In its Policy Statement 04/6 (published on 22 March 2004), the FSA has set out the regulatory provisions by which it intends to ensure that senior managers within regulated firms will manage conflicts of interest arising as a result of the production of investment research. The provisions will come into force on 1 July 2004, but firms will need to take preparatory steps before that date in order to ensure that their systems, controls and procedures are compliant.

The provisions which are to be introduced remain largely unchanged since they were first published in draft form as an annexure to the FSA's consultation paper CP205 in October 2003. They are contained in a new conduct of business rule (COB 7.16) and include at their core new COB 7.16.5R whereby a firm which publishes or distributes investment research (which research is held out and/or relied upon as an impartial assessment of the value or prospects of its subject matter) must establish, implement and make available for general inspection a written policy, appropriate to the firm, for managing effectively the conflicts of interest which might affect the impartiality of its investment research.

The new rules set out in some detail the elements that must be included in a given firm's written policy, including a clear explanation of the extent to which such a policy relies upon the existence of 'Chinese walls' and/or other information barriers within the relevant firm; details of the way in which the firm supervises and remunerates its investment analysts; and clarification as to the extent to which (and basis upon which) a firm will allow its investment analysts to become involved in activities other than the preparation of investment research (e.g. assistance in relation to corporate finance business opportunities).

As mentioned above, COB 7.16 will come into force on 1 July 2004. In the interim (and to the extent that they have not already done so as a reaction to the various consultation papers previously issued by the FSA on the same topic), firms will need to identify conflicts in their businesses, design appropriate procedures to manage them and to finalise and publish their written policies in that regard.

Policy Statement 04/6 also confirms that the final provisions set out in the FSA's CP205, which were designed to improve the management of conflicts of interest in respect of issuance of securities, dealing ahead of investment research and personal account dealing, will come into force (respectively, as a new conduct of business rule COB 5.10 and as amended COB 7.3 and COB 7.13) on 1 May 2004.

The FSA has given notice that, where it becomes aware that firms are not properly recognising and managing their conflicts of interest, it will be ready to intervene. Once the new rules are in force, such intervention will potentially include the commencement of disciplinary action. Regulated firms will thus be concerned to ensure that their systems, controls and procedures are compliant with the FSA's requirements ahead of the dates on which the new rules come into force.

Policy Statement 04/6 is available in full from the FSA's website at http://www.fsa.gov.uk/pubs/policy/ps04_06.pdf.

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