advertisement is a reference to any kind of advertisement, including, in particular, an advertisement which is, or forms part of, any publication, notice, poster, sign, label, showcard, circular, catalogue, price list or other document.
An advertisement also means any written communication to an individual inviting him to enter into an investment contract which is made directly following the individual’s response to an advertisement.
Note! The meaning of ‘advertising’ as defined in the Misleading Advertising Regulations 1988 (see Section 2.4.2) is also worth noting in the context of these Rules.
| (1) |
An advertisement issued by a Member of LAUTRO shall not contain —
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| (2) |
An advertisement shall not be so designed as to content and format as to be likely to be misunderstood. |
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| (3) |
Where an advertisement identifies and promotes one or more particular investments, the advertisement shall not specify some but not all of the terms and conditions which attach to the investment unless —
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| (4) |
Where an advertisement identifies and promotes one or more particular investments, the advertisement shall not compare one investment with another unless —
and shall not make a comparison with any index unless the comparison is fair. For the purpose of this paragraph, ‘investment’ shall mean any form of investment or saving, and includes an occupational pension scheme, the State earnings-related pension scheme and any arrangement for the repayment of a loan which does not involve an investment contract. |
Note! The ‘investment option’ status of the Repayment of a Loan is clearly acknowledged in paragraph (4) above. (See also the boxed NOTE! regarding 'investment business' in Section 2.5.1.)
FIMBRA Conduct of Business Rules
(As of April 1990)
Statement of Principle
In any conflict of interest which may arise between a member and a client, it is the client’s interest which shall be paramount in resolving the conflict.
Understanding of Risk
(Rule 4.3)
A member shall not recommend to a client a transaction in an investment or arrange or effect such a transaction with or for a client ……………… unless, before the recommendation is made or the transaction is effected, the member has taken all reasonable steps to satisfy itself that the client understands the extent to which he will be exposed to risk or further liability by entering into the transaction.
Best Advice
(Rule 4.4)
In the case of a transaction relating to a life policy or a pension contract or collective investments or a personal equity plan which includes collective investments, a member shall not recommend such a transaction nor arrange or effect such a transaction on behalf of a client ……. unless the member believes having exercised reasonable care in forming its belief, that no transaction in any other such investment of which the member is , or ought reasonably to be aware, and which would be available from the same or a different source, would be likely to secure the objectives of the client more advantageously than the transaction recommended, arranged or effected by the member.
Best Execution
(Rule 4.5)
When effecting a transaction in investments with or on behalf of a client, a member shall take steps to ascertain what are the best terms available in the market, at the time of the transaction, for comparable transactions and shall endeavour to effect the transaction upon terms which are no less advantageous to the client than those terms. For this purpose, regard will be had to all relevant factors; these will include commission payable by a life/pensions office.
Disclosure of Remuneration
(Rule 4.6)
A member shall not recommend to a client or potential client a transaction relating to a life policy or a pension contract unless the member then discloses or has disclosed to the client the basis on which the member will be remunerated, be this either (a) directly by the client, or (b) by commission from the life/pensions office. A written statement of these disclosures shall be transmitted to the client at the time of the making of the recommendation, or as soon as reasonably practicable afterwards.
Recommendations
(Rule 4.12)
A member shall take all reasonable care to include in any recommendation to a person sufficient information to provide that person with an adequate and reasonable basis for deciding whether to accept the recommendation. Note! Such information would reasonably include information relating to Risk, such information being the result of the member’s expert analysis.
Life Policies and Units: Forecasts and Particulars
(Rule 4.21)
The FIMBRA requirements regarding the ‘illustration of benefits’ and ‘product particulars’ were similar to those of LAUTRO as described above.
Product Bias
(Rule 4.22)
A member shall ensure that rates of commission and their frequency of payment and other inducements provided by the member in relation to different products or services marketed by the member are such that no person who will benefit from those inducements will be likely to be so influenced by them as to recommend to anyone the acquisition of an investment or the effecting of a transaction when to do so would be a breach of the Rules requiring Best Advice and Best Execution for the client. (See above.)
Advertising Standards to be Observed
(Rule 4.22)
Members shall observe advertising standards in general use, in particular those administered by the Advertising Standards Authority, and will not publish any advertisement which is not consistent with the high professional standards of FIMBRA. The issue or approval of an advertisement which contravenes any of those standards shall constitute a breach of these Rules.
Note! In the light of the Misleading Advertising Regulations (see Section 2.4.2) this Rule, invoked through Section 62(2) of the U.K. Financial Services Act 1986, makes a breach of those Regulations actionable.