Benchmarking under the Code of Practice for Investment Business

Summary

This guidance note explains how registered persons providing investment business in Jersey should meet the benchmarking requirement in paragraph 2.29 of the Code of Practice for Investment Business, which sits under Principle 2 (acting with highest regard for clients' interests). It applies where a firm provides advisory or discretionary services and must report client performance against a relevant benchmark, where one exists or is reasonably available.

• Benchmark selection: Benchmarks chosen should be appropriate/relevant to the product or service, transparent and clearly explained, measurable on a frequent basis, based on the client's investment objectives and portfolio, and documented in client records.
• No suitable benchmark available: Firms must discuss and record the rationale with the client and keep trying to rectify this; alternatives include peer group comparisons or a cash-plus return measure.
• Discretionary and advisory services: Firms should set an evaluation method from the outset, provide ongoing benchmark information when reporting performance, and give a clear rationale if changing the benchmark.
• Ongoing advice and client deviation: Where ongoing benchmarking is difficult for advisory services subject to continuing advice, the rationale must be discussed with the client and recorded; if a client deviates from advice, the benchmark should be adjusted if possible, otherwise the original benchmark is retained.
• Outsourcing: Outsourcing benchmark provision to a third party is subject to the JFSC's Outsourcing Policy and Guidance Notes and the Outsourcing Notification process.
• Performance reporting standards: Reporting should occur at a frequency allowing clients to reasonably assess performance, must distinguish actual performance from theoretical back testing, disclose whether fees are excluded, and disclose any difference in fee treatment between the benchmark and the strategy.

The note does not endorse any specific benchmark or index; examples given (such as MSCI World Index or FTSE All Share) are illustrative only.

Key obligations

• Registered persons providing advisory or discretionary services must report to clients on performance against a relevant and applicable benchmark where one exists or is reasonably available.
• Where no appropriate benchmark is available, the firm must discuss and record the rationale in the client file and make ongoing efforts to rectify the situation.
• Benchmarks used must be appropriate, transparent, measurable, based on client investment objectives, and documented/recorded in client records alongside performance reporting.
• Firms must establish an evaluation and comparison method from the outset of a discretionary or advisory relationship and provide ongoing benchmark information when reporting performance.
• If changing or amending a benchmark, firms must provide a clear and transparent rationale to the client.
• If a client deviates from advice, the benchmark should be adjusted to reflect the deviation where possible; otherwise the original benchmark must continue to be used.
• Outsourcing of benchmark provision to a third party must comply with the JFSC's Outsourcing Policy and Notification process.
• Performance reporting must clearly differentiate actual performance from theoretical back-tested performance, disclose exclusion of fees where applicable, and disclose differences in fee treatment between benchmark and strategy.

Applies to

registered persons (registered under Article 9 of the Financial Services (Jersey) Law 1998 to carry on Investment Business)