5.4 Core Principles 3 to 5 and Non-Compliance: Conflicts, Disclosure, Confidentiality and Misconduct

Core Principle 3: Avoidance of Conflict of Interest

Required conduct

• Avoid any conflict of interest when dealing with an investor.
• If a conflict cannot be avoided, promptly disclose it in writing to the investor, whether real or potential, and make sure the investor's interest comes first.
• Distributors must have systems, policies and procedures to identify, avoid, disclose and manage conflicts.

Prohibited conduct

• Performing any switching transaction to generate sales commission or other benefits (cash or in kind), or that is not in the investor's best interest.

Example: a Consultant persuades a client to switch from a no-load money market fund into a loaded equity fund just before a sales campaign deadline. If the switch is driven by the commission rather than the client's needs, it breaches Core Principle 3.

Core Principle 4: Disclosure of Information

Required conduct

Distributors and Consultants must provide accurate, timely and adequate information, including what is in the prospectus, disclosure document and PHS, and explain clearly the scheme's features:

They must give enough information and explanation for the investor to understand the investment.

Prohibited conduct

1. Providing a forecast of future performance of any scheme.
2. Making statements on yields or returns without an objective and reasonable basis.
3. Concealing the different characteristics of schemes when comparing them.
4. Providing information on matters they are not competent to deal with.

FIMM's practice question: omitting a material fact when dealing with a unit holder or PRS member falls under disclosure of information.

Core Principle 5: Observance of Confidentiality

Required conduct

• Safeguard investors' personal and financial information at all times, except where the investor has authorised disclosure in writing or disclosure is required by law or legal process to a relevant authority.
• Distributors must have systems to protect this information, ensure officers do not misuse it (for their own or others' advantage, or to investors' detriment), and allow access only to the servicing Consultant or authorised officers.

Prohibited conduct

1. Disclosing an investor's information to a third party without prior written consent, unless required by the SC, a court order or written law.
2. Acquiring or using information about an investor or potential investor without proper authorisation.
3. Disseminating or exchanging investors' information with another Distributor, Consultant or third party.
4. Requesting or procuring investors' information from a third party, including another Distributor or Consultant.

The study guide links these duties to the Personal Data Protection Act 2010 (PDPA).

Non-Compliance with the Code

FIMM's practice question on sanctions: a Consultant who breaches the Code may face a public reprimand and suspension of registration with FIMM. Imprisonment is not a FIMM sanction, and the SC does not hold Consultants' registrations.

Which Principle Applies?

Applying Chapters 4 and 5 of the Code: Three Short Cases

Case 1 – a request from another Distributor. A former colleague who now works for a different Distributor asks a Consultant for the names and holdings of clients who redeemed recently. Handing them over breaches Core Principle 5: it disseminates investors' personal and financial information to another Distributor, and the colleague, by asking, is requesting that information from a third party. The Consultant should refuse. Disclosure is allowed only with the investor's prior written consent or where the SC, a court order or a written law requires it.

Case 2 – misconduct found by the Distributor. A branch manager learns that clients deny signing switching forms submitted by one Consultant. The Distributor must establish a prima facie case and then submit a comprehensive investigation report to FIMM as soon as practicable once the report is complete. Forged signatures go to Core Principle 1 (honesty and integrity); switching clients mainly to earn commission engages Core Principle 3.

Case 3 – lending your name. A Consultant lets a colleague whose registration has lapsed submit sales under the Consultant's name. The colleague is using another Consultant's identity, which the Code prohibits under professionalism. The Consultant who knowingly allows it intentionally aids that misconduct, so the Consultant has committed misconduct through abetment, even without dealing with the investors personally.

Exam Pointers

• An unavoidable conflict must be disclosed promptly and in writing, with the investor's interest first.
• The ten features Consultants must explain run from investment objectives to the cooling-off period.
• Forecasts of future performance are banned outright; statements on yields or returns need an objective and reasonable basis.
• Confidential information can be released only with written consent or where law or legal process requires it.
• Attempting, preparing for and abetting misconduct are all misconduct; sanctions sit in Chapter 6 of the FCR.