Bribery Act 2010 - Criminalising Commission?
01 April 2011
Guidance to businesses about how they can reduce their risk of committing the new corporate offence under the Act has now been published. The guidance is principles-based and provides businesses with little in the way of certainty about the extent of the steps they will need to take.
The Secretary of State announced on 30 March that the Bribery Act will come into force on 1 July 2011, well over a year after enactment. At the same time he published guidance to businesses about how they can reduce their risk of committing the new corporate offence in section 7 (see below). Most comment on the Bribery Act 2010 in a financial services context has focused on the insurance industry. A more general issue that has received little attention so far concerns the extent to which payments of commission could constitute an offence under the Act where the recipient is in breach of conduct of business obligations owed to its clients. When the UK implemented the European Markets in Financial Instruments Directive (MiFiD), it chose not to criminalise breach of the conduct of business obligations: it is unclear whether the Act was intended to do so.
Defining bribery – payment and improper performance
The Act sets out a number of cases that constitute a criminal offence. Cases 1 and 2 can be committed by a person (either an individual or a corporate body) making or promising payment. Case 1 covers a payment that is intended to induce a person improperly to perform an activity connected with a business (or to reward improper performance). (This will rarely be relevant given firms generally do not pay commission with the requisite intention.) Case 2 is where the payer knows or believes that acceptance of the payment would itself constitute improper performance of an activity connected with a business. In each case, performance is improper if it breaches an expectation that the activity will be performed in good faith or any expectation arising from the fact that the person performing the activity is in a position of trust. There are corresponding offences that can be committed by the person receiving or agreeing to accept payment. In the case of British citizens (or other individuals with a close connection with the UK) or bodies incorporated in the UK, it does not matter whether the relevant act or omission takes place in the UK or not.
Improper performance – link to the client’s best interests and inducements rules
Article 19(1) of MiFiD (the client’s best interests rule) requires that an investment firm acts honestly, fairly and professionally in accordance with the best interests of its clients when providing investment services and/or ancillary services to retail and professional clients. The inducement rules under MiFiD appear in Article 26 of the Level 2 Directive as part of the conduct of business obligations owed by a firm when providing investment or ancillary services to clients pursuant to the client’s best interests rule. They have been implemented by the FSA on a copy out basis in chapter 2 of the FSA’s Conduct of Business Sourcebook.
The inducements rule provides that investment firms are not to be regarded as acting in accordance with the client’s best interests rule if they provide or receive the commission or non-monetary benefit to or from a third party in relation to investment services provided to a client unless the following conditions are satisfied:
- the existence, nature and amount of the benefit or, where the amount cannot be ascertained, the method of calculating that amount, has been clearly disclosed to the client in a manner that is comprehensive, accurate and understandable, prior to the provision of the relevant instrument or ancillary services (or in the alternative a summary may be given together with an undertaking to provide further details on request); and
- the payment or provision of the benefit is designed to enhance the quality of the relevant service to the client and does not impair the firm's duty to act in the best interests of the client.
Under the Act "good faith" is not defined. In the case law it is generally treated in this type of context as being synonymous with honesty or as imposing a requirement of fair and open dealing. It appears likely that the client’s best interests rule would give rise to an expectation of good faith. It may also be the case that the distributor is in a position of trust. If this is right, than making payment to a person, believing that acceptance of the payment would breach the client’s best interests or inducements rules, would be an offence within Case 2.
Application to distribution arrangements
Product providers routinely pay commissions to distributors of their products (asset managers, private banks, brokers, plan managers etc). Not all distributors comply with the inducements rules.
Whilst as a matter of good practice many product providers will require in their distribution agreement that the distributor disclose commissions to client, not all distributors will contract on this basis. The CESR recommendations on inducements make it clear that a product provider is not responsible for a distributor’s compliance with the inducements rule. Accordingly, product providers are often prepared to take a view on this issue, on grounds that non-disclosure by the distributor does not give rise to a breach by the product provider.
The effect of the Act appears to be to criminalise the product provider in this situation if the product provider knows, or believes, that the distributor is in breach of its obligations.
Failing to prevent bribery
The risk to firms paying commission is compounded by the corporate offence under section 7 of the Act of failing to prevent bribery. A firm is guilty of an offence if a person associated with it bribes another intending to obtain or retain business for the firm or to obtain or retain an advantage in the conduct of business for the firm. A person is "associated" with a firm if they perform services for or on behalf of the firm. The Act gives the examples of employees, agents and subsidiaries but makes clear that the question of whether a person is associated is to be determined by reference to all the relevant circumstances, not merely by the nature of the relationship. The offence is a strict liability offence, that is to say that no intention or knowledge is required. It is, however, a defence under the Act if the firm can prove that it had in place adequate procedures designed to prevent persons associated with it from bribing others for the purposes specified above. The Secretary of State has now published guidance about the Act and the procedures that firms can put in place to prevent persons associated with them from committing such offences. Firms subject to FSA regulation are, of course, already obliged under SYSC 3.2.6R to "establish and maintain effective systems and controls … for countering the risk that the firm might be used to further financial crime".
The guidance sets out, on a non-prescriptive basis, six principles that the Government considers should inform the procedures that a firm puts in place. Principle 1 requires a firm's procedures to prevent bribery to be proportionate to the risks it faces and the nature, scale and complexity of its commercial activities. In the distribution context, they key consideration is whether the recipient of the commission is acting in breach of the client's best interests or the inducement rules. Principle 4 will be relevant here. It requires a firm to apply due diligence procedures, taking a proportionate and risk based approach, in respect of persons who perform or will perform services for on behalf of the firm. This will include the distributor. While the inclusion of the concept of proportionality will mean that there is some flexibility, firms will face the uncertainty that what they have done may not be enough. The possibility of payments of commission constituting a criminal offence by the payer and leading to the commission of a criminal offence by the employing firm or its parent may well lead firms to take a cautious approach. This will almost certainly involve the monitoring and verification of the extent to which the recipient firm is complying with its obligation to act in the client's best interests and the inducement rules.