COBS Conduct of Business Sourcebook

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Used in

Export part as

COBS 1

Application

COBS 1.1

The general application rule

  • 01/11/2007

COBS 1.1.1

handbook-rule

This sourcebook applies to a firm with respect to the following activities carried on from an establishment maintained by it, or its appointed representative, in the United Kingdom:

  1. (1) [deleted]
  2. (2) designated investment business;
  3. (3) long-term insurance business in relation to life policies;

and activities connected with them.

COBS 1.1.1A

handbook-rule
This sourcebook does not apply to a firm with respect to the activity of accepting deposits carried on from an establishment maintained by it, or its appointed representative, in the United Kingdom, except for COBS 4.6 (Past, simulated past and future performance), COBS 4.7.1 R (Direct offer financial promotions), COBS 4.10 (Systems and controls and approving and communicating financial promotions), COBS 13 (Preparing product information) and COBS 14 (Providing product information to clients) which apply as set out in those provisions, COBS 4.1 and the Banking: Conduct of Business sourcebook (BCOBS).
  • 01/11/2009

COBS 1.1.1B

handbook-rule
COBS 4.4.3 R, COBS 5 (Distance communications), COBS 15.2 (The right to cancel), COBS 15.3 (Exercising a right to cancel), COBS 15.4 (Effects of cancellation) and COBS 15 Annex 1 (Exemptions from the right to cancel) apply to a firm with respect to the activity of issuing electronic money as set out in those provisions.
  • 30/04/2011

Modifications to the general application rule

COBS 1.1.2

handbook-rule
The general application rule is modified in COBS 1 Annex 1 according to the activities of a firm (Part 1) and its location (Part 2).

COBS 1.1.3

handbook-rule
The general rule is also modified in the chapters to this sourcebook for particular purposes, including those relating to the type of firm, its activities or location, and for purposes relating to connected activities.

Guidance

COBS 1.1.4

handbook-guidance
Guidance on the application provisions is in COBS 1 Annex 1 (Part 3).

COBS 1 Annex 1

Application (see COBS 1.1.2R)

  • 01/11/2007

handbook-rule
Part 1: What?
Modifications to the general application rule according to activities Part 2: Where?
Modifications to the general application rule according to location Part 3: Guidance

Export chapter as

COBS 2

Conduct of business obligations

COBS 2.1

Acting honestly, fairly and professionally

  • 01/11/2007

The client's best interests rule

COBS 2.1.1

handbook-rule
  1. (1) A firm must act honestly, fairly and professionally in accordance with the best interests of its client (the client's best interests rule).
  2. (2) This rule applies in relation to designated investment business carried on:
    1. (a) for a retail client; and
    2. (b) in relation to MiFID or equivalent third country business, for any other client.
  3. (3) For a management company, this rule applies in relation to any UCITS scheme or EEA UCITS scheme the firm manages.

[Note: article 19(1) of MiFID]and article 14(1)(a) and (b) of the UCITS Directive]

Exclusion of liability

COBS 2.1.2

handbook-rule

A firm must not, in any communication relating to designated investment business seek to:

  1. (1) exclude or restrict; or
  2. (2) rely on any exclusion or restriction of;

any duty or liability it may have to a client under the regulatory system.

  • 01/11/2007

COBS 2.1.3

handbook-guidance
  1. (1) In order to comply with the client's best interests rule, a firm should not, in any communication to a retail client relating to designated investment business:
    1. (a) seek to exclude or restrict; or
    2. (b) rely on any exclusion or restriction of;
  2. any duty or liability it may have to a client other than under the regulatory system, unless it is honest, fair and professional for it to do so.
  3. (2) The general law, including the Unfair Terms Regulations, also limits the scope for a firm to exclude or restrict any duty or liability to a consumer.
  • 01/11/2007

COBS 2.2

Information disclosure before providing services

  • 01/11/2007

Application

COBS 2.2.-1

handbook-rule
  1. (1) This section applies in relation to MiFID or equivalent third country business.
  2. (2) This section applies in relation to other designated investment business carried on for a retail client:
    1. (a) in relation to a derivative, a warrant or stock lending activity, but as regards the matters in COBS 2.2.1R (1)(b) only; and
    2. (b) in relation to a packaged product , but as regards the matters in COBS 2.2.1R (1)(a) and (d) only.

[Note: article 19(3) of MiFID]

Information disclosure before providing services

COBS 2.2.1

handbook-rule
  1. (1) A firm must provide appropriate information in a comprehensible form to a client about:
    1. (a) the firm and its services;
    2. (b) designated investments and proposed investment strategies; including appropriate guidance on and warnings of the risks associated with investments in those designated investments or in respect of particular investment strategies;
    3. (c) execution venues; and
    4. (d) costs and associated charges;
  2. so that the client is reasonably able to understand the nature and risks of the service and of the specific type of designated investment that is being offered and, consequently, to take investment decisions on an informed basis.
  3. (2) That information may be provided in a standardised format.
  4. (3) [deleted]
  5. (4) [deleted]

[Note: article 19(3) of MiFID]

COBS 2.2.2

handbook-guidance
A firm to which the rule on providing appropriate information (COBS 2.2.1 R) applies should also consider the rules on disclosing information about a firm, its services, costs and associated charges and designated investments in COBS 6.1 and COBS 14.
  • 01/11/2007

Disclosure of commitment to the Financial Reporting Council's Stewardship Code

COBS 2.2.3

handbook-rule

A firm, other than a venture capital firm, which is managing investments for a professional client that is not a natural person must disclose clearly on its website, or if it does not have a website in another accessible form:

  1. (1) the nature of its commitment to the Financial Reporting Council's Stewardship Code; or
  2. (2) where it does not commit to the Code, its alternative investment strategy.
  • 06/12/2010

COBS 2.3

Inducements

  • 01/11/2007

Rule on inducements

COBS 2.3.1

handbook-rule

A firm must not pay or accept any fee or commission, or provide or receive any non-monetary benefit, in relation to designated investment business or, in the case of its MiFID or equivalent third country business, another ancillary service, carried on for a client other than:

  1. (1) a fee, commission or non-monetary benefit paid or provided to or by the client or a person on behalf of the client; or
  2. (2) a fee, commission or non-monetary benefit paid or provided to or by a third party or a person acting on behalf of a third party, if:
    1. (a) the payment of the fee or commission, or the provision of the non-monetary benefit does not impair compliance with the firm's duty to act in the best interests of the client; and
    2. (b) the existence, nature and amount of the fee, commission or benefit, or, where the amount cannot be ascertained, the method of calculating that amount, is clearly disclosed to the client, in a manner that is comprehensive, accurate and understandable, before the provision of the service;
      1. (i) this requirement only applies to business other than MiFID or equivalent third country business if it includes giving a personal recommendation in relation to a packaged product;
      2. (ii) where this requirement applies to business other than MiFID or equivalent third country business, a firm is not required to make a disclosure to the client in relation to a non-monetary benefit permitted under (a) and which falls within the table of reasonable non-monetary benefits in COBS 2.3.15 G as though that table were part of this rule for this purpose only;
      3. (iii) this requirement does not apply to a firm giving basic advice; and
    3. (c) in relation to MiFID or equivalent third country business, the payment of the fee or commission, or the provision of the non-monetary benefit is designed to enhance the quality of the service to the client; or
  3. (3) proper fees which enable or are necessary for the provision of designated investment business or ancillary services, such as custody costs, settlement and exchange fees, regulatory levies or legal fees, and which, by their nature, cannot give rise to conflicts with the firm's duties to act honestly, fairly and professionally in accordance with the best interests of its clients.
[Note: article 26 of the MiFID implementing Directive and articles 29(1) and 29(2) of the UCITS implementing Directive]

[Note: The Committee of European Securities Regulators (CESR) has issued recommendations on inducements under MiFID]

COBS 2.3.1A

handbook-rule

COBS 2.3.1 R applies to a UK UCITS management company and EEA UCITS management company when providing collective portfolio management services, as if:

  1. (1) references to a client, were references to any UCITS it manages; and
  2. (2) in (2)(b) and (c) and (3) of that rule, references to MiFID or equivalent third country business were also references to the collective portfolio management activities of investment management and administration for the scheme.

[Note: article 29(1) of the UCITS implementing Directive]

  • 01/07/2011

COBS 2.3.2

handbook-rule

A firm will satisfy the disclosure obligation under this section if it:

  1. (1) discloses the essential arrangements relating to the fee, commission or non-monetary benefit in summary form;
  2. (2) undertakes to the client that further details will be disclosed on request; and
  3. (3) honours the undertaking in (2).

[Note: article 26 of the MiFID implementing Directive and article 29(2) of the UCITS implementing Directive]

COBS 2.3.2A

handbook-rule

COBS 2.3.2 R applies to a UK UCITS management company and EEA UCITS management company when providing collective portfolio management services, as if references to a client were references to a unitholder of the scheme.

[Note: article 29(2) of the UCITS implementing Directive]

  • 01/07/2011

Guidance on inducements

COBS 2.3.3

handbook-guidance
The obligation of a firm to act honestly, fairly and professionally in accordance with the best interests of its clients includes both the client's best interests rule and the duties under Principles 1 (integrity), 2 (skill, care and diligence) and 6 (customers' interests).
  • 01/11/2007

COBS 2.3.4

handbook-guidance
COBS 11.6 (Use of dealing commission) deals with the acceptance of certain inducements by investment managers and builds upon the requirements in this section. Investment managers should ensure they comply with this section and COBS 11.6.
  • 01/11/2007

COBS 2.3.5

handbook-guidance
For the purposes of this section, a non-monetary benefit would include the direction or referral by a firm of an actual or potential item of designated investment business to another person, whether on its own initiative or on the instructions of an associate.
  • 01/11/2007

COBS 2.3.6

handbook-guidance

For the purposes of this section, the receipt by an investment firm of a commission in connection with a personal recommendation or a general recommendation, in circumstances where the advice or recommendation is not biased as a result of the receipt of commission, should be considered as designed to enhance the quality of the recommendation to the client.

[Note: recital 39 of MiFID implementing Directive]

  • 01/11/2007

COBS 2.3.7

handbook-guidance
The fact that a fee, commission or non-monetary benefit is paid or provided to or by an appointed representative or, where applicable, by a tied agent, does not prevent the application of the rule on inducements.
  • 01/11/2007

COBS 2.3.8

handbook-guidance
The rule on inducements is applicable to a firm and those acting on behalf of a firm in relation to the provision of an investment service or ancillary service to a client. Small gifts and minor hospitality received by an individual in their personal capacity below a level specified in the firm's conflict's of interest policy, will not be relevant for the purpose of the rule on inducements.
  • 01/11/2007

Packaged products evidential provisions and guidance on inducements

COBS 2.3.9

handbook-guidance
The following guidance and evidential provisions provide examples of arrangements the FSA believes will breach the client's best interests rule if it sells, personally recommends or arranges the sale of a packaged product for a retail client.

COBS 2.3.10

handbook-evidential-provisions
  1. (1) If a firm is required to disclose commission (see COBS 6.4) to a client in relation to the sale of a packaged product (other than in relation to arrangements between firms that are in the same immediate group) the firm should not enter into any of the following:
    1. (a) volume overrides, if commission paid in respect of several transactions is more than a simple multiple of the commission payable in respect of one transaction of the same kind; and
    2. (b) an agreement to indemnify the payment of commission on terms that would or might confer an additional financial benefit on the recipient in the event of the commission becoming repayable.
  2. (2) Contravention of (1) may be relied upon as tending to establish contravention of the rule on inducements (COBS 2.3.1 R).
  • 01/11/2007

COBS 2.3.11

handbook-guidance
  1. (1) If a firm enters into an arrangement with another firm under which it makes or receives a payment of commission in relation to the sale of a packaged product that is increased in excess of the amount disclosed to the client, the firm is likely to have breached the rules on disclosure of charges, remuneration and commission (see COBS 6.4) and, where applicable, the rule on inducements in COBS 2.3.1R (2)(b), unless the increase is attributable to an increase in the premiums or contributions payable by that client.
  • 01/11/2007

COBS 2.3.12

handbook-evidential-provisions
  1. (1) This evidential provision applies in relation to a holding in, or the provision of credit to, a firm which holds itself out as making personal recommendations to retail clients on packaged products, except where the relevant transaction is between persons who are in the same immediate group.
  2. (2) A product provider should not take any step which would result in it:
    1. (a) having a direct or indirect holding of the capital or voting power of a firm in (1); or
    2. (b) providing credit to a firm in (1) (other than commission due from the firm to the product provider in accordance with an indemnity commission clawback arrangement);
  3. unless all the conditions in (4) are satisfied. A product provider should also take reasonable steps to ensure that its associates do not take any step which would result in it having a holding as in (a) or providing credit as in (b).
  4. (3) A firm in (1) should not take any step which would result in a product provider having a holding as in (2)(a) or providing credit as in paragraph (2)(b), unless all the conditions in (4) are satisfied.
  5. (4) The conditions referred to in (2) and (3) are that:
    1. (a) the holding is acquired, or credit is provided, on commercial terms, that is terms objectively comparable to those on which an independent person unconnected to a product provider would, taking into account all relevant circumstances, be willing to acquire the holding or provide credit;
    2. (b) the firm (or, if applicable, each of the firms) taking the step has reliable written evidence that (a) is satisfied;
    3. (c) there are no arrangements, in connection with the holding or credit, relating to the channelling of business from the firm in (1) to the product provider; and
    4. (d) the product provider is not able, and none of its associates is able, because of the holding or credit, to exercise any influence over the personal recommendations made in relation to packaged products given by the firm.
  6. (5) In this evidential provision, in applying (2) and (3) any holding of, or credit provided by, a product provider's associate is to be regarded as held by, or provided by, that product provider.
  7. (6) In this evidential provision, in applying (3) references to a "product provider" are to be taken as including an unauthorised equivalent of a product provider; that is, an unauthorised insurance undertaking or an unauthorised operator of a regulated collective investment scheme or of an investment trust savings scheme;
  8. (7) Contravention of (2) or (3) may be relied upon as tending to establish contravention of the rule on inducements (COBS 2.3.1 R).

COBS 2.3.13

handbook-guidance
In considering the compliance of arrangements between members of the same immediate group with the rule on inducements (COBS 2.3.1 R), firms may wish to consider the evidential provisions in COBS 2.3.10 E and COBS 2.3.12 E, to the extent that these are relevant.
  • 01/11/2007

Reasonable non-monetary benefits

COBS 2.3.14

handbook-guidance
  1. (1) In relation to the sale of packaged products , the table on reasonable non-monetary benefits (COBS 2.3.15 G) indicates the kind of benefits which are capable of enhancing the quality of the service provided to a client and, depending on the circumstances, are capable of being paid or received without breaching the client's best interests rule. However, in each case, it will be a question of fact whether these conditions are satisfied.
  2. (2) The guidance in the table on reasonable non-monetary benefits is not relevant to non-monetary benefits which may be given by a product provider or its associate to its own representatives. The guidance in this provision does not apply directly to non-monetary benefits provided by a firm to another firm that is in the same immediate group. In this situation, the rules on commission equivalent (COBS 6.4.3 R) will apply.

Reasonable non-monetary benefits

COBS 2.3.15

handbook-guidance
This table belongs to COBS 2.3.14 G.

COBS 2.3.16

handbook-guidance
In interpreting the table of reasonable non-monetary benefits, product providers should be aware that where a benefit is made available to one firm and not another, this is more likely to impair compliance with the client's best interests rule.

Record keeping: inducements

COBS 2.3.17

handbook-rule
  1. (1) A firm must make a record of the information disclosed to the client in accordance with COBS 2.3.1R (2)(b) and must keep that record for at least five years from the date on which it was given.
  2. (2) A firm must also make a record of each benefit given to another firm which does not have to be disclosed to the client in accordance with COBS 2.3.1R (2)(b)(ii), and must keep that record for at least five years from the date on which it was given.

[Note: see article 51(3) of the MiFID implementing Directive]

COBS 2.4

Agent as client and reliance on others

  • 01/11/2007

COBS 2.4.1

handbook-rule
This section applies to a firm that is conducting designated investment business or ancillary activities or, in the case of MiFID or equivalent third country business, other ancillary services.
  • 01/11/2007

COBS 2.4.2

handbook-guidance
This section is not relevant to the question of who is the firm's counterparty for prudential purposes and it does not affect any obligation a firm may owe to any other person under the general law.

Agent as client

COBS 2.4.3

handbook-rule
  1. (1) If a firm (F) is aware that a person (C1) with or for whom it is providing services is acting as agent for another person (C2) in relation to those services, C1, and not C2, is the client of F in respect of that business.
  2. (2) Paragraph (1) does not apply if:
    1. (a) F has agreed with C1 in writing to treat C2 as its client; or
    2. (b) C1 is neither a firm nor an overseas financial services institution and the main purpose of the arrangements between the parties is the avoidance of duties that F would otherwise owe to C2.
  3. If this is the case, C2 is the client of F in respect of that business and C1 is not.
  4. (3) If there is an agreement under (2)(a) in relation to more than one C2 represented by C1, F may discharge any requirement to notify, obtain consent from, or enter into an agreement with each C2 by sending to, or receiving from, C1 a single communication expressed to cover each C2, except that the following will be required for each C2:
    1. (a) separate risk warnings required under this sourcebook;
    2. (b) separate confirmations under the requirements on occasional reporting (COBS 16.3); and
    3. (c) separate periodic statements.
  • 01/11/2007

Reliance on other investment firms: MiFID and equivalent business

COBS 2.4.4

handbook-rule
  1. (1) This rule applies if a firm (F1), in the course of performing MiFID or equivalent third country business, receives an instruction to perform an investment or ancillary service on behalf of a client (C) through another firm (F2), if F2 is:
    1. (a) a MiFID investment firm or a third country investment firm; or
    2. (b) an investment firm that is:
      1. (i) a firm or authorised in another EEA State; and
      2. (ii) subject to equivalent relevant requirements.
  2. (2) F1 may rely upon:
    1. (a) any information about C transmitted to it by F2; and
    2. (b) any recommendations in respect of the service or transaction that have been provided to C by F2.
  3. (3) F2 will remain responsible for:
    1. (a) the completeness and accuracy of any information about C transmitted by it to F1; and
    2. (b) the appropriateness for C of any advice or recommendations provided to C.
  4. (4) F1 will remain responsible for concluding the services or transaction based on any such information or recommendations in accordance with the applicable requirements under the regulatory system.

[Note: article 20 of MiFID]

  • 01/11/2007

COBS 2.4.5

handbook-guidance
  1. (1) If F1 is required to perform a suitability assessment or an appropriateness assessment under COBS 9 or COBS 10, it may rely upon a suitability assessment performed by F2, if F2 was subject to the requirements for assessing suitability in COBS 9 (excluding the basic advice rules) or equivalent requirements in another EEA State in performing that assessment.
  2. (2) If F1 is required to perform an appropriateness assessment under COBS 10, it may rely upon an appropriateness assessment performed by F2, if F2 was subject to the requirements for assessing appropriateness in COBS 10.2 or equivalent requirements in another EEA State in performing that assessment.
  • 01/11/2007

Reliance on others: other situations

COBS 2.4.6

handbook-rule
  1. (1) This rule applies if the rule on reliance on other investment firms (COBS 2.4.4 R) does not apply.
  2. (2) A firm will be taken to be in compliance with any rule in this sourcebook that requires it to obtain information to the extent it can show it was reasonable for it to rely on information provided to it in writing by another person.
  • 01/11/2007

COBS 2.4.7

handbook-evidential-provisions
  1. (1) In relying on COBS 2.4.6 R, a firm should take reasonable steps to establish that the other person providing written information is not connected with the firm and is competent to provide the information.
  2. (2) Compliance with (1) may be relied upon as tending to establish compliance with COBS 2.4.6 R.
  3. (3) Contravention of (1) may be relied upon as tending to establish contravention of COBS 2.4.6 R.
  • 01/11/2007

COBS 2.4.8

handbook-guidance
It will generally be reasonable (in accordance with COBS 2.4.6R (2)) for a firm to rely on information provided to it in writing by an unconnected authorised person or a professional firm, unless it is aware or ought reasonably to be aware of any fact that would give reasonable grounds to question the accuracy of that information.
  • 01/11/2007

COBS 2.4.9

handbook-rule
Any information that a rule in COBS or CASS requires to be sent to a client may be sent to another person on the instruction of the client so long as the recipient is not connected to the firm.
  • 01/11/2007

COBS 2.4.10

handbook-rule
In the case of business that is not MiFID or equivalent third country business, if a rule in COBS or CASS requires information to be sent to a client, a firm need not send that information so long as it takes reasonable steps to establish that it has been or will be supplied by another person.
  • 01/11/2007

Export chapter as

COBS 3

Client categorisation

COBS 3.1

Application

  • 01/11/2007

Scope

COBS 3.1.1

handbook-rule
The scope of this chapter is the same as that of the rules in the Handbook to which it relates.
  • 01/11/2007

COBS 3.1.2

handbook-guidance
This chapter relates to parts of the Handbook whose application depends on whether a person is a client, a retail client, a professional client or an eligible counterparty. However, it does not apply to the extent that another part of the Handbook provides for a different approach to client categorisation. For example, a separate approach to client categorisation is set out in the definition of a retail client for a firm that gives basic advice.
  • 01/11/2007

COBS 3.1.3

handbook-rule

The sections in this chapter on general notifications (COBS 3.3) and policies, procedures and records (COBS 3.8) do not apply in relation to a firm that is neither:

  1. (1) conducting designated investment business; nor
  2. (2) in the case of MiFID or equivalent third country business providing an ancillary service that does not constitute designated investment business.
  • 01/11/2007

Mixed business

COBS 3.1.4

handbook-rule

If a firm conducts business for a client involving both:

  1. (1) MiFID or equivalent third country business; and
  2. (2) other regulated activities subject to this chapter;

it must categorise that client for such business in accordance with the provisions in this chapter that apply to MiFID or equivalent third country business.

  • 01/11/2007

COBS 3.1.5

handbook-guidance
  1. (1) For example, the requirement concerning mixed business will apply if a MiFID investment firm advises a client on whether to invest in a scheme or a life policy. This is because the former is within the scope of MiFID and the latter is not. In such a case, the MiFID client categorisation requirements prevail.
  2. (2) The requirement does not apply where the MiFID or equivalent third country business is provided separately from the other regulated activities. Where this is the case, in accordance with Principle 7 (communications with clients) the basis on which the different activities will be performed, including any differences in the categorisations that apply, should be made clear to the client.
  • 01/11/2007

COBS 3.2

Clients

  • 01/11/2007

General definition

COBS 3.2.1

handbook-rule
  1. (1) A person to whom a firm provides, intends to provide or has provided:
    1. (a) a service in the course of carrying on a regulated activity; or
    2. (b) in the case of MiFID or equivalent third country business, an ancillary service,
  2. is a "client" of that firm;
  3. (2) A "client" includes a potential client.
  4. (3) In relation to the financial promotion rules, a person to whom a financial promotion is or is likely to be communicated is a "client" of a firm that communicates or approves it.
  5. (4) A client of an appointed representative or, if applicable, a tied agent is a "client" of the firm for whom that appointed representative, or tied agent, acts or intends to act in the course of business for which that firm has accepted responsibility under the Act or MiFID (see sections 39 and 39A of the Act and SUP 12.3.5 R).

[Note: article 4(1)(10) of MiFID]

  • 01/11/2007

COBS 3.2.2

handbook-guidance
  1. (1) A corporate finance contact or a venture capital contact is not a client under the first limb of the general definition. This is because a firm does not provide a service to such a contact. However, it will be a client under the third limb of the general definition for the purposes of the financial promotion rules if the firm communicates or approves a financial promotion that is or is likely to be communicated to such a contact.
  2. (2) Communicating or approving a financial promotion that is or is likely to be communicated to such a contact is not MiFID or equivalent third country business. In such circumstances, the "non-MiFID" client categorisations are relevant and, in categorising elective professional clients, the "quantitative test" will not need to be satisfied.

Who is the client?

COBS 3.2.3

handbook-rule
  1. (1) If a firm provides services to a person that is acting as an agent, the identity of its client will be determined in accordance with the rule on agents as clients (see COBS 2.4.3 R).
  2. (2) In relation to a firm establishing, operating or winding up a personal pension scheme or a stakeholder pension scheme, a member or beneficiary of that scheme is a client of the firm.
  3. (3) If a firm that does not fall within (2) provides services to a person that is acting as the trustee of a trust, that person will be the firm's client and the underlying beneficiaries of the trust will not.
  4. (4) In relation to business that is neither MiFID or equivalent third country business, if a firm provides services to a collective investment scheme that does not have separate legal personality, that collective investment scheme will be the firm's client.
  5. (5) If a firm provides services relating to a contribution to or interest in a CTF (except for a personal recommendation relating to a contribution to a CTF or in relation to the communication or approval of a financial promotion), the firm's only client is:
    1. (a) the registered contact, if there is one;
    2. (b) otherwise, the person to whom the statement must be sent in accordance with Regulation 10 of the CTF Regulations.

COBS 3.3

General notifications

  • 01/11/2007

COBS 3.3.1

handbook-rule

A firm must:

  1. (1) notify a new client of its categorisation as a retail client, professional client, or eligible counterparty in accordance with this chapter; and
  2. (2) prior to the provision of services, inform a client in a durable medium about:
    1. (a) any right that client has to request a different categorisation; and
    2. (b) any limitations to the level of client protection that such a different categorisation would entail.

[Note: paragraph 2 of section I of annex II to MiFID and articles 28(1) and (2) and the second paragraph of article 50(2) of the MiFID implementing Directive]

  • 01/11/2007

COBS 3.3.2

handbook-guidance
This chapter requires a firm to allow a client to request re-categorisation as a client that benefits from a higher degree of protection (see COBS 3.7.1 R). A firm must therefore notify a client that is categorised as a professional client or an eligible counterparty of its right to request a different categorisation whether or not the firm will agree to such requests. However, a firm need only notify a client of a right to request a different categorisation involving a lower level of protection if it is prepared to consider such requests.
  • 01/11/2007

COBS 3.4

Retail clients

  • 01/11/2007

COBS 3.4.1

handbook-rule

A retail client is a client who is not a professional client or an eligible counterparty.

[Note: article 4(1)(12) of MiFID]

  • 01/11/2007

COBS 3.4.2

handbook-rule
If a firm provides services relating to a CTF (except for a personal recommendation relating to a contribution to a CTF), the firm's client is a retail client even if it would otherwise be categorised as a professional client or an eligible counterparty under this chapter.
  • 01/11/2007

COBS 3.5

Professional clients

  • 01/11/2007

COBS 3.5.1

handbook-rule

A professional client is a client that is either a per se professional client or an elective professional client.

[Note: article 4(1)(11) of MiFID]

  • 01/11/2007

Per se professional clients

COBS 3.5.2

handbook-rule

Each of the following is a per se professional client unless and to the extent it is an eligible counterparty or is given a different categorisation under this chapter:

  1. (1) an entity required to be authorised or regulated to operate in the financial markets. The following list includes all authorised entities carrying out the characteristic activities of the entities mentioned, whether authorised by an EEA State or a third country and whether or not authorised by reference to a directive:
    1. (a) a credit institution;
    2. (b) an investment firm;
    3. (c) any other authorised or regulated financial institution;
    4. (d) an insurance company;
    5. (e) a collective investment scheme or the management company of such a scheme;
    6. (f) a pension fund or the management company of a pension fund;
    7. (g) a commodity or commodity derivatives dealer;
    8. (h) a local;
    9. (i) any other institutional investor;
  2. (2) in relation to MiFID or equivalent third country business a large undertaking meeting two of the following size requirements on a company basis:
    1. (a) balance sheet total of EUR 20,000,000;
    2. (b) net turnover of EUR 40,000,000;
    3. (c) own funds of EUR 2,000,000;
  3. (3) in relation to business that is not MiFID or equivalent third country business a large undertaking meeting any of the following conditions:
    1. (a) a body corporate (including a limited liability partnership) which has (or any of whose holding companies or subsidiaries has) (or has had at any time during the previous two years) called up share capital or net assets of at least £5 million (or its equivalent in any other currency at the relevant time);
    2. (b) an undertaking that meets (or any of whose holding companies or subsidiaries meets) two of the following tests:
      1. (i) a balance sheet total of EUR 12,500,000;
      2. (ii) a net turnover of EUR 25,000,000;
      3. (iii) an average number of employees during the year of 250;
    3. (c) a partnership or unincorporated association which has (or has had at any time during the previous two years) net assets of at least £5 million (or its equivalent in any other currency at the relevant time) and calculated in the case of a limited partnership without deducting loans owing to any of the partners;
    4. (d) a trustee of a trust (other than an occupational pension scheme, SSAS, personal pension scheme or stakeholder pension scheme) which has (or has had at any time during the previous two years) assets of at least £10 million (or its equivalent in any other currency at the relevant time) calculated by aggregating the value of the cash and designated investments forming part of the trust's assets, but before deducting its liabilities;
    5. (e) a trustee of an occupational pension scheme or SSAS, or a trustee or operator of a personal pension scheme or stakeholder pension scheme where the scheme has (or has had at any time during the previous two years):
      1. (i) at least 50 members; and
      2. (ii) assets under management of at least £10 million (or its equivalent in any other currency at the relevant time);
    6. (f) a local authority or public authority.
  4. (4) a national or regional government, a public body that manages public debt, a central bank, an international or supranational institution (such as the World Bank, the IMF, the ECP, the EIB) or another similar international organisation;
  5. (5) another institutional investor whose main activity is to invest in financial instruments (in relation to the firm's MiFID or equivalent third country business) or designated investments (in relation to the firm's other business). This includes entities dedicated to the securitisation of assets or other financing transactions.

[Note: first paragraph of section I of annex II to MiFID]

  • 01/11/2007

COBS 3.5.2A

handbook-rule
In relation to MiFID or equivalent third country business a local authority or a public authority is not likely to be a regional government for the purposes of COBS 3.5.2 R (4). In the FSA's opinion, a local authority may be a per se professional client for those purposes if it meets the test for large undertakings in COBS 3.5.2 R (2).

Elective professional clients

COBS 3.5.3

handbook-rule

A firm may treat a client as an elective professional client if it complies with (1) and (3) and, where applicable, (2):

  1. (1) the firm undertakes an adequate assessment of the expertise, experience and knowledge of the client that gives reasonable assurance, in light of the nature of the transactions or services envisaged, that the client is capable of making his own investment decisions and understanding the risks involved (the "qualitative test");
  2. (2) in relation to MiFID or equivalent third country business in the course of that assessment, at least two of the following criteria are satisfied:
    1. (a) the client has carried out transactions, in significant size, on the relevant market at an average frequency of 10 per quarter over the previous four quarters;
    2. (b) the size of the client's financial instrument portfolio, defined as including cash deposits and financial instruments, exceeds EUR 500,000;
    3. (c) the client works or has worked in the financial sector for at least one year in a professional position, which requires knowledge of the transactions or services envisaged;
  3. (the "quantitative test"); and
  4. (3) the following procedure is followed:
    1. (a) the client must state in writing to the firm that it wishes to be treated as a professional client either generally or in respect of a particular service or transaction or type of transaction or product;
    2. (b) the firm must give the client a clear written warning of the protections and investor compensation rights the client may lose; and
    3. (c) the client must state in writing, in a separate document from the contract, that it is aware of the consequences of losing such protections.

[Note: first, second, third and fifth paragraphs of section II.1 and first paragraph of section II.2 of annex II to MiFID]

  • 01/11/2007

COBS 3.5.4

handbook-rule

If the client is an entity, the qualitative test should be performed in relation to the person authorised to carry out transactions on its behalf.

[Note: fourth paragraph of section II.1 of annex II to MiFID]

  • 01/11/2007

COBS 3.5.5

handbook-guidance

The fitness test applied to managers and directors of entities licensed under directives in the financial field is an example of the assessment of expertise and knowledge involved in the qualitative test.

[Note: fourth paragraph of section II.1 of annex II to MiFID]

  • 01/11/2007

COBS 3.5.6

handbook-rule

Before deciding to accept a request for re-categorisation as an elective professional client a firm must take all reasonable steps to ensure that the client requesting to be treated as an elective professional client satisfies the qualitative test and, where applicable, the quantitative test.

[Note: second paragraph of section II.2 of annex II to MiFID]

  • 01/11/2007

COBS 3.5.7

handbook-guidance

An elective professional client should not be presumed to possess market knowledge and experience comparable to a per se professional client

[Note: second paragraph of section II.1 of annex II to MiFID]

  • 01/11/2007

COBS 3.5.8

handbook-guidance

Professional client are responsible for keeping the firm informed about any change that could affect their current categorisation.

[Note: fourth paragraph of section II.2 of annex II to MiFID]

  • 01/11/2007

COBS 3.5.9

handbook-rule
  1. (1) If a firm becomes aware that a client no longer fulfils the initial conditions that made it eligible for categorisation as an elective professional client, the firm must take the appropriate action.
  2. (2) Where the appropriate action involves re-categorising that client as a retail client, the firm must notify that client of its new categorisation.


[Note: fourth paragraph of section II.2 of annex II to MiFID and article 28(1) of the MiFID implementing Directive]

  • 01/11/2007

COBS 3.6

Eligible counterparties

  • 01/11/2007

COBS 3.6.1

handbook-rule
  1. (1) An eligible counterparty is a client that is either a per se eligible counterparty or an elective eligible counterparty.
  2. (2) A client can only be an eligible counterparty in relation to eligible counterparty business (PRIN 1 Annex 1 R is an exception to this).

[Note: article 24(1) of MiFID]

  • 01/11/2007

Per se eligible counterparties

COBS 3.6.2

handbook-rule

Each of the following is a per se eligible counterparty (including an entity that is not from an EEA state that is equivalent to any of the following) unless and to the extent it is given a different categorisation under this chapter:

  1. (1) an investment firm;
  2. (2) a credit institution;
  3. (3) an insurance company;
  4. (4) a collective investment scheme authorised under the UCITS Directive or its management company;
  5. (5) a pension fund or its management company;
  6. (6) another financial institution authorised or regulated under EU legislation or the national law of an EEA State;
  7. (7) an undertaking exempted from the application of MiFID under either Article 2(1)(k) (certain own account dealers in commodities or commodity derivatives) or Article 2(1)(l) (locals) of that directive;
  8. (8) a national government or its corresponding office, including a public body that deals with the public debt;
  9. (9) a central bank;
  10. (10) a supranational organisation.

[Note: first paragraph of article 24(2) and first paragraph of article 24(4) of MiFID]

COBS 3.6.3

handbook-guidance
For the purpose of COBS 3.6.2 R (6), a financial institution includes regulated institutions in the securities, banking and insurance sectors.
  • 01/11/2007

Elective eligible counterparties

COBS 3.6.4

handbook-rule

A firm may treat a client as an elective eligible counterparty if:

  1. (1) the client is an undertaking and:
    1. (a) is a per se professional client (except for a client that is only a per se professional client because it is an institutional investor under COBS 3.5.2 R (5)) and, in relation to business other than MiFID or equivalent third country business:
      1. (i) is a body corporate (including a limited liability partnership) which has (or any of whose holding companies or subsidiaries has) called up share capital of at least £10 million (or its equivalent in any other currency at the relevant time); or
      2. (ii) meets the criteria in the rule on meeting two quantitative tests (COBS 3.5.2 R (3)(b)); or
    2. (b) requests such categorisation and is an elective professional client, but only in respect of the services or transactions for which it could be treated as a professional client; and
  2. (2) the firm has, in relation to MiFID or equivalent third country business, obtained express confirmation from the prospective counterparty that it agrees to be treated as an eligible counterparty.

[Note: article 24(3) and the second paragraph of article 24(4) of MiFID and article 50(1) of the MiFID implementing Directive]

  • 01/11/2007

COBS 3.6.5

handbook-guidance
The categories of elective eligible counterparties include an equivalent undertaking that is not from an EEA State provided the above conditions and requirements are satisfied.
  • 01/11/2007

COBS 3.6.6

handbook-rule

A firm may obtain a prospective counterparty's confirmation that it agrees to be treated as an eligible counterparty either in the form of a general agreement or in respect of each individual transaction.



[Note: second paragraph of article 24(3) of MiFID]

  • 01/11/2007

Client and firm located in different jurisdictions

COBS 3.6.7

handbook-rule

In the case of MiFID or equivalent third country business, in the event of a transaction where the prospective counterparties are located in different EEA States, the firm shall defer to the status of the other undertaking as determined by the law or measures of the EEA State in which that undertaking is established.

[Note: first paragraph of article 24(3) of MiFID]

  • 01/11/2007

COBS 3.7

Providing clients with a higher level of protection

  • 01/11/2007

COBS 3.7.1

handbook-rule

A firm must allow a professional client or an eligible counterparty to request re-categorisation as a client that benefits from a higher degree of protection.

[Note: second paragraph of article 24(2) of, and the second paragraph of section I of annex II to, MiFID and the second paragraph of article 50(2) of the MiFID implementing Directive]

  • 01/11/2007

COBS 3.7.2

handbook-guidance

It is the responsibility of a professional client or eligible counterparty to ask for a higher level of protection when it deems it is unable to properly assess or manage the risks involved.

[Note: third paragraph of section I and fourth paragraph of section II.2 of annex II to MiFID and second paragraph of article 50(2) of the MiFID implementing Directive]

  • 01/11/2007

COBS 3.7.3

handbook-rule

A firm may, either on its own initiative or at the request of the client concerned:

  1. (1) treat as a professional client or a retail client a client that might otherwise be categorised as a per se eligible counterparty;
  2. (2) treat as a retail client a client that might otherwise be categorised as a per se professional client;
and if it does so, the client will be re-categorised accordingly. Where applicable, this re-categorisation is subject to the requirement for a written agreement in COBS 3.7.5 R.

[Note: second paragraph of article 24(2) of, and second paragraph of section I of annex II to, MiFID and article 28(3) and the second paragraph of article 50(2) of the MiFID implementing Directive]

  • 01/11/2007

COBS 3.7.4

handbook-rule

If a per se eligible counterparty requests treatment as a client whose business with the firm is subject to conduct of business protections, but does not expressly request treatment as a retail client and the firm agrees to that request, the firm must treat that eligible counterparty as a professional client.

[Note: first paragraph of article 50(2) of the MiFID implementing Directive]

  • 01/11/2007

COBS 3.7.5

handbook-rule
  1. (1) If, in relation to MiFID or equivalent third country business a per se professional client or a per se eligible counterparty requests treatment as a retail client, the client will be classified as a retail client if it enters into a written agreement with the firm to the effect that it will not be treated as a professional client or eligible counterparty for the purposes of the applicable conduct of business regime.
  2. (2) This agreement must specify the scope of the re-categorisation, such as whether it applies to one or more particular services or transactions, to one or more types of product or transaction or to one or more rules.

[Note: fourth paragraph of section I of annex II to MiFID and second paragraph of article 50(2) of the MiFID implementing Directive]

  • 01/11/2007

COBS 3.7.6

handbook-guidance
  1. (1) In accordance with Principle 7 (communications with clients) if a firm at its own initiative re-categorises a client in accordance with this section, it should notify that client of its new category under this section.
  2. (2) If the firm already has an agreement with the client, it should also consider any contractual requirements concerning the amendment of that agreement.
  • 01/11/2007

COBS 3.7.7

handbook-guidance

The ways in which a client may be provided with additional protections under this section include re-categorisation:

  1. (1) on a general basis; or
  2. (2) on a trade by trade basis; or
  3. (3) in respect of one or more specified rules; or
  4. (4) in respect of one or more particular services or transactions; or
  5. (5) in respect of one or more types of product or transaction.

[Note: second paragraph of article 24(2) of MiFID]

  • 01/11/2007

COBS 3.7.8

handbook-guidance
Re-categorising a client as a retail client under this section does not necessarily mean it will become an eligible complainant under DISP.
  • 01/11/2007

COBS 3.8

Policies, procedures and records

  • 01/11/2007

Policies and procedures

COBS 3.8.1

handbook-rule

A firm must implement appropriate written internal policies and procedures to categorise its clients.

[Note: fourth paragraph of section II.2 of annex II to MiFID]

  • 01/11/2007

Records

COBS 3.8.2

handbook-rule
  1. (1) A firm must make a record of the form of each notice provided and each agreement entered into under this chapter. This record must be made at the time that standard form is first used and retained for the relevant period after the firm ceases to carry on business with clients who were provided with that form.
  2. (2) A firm must make a record in relation to each client of:
    1. (a) the categorisation established for the client under this chapter, including sufficient information to support that categorisation;
    2. (b) evidence of despatch to the client of any notice required under this chapter and if such notice differs from the relevant standard form, a copy of the actual notice provided; and
    3. (c) a copy of any agreement entered into with the client under this chapter.
  3. This record must be made at the time of categorisation and should be retained for the relevant period after the firm ceases to carry on business with or for that client.
  4. (3) The relevant periods are:
    1. (a) indefinitely, in relation to a pension transfer, pension opt-out or FSAVC;
    2. (b) at least five years, in relation to a life policy or pension contract;
    3. (c) five years in relation to MiFID or equivalent third country business; and
    4. (d) three years in any other case.

[Note: article 51(3) of the MiFID implementing Directive]

  • 01/11/2007

COBS 3.8.3

handbook-guidance
If a firm provides the same form of notice to more than one client, it need not maintain a separate copy of it for each client, provided it keeps evidence of despatch of the notice to each client.
  • 01/11/2007

Export chapter as

COBS 4

Communicating with clients, including financial promotions

COBS 4.1

Application

  • 01/11/2007

Who? What?

COBS 4.1.1

handbook-rule

This chapter applies to a firm:

  1. (1) communicating with a client in relation to its designated investment business;
  2. (2) communicating or approving a financial promotion other than:
    1. (a) a financial promotion of qualifying credit, a home purchase plan or a home reversion plan; or
    2. (b) a financial promotion in respect of a non-investment insurance contract; or
    3. (c) a promotion of an unregulated collective investment scheme that would breach section 238(1) of the Act if made by an authorised person (firms may not communicate or approve such promotions).
  • 01/11/2007

COBS 4.1.1A

handbook-rule
COBS 4.4.3 R applies to a firm with respect to the activity of issuing electronic money.
  • 30/04/2011

COBS 4.1.2

handbook-guidance
  1. (1) This chapter applies in relation to an authorised professional firm in accordance with COBS 18 (Specialist regimes).
  2. (2) This chapter applies, to a limited extent, in relation to communicating or approving a financial promotion that relates to a deposit if the deposit is a structured deposit, cash deposit ISA or cash deposit CTF.

COBS 4.1.3

handbook-guidance

A firm is required to comply with the financial promotion rules in relation to a financial promotion communicated by its appointed representative even where the financial promotion does not require approval because of the exemption in article 16 of the Financial Promotion Order (Exempt persons).

[Note: see section 39 of the Act]

  • 01/11/2007

COBS 4.1.4

handbook-guidance
  1. (1) In COBS 4.3.1 R, COBS 4.5.8 R and COBS 4.7.1 R, the defined terms "financial promotion" and "direct offer financial promotion" include, in relation to MiFID or equivalent third country business, all communications that are marketing communications within the meaning of MiFID.
  2. (2) In the case of MiFID or equivalent third country business, certain requirements in this chapter are subject to an exemption for the communication of a third party prospectus in certain circumstances. This has a similar effect to the exemption in article 70(1)(c) of the Financial Promotion Order, which is referred to in the definition of an excluded communication.
  3. (3) In this chapter "financial promotion" and "direct offer financial promotion" include communications that are marketing communications for the purposes of the UCITS Directive.

COBS 4.1.5

handbook-guidance
  1. (1) A firm communicating with an eligible counterparty should have regard to the application of COBS to eligible counterparty business (COBS 1 Annex 1 Part 1).
  2. (2) This chapter does not apply in relation to communicating with an eligible counterparty other than the section on compensation information (see COBS 4.4) but elements of the requirements in PRIN may apply.
  • 01/11/2007

COBS 4.1.6

handbook-guidance
Approving a financial promotion without communicating it (which includes causing it to be communicated) is not MiFID or equivalent third country business. Communicating a financial promotion to a person, such as a corporate finance contact or a venture capital contact, who is not a client within the meaning of COBS 3.2.1 R (1), COBS 3.2.1 R (2) or COBS 3.2.1 R (4) in respect of the MiFID or equivalent third country business to which the financial promotion relates, is also not MiFID or equivalent third country business. Further guidance on what amounts to MiFID business may be found in PERG 13.

COBS 4.1.7

handbook-guidance

A reference in this chapter to MiFID or equivalent third country business includes a reference to communications that occur before an agreement to perform services in relation to MiFID or equivalent third country business.

[Note: see recital 82 to the MiFID implementing Directive]

  • 01/11/2007

Where? General position

COBS 4.1.8

handbook-rule
  1. (1) In relation to communications by a firm to a client in relation to its designated investment business this chapter applies in accordance with the general application rule and the rule on business with UK clients from an overseas establishment (COBS 1 Annex 1 Part 2 paragraph 2.1R).
  2. (2) In addition, the financial promotion rules apply to a firm in relation to:
    1. (a) the communication of a financial promotion to a person inside the United Kingdom;
    2. (b) the communication of a cold call to a person outside the United Kingdom, unless:
      1. (i) it is made from a place outside the United Kingdom; and
      2. (ii) it is made for the purposes of a business which is carried on outside the United Kingdom and which is not carried on in the United Kingdom; and
    3. (c) the approval of a financial promotion for communication to a person inside the United Kingdom.
  • 01/11/2007

Where? Modifications to comply with EU law

COBS 4.1.9

handbook-guidance
  1. (1) The EEA territorial scope rule modifies the general territorial scope of the rules in this chapter to the extent necessary to be compatible with European law. This means that in a number of cases, the rules in this chapter will apply to communications made by UK firms to persons located outside the United Kingdom and will not apply to communications made to persons inside the United Kingdom by EEA firms. Further guidance on this is located in COBS 1 Annex 1.
  2. (2) One effect of the EEA territorial scope rule is that the rules in this chapter will not generally apply to an EEA key investor information document but will, for example, apply to a firm (including an EEA UCITS management company) when marketing in the United Kingdom the units of an EEA UCITS scheme that is a recognised scheme.
  3. (3) The financial promotion rules do not apply to incoming communications in relation to the MiFID business of an investment firm from another EEA State that are, in its home member state, regulated under MiFID in another EEA State. For the purpose of article 36 of the Financial Promotion Order the FSA does not make any rules in relation to such incoming communications.

COBS 4.1.10

handbook-guidance

Firms should note the territorial scope of this chapter is also affected by:

  1. (1) the disapplication for financial promotions originating outside the United Kingdom that are not capable of having an effect within the United Kingdom (section 21(3) of the Act (Restrictions on financial promotion)) (see the defined term "excluded communication");
  2. (2) the exemptions for overseas communicators (see the defined term "excluded communication"); and
  3. (3) the rules on financial promotions with an overseas element (see COBS 4.9).
  • 01/11/2007

COBS 4.2

Fair, clear and not misleading communications

  • 01/11/2007

The fair, clear and not misleading rule

COBS 4.2.1

handbook-rule
  1. (1) A firm must ensure that a communication or a financial promotion is fair, clear and not misleading.
  2. (2) This rule applies in relation to:
    1. (a) a communication by the firm to a client in relation to designated investment business other than a third party prospectus;
    2. (b) a financial promotion communicated by the firm that is not:
      1. (i) an excluded communication;
      2. (ii) a non-retail communication;
      3. (iii) a third party prospectus; and
    3. (c) a financial promotion approved by the firm.

[Note: article 19(2) of MiFID, recital 52 to the MiFID implementing Directive and article 77 of the UCITS Directive]

COBS 4.2.2

handbook-guidance
  1. (1) The fair, clear and not misleading rule applies in a way that is appropriate and proportionate taking into account the means of communication and the information the communication is intended to convey. So a communication addressed to a professional client may not need to include the same information, or be presented in the same way, as a communication addressed to a retail client.
  2. (2) COBS 4.2.1R(2)(b) does not limit the application of the fair, clear and not misleading rule under COBS 4.2.1R (2) (a). So, for example, a communication in relation to designated investment business that is both a communication to a professional client and a financial promotion, will still be subject to the fair, clear and not misleading rule.
  • 01/11/2007

COBS 4.2.3

handbook-guidance
Section 397 of the Act creates a criminal offence relating to certain misleading statements and practices.
  • 01/11/2007

Fair, clear and not misleading financial promotions

COBS 4.2.4

handbook-guidance

A firm should ensure that a financial promotion:

  1. (1) for a product or service that places a client's capital at risk makes this clear;
  2. (2) that quotes a yield figure gives a balanced impression of both the short and long term prospects for the investment;
  3. (3) that promotes an investment or service whose charging structure is complex, or in relation to which the firm will receive more than one element of remuneration, includes the information necessary to ensure that it is fair, clear and not misleading and contains sufficient information taking into account the needs of the recipients;
  4. (4) that names the FSA as its regulator and refers to matters not regulated by the FSA makes clear that those matters are not regulated by the FSA;
  5. (5) that offers packaged products or stakeholder products not produced by the firm, gives a fair, clear and not misleading impression of the producer of the product or the manager of the underlying investments.
  • 01/11/2007

COBS 4.2.5

A communication or a financial promotion should not describe a feature of a product or service as "guaranteed", "protected" or "secure", or use a similar term unless:

  1. (1) that term is capable of being a fair, clear and not misleading description of it; and
  2. (2) the firm communicates all of the information necessary, and presents that information with sufficient clarity and prominence, to make the use of that term fair, clear and not misleading.

The reasonable steps defence to an action for damages

COBS 4.2.6

handbook-rule
If, in relation to a particular communication or financial promotion, a firm takes reasonable steps to ensure it complies with the fair, clear and not misleading rule, a contravention of that rule does not give rise to a right of action under section 150 of the Act.
  • 01/11/2007

COBS 4.3

Financial promotions to be identifiable as such

  • 01/11/2007

COBS 4.3.1

handbook-rule
  1. (1) A firm must ensure that a financial promotion addressed to a client is clearly identifiable as such.
  2. [Note: article 19(2) of MiFID and article 77 of the UCITS Directive]
  3. (2) If a financial promotion relates to a firm's MiFID or equivalent third country business, this rule does not apply to the extent that the financial promotion is a third party prospectus.
  4. (3) If a financial promotion relates to a firm's business that is not MiFID or equivalent third country business, this rule applies to communicating or approving the financial promotion but does not apply:
    1. (a) to the extent that it is an excluded communication;
    2. (b) to the extent that it is a prospectus advertisement to which PR 3.3 applies;
    3. (c) if it is image advertising;
    4. (d) if it is a non-retail communication;
    5. (e) to the extent that it relates to a pure protection contract that is a long-term care insurance contract.
  5. (4) In the case of a marketing communication that relates to a UCITS scheme or an EEA UCITS scheme, (2) and (3) do not limit the application of this rule.

COBS 4.4

Compensation information

  • 01/11/2007

COBS 4.4.1

handbook-rule

A firm must ensure that any reference in advertising to an investor compensation scheme established under the Investor Compensation Directive is limited to a factual reference to the scheme.

[Note: article 10(3) of the Investor Compensation Directive]

  • 01/11/2007

COBS 4.4.3

handbook-rule
To ensure that a firm pays due regard to the information needs of its clients, and communicates information to them in a way which is clear, fair and not misleading with respect to the activity of issuing electronic money, a firm must ensure that, in good time before the firm issues electronic money to a person, it has been communicated to that person on paper or in another durable medium that the compensation scheme does not cover claims made in connection with issuing electronic money.
  • 30/04/2011

COBS 4.5

Communicating with retail clients

  • 01/11/2007

Application

COBS 4.5.1

handbook-rule
  1. (1) Subject to (2) and (3), this section applies to a firm in relation to:
    1. (a) the provision of information in relation to its designated investment business; and
    2. (b) the communication or approval of a financial promotion;
  2. where such information or financial promotion is addressed to, or disseminated in such a way that it is likely to be received by, a retail client.
  3. (2) If a communication relates to a firm's MiFID or equivalent third country business, this section does not apply:
    1. (a) to the extent that it is a third party prospectus;
    2. (b) if it is image advertising.
  4. (3) If a communication relates to a firm's business that is not MiFID or equivalent third country business, this section does not apply:
    1. (a) to the extent that it is an excluded communication;
    2. (b) to the extent that it is a prospectus advertisement to which PR 3.3 applies;
    3. (c) if it is image advertising.

General rule

COBS 4.5.2

handbook-rule

A firm must ensure that information:

  1. (1) includes the name of the firm;
  2. (2) is accurate and in particular does not emphasise any potential benefits of relevant business or a relevant investment without also giving a fair and prominent indication of any relevant risks;
  3. (3) is sufficient for, and presented in a way that is likely to be understood by, the average member of the group to whom it is directed, or by whom it is likely to be received; and
  4. (4) does not disguise, diminish or obscure important items, statements or warnings.

[Note: article 27(2) of the MiFID implementing Directive]

  • 01/11/2007

COBS 4.5.3

handbook-guidance
The name of the firm may be a trading name or shortened version of the legal name of the firm, provided the retail client can identify the firm communicating the information.
  • 01/11/2007

COBS 4.5.4

handbook-guidance
In deciding whether, and how, to communicate information to a particular target audience, a firm should take into account the nature of the product or business, the risks involved, the client's commitment, the likely information needs of the average recipient, and the role of the information in the sales process.
  • 01/11/2007

COBS 4.5.5

handbook-guidance
When communicating information, a firm should consider whether omission of any relevant fact will result in information being insufficient, unclear, unfair or misleading.
  • 01/11/2007

Comparative information

COBS 4.5.6

handbook-rule
  1. (1) If information compares relevant business, relevant investments, or persons who carry on relevant business, a firm must ensure that:
    1. (a) the comparison is meaningful and presented in a fair and balanced way; and
    2. (b) in relation to MiFID or equivalent third country business;
      1. (i) the sources of the information used for the comparison are specified; and
      2. (ii) the key facts and assumptions used to make the comparison are included.
  2. (2) In this rule, in relation to MiFID or equivalent third country business, ancillary services are to be regarded as relevant business.

[Note: article 27(3) of the MiFID implementing Directive]

Referring to tax

COBS 4.5.7

handbook-rule
  1. (1) If any information refers to a particular tax treatment, a firm must ensure that it prominently states that the tax treatment depends on the individual circumstances of each client and may be subject to change in future.
  2. [Note: article 27(7) of the MiFID implementing Directive]
  3. (2) This rule applies in relation to MiFID or equivalent third country business or, otherwise, to a financial promotion. However, it does not apply to a financial promotion to the extent that it relates to:
    1. (a) [deleted]
    2. (b) a pure protection contract that is a long-term care insurance contract.

Consistent financial promotions

COBS 4.5.8

handbook-rule
  1. (1) A firm must ensure that information contained in a financial promotion is consistent with any information the firm provides to a retail client in the course of carrying on designated investment business or, in the case of MiFID or equivalent third country business, ancillary services.
  2. [Note: article 29(7) of the MiFID implementing Directive]
  3. (2) This rule does not apply to a financial promotion to the extent that it relates to:
    1. (a) [deleted]
    2. (b) a pure protection contract that is a long-term care insurance contract.

COBS 4.6

Past, simulated past and future performance

  • 01/11/2007

Application

COBS 4.6.1

handbook-rule
  1. (1) Subject to (2) and (3), this section applies to a firm in relation to:
    1. (a) the provision of information in relation to its MiFID or equivalent third country business;
    2. (b) the communication or approval of a financial promotion;
  2. where such information or financial promotion is addressed to, or disseminated in such a way that it is likely to be received by, a retail client.
  3. (2) If a communication relates to a firm's MiFID or equivalent third country business , this section does not apply:
    1. (a) to the extent that the communication is a third party prospectus;
    2. (b) if it is image advertising.
  4. (3) If a communication relates to a firm's business that is not MiFID or equivalent third country business, this section does not apply:
    1. (a) to the extent that it is an excluded communication;
    2. (b) to the extent that it is a prospectus advertisement to which PR 3.3 applies;
    3. (c) if it is image advertising;
    4. (d) to the extent that it relates to a deposit that is not a structured deposit;
    5. (e) to the extent that it relates to a pure protection contract that is a long-term care insurance contract.

Past performance

COBS 4.6.2

handbook-rule

A firm must ensure that information that contains an indication of past performance of relevant business, a relevant investment or a financial index, satisfies the following conditions:

  1. (1) that indication is not the most prominent feature of the communication;
  2. (2) the information includes appropriate performance information which covers at least the immediately preceding five years, or the whole period for which the investment has been offered, the financial index has been established, or the service has been provided if less than five years, or such longer period as the firm may decide, and in every case that performance information must be based on and show complete 12-month periods;
  3. (3) the reference period and the source of information are clearly stated;
  4. (4) the information contains a prominent warning that the figures refer to the past and that past performance is not a reliable indicator of future results;
  5. (5) if the indication relies on figures denominated in a currency other than that of the EEA State in which the retail client is resident, the currency is clearly stated, together with a warning that the return may increase or decrease as a result of currency fluctuations;
  6. (6) if the indication is based on gross performance, the effect of commissions, fees or other charges is disclosed.

[Note: article 27(4) of the MiFID implementing Directive]

  • 01/11/2007

COBS 4.6.3

handbook-guidance
The obligations relating to describing performance should be interpreted in the light of their purpose and in a way that is appropriate and proportionate taking into account the means of communication and the information the communication is intended to convey. For example, a periodic statement in relation to managing investments that is sent in accordance with the rules on reporting information to clients (see COBS 16) may include past performance as its most prominent feature.
  • 01/11/2007

COBS 4.6.4

handbook-guidance
If a financial promotion includes information referring to the past performance of a packaged product that is not a financial instrument, a firm will comply with the rule on appropriate performance information (COBS 4.6.2R (2)) if the financial promotion includes, in the case of a scheme, unit-linked life policy, unit-linked personal pension scheme or unit-linked stakeholder pension scheme (other than a unitised with-profits life policy or stakeholder pension scheme) past performance information calculated and presented in accordance with the table in COBS 4.6.4A G.

COBS 4.6.4A

handbook-guidance
This Table belongs to COBS 4.6.4 G
  • 01/11/2007

COBS 4.6.4B

handbook-guidance
  1. (1) The firm should present the information referred to in COBS 4.6.4 G no less prominently than any other past performance information.
  2. (2) This guidance does not apply to a prospectus, key investor information document or simplified prospectus drawn up in accordance with COLL.

COBS 4.6.5

handbook-guidance
  1. (1) In relation to a packaged product (other than a scheme, a unit-linked life policy, unit-linked personal pension scheme or a unit-linked stakeholder pension scheme (that is not a unitised with-profits life policy or stakeholder pension scheme)), the information should be given on:
    1. (a) an offer to bid basis (which should be stated) if there is an actual return or comparison of performance with other investments; or
    2. (b) an offer to offer, bid to bid or offer to bid basis (which should be stated) if there is a comparison of performance with an index or with movements in the price of units; or
    3. (c) a single pricing basis with allowance for charges.
  2. (2) If the pricing policy of the investment has changed, the prices used should include such adjustments as are necessary to remove any distortions resulting from the pricing method.
  • 01/11/2007

Simulated past performance

COBS 4.6.6

handbook-rule

A firm must ensure that information that contains an indication of simulated past performance of relevant business, a relevant investment or a financial index, satisfies the following conditions:

  1. (1) it relates to an investment or a financial index;
  2. (2) the simulated past performance is based on the actual past performance of one or more investments or financial indices which are the same as, or underlie, the investment concerned;
  3. (3) in respect of the actual past performance, the conditions set out in paragraphs (1) to (3), (5) and (6) of the rule on past performance (COBS 4.6.2 R) are complied with; and
  4. (4) the information contains a prominent warning that the figures refer to simulated past performance and that past performance is not a reliable indicator of future performance.

[Note: article 27(5) of the MiFID implementing Directive]

  • 01/11/2007

Future performance

COBS 4.6.7

handbook-rule
  1. (1) A firm must ensure that information that contains an indication of future performance of relevant business, a relevant investment, a structured deposit or a financial index, satisfies the following conditions:
    1. (a) it is not based on and does not refer to simulated past performance;
    2. (b) it is based on reasonable assumptions supported by objective data;
    3. (c) it discloses the effect of commissions, fees or other charges if the indication is based on gross performance; and
    4. (d) it contains a prominent warning that such forecasts are not a reliable indicator of future performance.
  2. (2) Other than in relation to MiFID or equivalent third country business, this rule only applies to financial promotions that relate to a financial instrument (or a financial index that relates exclusively to financial instruments) or a structured deposit.

[Note: article 27(6) of the MiFID implementing Directive]

  • 01/11/2007

COBS 4.6.8

handbook-guidance
A firm should not provide information on future performance if it is not able to obtain the objective data needed to comply with the rule on future performance. For example, objective data in relation to EIS shares may be difficult to obtain.
  • 01/11/2007

COBS 4.6.9

handbook-rule
  1. (1) A firm that communicates to a client a projection for a packaged product which is not a financial instrument must ensure that the projection complies with the projections rules in COBS 13.4, COBS 13.5 and COBS 13 Annex 2.
  2. (2) A firm must not communicate a projection for a highly volatile product to a client unless the product is a financial instrument.

COBS 4.7

Direct offer financial promotions

  • 01/11/2007

COBS 4.7.1

handbook-rule
  1. (1) Subject to (3) and (4), a firm must ensure that a direct offer financial promotion that is addressed to, or disseminated in such a way that it is likely to be received by, a retail client contains:
    1. (a) such of the information referred to in the rules on information disclosure (COBS 6.1.4 R, COBS 6.1.6 R, COBS 6.1.7 R, COBS 6.1.9 R, COBS 14.3.2 R, COBS 14.3.3 R, COBS 14.3.4 R and COBS 14.3.5 R) as is relevant to that offer or invitation; and
    2. [Note: article 29(8) of the MiFID implementing Directive, the rules listed implement Articles 30 to 33 of the MiFID implementing Directive]
    3. (b) if it does not relate to MiFID or equivalent third country business, additional appropriate information about the relevant business and relevant investments so that the client is reasonably able to understand the nature and risks of the relevant business and relevant investments and consequently to take investment decisions on an informed basis.
  2. (2) This rule does not require the information in (1) to be included in a direct offer financial promotion if, in order to respond to an offer or invitation contained in it, the retail client must refer to another document or documents, which, alone or in combination, contain that information.
  3. (3) If a communication relates to a firm's MiFID or equivalent third country business, this section does not apply:
    1. (a) to the extent that it is a third party prospectus;
    2. (b) if it is image advertising.
  4. (4) If a communication relates to a firm's business that is not MiFID or equivalent third country business, this section does not apply:
    1. (a) to the extent that it is an excluded communication;
    2. (b) to the extent that it is a prospectus advertisement to which PR 3.3 applies;
    3. (c) if it is image advertising;
    4. (d) to the extent that it relates to a deposit that is not a cash deposit ISA or cash deposit CTF;
    5. (e) to the extent that it relates to a pure protection contract that is a long-term care insurance contract.
  5. (5) In this rule, in relation to MiFID or equivalent third country business, ancillary services are to be regarded as relevant business.

Guidance

COBS 4.7.2

handbook-guidance
Although COBS 4.7.1R (1)(b) does not apply in relation to MiFID or equivalent third country business, similar requirements may apply under COBS 2.2.
  • 01/11/2007

COBS 4.7.3

handbook-guidance
  1. (1) COBS 4.7.1R (2) allows a firm to communicate a direct offer financial promotion that does not contain all the information required by COBS 4.7.1R (1), if the firm can demonstrate that the client has referred to the required information before the client makes or accepts an offer in response to the direct offer financial promotion.
  2. (2) A firm communicating or approving a direct offer financial promotion may also be subject to the rules on providing product information in COBS 14.2, including the exceptions in COBS 14.2.5 R to 14.2.9 R.
  • 01/11/2007

COBS 4.7.4

handbook-guidance

In order to enable a client to make an informed assessment of a relevant investment or relevant business, a firm may wish to include in a direct offer financial promotion:

  1. (1) a summary of the taxation of any investment to which it relates and the taxation consequences for the average member of the group to whom it is directed or by whom it is likely to be received;
  2. (2) a statement that the recipient should seek a personal recommendation if he has any doubt about the suitability of the investments or services being promoted; and
  3. (3) (in relation to a promotion for a packaged product that is not a financial instrument) a key features illustration, in which a generic projection may generally be used.
  • 01/11/2007

COBS 4.7.5A

handbook-guidance
COBS 4.13.2 R (Marketing communications relating to UCITS schemes or EEA UCITS schemes) and COBS 4.13.3 R (Marketing communications relating to feeder UCITS) contain additional disclosure requirements for firms in relation to marketing communications (other than key investor information) that concern particular investment strategies of a UCITS scheme or EEA UCITS scheme.
  • 01/07/2011

COBS 4.7.6

handbook-rule
  1. (1) A firm must not communicate or approve a direct offer financial promotion:
    1. (a) relating to a warrant or derivative;
    2. (b) to or for communication to a retail client; and
    3. (c) where the firm will not itself be required to comply with the rules on appropriateness (see COBS 10);
  2. unless the firm has adequate evidence that the condition in (2) is satisfied.
  3. (2) The condition is that the person who will arrange or deal in relation to the derivative or warrant will comply with the rules on appropriateness or equivalent requirements for any application or order that the person is aware, or ought reasonably to be aware, is in response to the direct offer financial promotion.
  • 06/03/2008

COBS 4.8

Cold calls and other promotions that are not in writing

  • 01/11/2007

Application

COBS 4.8.1

handbook-rule

This section applies to a firm in relation to the communication of a financial promotion that is not in writing, but it does not apply:

  1. (1) to the extent that the financial promotion is an excluded communication;
  2. (2) if the financial promotion is image advertising;
  3. (3) if the financial promotion is a non-retail communication;
  4. (4) [deleted]
  5. (5) to the extent that the financial promotion relates to a pure protection contract that is a long-term care insurance contract.

Restriction on cold calling

COBS 4.8.2

handbook-rule

A firm must not make a cold call unless:

  1. (1) the recipient has an established existing client relationship with the firm and the relationship is such that the recipient envisages receiving cold calls; or
  2. (2) the cold call relates to a generally marketable packaged product which is not:
    1. (a) a higher volatility fund; or
    2. (b) a life policy with a link (including a potential link) to a higher volatility fund; or
  3. (3) the cold call relates to a controlled activity to be carried on by an authorised person or exempt person and the only controlled investments involved or which reasonably could be involved are:
    1. (a) readily realisable securities (other than warrants); and
    2. (b) generally marketable non-geared packaged products.
  • 01/11/2007

Promotions that are not in writing

COBS 4.8.3

handbook-rule

A firm must not communicate a solicited or unsolicited financial promotion that is not in writing, to a client outside the firm's premises, unless the person communicating it:

  1. (1) only does so at an appropriate time of the day;
  2. (2) identifies himself and the firm he represents at the outset and makes clear the purpose of the communication;
  3. (3) clarifies if the client would like to continue with or terminate the communication, and terminates the communication at any time that the client requests it; and
  4. (4) gives a contact point to any client with whom he arranges an appointment.

COBS 4.9

Financial promotions with an overseas element

  • 01/11/2007

Application

COBS 4.9.1

handbook-rule
  1. (1) Subject to (2) and (3), this section applies to a firm in relation to the communication or approval of a financial promotion that relates to the business of an overseas person.
  2. (2) This section does not apply to a firm in relation to its MiFID or equivalent third country business.
  3. (3) If a communication relates to a firm's business that is not MiFID or equivalent third country business, this section does not apply:
    1. (a) to the extent that it is an excluded communication;
    2. (b) to the extent that it is a prospectus advertisement to which PR 3.3 applies;
    3. (c) if it is image advertising;
    4. (d) if it is a non-retail communication;
    5. (e) [deleted]
    6. (f) to the extent that it relates to a pure protection contract that is a long-term care insurance contract.

COBS 4.9.2

handbook-guidance
  • 01/11/2007

Financial promotions for the business of an overseas person

COBS 4.9.3

handbook-rule

A firm must not communicate or approve a financial promotion which relates to a particular relevant investment or relevant business of an overseas person, unless:

  1. (1) the financial promotion makes clear which firm has approved or communicated it and, where relevant, explains:
    1. (a) that the rules made under the Act for the protection of retail clients do not apply;
    2. (b) the extent and level to which the compensation scheme will be available, or if the scheme will not be available, a statement to that effect; and
    3. (c) if the communicator wishes, the protection or compensation available under another system of regulation; and
  2. (2) the firm has taken reasonable steps to satisfy itself that the overseas person will deal with retail clients in the United Kingdom in an honest and reliable way.

Financial promotions for an overseas long-term insurer

COBS 4.9.4

handbook-rule

A firm may only communicate or approve a financial promotion to enter into a life policy with a person who is:

  1. (1) an authorised person; or
  2. (2) an exempt person who is exempt in relation to effecting or carrying out contracts of insurance of the class to which the financial promotion relates; or
  3. (3) an overseas long-term insurer that is entitled under the law of its home country or territory to carry on there insurance business of the class to which the financial promotion relates.

COBS 4.9.5

handbook-rule

A financial promotion for an overseas long-term insurer, which has no establishment in the United Kingdom, must include:

  1. (1) the full name of the overseas long-term insurer, the country where it is registered, and, if different, the country where its head office is situated;
  2. (2) a prominent statement that 'holders of policies issued by the company will not be protected by the Financial Services Compensation Scheme if the company becomes unable to meet its liabilities to them'; and
  3. (3) if any trustee, investment manager or United Kingdom agent of the overseas long-term insurer is named which is not independent of the overseas long-term insurer, a prominent statement of that fact.
  • 01/11/2007

COBS 4.9.6

handbook-rule

A financial promotion for an overseas long-term insurer which is authorised to carry on long-term insurance business in any country or territory listed in paragraph (c) of the Glossary definition of overseas long-term insurer must also include:

  1. (1) the full name of any trustee of property of any description which is retained by the overseas long-term insurer in respect of the promoted contracts;
  2. (2) an indication whether the investment of such property (or any part of it) is managed by the overseas long-term insurer or by another person and the full name of any investment manager;
  3. (3) the registered office of any such trustee and of any investment manager and of his principal office (if different); and
  4. (4) where any person in the United Kingdom takes, or may take, any steps on behalf of the overseas long-term insurer to enter into a promoted contract, the following details:
    1. (a) the full name of the overseas long-term insurer;
    2. (b) the registered office, head office or principal place of business of that person in the United Kingdom; and
    3. (c) if there is more than one such person, the principal or main person in the United Kingdom.
  • 01/11/2007

COBS 4.9.7

handbook-rule

If a financial promotion relates to a life policy with an overseas long-term insurer but does not name the overseas long-term insurer by giving its full name or its business name:

  1. (1) it must include the following prominent statement: "This financial promotion relates to an insurance company which does not, and is not authorised to, carry on in any part of the United Kingdom the class of insurance business to which this promotion relates. This means that the management and solvency of the company are not supervised by the Financial Services Authority. Holders of policies issued by the company will not have the right to complain to the Financial Ombudsman Service if they have a complaint against the company and will not be protected by the Financial Services Compensation Scheme if the company should become unable to meet its liabilities to them"; and
  2. (2) if it also refers to other investments, it must make this clear.
  • 01/11/2007

COBS 4.10

Systems and controls and approving and communicating financial promotions

  • 01/11/2007

Systems and controls

COBS 4.10.1

handbook-guidance
The rules in SYSC 3 and SYSC 4 require a firm that communicates with a client in relation to designated investment business, or communicates or approves a financial promotion, to put in place systems and controls or policies and procedures in order to comply with the rules in this chapter.
  • 01/11/2007

Approving financial promotions

COBS 4.10.2

handbook-rule
  1. (1) Before a firm approves a financial promotion for communication by an unauthorised person, it must confirm that the financial promotion complies with the financial promotion rules.
  2. (2) If, at any time after a firm has complied with (1), a firm becomes aware that a financial promotion no longer complies with the financial promotion rules, it must withdraw its approval and notify any person that it knows to be relying on its approval as soon as reasonably practicable.
  3. (3) When approving a financial promotion, the firm must confirm compliance with the financial promotion rules that would have applied if the financial promotion had been communicated by a firm other than in relation to MiFID or equivalent third country business.
  • 01/11/2007

COBS 4.10.3

handbook-guidance
  1. (1) Section 21(1) of the Act (Restrictions on financial promotion) prohibits an unauthorised person from communicating a financial promotion, in the course of business, unless an exemption applies or the financial promotion is approved by a firm. Many of the rules in this chapter apply when a firm approves a financial promotion in the same way as when a firm communicates a financial promotion itself.
  2. (2) A firm may also wish to approve a financial promotion that it communicates itself. This would ensure that an unauthorised person who then also communicates the financial promotion to another person will not contravene the restriction on financial promotion in the Act (section 21).
  3. (3) Approving a financial promotion for communication by an unauthorised person is not MiFID or equivalent third country business.
  4. (4) A firm may not approve a financial promotion relating to an unregulated collective investment scheme unless the firm would be able to communicate the promotion without breaching section 238(1) of the Act (see section 240 of the Act). The exemptions from that section in the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001 (as amended from time to time) are relevant.
  • 01/11/2007

COBS 4.10.4

handbook-rule
A firm must not approve a financial promotion to be made in the course of a personal visit, telephone conversation or other interactive dialogue.
  • 01/11/2007

COBS 4.10.5

handbook-rule
If a firm approves a financial promotion in circumstances in which one or more of the financial promotion rules, or the prohibition on approval of promotions for collective investment schemes in section 240(1) of the Act (Restriction on approval), are expressly disapplied, the approval must be given on terms that it is limited to those circumstances.
  • 01/11/2007

COBS 4.10.6

handbook-guidance
For example, if a firm approves a financial promotion for communication to a professional client or an eligible counterparty, the approval must be limited to communication to such persons.
  • 01/11/2007

COBS 4.10.7

handbook-guidance
If an approval is limited, and an unauthorised person communicates the financial promotion to persons not covered by the approval, the unauthorised person may commit an offence under the restriction on financial promotion in the Act (section 21). A firm giving a limited approval may wish to notify the unauthorised person accordingly.
  • 01/11/2007

Communicating financial promotions

COBS 4.10.8

handbook-guidance
If a firm continues to communicate a financial promotion when the financial promotion no longer complies with the rules in this chapter, it will breach those rules.
  • 01/11/2007

COBS 4.10.9

handbook-guidance
A financial promotion which is clearly only relevant at a particular date will not cease to comply with the financial promotion rules merely because the passage of time has rendered it out-of-date; an example would be a dated analyst's report.
  • 01/11/2007

Relying on another firm's confirmation of compliance

COBS 4.10.10

handbook-rule
  1. (1) A firm (A) will not contravene any of the financial promotion rules if it communicates a financial promotion which has been produced by another person and:
    1. (a) A takes reasonable care to establish that another firm (B) has confirmed that the financial promotion complies with the financial promotion rules;
    2. (b) A takes reasonable care to establish that it communicates the financial promotion only to recipients of the type for whom it was intended at the time B carried out the confirmation exercise; and
    3. (c) so far as A is, or ought reasonably to be, aware:
      1. (i) the financial promotion has not ceased to be fair, clear and not misleading since that time; and
      2. (ii) B has not withdrawn the financial promotion.
  2. (2) This rule does not apply in relation to MiFID or equivalent third country business.
  • 01/11/2007

COBS 4.10.11

handbook-guidance
A firm should inform anyone relying on its confirmation of compliance if it becomes aware that the financial promotion no longer complies with the rules in this chapter.
  • 01/11/2007

COBS 4.11

Record keeping: financial promotion

  • 01/11/2007

COBS 4.11.1

handbook-rule
  1. (1) A firm must make an adequate record of any financial promotion it communicates or approves, other than a financial promotion made in the course of a personal visit, telephone conversation or other interactive dialogue.
  2. (2) For a telemarketing campaign, a firm must make an adequate record of copies of any scripts used.
  3. (3) A firm must retain the record in relation to a financial promotion relating to:
    1. (a) a pension transfer, pension opt-out or FSAVC, indefinitely;
    2. (b) a life policy, occupational pension scheme, SSAS, personal pension scheme or stakeholder pension scheme, for six years;
    3. (c) MiFID or equivalent third country business, for five years; and
    4. (d) any other case, for three years.
  4. (4) If a communication relates to a firm's MiFID or equivalent third country business, this section does not apply:
    1. (a) to the extent that the communication is a third party prospectus;
    2. (b) if it is image advertising;
    3. (c) if it is a non-retail communication.
  5. (5) If a communication relates to a firm's business that is not MiFID or equivalent third country business, this section does not apply:
    1. (a) to the extent that it is an excluded communication;
    2. (b) to the extent that it is a prospectus advertisement to which PR 3.3 applies;
    3. (c) if it is image advertising;
    4. (d) if it is a non-retail communication;
    5. (e) [deleted]
    6. (f) to the extent that it relates to a pure protection contract that is a long-term care insurance contract.

[Note: see article 51(3) of the MiFID implementing Directive]

COBS 4.11.2

handbook-guidance
A firm should consider maintaining a record of why it is satisfied that the financial promotion complies with the financial promotion rules.
  • 01/11/2007

COBS 4.11.3

handbook-guidance
If the financial promotion includes market information that is updated continuously in line with the relevant market, the record-keeping rules do not require a firm to record that information.
  • 01/11/2007

COBS 4.12

Unregulated collective investment schemes

  • 01/11/2007

COBS 4.12.1

handbook-rule
  1. (1) A firm may communicate an invitation or inducement to participate in an unregulated collective investment scheme without breaching the restriction on promotion in section 238 of the Act if the promotion falls within an exemption in the table in (4), as explained further in the Notes.
  2. (2) Where the left-hand column in the table in (4) refers to promotion to a category of person, this means that the invitation or inducement:
    1. (a) is made only to recipients who the firm has taken reasonable steps to establish are persons in that category; or
    2. (b) is directed at recipients in a way that may reasonably be regarded as designed to reduce, so far as possible, the risk of participation in the collective investment scheme by persons who are not in that category.
  3. (3) A firm may rely on more than one exemption in relation to the same invitation or inducement.
  4. (4)

COBS 4.12.2

handbook-guidance
Guidance on the regulatory system as it applies to unregulated collective investment schemes appears at PERG 8.20.
  • 01/11/2007

COBS 4.13

UCITS

  • 01/07/2011

Application

COBS 4.13.1

handbook-rule
  1. (1) This section applies to a firm in relation to a communication to a client, including an excluded communication, that is a marketing communication within the meaning of the UCITS Directive.
  2. (2) This section does not apply to:
    1. (a) image advertising; or
    2. (b) the instrument constituting the scheme, the prospectus, the key investor information (or alternatively the simplified prospectus or EEA simplified prospectus) or the periodic reports and accounts of either a UCITS scheme or an EEA UCITS scheme.

[Note: recital (58) of the UCITS Directive]

  • 01/07/2011

Marketing communications relating to UCITS schemes or EEA UCITS schemes

COBS 4.13.2

handbook-rule
  1. (1) A firm must ensure that a marketing communication that comprises an invitation to purchase units in a UCITS scheme or EEA UCITS scheme and that contains specific information about the scheme:
    1. (a) makes no statement that contradicts or diminishes the significance of the information contained in the prospectus and the key investor information document or EEA key investor information document for the scheme;
    2. (b) indicates that a prospectus exists for the scheme and that the key investor information document or EEA key investor information document is available; and
    3. (c) specifies where and in which language such information or documents may be obtained by investors or potential investors or how they may obtain access to them.
  2. (2) Where a UCITS scheme or an EEA UCITS scheme may invest more than 35% of its scheme property in transferable securities and money market instruments issued or guaranteed by an EEA State, one or more of its local authorities, a third country or a public international body to which one or more EEA States belong, the firm must ensure that a marketing communication relating to the scheme contains a prominent statement drawing attention to the investment policy and indicating the particular EEA States, local authorities, third countries or public international bodies in the securities of which the scheme intends to invest or has invested more than 35% of its scheme property.
  3. (3) Where a UCITS scheme or EEA UCITS scheme invests principally in units in collective investment schemes, deposits or derivatives, or replicates a stock or debt securities index in accordance with COLL 5.2.31 R (Schemes replicating an index) or equivalent national measures implementing article 53 of the UCITS Directive, the firm must ensure that a marketing communication relating to the scheme contains a prominent statement drawing attention to the investment policy.
  4. (4) Where the net asset value of a UCITS scheme or EEA UCITS scheme has, or is likely to have, high volatility owing to its portfolio composition or the portfolio management techniques that are or may be used, the firm must ensure that a marketing communication relating to the scheme contains a prominent statement drawing attention to that characteristic.

[Note: articles 54(3), 70(2), 70(3) and 77 of the UCITS Directive]

  • 01/07/2011

Marketing communications relating to a feeder UCITS

COBS 4.13.3

handbook-rule

A firm must ensure that a marketing communication (other than a key investor information document or EEA key investor information document) relating to a feeder UCITS contains a statement that the feeder UCITS permanently invests at least 85% in value of its assets in units of its master UCITS.

[Note: article 63(4) of the UCITS Directive]

  • 01/07/2011

Export chapter as

COBS 5

Distance communications

COBS 5.1

The distance marketing disclosure rules

  • 01/11/2007

Application

COBS 5.1.-1

handbook-rule
  1. (1) This section applies to a firm that carries on any distance marketing activity from an establishment in the United Kingdom, with or for a consumer in the United Kingdom or another EEA State.
  2. (2) If a firm is an intermediary rather than the supplier under the distance contract, references to 'firm' in COBS 5 Annex 1 R and COBS 5 Annex 2 R are to be interpreted as referring to the supplier except for references to 'firm' in COBS 5 Annex 1 R (2), (4) and (18).

The distance marketing disclosure rules

COBS 5.1.1

handbook-rule

A firm must provide a consumer with the distance marketing information (COBS 5 Annex 1R ) in good time before the consumer is bound by a distance contract or offer.

[Note: article 3(1) of the Distance Marketing Directive]

  • 01/11/2007

COBS 5.1.2

handbook-rule

A firm must ensure that the distance marketing information, the commercial purpose of which must be made clear, is provided in a clear and comprehensible manner in any way appropriate to the means of distance communication used, with due regard, in particular, to the principles of good faith in commercial transactions, and the legal principles governing the protection of those who are unable to give their consent, such as minors.

[Note: article 3(2) of the Distance Marketing Directive]

  • 01/11/2007

COBS 5.1.3

handbook-rule

When a firm makes a voice telephony communication to a consumer, it must make its identity and the purpose of its call explicitly clear at the beginning of the conversation.

[Note: article 3(3)(a) of the Distance Marketing Directive]

  • 01/11/2007

Exception: contracts for payment services

COBS 5.1.3A

handbook-rule
Where a distance contract is also a contract for payment services to which the Payment Services Regulations apply, a firm is required to provide to the consumer only the information specified in rows 7 to 12, 15, 16 and 20 of COBS 5 Annex 1 R.

[Note: article 4(5) of the Distance Marketing Directive]

  • 01/11/2009

COBS 5.1.3B

handbook-guidance
Where a distance contract covers both payment services and non-payment services, this exception applies only to the payment services aspects of the contract. A firm taking advantage of this exception will need to comply with the information requirements in Part 5 of the Payment Services Regulations.
  • 01/11/2009

COBS 5.1.4

handbook-rule

A firm must ensure that information on contractual obligations to be communicated to a consumer during the pre-contractual phase is in conformity with the contractual obligations which would result from the law presumed to be applicable to the distance contract if that contract is concluded.

[Note: article 3(4) of the Distance Marketing Directive]

  • 01/11/2007

Terms and conditions, and form

COBS 5.1.5

handbook-rule

A firm must communicate to the consumer all the contractual terms and conditions and the information referred to in the distance marketing disclosure rules (COBS 5.1.1 R to COBS 5.1.4 R) on a durable medium available and accessible to the consumer in good time before the consumer is bound by any distance contract or offer.

[Note: article 5(1) of the Distance Marketing Directive]

  • 01/11/2007

COBS 5.1.6

handbook-guidance
A firm will provide information, or communicate contractual terms and conditions, to a consumer if another person provides the information, or communicates the terms and conditions, to the consumer on its behalf.
  • 01/11/2007

Exception: distance contract as a stage in the provision of another service

COBS 5.1.7

handbook-rule

This section does not apply to a distance contract to deal as agent, advise or arrange, if the distance contract is concluded merely as a stage in the provision of another service by the firm or another person.

[Note: recital 19 to the Distance Marketing Directive]

  • 01/11/2007

Exception: successive operations

COBS 5.1.8

handbook-rule

In the case of a distance contract comprising an initial service agreement, followed by successive operations or a series of separate operations of the same nature performed over time, the rules in this section only apply to the initial agreement.

[Note: article 1(2) of the Distance Marketing Directive]

  • 01/11/2007

COBS 5.1.9

handbook-rule

If there is no initial service agreement but the successive operations or separate operations of the same nature performed over time are performed between the same contractual parties, the distance marketing disclosure rules (COBS 5.1.1 R to COBS 5.1.4 R) will only apply:

  1. (1) when the first operation is performed; and
  2. (2) if no operation of the same nature is performed for more than a year, when the next operation is performed (the next operation being deemed the first in a new series of operations).

[Note: recital 16 and article 1(2) of the Distance Marketing Directive]

  • 01/11/2007

COBS 5.1.10

handbook-guidance

In this section:

  1. (1) 'initial service agreement' includes the opening of a bank account and the concluding of a portfolio management contract;
  2. (2) 'operations' includes transactions made within the framework of a portfolio management contract; and
  3. (3) adding new elements to an initial service agreement, such as the ability to use an electronic payment instrument together with one's existing bank account, does not constitute an 'operation' but an additional contract to which the rules in this section apply. The subscription to new units of the same collective investment scheme is considered to be one of 'successive operations of the same nature'.

[Note: recital 17 of the Distance Marketing Directive]

COBS 5.1.11

handbook-guidance

In the FSA's view, other examples of:

  1. (1) 'initial service agreement' include:
    1. (a) subscribing to an investment trust savings scheme; or
    2. (b) concluding a life policy, personal pension scheme or stakeholder pension scheme that includes a pre-selected option providing for future increases or decreases in regular premiums or payments; and
  2. (2) 'operations' include:
    1. (a) successive purchases or sales of shares under an investment trust savings scheme; and
    2. (b) subsequent index-linked changes to premiums or increases or decreases to pension contributions following fluctuations in salary.
  • 01/11/2007

Exception: voice telephony communications

COBS 5.1.12

handbook-rule

In the case of a voice telephony communication, and subject to the explicit consent of the consumer, only the abbreviated distance marketing information (COBS 5 Annex 2R) needs to be provided during that communication. However, a firm must still provide the distance marketing information (COBS 5 Annex 1R) on a durable medium available and accessible to the consumer in good time before the consumer is bound by any distance contract or offer, unless another exception applies.

[Note: articles 3(3)(b) and 5(1) of the Distance Marketing Directive]

  • 01/11/2007

Exception: means of distance communication not enabling disclosure

COBS 5.1.13

handbook-rule

A firm may provide the distance marketing information (COBS 5 Annex 1R) and the contractual terms and conditions in a durable medium immediately after the conclusion of a distance contract, if the contract has been concluded at a consumer's request using a means of distance communication that does not enable the provision of that information in that form in good time before the consumer is bound by any distance contract or offer.

[Note: article 5(2) of the Distance Marketing Directive]

  • 01/11/2007

Exception: contracts for payment services

COBS 5.1.13A

handbook-rule

Where a distance contract is also a contract for payment services to which the Payment Services Regulations apply, a firm is required to provide to the consumer only the information specified in rows 7 to 12, 15, 16 and 20 of COBS 5 Annex 1 R.

[Note: article 4(5) of the Distance Marketing Directive]

  • 01/11/2009

COBS 5.1.13B

handbook-guidance
Where a distance contract covers both payment services and non-payment services, this exception applies only to the payment services aspects of the contract. A firm taking advantage of this exception will need to comply with the information requirements in Part 5 of the Payment Services Regulations.
  • 01/11/2009

Distance marketing: other provisions

COBS 5.1.14

handbook-rule

If, at any time during the contractual relationship, a consumer that is a party to a distance contract asks a firm:

  1. (1) for a paper copy of the terms and conditions of that contract; or
  2. (2) to change the means of distance communication used;
the firm must provide that paper copy or change the means of distance communication used, unless (in the latter case) that would be incompatible with the contract or the nature of the service provided.

[Note: article 5(3) of the Distance Marketing Directive]

  • 01/11/2007

Unsolicited services

COBS 5.1.15

handbook-rule
  1. (1) A firm must not enforce, or seek to enforce, any obligations under a distance contract against a consumer, in the event of an unsolicited supply of services, the absence of reply not constituting consent.
  2. (2) This rule does not apply to the tacit renewal of a distance contract.

[Note: article 9 of the Distance Marketing Directive]

  • 01/11/2007

Mandatory nature of consumer's rights

COBS 5.1.16

handbook-rule

If a consumer purports to waive any of the consumer's rights created or implied by the rules in this section, a firm must not accept that waiver, nor seek to rely on or enforce it against the consumer.

[Note: article 12 of the Distance Marketing Directive]

  • 01/11/2007

COBS 5.1.17

handbook-rule

If a firm proposes to enter into a distance contract with a consumer that will be governed by the law of a country outside the EEA, the firm must ensure that the consumer will not lose the protection created by the rules in this section if the distance contract has a close link with the territory of one or more EEA States.

[Note: articles 12 and 16 of the Distance Marketing Directive]

  • 01/11/2007

COBS 5.2

E-Commerce

  • 01/11/2007

Application

COBS 5.2.1

handbook-rule
This section applies to a firm carrying on an electronic commerce activity from an establishment in the United Kingdom, with or for a person in the United Kingdom or another EEA State.
  • 01/11/2007

Information about the firm and its products or services

COBS 5.2.2

handbook-rule

A firm must make at least the following information easily, directly and permanently accessible to the recipients of the information society services it provides:

  1. (1) its name;
  2. (2) the geographic address at which it is established;
  3. (3) the details of the firm, including its e-mail address, which allow it to be contacted rapidly and communicated with in a direct and effective manner;
  4. (4) an appropriate statutory status disclosure statement (GEN 4 Annex 1 R), together with a statement which explains that it is on the FSA register and includes its FSA register number;
  5. (5) if it is a professional firm, or a person regulated by the equivalent of a designated professional body in another EEA State:
    1. (a) the name of the professional body (including any designated professional body) or similar institution with which it is registered;
    2. (b) the professional title and the EEA State where it was granted;
    3. (c) a reference to the applicable professional rules in the EEA State of establishment and the means to access them; and
  6. (6) where the firm undertakes an activity that is subject to VAT, its VAT number.

[Note: article 5(1) of the E-Commerce Directive]

  • 01/11/2007

COBS 5.2.3

handbook-rule

If a firm refers to price, it must do so clearly and unambiguously, indicating whether the price is inclusive of tax and delivery costs.

[Note: article 5(2) of the E-Commerce Directive]

  • 01/11/2007

COBS 5.2.4

handbook-rule

A firm must ensure that commercial communications which are part of, or constitute, an information society service, comply with the following conditions:

  1. (1) the commercial communication must be clearly identifiable as such;
  2. (2) the person on whose behalf the commercial communication is made must be clearly identifiable;
  3. (3) promotional offers must be clearly identifiable as such, and the conditions that must be met to qualify for them must be easily accessible and presented clearly and unambiguously; and
  4. (4) promotional competitions or games must be clearly identifiable as such, and the conditions for participation must be easily accessible and presented clearly and unambiguously.

[Note: article 6 of the E-Commerce Directive]

  • 01/11/2007

COBS 5.2.5

handbook-rule

An unsolicited commercial communication sent by e-mail by a firm established in the United Kingdom must be identifiable clearly and unambiguously as an unsolicited commercial communication as soon as it is received by the recipient.

[Note: article 7(1) of the E-Commerce Directive]

  • 01/11/2007

Requirements relating to the placing and receipt of orders

COBS 5.2.6

handbook-rule

A firm must (except when otherwise agreed by parties who are not consumers):

  1. (1) give an ECA recipient at least the following information, clearly, comprehensibly and unambiguously, and prior to the order being placed by the recipient of the service:
    1. (a) the different technical steps to follow to conclude the contract;
    2. (b) whether or not the concluded contract will be filed by the firm and whether it will be accessible;
    3. (c) the technical means for identifying and correcting input errors prior to the placing of the order; and
    4. (d) the languages offered for the conclusion of the contract;
  2. (2) indicate any relevant codes of conduct to which it subscribes and information on how those codes can be consulted electronically;
  3. (3) (when an ECA recipient places an order through technological means), acknowledge the receipt of the recipient's order without undue delay and by electronic means; and
  4. (4) make available to an ECA recipient, appropriate, effective and accessible technical means allowing the recipient to identify and correct input errors prior to the placing of an order.

[Note: articles 10(1) and (2) and 11(1) and (2) of the E-Commerce Directive]

  • 01/11/2007

COBS 5.2.7

handbook-rule

For the purposes of COBS 5.2.6 R (3), an order and an acknowledgement of receipt are deemed to be received when the parties to whom they are addressed are able to access them.

[Note: article 11(1) of the E-Commerce Directive]

  • 01/11/2007

COBS 5.2.8

handbook-rule

Contractual terms and conditions provided by a firm to an ECA recipient must be made available in a way that allows the recipient to store and reproduce them.

[Note: article 10(3) of the E-Commerce Directive]

  • 01/11/2007

Exception: contract concluded by e-mail

COBS 5.2.9

handbook-rule

The requirements relating to the placing and receipt of orders (COBS 5.2.6 R) do not apply to contracts concluded exclusively by exchange of e-mail or by equivalent individual communications.

[Note: article 10(4) and 11(3) of the E-Commerce Directive]

  • 01/11/2007

COBS 5 Annex 1

Distance marketing information

  • 01/11/2007

handbook-rule
This Annex belongs to COBS 5.1.1 R (The distance marketing disclosure rules)
  • 01/11/2007

COBS 5 Annex 2

Abbreviated distance marketing disclosure

  • 01/11/2007

handbook-rule
This Annex belongs to COBS 5.1.12 R
  • 01/11/2007

Export chapter as

COBS 6

Information about the firm, its services and remuneration

COBS 6.1

Information about the firm and compensation information

  • 01/11/2007

Application

COBS 6.1.1

handbook-rule
  1. (1) This section applies to a firm that carries on designated investment business for:
    1. (a) a retail client; and
    2. (b) in the case of MiFID or equivalent third country business, a client.
  2. (2) If expressly provided, this section also applies to ancillary services not covered by (1), but only in the course of MiFID or equivalent third country business carried on with or for a client.
  • 01/11/2007

COBS 6.1.2

handbook-rule
If a firm provides basic advice on stakeholder products in accordance with the basic advice rules, this section does not apply to that service.
  • 01/11/2007

COBS 6.1.3

handbook-guidance
This section imposes requirements relating to disclosure of information to clients that are additional to the general requirement in COBS 2.2.
  • 01/11/2007

Information about a firm and its services

COBS 6.1.4

handbook-rule

A firm must provide a retail client with the following general information, if relevant:

  1. (1) the name and address of the firm, and the contact details necessary to enable a client to communicate effectively with the firm;
  2. (2) in the case of MiFID or equivalent third country business, the languages in which the client may communicate with the firm, and receive documents and other information from the firm;
  3. (3) the methods of communication to be used between the firm and the client including, where relevant, those for the sending and reception of orders;
  4. (4) a statement of the fact that the firm is authorised and the name of the competent authority that has authorised it;
  5. (5) in the case of MiFID or equivalent third country business, the contact address of the competent authority that has authorised the firm;
  6. (6) if the firm is acting through an appointed representative or, where applicable, a tied agent, a statement of this fact specifying the EEA State in which that appointed representative or tied agent is registered;
  7. (7) the nature, frequency and timing of the reports on the performance of the service to be provided by the firm to the client in accordance with the rules on reporting to clients on the provision of services (COBS 16);
  8. (8)
    1. (a) in the case of a common platform firm, a description, which may be provided in summary form, of the conflicts of interest policy;
    2. (b) other than in the case of a common platform firm, when a material interest or conflict of interest may or does arise, the manner in which the firm will ensure fair treatment of the client;
  9. (9) in the case of a common platform firm, at any time that the client requests it, further details of the conflicts of interest policy.

[Note: article 30(1) of the MiFID implementing Directive]

  • 01/11/2007

COBS 6.1.5

handbook-guidance
A firm disclosing details of its authorisation should refer to the appropriate forms of words set out in GEN 4 Annex 1 R.
  • 01/11/2007

COBS 6.1.6

handbook-rule
  1. (1) A firm that manages investments for a client must establish an appropriate method of evaluation and comparison such as a meaningful benchmark, based on the investment objectives of the client and the types of designated investments included in the client portfolio, so as to enable the client to assess the firm's performance.
  2. (2) If a firm proposes to manage investments for a retail client, the firm must provide the client with such of the following information as is applicable:
    1. (a) information on the method and frequency of valuation of the designated investments in the client portfolio;
    2. (b) details of any delegation of the discretionary management of all or part of the designated investments or funds in the client portfolio;
    3. (c) a specification of any benchmark against which the performance of the client portfolio will be compared;
    4. (d) the types of designated investments that may be included in the client portfolio and types of transaction that may be carried out in those designated investments, including any limits; and
    5. (e) the management objectives, the level of risk to be reflected in the manager's exercise of discretion, and any specific constraints on that discretion.

[Note: articles 30(2) and (3) of the MiFID implementing Directive]

  • 01/11/2007

Information concerning safeguarding of designated investments belonging to clients and client money

COBS 6.1.7

handbook-rule
  1. (1) A firm that holds designated investments or client money for a retail client subject to the custody chapter or the client money chapter must provide that client with the following information:
    1. (a) if applicable,
      1. (i) that the designated investments or client money of that client may be held by a third party on behalf of the firm;
      2. (ii) the responsibility of the firm under the applicable national law for any acts or omissions of the third party; and
      3. (iii) the consequences for the client of the insolvency of the third party;
    2. (b) if applicable, that the designated investments belonging to the retail client may be held in an omnibus account by a third party and a prominent warning of the resulting risks;
    3. (c) if it is not possible under national law for designated investments belonging to a client held with a third party to be separately identifiable from the proprietary designated investments of that third party or of the firm, that fact and a prominent warning of the resulting risks;
    4. (d) if applicable, that accounts that contain designated investments or client money belonging to that client are or will be subject to the law of a jurisdiction other than that of a EEA State, an indication that the rights of the client relating to those instruments or money may differ accordingly;
    5. (e) a summary description of the steps which it takes to ensure the protection of any designated investments belonging to the client or client money it holds, including summary details of any relevant investor compensation or deposit guarantee scheme which applies to the firm by virtue of its activities in an EEA State.
  2. (2) A firm that holds designated investments or client money for a retail client must inform the client:
    1. (a) if applicable, about the existence and the terms of any security interest or lien which the firm has or may have over the client's designated investments or client money, or any right of set-off it holds in relation to the client's designated investments or client money; and
    2. (b) if applicable, that a depositary may have a security interest or lien over, or right of set-off in relation to those instruments or money.
  3. (3) A firm within (1) must also, before entering into securities financing transactions in relation to designated investments held by it on behalf of a retail client, or before otherwise using such designated investments for its own account or the account of another client, in good time before the use of those designated investments provide the client, in a durable medium, with clear, full and accurate information on the obligations and responsibilities of the firm with respect to the use of those designated investments, including the terms for their restitution, and on the risks involved.
  4. (4) A firm within (1) that holds client designated investments or client money for a professional client must provide that client with the information in paragraphs (1)(d) and (2)(a) and(b).

[Note: articles 29(3), 30(1)(g) and 32 of the MiFID implementing Directive]

Information about costs and associated charges

COBS 6.1.9

handbook-rule

A firm must provide a retail client with information on costs and associated charges including, if applicable:

  1. (1) the total price to be paid by the client in connection with the designated investment or the designated investment business or ancillary services, including all related fees, commissions, charges and expenses, and all taxes payable via the firm or, if an exact price cannot be indicated, the basis for the calculation of the total price so that the client can verify it. The commissions charged by the firm must be itemised separately in every case;
  2. (2) if any part of the total price referred to (1) is to be paid in or represents an amount of foreign currency, an indication of the currency involved and the applicable currency conversion rates and costs;
  3. (3) notice of the possibility that other costs, including taxes, related to transactions in connection with the designated investment or the designated investment business may arise for the client that are not paid via the firm or imposed by it; and
  4. (4) the arrangements for payment or other performance.

[Note: article 33 of the MiFID implementing Directive]

  • 01/11/2007

COBS 6.1.10

handbook-guidance
The rules on inducements in COBS 2.3 may also require a firm to disclose information to a client in relation to benefits provided to the firm.
  • 01/11/2007

Timing of disclosure

COBS 6.1.11

handbook-rule
  1. (1) A firm must provide a client with the information required by this section in good time before the provision of designated investment business or ancillary services unless otherwise provided by this rule.
  2. (2) A firm may instead provide that information immediately after starting to provide designated investment business or ancillary services if:
    1. (a) the firm was unable to comply with (1) because, at the request of the client, the agreement was concluded using a means of distance communication which prevented the firm from doing so; and
    2. (b) in any case where the rule on voice telephony communications (COBS 5.1.12 R) does not otherwise apply, the firm complies with that rule in relation to the retail client, as if that client were a consumer.

[Note: article 29(2), 29(3) and 29(5) of the MiFID implementing Directive]

  • 01/11/2007

COBS 6.1.12

handbook-guidance
A firm should take into account COBS 8.1.3 R (1), which requires earlier disclosure of some items of information covered in this section.
  • 01/11/2007

Medium of disclosure

COBS 6.1.13

handbook-rule

Except where expressly provided, a firm must provide the information required by this section in a durable medium or via a website (where it does not constitute a durable medium) where the website conditions are satisfied.

[Note: article 29(4) of the MiFID implementing Directive]

  • 01/11/2007

Keeping the client up to date

COBS 6.1.14

handbook-rule
  1. (1) A firm must notify a client in good time about any material change to the information provided under this section which is relevant to a service that the firm is providing to that client.
  2. (2) A firm must provide this notification in a durable medium if the information to which it relates was given in a durable medium.

[Note: article 29(6) of the MiFID implementing Directive]

  • 01/11/2007

Existing clients

COBS 6.1.15

handbook-guidance
  1. (1) A firm need not treat each of several transactions in respect of the same type of financial instrument as a new or different service and so does not need to comply with the disclosure rules in this chapter in relation to each transaction.
  2. [Note: recital 50 to the MiFID implementing Directive]
  3. (2) But a firm should ensure that the client has received all relevant information in relation to a subsequent transaction, such as details of product charges that differ from those disclosed in respect of a previous transaction.
  • 01/11/2007

Compensation information

COBS 6.1.16

handbook-rule
  1. (1) A firm carrying on MiFID business must make available to a client, who has used or intends to use those services, information necessary for the identification of the compensation scheme or any other investor-compensation scheme of which the firm is a member (including, if relevant, membership through a branch) or any alternative arrangement provided for in accordance with the Investor Compensation Directive.
  2. (2) The information under (1) must include the amount and scope of the cover offered by the compensation scheme and any rules laid down by the EEA State pursuant to article 2 (3) of the Investor Compensation Directive.
  3. (3) A firm must provide, on the client's request, information concerning the conditions governing compensation and the formalities which must be completed to obtain compensation.
  4. (4) The information provided for in this rule must be made available in a durable medium or via a website if the website conditions are satisfied in the official language or languages of the EEA State.

[Note: article 10(1) and (2) of the Investor Compensation Directive]

  • 01/11/2007

Record keeping: information about the firm and compensation information

COBS 6.1.17

handbook-guidance
Firms are reminded of the general record-keeping requirements in SYSC 3.2 and SYSC 9.
  • 01/11/2007

COBS 6.2

Describing the breadth of a firm's personal recommendations

  • 01/11/2007

Application and introduction

COBS 6.2.1

handbook-rule
This section applies to a firm which makes a personal recommendation to a retail client to buy a packaged product.
  • 01/11/2007

COBS 6.2.2

handbook-rule
This section does not apply if a firm gives basic advice in accordance with the basic advice rules.
  • 01/11/2007

COBS 6.2.3

handbook-guidance

Under the territorial application rules in COBS 1, the rules in this section apply to:

  1. (1) a UK firm's business carried on from an establishment in an EEA State other than the United Kingdom for a retail client in the United Kingdom unless, the office from which the activity is carried on were a separate person, the activity:
    1. (a) would fall within the overseas persons exclusion in article 72 of the Regulated Activities Order; or
    2. (b) would not be regarded as carried on in the United Kingdom;
  2. (2) a firm's business carried on from an establishment in the United Kingdom carried on for a client in another EEA state.
  • 01/11/2007

COBS 6.2.4

handbook-guidance
A firm's scope of advice relates to the product providers whose products it sells. Its range relates to which products from those providers it sells.
  • 01/11/2007

COBS 6.2.5

handbook-guidance
A firm may operate on the basis of recommending only a subset of the packaged products (its range) selected from the product providers within its scope.
  • 01/11/2007

COBS 6.2.6

handbook-guidance

In order to comply with the rule on information disclosure before providing services (COBS 2.2.1R (1)(a)) and, if applicable, the rule on information to be provided by an insurance intermediary (COBS 7.2.1 R (2)) a firm's disclosures to a client should include whether it expects its scope to be:

  1. (1) the whole of the market;
  2. (2) limited to several product providers;
  3. (3) limited to a single product provider.
  • 01/11/2007

COBS 6.2.7

handbook-guidance
In order to comply with the rule on providing the details of insurance undertakings (COBS 7.2.1 R (3)) a firm should make a record appropriate for distribution to a client of the names of the insurance undertakings with which the firm conducts, or may conduct, business.
  • 01/11/2007

COBS 6.2.8

handbook-guidance
  1. (1) If a firm holds itself out as independent or as otherwise giving personal recommendations to retail clients on packaged products from the whole market (or the whole of any sector of that market), the firm's selection for this purpose will need to be sufficiently large to satisfy the client's best interests rule and the fair, clear and not misleading rule.
  2. (2) A firm that gives personal recommendations on packaged products from the whole of a sector of the market may hold itself out as giving personal recommendations from the whole of that sector.
  • 01/11/2007

COBS 6.2.9

handbook-guidance
A firm may use "panels" of product providers which are sufficient for the purpose of giving recommendations from the whole market and which are reviewed on a regular basis. A firm which provides personal recommendations from the whole market should ensure that its analysis of the market and the available packaged products is kept adequately up to date.
  • 01/11/2007

COBS 6.2.10

handbook-rule
A firm must not hold itself out as providing personal recommendations from the whole market on any type of personal pension scheme unless its advice is based on all types of personal pension schemes, including SIPPs.
  • 01/11/2007

Selling products from the scope and range

COBS 6.2.11

handbook-guidance

In accordance with the client's best interests rule and the fair, clear and not misleading rule, a firm should not describe its services to a retail client as being based on a particular scope of advice and range unless its business processes are designed to ensure that:

  1. (1) its representatives consider, based on adequate knowledge, products from across that scope and range before making a personal recommendation;
  2. (2) it does not recommend products that are not in its scope or range;
  3. (3) each of its representatives who advise on packaged products is able to recommend and sell each product within the relevant range. However it may use a representative who is not competent to advise on and sell a product or category of product within the range if it:
    1. (a) prevents that representative from recommending that product or category of product; and
    2. (b) ensures that if a product ought to be recommended to a client, that client is referred to a representative that is competent to recommend it;
  4. (4) it does not narrow the scope it provides to a client compared with the scope it has disclosed to that client;
  5. (5) it does not alter the scope or range (where permitted under (4)) compared to the scope it has disclosed to a retail client without making a subsequent disclosure of its scope or range with appropriate content, presented with sufficient prominence, and in an appropriate format; and
  6. (6) it does not extend the scope or range in a way that materially alters its remuneration arrangements unless it provides to the client new and appropriate information on inducements, costs and charges (a firm may do this by providing a further services and costs disclosure document or combined initial disclosure document).

Records of scope and range

COBS 6.2.12

handbook-rule
  1. (1) A firm must make, and keep up to date, a record of the scope (or scopes) and the range (or ranges) it will use.
  2. (2) A firm must maintain a record of the particular scope and range on which its personal recommendation to each retail client is based.
  3. (3)
    1. (a) The record of the firm's scope and range (or ranges) must be retained for five years from the date on which it was superseded by a more up-to-date record.
    2. (b) The client-specific record required by (2) must be retained for five years from the date of the provision of the personal recommendation.
  • 01/11/2007

COBS 6.2.13

handbook-guidance
In the case of a firm whose only scope is the selection of packaged products from the whole of the market (or from the whole of a sector of the market), it will be sufficient if the firm's record simply confirms that the personal recommendations it provides are given on this basis (and in the case of a firm which provides personal recommendations on the whole of a sector of the market, confirms the nature and parameters of that sector).
  • 01/11/2007

Remuneration structure and referrals

COBS 6.2.14

handbook-guidance
In determining the remuneration structure of its representatives, a firm should manage any tensions between its obligations to its clients and the personal interests of its representatives (see SYSC 3A.6.2 G and SYSC 10.1.3 R).
  • 01/11/2007

Firms holding themselves out as independent

COBS 6.2.15

handbook-rule
  1. (1) A firm must not hold itself out to a client as acting independently unless it intends to:
    1. (a) provide personal recommendations to that client on packaged products from the whole market (or the whole of a sector of the market); and
    2. (b) offers the client the opportunity of paying a fee for the provision of such advice.
  2. (2) Paragraph (1) does not apply to group personal pension schemes if a firm discloses information to a client in accordance with the rule on group personal pension schemes (COBS 6.3.21 R).
  • 01/11/2007

COBS 6.2.16

handbook-rule
  1. (1) A firm which charges a retail client a fee under COBS 6.2.15R (1)(b) must do so on the basis that it will, in respect of any commission which it receives in respect of transactions in packaged products for that client (and to which the particular fee charging arrangement relates), ensure the value of that commission is transferred to the client.
  2. (2) This rule does not prohibit such a firm from agreeing with the client (in writing) that it will retain an amount or rate of trail or renewal commission up to an amount each year specified in the agreement and so small, relative to the overall amount of fees paid by the client, that it would be manifestly disproportionate for the firm to be required to account to the client in one of the ways outlined in this rule.
  • 01/11/2007

COBS 6.2.17

handbook-guidance
A firm that carries on business in relation to a combination of packaged products, regulated mortgage contracts and home reversion plans can do so in relation to the whole market and therefore be "independent" for one but offer only a limited service for the others. If this is the case, the firm should explain the different nature of the services in a way which complies with the fair, clear and not misleading rule. (See also MCOB.)

COBS 6.2.18

handbook-guidance
The rule on independence means that a firm wishing to hold itself out as independent will need to give clients a purely fee based option for paying for its services. Such a fee may be offered on a contingent basis so that it does not become payable if the client does not acquire a product. A firm offering a fee-based service may, in addition, provide the client with other payment options, such as by commission, or by a combination of fee and commission.
  • 01/11/2007

COBS 6.2.19

handbook-guidance
A firm that holds itself out as independent should consider whether any ownership by it of shares in a product provider or by a product provider in it, or any loan agreements with a product provider, should be disclosed in order to meet the fair, clear and not misleading rule.
  • 01/11/2007

COBS 6.3

Disclosing information about services, fees and commission - packaged products

Application

COBS 6.3.1

handbook-rule
This section applies to a firm which makes a personal recommendation to, deals in investments as agent for, or arranges for, a retail client in relation to a packaged product.
  • 01/11/2007

COBS 6.3.2

handbook-rule
This section does not apply to a firm giving basic advice where the firm follows the basic advice rules in COBS 9.6.

Disclosure to retail clients in good time

COBS 6.3.3

handbook-guidance
  1. (1) The rules referred to in (4) are derived from the Single Market directives and the Distance Marketing Directive. In the FSA's opinion, a firm may comply with them by ensuring that in good time before:
    1. (a) a retail client is bound by an agreement for the provision of a personal recommendation on packaged products; or
    2. (b) the firm performs an act preparatory to the provision of a personal recommendation;
    3. (c) (in relation to the amendment of a life policy for that retail client) it gives a personal recommendation in relation to packaged products;
  2. its representative provides the client with a services and costs disclosure document or combined initial disclosure document.
  3. (2) A firm should consider the extent to which it is appropriate to provide a services and costs disclosure document or a combined initial disclosure document if the appropriate information has been given to the client on a previous occasion and the information is still accurate and appropriate for the client.
  4. (3) A firm should provide the information required by this section in a durable medium.
  5. (4) For the purposes of (1), provision of a services and costs disclosure document or combined initial disclosure document will comply with:
    1. (a) the elements of the rule on summary disclosure of fees, commissions and non-monetary benefits (COBS 2.3.1R (2)(b), as qualified by COBS 2.3.2 R) that relate to disclosure of fees and commissions and, where included, non-monetary benefits;
    2. (b) the rule on information about costs and charges (COBS 6.1.9 R) but only if the hourly rates indicated in the services and costs disclosure document or combined initial disclosure document are actual hourly rates rather than indicative hourly rates;
    3. (c) the rule on information disclosure before providing services (COBS 2.2.1R (1)(a) and COBS 2.2.1R (1)(d));
    4. (d) the items of distance marketing information, set out in paragraphs (1), (2), (4), (5), (19) and (20) of COBS 5 Annex 1 R;
    5. (e) paragraphs (1) (so far as it relates to the firm's name and address), (4) and (6) of the rule on disclosure of information about a firm and its services (COBS 6.1.4 R);
    6. (f) the investor compensation scheme rule in COBS 6.1.16R (1) and (2); and
    7. (g) the rule on information to be provided by an insurance intermediary (COBS 7.2.1 R (1) and COBS 7.2.1 R (2)).
  6. (5) [deleted]
    1. (a) [deleted]
    2. (b) [deleted]
    3. (c) [deleted]
    4. (d) [deleted]
    5. (e) [deleted]

COBS 6.3.4

handbook-rule
For the purposes of GEN 5, a firm may not use the keyfacts logo in relation to any document that is designed to comply with rules in COBS 5, 6.1 or COBS 7 unless it is a services and costs disclosure document or a combined initial disclosure document produced in accordance with the templates and Notes in the annexes to this chapter.

COBS 6.3.5

handbook-guidance
Each of the services and costs disclosure document and combined initial disclosure document that a firm provides to a client should be documents which the firm reasonably considers will be, or are likely to be, appropriate for the client having regard to the type of service which the firm may provide or business which the firm may conduct.

COBS 6.3.6

handbook-guidance
  1. (1) A firm will satisfy the requirements as to timing in the rules referred to in COBS 6.3.3G (4) if its representative provides information to the client on first making contact with the client.
  2. (2) [deleted]

Services and costs disclosure document and combined initial disclosure document

COBS 6.3.7

handbook-guidance
  1. (1) A services and costs disclosure document is a document that contains the keyfacts logo, headings and text in the order shown in COBS 6 Annex 1 and in accordance with the Notes.
  2. (2) A combined initial disclosure document is a document that contains the keyfacts logo, headings and text in the order shown in COBS 6 Annex 2 and in accordance with the Notes.

COBS 6.3.8

handbook-guidance

A firm may include, in a services and costs disclosure document or a combined initial disclosure document, information required by COBS or by the rule on disclosing a tied agent's capacity (SUP 12.6.13 R) and which is not in the template for the services and costs disclosure document or combined initial disclosure document, if the information would be sufficiently prominent. For example, a firm may wish to use those documents to satisfy:

  1. (1) the parts of the rule on information about the firm and its services (COBS 6.1.4 R);
  2. (2) the rule on costs and associated charges (COBS 6.1.9 R);
  3. (3) the items of distance marketing information described in paragraphs (6), (8), (10) and (11) of COBS 5 Annex 1 R;

that would not otherwise be satisfied by providing the services and costs disclosure document or combined initial disclosure document.

COBS 6.3.9

handbook-guidance
Firms can obtain from the FSA website http://www.fsa.gov.uk a specimen of the services and costs disclosure document and the combined initial disclosure document. A firm may produce its services and costs disclosure document or combined initial disclosure document by using its own house style and brand. Electronic tools to help firms to construct their own versions of these documents are available from the FSA website.

COBS 6.3.10

handbook-guidance
  1. (1) [deleted]
  2. (2) [deleted]

COBS 6.3.11

handbook-rule
  1. (1) [deleted]
  2. (2) [deleted]

COBS 6.3.12

handbook-guidance

[deleted]

  1. (1) [deleted]
  2. (2) [deleted]
  3. (3) [deleted]

COBS 6.3.14

handbook-guidance

A firm would be unlikely to comply with the client's best interests rule and the fair, clear and not misleading rule, if:

  1. (1) the services and costs disclosure document or the combined initial disclosure document that it provided initially did not reflect relevant expected commission arrangements; or
  2. (2) the firm arranged to retain any commission which exceeded the amount or rate disclosed without first providing further appropriate inducements information and obtaining the client's prior informed consent to the proposed alteration in a durable medium.

Provision of information on request

COBS 6.3.17

handbook-guidance
A firm should take reasonable steps to ensure that its representative provides a copy of the appropriate range of packaged products to a client on the client's request.

COBS 6.3.18

handbook-guidance
  1. (1) [deleted]
  2. (2)
    1. (a) [deleted]
      1. (i) [deleted]
      2. (ii) [deleted]
    2. (b) [deleted]

Telephone sales

COBS 6.3.19

handbook-guidance
In cases where firms make initial contact with a client on the telephone a firm may, in addition, have to take into account and comply with the requirements in this sourcebook applicable to the conclusion of distance contracts (see COBS 5).

COBS 6.3.20

handbook-guidance
  1. (1) In accordance with the rule on information disclosure before providing services (COBS 2.2.1 R), if a firm's initial contact with a retail client with a view to providing a personal recommendation on packaged products is by telephone then the following information should be provided before proceeding further:
    1. (a) the name of the firm and, if the call is initiated by or on behalf of a firm, the commercial purpose of the call;
    2. (b) whether the firm offers packaged products from the whole market or from a limited number of companies or from a single company or a single group of companies;
    3. (c) whether the firm will provide the client with a personal recommendation on packaged products;
    4. (d) that the client can request a copy of the appropriate range of packaged products;
    5. (e) whether the firm offers a fee-based service, a commission-based service, a service based on a combination of fee and commission, or a combination of these services, and the consequences for the client of proceeding with each type of service; and
    6. (f) that the information given under (a) to (e) will subsequently be confirmed in writing.
  2. (2) If a firm's initial contact with a retail client is by telephone in circumstances in which the firm would otherwise provide a services and costs disclosure document, or a combined initial disclosure document, it should consider sending the client the document as soon as is reasonably practicable following the conclusion of the call.

Group Personal Pensions

COBS 6.3.21

handbook-rule

A firm must take reasonable steps to ensure that its representatives when making contact with an employee with a view to giving a personal recommendation on his employer's group personal pension scheme or stakeholder pension scheme, inform the employer:

  1. (1) that the firm will be providing a personal recommendation on group personal pension schemes and/or stakeholder pension schemes provided by the employer;
  2. (2) whether the employee will be provided with a personal recommendation that is restricted to the group personal pension scheme or stakeholder pension scheme provided by the employer or the recommendation will also cover other products;
  3. (3) the amount and nature of any payments that the employee will have to pay, directly or indirectly, for the personal recommendation.

COBS 6.3.22

handbook-guidance

The payments that the employee would have to pay could be:

  1. (1) fees;
  2. (2) commission;
  3. (3) commission equivalent;
  4. (4) a combination of the above.
  • 01/11/2007

COBS 6.4

Disclosure of charges, remuneration and commission

  • 01/11/2007

Application

COBS 6.4.1

handbook-rule
This section applies to a firm carrying on designated investment business with a retail client.

COBS 6.4.2

handbook-guidance

Under the territorial application rules in COBS 1, the rules in this section apply to:

  1. (1) a UK firm's business carried on from an establishment in an EEA State other than the United Kingdom for a retail client in the United Kingdom unless, if the office from which the activity is carried on were a separate person, the activity:
    1. (a) would fall within the overseas persons exclusion in article 72 of the Regulated Activities Order; or
    2. (b) would not be regarded as carried on in the United Kingdom.
  2. (2) a firm's business carried on from an establishment in the United Kingdom carried on for a client in an other EEA state.
  • 01/11/2007

Disclosure of commission (or equivalent) for packaged products

COBS 6.4.3

handbook-rule
  1. (1) If a firm sells, personally recommends or arranges the sale of a packaged product to a retail client, and subsequently if the retail client requests it, the firm must disclose to the client in cash terms:
    1. (a) any commission receivable by it or any of its associates in connection with the transaction;
    2. (b) if the firm is also the product provider, any commission or commission equivalent payable in connection with the transaction; and
    3. (c) if the firm or any of its associates is in the same immediate group as the product provider, any commission equivalent in connection with the transaction.
  2. (2) Disclosure "in cash terms" in relation to commission does not include the value of any indirect benefits listed in the table at COBS 2.3.15 G.
  3. (3) In determining the amount to be disclosed as commission equivalent, a firm must put a proper value on the cash payments, benefits and services provided to its representatives in connection with the transaction.
  4. (4) This rule does not apply if:
    1. (a) the firm is acting as an investment manager; or
    2. (b) the retail client is not present in the EEA at the time of the transaction; or
    3. (c) the firm provides the client with a key features document, a simplified prospectus, a key investor information document or EEA key investor information document, in accordance with COBS 14, provided that the firm discloses to the client the actual amount or value of commission or equivalent within five business days of effecting the transaction.
  5. (5) If the terms of a packaged product are varied in a way that results in a material increase in commission or commission equivalent, a firm must disclose to a retail client in writing any consequent increase in commission or equivalent receivable by it in relation to that transaction.

COBS 6.4.4

handbook-guidance
Where a firm is required to disclose the value of commission equivalent, the value will be at least as high as the amount of any commission.
  • 01/11/2007

COBS 6.4.5

handbook-rule
  1. (1) A firm must make the disclosure required by the rule on disclosure of commission or equivalent (COBS 6.4.3 R) as close as practicable to the time that it sells, personally recommends or arranges the sale of a packaged product.
  2. (2) The firm must make the disclosure:
    1. (a) in a durable medium; or
    2. (b) when a retail client does not make a written application to enter into a transaction, orally. In these circumstances, the firm must give written confirmation as soon as possible after the date of the transaction, and in any event within five business days.

COBS 6.4.6

handbook-evidential-provisions
  1. (1) When determining the value of cash payments, benefits and services under the rule on disclosure of commission equivalent (COBS 6.4.3 R), a firm should follow the provisions of COBS 6 Annex 6.
  2. (2) Compliance with this evidential provision may be relied on as tending to establish compliance with COBS 6.4.3 R; and
  3. (3) Contravention of this evidential provision may be relied on as tending to establish contravention of COBS 6.4.3 R.
  • 01/11/2007

Guidance on disclosure requirements for packaged products.

COBS 6.4.7

handbook-rule

A firm must not enter into an arrangement to pay commission other than to the firm responsible for a sale, unless:

  1. (1) the firm responsible for the sale has passed on its right to receive the commission to the recipient; or
  2. (2) another firm has given a personal recommendation to the same retail client after the sale; or
  3. (3) the commission is paid following the sale of a packaged product by the firm in response to a financial promotion communicated by that firm to a client of the recipient firm; or
  4. (4) the arrangement is with a firm in the same immediate group.

COBS 6.4.8

handbook-guidance
A disclosure made under this section should indicate the timing of any payment. For example, if a firm exchanges its right to future commission payments for a lump sum, whether by way of a loan or other commercial arrangement, it should disclose the amount of commission receivable by it that has been exchanged for the lump sum.
  • 01/11/2007

COBS 6.4.9

handbook-guidance
The rules in this section build on the disclosure of fees, commissions and non-monetary benefits made under the rule on inducements (COBS 2.3.1 R). However the rules in this section do not require disclosures before the firm makes a personal recommendation.

COBS 6.4.10

handbook-guidance
If the precise rate or value of commission or equivalent is not known in advance, the firm should estimate the rate likely to apply to the representative in respect of the transaction.
  • 01/11/2007

COBS 6.4.11

handbook-guidance
  • 01/11/2007

COBS 6 Annex 1

Services and costs disclosure document described in COBS 6.3.7G(1)

handbook-guidance
Firms should omit the notes and square brackets which appear in the following specimen.

Services and costs disclosure document described in COBS 6.3.7G(1) - COBS 6 Annex 1

COBS 6 Annex 2

Combined initial disclosure document described in COBS 6.3, ICOBS 4.5, MCOB 4.4.1R(1) and MCOB 4.10.2R(1)

This specimen covers services in relation to packaged products, non-investment insurance contracts and home finance transactions (including equity release transactions).



If the firm is not providing services in relation to all products, the parts of the combined initial disclosure document that are not relevant should be omitted.



Firms should omit the notes and square brackets that appear in the following combined initial disclosure document. The completed combined initial disclosure document should contain the keyfacts logo, headings and text in the order shown and in accordance with the notes. Subject to this, a firm may use its own house style and brand.



COBS 6 Annex 2: Combined initial disclosure document described in COBS 6.3, ICOBS 4.5, MCOB 4.4.1R(1) and MCOB 4.10.2R(1) - COBS 6 Annex 2

COBS 6 Annex 6

Calculating commission equivalent

  • 01/11/2007

handbook-evidential-provisions
This table forms part of COBS 6.4.6 E.
  • 01/11/2007

Export chapter as

COBS 7

Insurance mediation

COBS 7.1

Application

  • 01/11/2007

COBS 7.1.1

handbook-rule

This chapter applies to a firm carrying on insurance mediation in relation to a life policy, but only if the State of the commitment is an EEA State.

[Note: articles 1 and 12 (4) and (5) of the Insurance Mediation Directive]

  • 01/11/2007

COBS 7.2

Information to be provided by the insurance intermediary

  • 01/11/2007

COBS 7.2.1

handbook-rule
  1. (1) Prior to the conclusion of any initial life policy and, if necessary, on amendment or renewal, a firm must provide a client with at least the following information:
    1. (a) its name and address;
    2. (b) the fact that it is registered on the FSA register and its FSA register number (or, if it is not on the FSA register , the register in which it has been included and the means for verifying that it has been registered);
    3. (c) whether it has a direct or indirect holding representing more than 10% of the voting rights or capital in a given insurance undertaking (that is not a pure reinsurer);
    4. (d) whether a given insurance undertaking (other than a pure reinsurer) or its parent undertaking has a direct or indirect holding representing more than 10% of the voting rights or capital in the firm; and
    5. (e) the procedures which allow a client and other interested parties to register complaints about the firm with the firm and the Financial Ombudsman Service or, if the Financial Ombudsman Service does not apply, information about the out-of-court complaint and redress procedures available for the settlement of disputes between the firm and its clients.
  2. (2) In addition, a firm must inform a client, concerning the life policy that is provided, whether:
    1. (a) it gives advice on the basis of a fair analysis of the market; or
    2. (b) it is contractually obliged to conduct its insurance mediation business exclusively with one or more insurance undertakings and, if that is the case, that the client can request the names of those insurance undertakings; or
    3. (c) it is not contractually obliged to conduct its insurance mediation business exclusively with one or more insurance undertakings and does not give advice on the basis of a fair analysis of the market and, if that is the case, that the client can request the names of the insurance undertakings with which the firm may and does conduct business.
  3. (3) If a client asks a firm to provide the names of the insurance undertakings with which the firm conducts, or may conduct, business (COBS 7.2.1 R (2)), the firm must provide it.

[Note: article 12(1) of the Insurance Mediation Directive]

  • 01/11/2007

Interface with the services and costs disclosure document

COBS 7.2.2

handbook-guidance
A firm will satisfy elements of the requirement immediately above if it provides a services and costs disclosure document or a combined initial disclosure document to a client (see COBS 6.3).

COBS 7.2.2B

handbook-guidance
  • 06/08/2008

Fair analysis for advised sales

COBS 7.2.3

handbook-rule

When a firm informs a client that it gives advice on the basis of a fair analysis of the market, it must give that advice on the basis of an analysis of a sufficiently large number of life policies available on the market to enable the firm to make a recommendation, in accordance with professional criteria, regarding which life policy would be adequate to meet the client's needs.



[Note: article 12(2) of the Insurance Mediation Directive]

  • 01/11/2007

Specifying demands and needs

COBS 7.2.4

handbook-rule
  1. (1) Prior to the conclusion of any specific life policy, a firm must at least specify, in particular on the basis of the information provided by the client, the demands and needs of that client. Those demands and needs must be modulated according to the complexity of the relevant policy.
  2. (2) This rule does not apply when a firm makes a personal recommendation in relation to a life policy.

[Note: article 12(3) of the Insurance Mediation Directive]

  • 01/11/2007

COBS 7.2.5

handbook-guidance
Firms are reminded that they are obliged to take reasonable steps to ensure that a personal recommendation is suitable for the client and that, whenever a personal recommendation relates to a life policy, a suitability report is required (COBS 9).
  • 01/11/2007

Means of communication to clients

COBS 7.2.6

handbook-rule

All information to be provided to a client in accordance with the rules in this chapter must be communicated:

  1. (1) in a durable medium available and accessible to the client;
  2. (2) in a clear and accurate manner, comprehensible to the client; and
  3. (3) in an official language of the State of the commitment or in any other language agreed by the parties.

[Note: article 13(1) of the Insurance Mediation Directive]

  • 01/11/2007

Additional requirement: telephone selling

COBS 7.2.7

handbook-rule

In the case of telephone selling, the prior information given to a client must be in accordance with the distance marketing disclosure rules (COBS 5.1). Moreover, information must be provided to the client in accordance with the means of communication to clients rule (COBS 7.2.6 R) immediately after the conclusion of the life policy.

[Note: article 13(3) of the Insurance Mediation Directive]

  • 01/11/2007

Exceptions: client request or immediate cover

COBS 7.2.8

handbook-rule

The information referred to in the means of communication to clients rule (COBS 7.2.6 R) may be provided orally where the client requests it, or where immediate cover is necessary. In those cases, the information must be provided to the client in accordance with that rule immediately after the conclusion of the life policy.



[Note: article 13(2) of the Insurance Mediation Directive]

  • 01/11/2007

Export chapter as

COBS 8

Client agreements

COBS 8.1

Client agreements: designated investment business

  • 01/11/2007

Providing a client agreement

COBS 8.1.1

handbook-rule
  1. (1) This chapter applies to a firm in relation to designated investment business carried on for:
    1. (a) a retail client; and
    2. (b) in relation to MiFID or equivalent third country business, a professional client.
  2. (2) If expressly provided, this chapter also applies to a firm in relation to other ancillary services carried on for a client, but only in relation to its MiFID or equivalent third country business.
  3. (3) But this chapter does not apply to a firm to the extent that it is effecting contracts of insurance in relation to a life policy issued or to be issued by the firm as principal.
  • 01/11/2007

COBS 8.1.2

handbook-rule

If a firm carries on designated investment business, other than advising on investments, with or for a new retail client, the firm must enter into a written basic agreement, on paper or other durable medium, with the client setting out the essential rights and obligations of the firm and the client.

[Note: article 39 of the MiFID implementing Directive]

  • 01/11/2007

COBS 8.1.3

handbook-rule
  1. (1) A firm must, in good time before a retail client is bound by any agreement relating to designated investment business or ancillary services or before the provision of those services, whichever is the earlier, provide that client with:
    1. (a) the terms of any such agreement; and
    2. (b) the information about the firm and its services relating to that agreement or to those services required by COBS 6.1.4 R, including information on communications, conflicts of interest and authorised status.
  2. (2) A firm must provide the agreement and information in a durable medium or, where the website conditions are satisfied, otherwise via a website.
  3. (3) A firm may provide the agreement and the information immediately after the client is bound by any such agreement if:
    1. (a) the firm was unable to comply with (1) because, at the request of the client, the agreement was concluded using a means of distance communication which prevented the firm from doing so; and
    2. (b) if the rule on voice telephony communications (COBS 5.1.12 R) does not otherwise apply, the firm complies with that rule in relation to the retail client, as if he were a consumer.
  4. (4)
    1. (a) A firm must notify a client in good time about any material change to the information provided under this rule which is relevant to a service that the firm is providing to that client.
    2. (b) A firm must provide the notification in a durable medium if the information to which it relates was given in a durable medium.

[Note: article 29(1), (4), (5) and (6) of the MiFID implementing Directive]

  • 01/11/2007

Record keeping: client agreements

COBS 8.1.4

handbook-rule
  1. (1) A firm must establish a record that includes the document or documents agreed between it and a client which set out the rights and obligations of the parties, and the other terms on which it will provide services to the client.
  2. (2) The record must be maintained for at least whichever is the longer of:
    1. (a) 5 years; or
    2. (b) the duration of the relationship with the client; or
    3. (c) in the case of a record relating to a pension transfer, pension opt-out or FSAVC, indefinitely.

[Note: article 19(7) of MiFID and article 51(1) of the MiFID implementing Directive. See article 51(3) of the MiFID implementing Directive]

  • 01/11/2007

COBS 8.1.5

handbook-rule

For the purposes of this chapter, a firm may incorporate the rights and duties of the parties into an agreement by referring to other documents or legal texts.

[Note: article 19(7) of MiFID and article 39 of the MiFID implementing Directive]

  • 01/11/2007

COBS 8.1.6

handbook-guidance
When considering its approach to client agreements, a firm should be aware of other obligations in the Handbook which may be relevant. These include the fair, clear and not misleading rule and the rules on disclosure of information to a client before providing services and the rules on distance communications (principally in COBS 2.2, 5, 6 and 13).
  • 01/11/2007

Export chapter as

COBS 9

Suitability (including basic advice)

COBS 9.1

Application and purpose provisions

  • 01/11/2007

Making personal recommendations

COBS 9.1.1

handbook-rule
This chapter applies to a firm which makes a personal recommendation in relation to a designated investment.
  • 01/11/2007

Providing basic advice on a stakeholder product

COBS 9.1.2

handbook-rule
If a firm makes a personal recommendation in relation to a stakeholder product, other than in the course of MiFID or equivalent third country business, it may choose to give basic advice under the rules in section 9.6 of this chapter instead of the rules in the remainder of this chapter.
  • 01/11/2007

Managing investments

COBS 9.1.3

handbook-rule
This chapter applies to a firm which manages investments.
  • 01/11/2007

Business which is not MiFID or equivalent third country business

COBS 9.1.4

handbook-rule

In respect of the business of a firm which is not MiFID or equivalent third country business, this chapter applies only if:

  1. (1) the client is a retail client; or
  2. (2) the firm is managing the assets of an occupational pension scheme, stakeholder pension scheme or personal pension scheme.
  • 01/11/2007

Life policies for professional clients

COBS 9.1.5

handbook-rule
If the firm makes a personal recommendation to a professional client to take out a life policy, this chapter applies only those rules which implement the requirements of the Insurance Mediation Directive.
  • 01/11/2007

COBS 9.1.6

handbook-guidance
If a rule implements a requirement of the Insurance Mediation Directive, a Note follows the rule indicating which provision is being implemented. COBS 7 (Insurance mediation) contains further rules implementing the Insurance Mediation Directive.
  • 01/11/2007

COBS 9.1.7

handbook-guidance
The effect of these application rules and the fact that the Insurance Mediation Directive does not apply to an insurer (unless it is involved in mediation activities) is that this chapter does not apply to an insurer when it is making a personal recommendation to a professional client to take out a life policy.
  • 01/11/2007

Related rules

COBS 9.1.8

handbook-guidance
For a firm making personal recommendations in relation to pensions, COBS 19 contains additional provisions relevant to assessing suitability and the contents of suitability reports.
  • 01/11/2007

COBS 9.1.9

handbook-guidance
COBS 7 (Insurance mediation) contains requirements relating to the basis on which certain recommendations may be made, including requirements relating to fair analysis and range and scope.
  • 01/11/2007

COBS 9.2

Assessing suitability

  • 01/11/2007

Assessing suitability: the obligations

COBS 9.2.1

handbook-rule
  1. (1) A firm must take reasonable steps to ensure that a personal recommendation, or a decision to trade, is suitable for its client.
  2. (2) When making the personal recommendation or managing his investments, the firm must obtain the necessary information regarding the client's:
    1. (a) knowledge and experience in the investment field relevant to the specific type of designated investment or service;
    2. (b) financial situation; and
    3. (c) investment objectives;
  3. so as to enable the firm to make the recommendation, or take the decision, which is suitable for him.

[Note: article 19(4) of MiFID, article 12(2) of the Insurance Mediation Directive]

  • 01/11/2007

COBS 9.2.2

handbook-rule
  1. (1) A firm must obtain from the client such information as is necessary for the firm to understand the essential facts about him and have a reasonable basis for believing, giving due consideration to the nature and extent of the service provided, that the specific transaction to be recommended, or entered into in the course of managing:
    1. (a) meets his investment objectives;
    2. (b) is such that he is able financially to bear any related investment risks consistent with his investment objectives; and
    3. (c) is such that he has the necessary experience and knowledge in order to understand the risks involved in the transaction or in the management of his portfolio.
  2. (2) The information regarding the investment objectives of a client must include, where relevant, information on the length of time for which he wishes to hold the investment, his preferences regarding risk taking, his risk profile, and the purposes of the investment.
  3. (3) The information regarding the financial situation of a client must include, where relevant, information on the source and extent of his regular income, his assets, including liquid assets, investments and real property, and his regular financial commitments.

[Note: articles 35(1), (3) and (4) of the MiFID implementing Directive]

  • 01/11/2007

COBS 9.2.3

handbook-rule

The information regarding a client's knowledge and experience in the investment field includes, to the extent appropriate to the nature of the client, the nature and extent of the service to be provided and the type of product or transaction envisaged, including their complexity and the risks involved, information on:

  1. (1) the types of service, transaction and designated investment with which the client is familiar;
  2. (2) the nature, volume, frequency of the client's transactions in designated investments and the period over which they have been carried out;
  3. (3) the level of education, profession or relevant former profession of the client.


[Note: article 37(1) of the MiFID implementing Directive]

  • 01/11/2007

COBS 9.2.4

handbook-rule

A firm must not encourage a client not to provide information for the purposes of its assessment of suitability.

[Note: article 37(2) of the MiFID implementing Directive]

  • 01/11/2007

Reliance on information

COBS 9.2.5

handbook-rule

A firm is entitled to rely on the information provided by its clients unless it is aware that the information is manifestly out of date, inaccurate or incomplete.

[Note: article 37(3) of the MiFID implementing Directive]

  • 01/11/2007

Insufficient information

COBS 9.2.6

handbook-rule

If a firm does not obtain the necessary information to assess suitability, it must not make a personal recommendation to the client or take a decision to trade for him.

[Note: article 35(5) of the MiFID implementing Directive]

  • 01/11/2007

COBS 9.2.7

handbook-guidance
Although a firm may not be permitted to make a personal recommendation or take a decision to trade because it does not have the necessary information, its client may still ask the firm to provide another service such as, for example, to arrange a deal or to deal as agent for the client. If this happens, the firm should ensure that it receives written confirmation of the instructions. The firm should also bear in mind the client's best interests rule and any obligation it may have under the rules relating to appropriateness when providing the different service (see COBS 10, Appropriateness (for non-advised services)).
  • 01/11/2007

Professional clients (MiFID and equivalent third country business)

COBS 9.2.8

handbook-rule
  1. (1) If a firm makes a personal recommendation or manages investments for a professional client in the course of MiFID or equivalent third country business, it is entitled to assume that, in relation to the products, transactions and services for which the professional client is so classified, the client has the necessary level of experience and knowledge for the purposes of COBS 9.2.2R (1)(c).
  2. (2) If the service consists of making a personal recommendation to a per se professional client, the firm is entitled to assume that the client is able financially to bear any related investment risks consistent with his investment objectives for the purposes of COBS 9.2.2R (1)(b).

[Note: article 35(2) of the MiFID implementing Directive]

  • 01/11/2007

Friendly society life policies

COBS 9.2.9

handbook-rule
  1. (1) When recommending a small friendly society life policy, a firm, for the purpose of assessing suitability, need only obtain details of the net income and expenditure of the client and his dependants.
  2. (2) A friendly society life policy is small if the premium:
    1. (a) does not exceed £50 a year; or
    2. (b) if payable weekly, £1 a week.
  3. (3) The firm must keep for five years a record of the reasons why the recommendation is considered suitable.
  • 01/11/2007

COBS 9.3

Guidance on assessing suitability

  • 01/11/2007

COBS 9.3.1

handbook-guidance
  1. (1) A transaction may be unsuitable for a client because of the risks of the designated investments involved, the type of transaction, the characteristics of the order or the frequency of the trading.
  2. (2) In the case of managing investments, a transaction might also be unsuitable if it would result in an unsuitable portfolio.

[Note: recital 57 to the MiFID implementing Directive]

  • 01/11/2007

Churning and switching

COBS 9.3.2

handbook-guidance
  1. (1) A series of transactions that are each suitable when viewed in isolation may be unsuitable if the recommendation or the decisions to trade are made with a frequency that is not in the best interests of the client.
  2. (2) A firm should have regard to the client's agreed investment strategy in determining the frequency of transactions. This would include, for example, the need to switch a client within or between packaged products.

[Note: recital 57 to the MiFID implementing Directive]

  • 01/11/2007

Income withdrawals and short-term annuities

COBS 9.3.3

handbook-guidance

When a firm is making a personal recommendation to a retail client about income withdrawals or purchase of short-term annuities, it should consider all the relevant circumstances including:

  1. (1) the client's investment objectives, need for tax-free cash and state of health;
  2. (2) current and future income requirements, existing pension assets and the relative importance of the plan, given the client's financial circumstances;
  3. (3) the client's attitude to risk, ensuring that any discrepancy is clearly explained between his attitude to an income withdrawal or purchase of a short-term annuity and other investments.
  • 01/11/2007

Loans and mortgages

COBS 9.3.4

handbook-guidance
When considering the suitability of a particular investment product which is linked directly or indirectly to any form of loan, mortgage or home reversion plan, a firm should take account of the suitability of the overall transaction. The firm should also have regard to any applicable suitability rules in MCOB.
  • 01/11/2007

COBS 9.4

Suitability reports

  • 01/11/2007

Providing a suitability report

COBS 9.4.1

handbook-rule

A firm must provide a suitability report to a retail client if the firm makes a personal recommendation to the client and the client:

  1. (1) acquires a holding in, or sells all or part of a holding in:
    1. (a) a regulated collective investment scheme;
    2. (b) an investment trust where the relevant shares have been or are to be acquired through an investment trust savings scheme;
    3. (c) an investment trust where the relevant shares are to be held within an ISA which has been promoted as the means for investing in one or more specific investment trusts; or
  2. (2) buys, sells, surrenders, converts or cancels rights under, or suspends contributions to, a personal pension scheme or a stakeholder pension scheme; or
  3. (3) elects to make income withdrawals or purchase a short-term annuity; or
  4. (4) enters into a pension transfer or pension opt-out.

[Note: article 19(8) of MiFID]

COBS 9.4.2

handbook-rule

If a firm makes a personal recommendation in relation to a life policy, it must provide the client with a suitability report.

[Note: article 12(3) of the Insurance Mediation Directive]

  • 01/11/2007

COBS 9.4.3

handbook-rule

The obligation to provide a suitability report does not apply:

  1. (1) if the firm, acting as an investment manager for a retail client, makes a personal recommendation relating to a regulated collective investment scheme;
  2. (2) if the client is habitually resident outside the EEA and the client is not present in the United Kingdom at the time of acknowledging consent to the proposal form to which the personal recommendation relates;
  3. (3) to any personal recommendation by a friendly society for a small life policy sold by it with a premium not exceeding £50 a year or, if payable weekly, £1 a week;
  4. (4) if the personal recommendation is to increase a regular premium to an existing contract;
  5. (5) if the personal recommendation is to invest additional single premiums or single contributions to an existing packaged product to which a single premium or single contribution has previously been paid.
  • 01/11/2007

Timing

COBS 9.4.4

handbook-rule

A firm must provide the suitability report to the client:

  1. (1) in the case of a life policy, before the contract is concluded unless the necessary information is provided orally or immediate cover is necessary; or
  2. (2) in the case of a personal pension scheme or stakeholder pension scheme, where the rules on cancellation (COBS 15) require notification of the right to cancel, no later than the fourteenth day after the contract is concluded; or
  3. (3) in any other case, when or as soon as possible after the transaction is effected or executed.

[Note: article 12(3) of the Insurance Mediation Directive]

  • 01/11/2007

COBS 9.4.5

handbook-rule

If, in respect of a life policy, the firm gives necessary information orally or gives immediate cover, it must provide a suitability report to the client in a durable medium immediately after the contract is concluded.

[Note: article 13(2) of the Insurance Mediation Directive]

  • 01/11/2007

COBS 9.4.6

handbook-rule

In the case of telephone selling of a life policy, when the only contact between a firm and its client before conclusion of a contract is by telephone, the suitability report must:

  1. (1) comply with the distance marketing disclosure rules (COBS 5.1);
  2. (2) be provided immediately after the conclusion of the contract; and
  3. (3) be in a durable medium.

[Note: article 13(3) of the Insurance Mediation Directive]

  • 01/11/2007

Contents

COBS 9.4.7

handbook-rule

The suitability report must, at least:

  1. (1) specify the client's demands and needs;
  2. (2) explain why the firm has concluded that the recommended transaction is suitable for the client having regard to the information provided by the client; and
  3. (3) explain any possible disadvantages of the transaction for the client.

[Note: article 12(3) of the Insurance Mediation Directive]

  • 01/11/2007

COBS 9.4.8

handbook-guidance

A firm should give the client such details as are appropriate according to the complexity of the transaction.

[Note: article 12(3) of the Insurance Mediation Directive]

  • 01/11/2007

COBS 9.4.9

handbook-rule

If a firm is providing a suitability report in the course of insurance mediation activity, the information must be provided:

  1. (1) in a durable medium which is available and accessible to the client;
  2. (2) in a clear and accurate manner, comprehensible to the client; and
  3. (3) in an official language of the State of the commitment in which the contract of insurance is made or in any other language agreed by the parties.

[Note: article 13 of the Insurance Mediation Directive]

  • 01/11/2007

Additional content for income withdrawals

COBS 9.4.10

handbook-guidance

When a firm is making a personal recommendation to a retail client about income withdrawals or purchase of short-term annuities, explanation of possible disadvantages in the suitability report should include the risk factors involved in entering into an income withdrawal or purchase of a short-term annuity. These may include:

  1. (1) the capital value of the fund may be eroded;
  2. (2) the investment returns may be less than those shown in the illustrations;
  3. (3) annuity or scheme pension rates may be at a worse level in the future;
  4. (4) when maximum withdrawals are taken or the maximum short-term annuity is purchased, high levels of income may not be sustainable;
  5. (5) [deleted]

COBS 9.5

Record keeping and retention periods for suitability records

  • 01/11/2007

COBS 9.5.1

handbook-guidance
A firm to which SYSC 9 applies is required to keep orderly records of its business and internal organisation (see SYSC 9, General rules on record-keeping). Other firms are required to take reasonable care to establish and maintain such systems and controls as are appropriate to their business (see SYSC 3, Systems and controls). The records may be expected to reflect the different effect of the rules in this chapter depending on whether the client is a retail client or a professional client: for example, in respect of the information about the client which the firm must obtain and whether the firm is required to provide a suitability report.

COBS 9.5.2

handbook-rule

A firm must retain its records relating to suitability for a minimum of the following periods:

  1. (1) if relating to a pension transfer, pension opt-out or FSAVC, indefinitely;
  2. (2) if relating to a life policy, personal pension scheme or stakeholder pension scheme, five years;
  3. (3) if relating to MiFID or equivalent third country business, five years; and
  4. (4) in any other case, three years.
  • 01/11/2007

COBS 9.5.3

handbook-rule

A firm need not retain its records relating to suitability if:

  1. (1) the client does not proceed with the recommendation; and
  2. (2) they do not relate to MiFID or equivalent third country business.
  • 01/11/2007

COBS 9.6

Special rules for giving basic advice on a stakeholder product

  • 01/11/2007

COBS 9.6.1

handbook-guidance
This section applies to a firm giving basic advice, which has chosen to comply with the rules in this section instead of the other rules in this chapter (see COBS 9.1.2 R).
  • 01/11/2007

Range

COBS 9.6.2

handbook-rule
A firm is permitted to maintain more than one range of stakeholder products.
  • 01/11/2007

COBS 9.6.3

handbook-rule

A range of stakeholder products:

  1. (1) may include more than one deposit-based stakeholder product;
  2. (2) may include the stakeholder products of more than one stakeholder product provider;
  3. (3) must not include any more than one:
    1. (a) CIS stakeholder product or linked life stakeholder product; or
    2. (b) stakeholder CTF; or
    3. (c) stakeholder pension scheme.
  • 01/11/2007

COBS 9.6.4

handbook-rule

When a firm provides basic advice it must:

  1. (1) explain why it chose the stakeholder products and stakeholder product providers that appear in the relevant range; and
  2. (2) give the client a list of the stakeholder products and stakeholder product providers that appear in that range;

if the client asks it do so.

  • 01/11/2007

Requirements on first contact

COBS 9.6.5

handbook-rule

When a firm first has contact with a retail client with a view to giving basic advice on a stakeholder product, it must give the retail client:

  1. (1) the basic advice initial disclosure information (COBS 9 Annex 1), in a durable medium, together with an explanation of that information, unless:
    1. (a) it has already done so and the basic advice initial disclosure information is likely still to be accurate and appropriate; or
    2. (b) the contact is not face to face and is using a means of communication which makes it not practicable to provide the basic advice initial disclosure information in a durable medium; and
  2. (2) an explanation of how the advice will be paid for and the fact that any commission will be disclosed.
  • 01/11/2007

COBS 9.6.6

handbook-guidance
  1. (1) A firm may give a retail client the basic advice initial disclosure information (COBS 9 Annex 1) as part of:
    1. (a) a services and costs disclosure document; or
    2. (b) a combined initial disclosure document if it has reasonable grounds to believe that it will provide services relating to a stakeholder product and a non-investment insurance contract, a regulated mortgage contract, an equity release transaction or a home purchase plan.
  2. (2) If a firm provides a services and costs disclosure document or combined initial disclosure document to a retail client it will comply with the requirements under:
    1. (a) COBS 2.2.1R (1)(a) and COBS 2.2.1R (1)(d);
    2. (b) COBS 9.6.5R (1) and COBS 9 Annex 1;
    3. (c) the items of distance marketing information set out in paragraphs (1), (2), (4), (5) (19) and (20) of COBS 5 Annex 1 R; and
    4. (d) any duties that apply to it under the rule on information to be provided by the insurance intermediary (COBS 7.2.1 R (1) and (2)).

COBS 9.6.7

handbook-rule
For the purposes of GEN 5, a firm may not use the keyfacts logo in relation to any document that is designed to comply with rules in COBS 9.6 or COBS 7 unless it is a services and costs disclosure document or a combined initial disclosure document produced in accordance with the templates and notes in the annexes to COBS 6.

COBS 9.6.8

handbook-rule

If a firm's first contact with a retail client is not face to face, it must:

  1. (1) inform the client at the outset:
    1. (a) (if the communication is initiated by or on behalf of a firm), of the name of the firm and the commercial purpose of the communication;
    2. (b) whether the firm will select from, or deal with, stakeholder products from a single provider, or from more than one provider;
    3. (c) that the firm will provide the retail client with basic advice without carrying out a full assessment of the retail client's needs and circumstances; and
    4. (d) that such information will be confirmed in writing; and
  2. (2) (if not provided at first contact) send the client the basic advice initial disclosure information (COBS 9 Annex 1) in a durable medium as soon as reasonably practicable following the conclusion of the first contact.

Sales process

COBS 9.6.9

handbook-rule

When a firm gives basic advice, it must do so using:

  1. (1) a single range of stakeholder products; and
  2. (2) a sales process that includes putting pre-scripted questions to the client.
  • 01/11/2007

COBS 9.6.10

handbook-rule

When a firm gives basic advice it must not:

  1. (1) describe or recommend a stakeholder product outside the firm's range; or
  2. (2) describe or recommend a smoothed linked long term stakeholder product; or
  3. (3) describe fund choice, or recommend a particular fund, if a stakeholder product offers a choice of funds; or
  4. (4) recommend the level of contributions required to be made to a stakeholder pension scheme to achieve a specific income in retirement; or
  5. (5) recommend or agree that a client makes a contribution to an ISA which exceeds the HM Revenue & Customs ISA limits.
  • 01/11/2007

COBS 9.6.11

handbook-rule
  1. (1) If a firm starts the sales process for a stakeholder product that is not a deposit-based stakeholder product, it must not depart from that process unless it has advised the retail client that it will not provide basic advice on stakeholder products during the period of departure. A firm that does that must not provide basic advice during the departure period.
  2. (2) Before a firm returns to the sales process for stakeholder products, it must tell the retail client that that process is about to recommence.
  • 01/11/2007

Suitability of recommendations

COBS 9.6.12

handbook-rule

A firm must only recommend a stakeholder product to a retail client if:

  1. (1) it has taken reasonable steps to assess the client's answers to the scripted questions and any other facts, circumstances or information disclosed by the client during the sales process;
  2. (2) (unless the relevant product is a deposit-based stakeholder product) having done so, it has reasonable grounds for believing that the stakeholder product is suitable for the client; and
  3. (3) the firm reasonably believes that the client understands the firm's advice and the basis on which it was provided.
  • 01/11/2007

COBS 9.6.13

handbook-guidance
COBS 9 Annex 2 gives guidance on the steps a firm could take to help it meet these suitability obligations.
  • 01/11/2007

COBS 9.6.14

handbook-rule

If a firm giving basic advice recommends to a retail client to acquire a stakeholder product, it must ensure that, before the conclusion of the contract, its representative:

  1. (1) (unless the relevant product is a deposit-based stakeholder product) explains to the client, if necessary in summary form, but always in a way that will allow the client to make an informed decision about the firm's recommendation:
    1. (a) the nature of the stakeholder product; and
    2. (b) the "aims", "commitment" and "risks" sections of the appropriate key features document;
  2. (2) provides the client with a summary sheet, which is in a durable medium and sets out, for each product it recommends:
    1. (a) the specific amount the client wishes to pay into the product; and
    2. (b) the reasons for the recommendation, including the client's attitude to risk and any information provided by the client on which the recommendation is based; and
  3. (3) informs the client that in determining any subsequent complaint, the Ombudsman may take into account the limited information on which the recommendation was based and the fact that it was not tailored to take account of those aspects of the client's financial needs and circumstances not covered by the firm's sales process.
  • 01/11/2007

COBS 9.6.15

handbook-rule

Notwithstanding COBS 9.6.14R (2) a firm may provide the summary sheet (COBS 9.6.14R (2)) as soon as reasonably practicable after the conclusion of the contract if the client asks it to do so, or the contract will be concluded using a means of distance communication that does not enable the provision of the summary sheet in a durable medium before the conclusion of the contract, but only if the firm:

  1. (1) reads the summary sheet to the client before it concludes the contract; and
  2. (2) sends the summary sheet to the client as soon as practicable after the conclusion of the contract.
  • 01/11/2007

Concluding the contract

COBS 9.6.16

handbook-rule
If a firm concludes a contract for a stakeholder product with or for a retail client it must provide a copy of the completed questions and answers to the client in a durable medium as soon as reasonably practicable afterwards.
  • 01/11/2007

Basic advice on stakeholder products: other issues

COBS 9.6.17

handbook-rule
  1. (1) When a firm provides basic advice on a stakeholder product, it must not hold itself out as giving independent advice.
  2. (2) Nevertheless, a firm may still use the facilities and stationery it uses for other business in respect of which it does hold itself out as acting or advising independently.

COBS 9.6.18

handbook-rule

A firm must ensure that none of its representatives:

  1. (1) is likely to be influenced by the structure of his or her remuneration to give unsuitable basic advice on stakeholder products to a retail client; or
  2. (2) refers a retail client to another firm in circumstances which would amount to the provision of any fee, commission or non-monetary benefit.
  • 01/11/2007

Records

COBS 9.6.19

handbook-rule
A firm must record that it has chosen to give basic advice to a retail client and make a record of the range used and the summary sheet (COBS 9.6.14R (2)) prepared for each retail client. That record must be retained for at least five years from the date of the relevant basic advice.
  • 01/11/2007

COBS 9.6.20

handbook-rule
  1. (1) A firm must make an up-to-date record of:
    1. (a) its scope of basic advice, and the scope of basic advice used by its appointed representatives (if any); and
    2. (b) its range (or ranges) of stakeholder products, and the range (or ranges) used by its appointed representatives (if any).
  2. (2) Those records must be retained for five years from the date on which they are replaced by a more up-to-date record.
  • 01/11/2007

COBS 9 Annex 1

Basic advice initial disclosure information

  • 01/11/2007

handbook-rule
This Annex belongs to COBS 9.6.5R (1)

COBS 9 Annex 2

Sales processes for stakeholder products

  • 01/11/2007

handbook-guidance
This Annex gives guidance on the standards and requirements to which a firm may have regard in designing a sales process for stakeholder products and assumes that firms will provide basic advice to retail clients who have no practical knowledge of investing in stakeholder products or investments.

Export chapter as

COBS 10

Appropriateness (for non-advised services)

COBS 10.1

Application and purpose provisions

  • 01/11/2007

COBS 10.1.1

handbook-rule
This chapter applies to a firm which provides investment services in the course of MiFID or equivalent third country business other than making a personal recommendation and managing investments.
  • 01/11/2007

COBS 10.1.2

handbook-rule
This chapter applies to a firm which arranges or deals in relation to a derivative or a warrant with or for a retail client and the firm is aware, or ought reasonably to be aware, that the application or order is in response to a direct offer financial promotion.
  • 01/11/2007

COBS 10.1.3

handbook-rule
This chapter applies to a firm which assesses appropriateness on behalf of another MiFID investment firm so that the other firm may rely on the assessment under COBS 2.4.4 R (Reliance on other investment firms: MiFID and equivalent business).
  • 01/11/2007

Related rules

COBS 10.1.4

handbook-guidance
A firm that is carrying on a regulated activity on a non-advised basis, whether or not the rules in this chapter apply to its activities, should also consider whether other rules in COBS apply. For example, a firm carrying on insurance mediation activity in relation to a life policy that does not involve the provision of advice, should have regard to COBS 7 (Insurance mediation).
  • 01/11/2007

COBS 10.2

Assessing appropriateness: the obligations

  • 01/11/2007

COBS 10.2.1

handbook-rule
  1. (1) When providing a service to which this chapter applies, a firm must ask the client to provide information regarding his knowledge and experience in the investment field relevant to the specific type of product or service offered or demanded so as to enable the firm to assess whether the service or product envisaged is appropriate for the client.
  2. (2) When assessing appropriateness, a firm:
    1. (a) must determine whether the client has the necessary experience and knowledge in order to understand the risks involved in relation to the product or service offered or demanded;
    2. (b) may assume that a professional client has the necessary experience and knowledge in order to understand the risks involved in relation to those particular investment services or transactions, or types of transaction or product, for which the client is classified as a professional client.

[Note: article 19(5) of MiFID and article 36 of the MiFID implementing Directive]

  • 01/11/2007

COBS 10.2.2

handbook-rule

The information regarding a client's knowledge and experience in the investment field includes, to the extent appropriate to the nature of the client, the nature and extent of the service to be provided and the type of product or transaction envisaged, including their complexity and the risks involved, information on:

  1. (1) the types of service, transaction and designated investment with which the client is familiar;
  2. (2) the nature, volume, frequency of the client's transactions in designated investments and the period over which they have been carried out;
  3. (3) the level of education, profession or relevant former profession of the client.

[Note: article 37(1) of the MiFID implementing Directive]

  • 01/11/2007

COBS 10.2.3

handbook-rule

A firm must not encourage a client not to provide information required for the purposes of its assessment of appropriateness.

[Note: article 37(2) of the MiFID implementing Directive]

  • 01/11/2007

Reliance on information

COBS 10.2.4

handbook-rule

A firm is entitled to rely on the information provided by a client unless it is aware that the information is manifestly out of date, inaccurate or incomplete.

[Note: article 37(3) of the MiFID implementing Directive]

  • 01/11/2007

Use of existing information

COBS 10.2.5

handbook-guidance
When assessing appropriateness, a firm may use information it already has in its possession.
  • 01/11/2007

Knowledge and experience

COBS 10.2.6

handbook-guidance
Depending on the circumstances, a firm may be satisfied that the client's knowledge alone is sufficient for him to understand the risks involved in a product or service. Where reasonable, a firm may infer knowledge from experience.
  • 01/11/2007

Increasing the client's understanding

COBS 10.2.7

handbook-guidance
If, before assessing appropriateness, a firm seeks to increase the client's level of understanding of a service or product by providing information to him, relevant considerations are likely to include the nature and complexity of the information and the client's existing level of understanding.
  • 01/11/2007

No duty to communicate firm's assessment of knowledge and experience

COBS 10.2.8

handbook-guidance
If a firm is satisfied that the client has the necessary experience and knowledge in order to understand the risks involved in relation to the product or service, there is no duty to communicate this to the client. If the firm does so, it must not do so in a way that amounts to making a personal recommendation unless it complies with the rules in COBS 9 on suitability.
  • 01/11/2007

COBS 10.3

Warning the client

  • 01/11/2007

COBS 10.3.1

handbook-rule
  1. (1) If a firm considers, on the basis of the information received to enable it to assess appropriateness, that the product or service is not appropriate to the client, the firm must warn the client.
  2. (2) This warning may be provided in a standardised format.

[Note: article 19(5) of MiFID]

  • 01/11/2007

COBS 10.3.2

handbook-rule
  1. (1) If the client elects not to provide the information to enable the firm to assess appropriateness, or if he provides insufficient information regarding his knowledge and experience, the firm must warn the client that such a decision will not allow the firm to determine whether the service or product envisaged is appropriate for him.
  2. (2) This warning may be provided in a standardised format.

[Note: article 19(5) of MiFID]

  • 01/11/2007

COBS 10.3.3

handbook-guidance
If a client asks a firm to go ahead with a transaction, despite being given a warning by the firm, it is for the firm to consider whether to do so having regard to the circumstances.
  • 01/11/2007

COBS 10.4

Assessing appropriateness: when it need not be done

  • 01/11/2007

COBS 10.4.1

handbook-rule
  1. (1) A firm is not required to ask its client to provide information or assess appropriateness if:
    1. (a) the service only consists of execution and/or the reception and transmission of client orders, with or without ancillary services, it relates to particular financial instruments and is provided at the initiative of the client;
    2. (b) the client has been clearly informed (whether the warning is given in a standardised format or not) that in the provision of this service the firm is not required to assess the suitability of the instrument or service provided or offered and that therefore he does not benefit from the protection of the rules on assessing suitability; and
    3. (c) the firm complies with its obligations in relation to conflicts of interest.
  2. (2) The financial instruments are:
    1. (a) shares admitted to trading on a regulated market or an equivalent third country market (that is, one which is included in the list which is published by the European Commission and updated periodically); or
    2. (b) money market instruments, bonds or other forms of securitised debt (excluding those bonds or securitised debt that embed a derivative); or
    3. (c) units in a scheme authorised under the UCITS directive; or
    4. (d) other non-complex financial instruments.
  3. (3) A financial instrument is non-complex if it satisfies the following criteria:
    1. (a) it is not a derivative or other security giving the right to acquire or sell a transferable security or giving rise to a cash settlement determined by reference to transferable securities, currencies, interest rates or yields, commodities or other indices or measures;
    2. (b) there are frequent opportunities to dispose of, redeem, or otherwise realise the instrument at prices that are publicly available to the market participants and that are either market prices or prices made available, or validated, by valuation systems independent of the issuer;
    3. (c) it does not involve any actual or potential liability for the client that exceeds the cost of acquiring the instrument; and
    4. (d) adequately comprehensive information on its characteristics is publicly available and is likely to be readily understood so as to enable the average retail client to make an informed judgment as to whether to enter into a transaction in that instrument.

[Note: article 19(6) of MiFID and article 38 of the MiFID implementing Directive]

  • 01/11/2007

COBS 10.4.2

handbook-rule

If a client engages in a course of dealings involving a specific type of product or service through the services of a firm, the firm is not required to make a new assessment on the occasion of each separate transaction. A firm complies with the rules in this chapter provided that it makes the necessary appropriateness assessment before beginning that service.

[Note: recital 59 to the MiFID implementing Directive]

  • 01/11/2007

COBS 10.4.3

handbook-rule

A client who has engaged in a course of dealings involving a specific type of product or service beginning before 1 November 2007 is presumed to have the necessary experience and knowledge in order to understand the risks involved in relation to that specific type of product or service.

[Note: recital 59 of the MiFID implementing Directive]

  • 01/11/2007

COBS 10.5

Assessing appropriateness: guidance

  • 01/11/2007

The initiative of the client

COBS 10.5.1

handbook-guidance

A service should be considered to be provided at the initiative of a client (see COBS 10.4.1 R (1)(a)) unless the client demands it in response to a personalised communication from or on behalf of the firm to that particular client which contains an invitation or is intended to influence the client in respect of a specific financial instrument or specific transaction.

[Note: recital 30 to MiFID]

  • 01/11/2007

COBS 10.5.2

handbook-guidance

A service can be considered to be provided at the initiative of a client notwithstanding that the client demands it on the basis of any communication containing a promotion or offer of financial instruments made by any means that by its very nature is general and addressed to the public or a larger group or category of clients.

[Note: recital 30 to MiFID]

  • 01/11/2007

Personalised communications

COBS 10.5.3

handbook-guidance
  1. (1) Communications to the world at large, such as those in newspapers or on billboards, are likely to be by their very nature general and therefore not personalised communications.
  2. (2) Communications addressed to a client (such as, for example, an email, a telephone call or a letter), may or may not be personalised depending on the content.
  3. (3) A communication is not personalised solely because it contains the name and address of the client or because a mailing list has been filtered.
  4. (4) If a firm is satisfied that a communication does not contain any personalised content, it may wish to make clear that it does not intend the communication to be personalised and that the personal circumstances of the recipient have not been taken into account.
  • 01/11/2007

Equivalent third country markets

COBS 10.5.4

handbook-guidance

[to insert the reference or hypertext link to the list of equivalent third country markets when available]

[Note: article 19(6) of MiFID]

  • 01/11/2007

Independent valuation systems

COBS 10.5.5

handbook-guidance

The circumstances in which valuation systems will be independent of the issuer (see COBS 10.4.1 R (3)(b)) include where they are overseen by a depositary that is regulated as a provider of depositary services in a EEA State.

[Note: recital 61 to the MiFID implementing Directive]

  • 01/11/2007

COBS 10.6

When a firm need not assess appropriateness

  • 01/11/2007

COBS 10.6.1

handbook-guidance
A firm need not assess appropriateness if it is receiving or transmitting an order in relation to which it has assessed suitability under COBS 9 (Suitability (including basic advice)).
  • 01/11/2007

COBS 10.6.2

handbook-guidance
A firm may not need to assess appropriateness if it is able to rely on a recommendation made by an investment firm (see COBS 2.4.5 G (Reliance on other investment firms: MiFID and equivalent business).
  • 01/11/2007

COBS 10.7

Record keeping and retention periods for appropriateness records

  • 01/11/2007

COBS 10.7.1

handbook-guidance
A firm is required to keep orderly records of its business and internal organisation, including all services and transactions undertaken by it. The records may be expected to include the client information a firm obtains to assess appropriateness and should be adequate to indicate what the assessment was.

COBS 10.7.2

handbook-rule
The firm must retain its records relating to appropriateness for a minimum of five years.
  • 01/11/2007

Export chapter as

COBS 11

Dealing and managing

COBS 11.1

Application

  • 01/11/2007

General application

COBS 11.1.1

handbook-rule

This chapter applies to a firm.

  1. (1) [deleted]
  2. (2) [deleted]
  • 01/11/2007

COBS 11.1.2

handbook-rule
In this chapter, provisions marked "EU" apply to a firm which is not a MiFID investment firm as if they were rules.
  • 01/11/2007

Application to section on the use of dealing commission

COBS 11.1.3

handbook-rule
The section on the use of dealing commission applies to a firm that acts as an investment manager.
  • 01/11/2007

Application of section on personal account dealing

COBS 11.1.4

handbook-rule
The section on personal account dealing applies to the designated investment business of a firm in relation to activities carried on from an establishment in the United Kingdom.
  • 01/11/2007

COBS 11.1.5

handbook-guidance
The EEA territorial scope rule modifies the default territorial scope of the section on personal account dealing (see COBS 11.7) to the extent necessary to be compatible with European law (see paragraph 1.1G of Part 3 of COBS 1 Annex 1). This means that the section on personal account dealing also applies to passported activities carried on by a UK MiFID investment firm or a UK UCITS management company from a branch in another EEA state, but does not apply to the UK branch of an EEA MiFID investment firm in relation to its MiFID business or of an EEA UCITS management company in relation to activities it is entitled to carry on in the United Kingdom under the UCITS Directive.

Disapplication of best execution for non-financial spreads

COBS 11.1.6

handbook-rule

The section on best execution (COBS 11.2) does not apply to a firm when:

  1. (1) executing orders: or
  2. (2) placing orders with other entities for execution: or
  3. (3) transmitting orders to other entities for execution;

in relation to a spread-bet which is not a financial instrument, where the firm has not made a personal recommendation in relation to that spread-bet.

  • 01/11/2007

Disapplication of best execution to CIS operators purchasing or selling own units

COBS 11.1.7

handbook-rule
The section on best execution (COBS 11.2) does not apply to a firm when, acting in the capacity of operator of a regulated collective investment scheme, it purchases or sells units in that scheme.
  • 01/11/2008

COBS 11.2

Best execution

  • 01/11/2007

Obligation to execute orders on terms most favourable to the client

COBS 11.2.1

handbook-rule

A firm must take all reasonable steps to obtain, when executing orders, the best possible result for its clients taking into account the execution factors.

[Note: article 21(1) of MiFID and article 25(2) first sentence of the UCITS implementing Directive]

[Note: The Committee of European Securities Regulators (CESR) has issued a Question and Answer paper on best execution under MiFID. This paper also incorporates the European Commission's response to CESR's questions regarding the scope of the best execution obligations under MiFID. The paper can be found at: http://www.cesr.eu/index.php?docid=4606]

Execution of decisions by UCITS management companies to deal on behalf of the schemes they manage

COBS 11.2.1A

handbook-rule

A management company must, in relation to each UCITS scheme or EEA UCITS scheme it manages, act in the best interests of the scheme when executing decisions to deal on its behalf in the context of the management of its portfolio, and COBS 11.2.1 R applies in relation to all such decisions.

[Note: article 25(1) of the UCITS implementing Directive]

  • 01/07/2011

Application of best execution obligation

COBS 11.2.2

handbook-guidance

The obligation to take all reasonable steps to obtain the best possible result for its clients (see COBS 11.2.1 R) should apply to a firm which owes contractual or agency obligations to the client.

[Note: recital 33 to MiFID]

  • 01/11/2007

COBS 11.2.3

handbook-guidance

Dealing on own account with clients by a firm should be considered as the execution of client orders, and therefore subject to the requirements under MiFID, in particular, those obligations in relation to best execution.

[Note: first sentence of recital 69 to the MiFID implementing Directive]

  • 01/11/2007

COBS 11.2.4

handbook-guidance

If a firm provides a quote to a client and that quote would meet the firm's obligations to take all reasonable steps to obtain the best possible result for its clients if the firm executed that quote at the time the quote was provided, the firm will meet those same obligations if it executes its quote after the client accepts it, provided that, taking into account the changing market conditions and the time elapsed between the offer and acceptance of the quote, the quote is not manifestly out of date.

[Note: second sentence of recital 69 to the MiFID implementing Directive]

  • 01/11/2007

COBS 11.2.5

handbook-guidance

The obligation to deliver the best possible result when executing client orders applies in relation to all types of financial instruments. However, given the differences in market structures or the structure of financial instruments, it may be difficult to identify and apply a uniform standard of and procedure for best execution that would be valid and effective for all classes of instrument. Best execution obligations should therefore be applied in a manner that takes into account the different circumstances associated with the execution of orders related to particular types of financial instruments. For example, transactions involving a customised OTC financial instrument that involve a unique contractual relationship tailored to the circumstances of the client and the firm may not be comparable for best execution purposes with transactions involving shares traded on centralised execution venues.

[Note: recital 70 to the MiFID implementing Directive]

  • 01/11/2007

Management companies: execution and transmission of orders

COBS 11.2.5A

handbook-guidance
  1. (1) A management company should, for each UCITS scheme or EEA UCITS scheme it manages, act in the best interests of the scheme when directly executing orders to deal on its behalf or when transmitting those orders to third parties.
  2. (2) When executing orders on behalf of any such scheme it manages, a management company is expected to take all reasonable steps to obtain the best possible result for the scheme on a consistent basis, taking into account price, costs, speed, likelihood of execution and settlement, size and nature of the order or any other consideration relevant to the execution of the order.

[Note: recital (19) to the UCITS implementing Directive]

  • 01/07/2011

Best execution criteria

COBS 11.2.6

handbook-rule

When executing a client order, a firm must take into account the following criteria for determining the relative importance of the execution factors:

  1. (1) the characteristics of the client including the categorisation of the client as retail or professional;
  2. (2) the characteristics of the client order;
  3. (3) the characteristics of financial instruments that are the subject of that order;
  4. (4) the characteristics of the execution venues to which that order can be directed; and
  5. (5) for a management company, the objectives, investment policy and risks specific to the UCITS scheme or EEA UCITS scheme, as indicated in its prospectus or instrument constituting the scheme.

[Note: article 44(1) of the MiFID implementing Directive and article 25(2) second sentence of the UCITS implementing Directive]

Role of price

COBS 11.2.7

handbook-rule

Where a firm executes an order on behalf of a retail client, the best possible result must be determined in terms of the total consideration, representing the price of the financial instrument and the costs related to execution, which must include all expenses incurred by the client which are directly related to the execution of the order, including execution venue fees, clearing and settlement fees and any other fees paid to third parties involved in the execution of the order.

[Note: paragraph 1 of article 44(3) of the MiFID implementing Directive]

  • 01/11/2007

COBS 11.2.8

handbook-guidance

For the purposes of ensuring that a firm obtains the best possible result for the client when executing a retail client order in the absence of specific client instructions, the firm should take into consideration all factors that will allow it to deliver the best possible result in terms of the total consideration, representing the price of the financial instrument and the costs related to execution. Speed, likelihood of execution and settlement, the size and nature of the order, market impact and any other implicit transaction costs may be given precedence over the immediate price and cost consideration only insofar as they are instrumental in delivering the best possible result in terms of the total consideration to the retail client.

[Note: recital 67 to the MiFID implementing Directive]

  • 01/11/2007

COBS 11.2.9

handbook-guidance
A firm's execution policy should determine the relative importance of each of the execution factors or establish a process by which the firm will determine the relative importance of the execution factors. The relative importance that the firm gives to those execution factors must be designed to obtain the best possible result for the execution of its client orders. Ordinarily, the FSA would expect that price will merit a high relative importance in obtaining the best possible result for professional clients. However, in some circumstances for some clients, orders, financial instruments or markets, the policy may appropriately determine that other execution factors are more important than price in obtaining the best possible execution result.
  • 01/11/2007

Delivering best execution where there are competing execution venues

COBS 11.2.10

handbook-rule

For the purposes of delivering best execution for a retail client where there is more than one competing venue to execute an order for a financial instrument, in order to assess and compare the results for the client that would be achieved by executing the order on each of the execution venues listed in the firm's order execution policy that is capable of executing that order, the firm's own commissions and costs for executing the order on each of the eligible execution venues must be taken into account in that assessment.

[Note: article 44(3) of paragraph 2 of the MiFID implementing Directive]

  • 01/11/2007

COBS 11.2.11

handbook-guidance

The obligation to deliver best execution for a retail client where there are competing execution venues is not intended to require a firm to compare the results that would be achieved for its client on the basis of its own execution policy and its own commissions and fees, with results that might be achieved for the same client by any other firm on the basis of a different execution policy or a different structure of commissions or fees. Nor is it intended to require a firm to compare the differences in its own commissions which are attributable to differences in the nature of the services that the firm provides to clients.

[Note: recital 71 to the MiFID implementing Directive]

  • 01/11/2007

COBS 11.2.12

handbook-rule

A firm must not structure or charge its commissions in such a way as to discriminate unfairly between execution venues.

[Note: article 44(4) of the MiFID implementing Directive]

  • 01/11/2007

COBS 11.2.13

handbook-guidance

A firm would be considered to structure or charge its commissions in a way which discriminates unfairly between execution venues if it charges a different commission or spread to clients for execution on different execution venues and that difference does not reflect actual differences in the cost to the firm of executing on those venues.

[Note: recital 73 to the MiFID implementing Directive]

  • 01/11/2007

Requirement for order execution arrangements including an order execution policy

COBS 11.2.14

handbook-rule

A firm must establish and implement effective arrangements for complying with the obligation to take all reasonable steps to obtain the best possible result for its clients. In particular, the firm must establish and implement an order execution policy to allow it to obtain, for its client orders, the best possible result in accordance with that obligation.

[Note: article 21(2) of MiFID and article 25(3) first paragraph of the UCITS implementing Directive]

COBS 11.2.15

handbook-rule

The order execution policy must include, in respect of each class of financial instruments, information on the different execution venues where the firm executes its client orders and the factors affecting the choice of execution venue. It must at least include those execution venues that enable the firm to obtain on a consistent basis the best possible result for the execution of client orders.

[Note: paragraph 1 of article 21(3) of MiFID]

  • 01/11/2007

COBS 11.2.16

handbook-guidance
  1. (1) When establishing its execution policy, a firm should determine the relative importance of the execution factors, or at least establish the process by which it determines the relative importance of these factors, so that it can deliver the best possible result to its clients.
  2. (2) In order to give effect to that policy, a firm should select the execution venues that enable it to obtain on a consistent basis the best possible result for the execution of client orders.
  3. (3) A firm should apply its execution policy to each client order that it executes with a view to obtaining the best possible result for the client in accordance with that policy.
  4. (4) The obligation to take all reasonable steps to obtain the best possible result for the client should not be treated as requiring a firm to include in its execution policy all available execution venues.

[Note: recital 66 to the MiFID implementing Directive]

  • 01/11/2007

COBS 11.2.17

handbook-guidance

The provisions of this section which provide that costs of execution include a firm's own commissions or fees charged to the client for the provision of an investment service should not apply for the purpose of determining what execution venues must be included in the firm's execution policy.

[Note: recital 72 to the MiFID implementing Directive]

  • 01/11/2007

COBS 11.2.18

handbook-guidance

The provisions of this section as to execution policy are without prejudice to the general obligation of a firm to monitor the effectiveness of its order execution arrangements and policy and assess the execution venues in its execution policy on a regular basis.

[Note: recital 74 to the MiFID implementing Directive]

  • 01/11/2007

Following specific instructions from a client

COBS 11.2.19

handbook-rule
  1. (1) Whenever there is a specific instruction from the client, the firm must execute the order following the specific instruction.
  2. [Note: article 21(1) of MiFID]
  3. (2) A firm satisfies its obligation under this section to take all reasonable steps to obtain the best possible result for a client to the extent that it executes an order, or a specific aspect of an order, following specific instructions from the client relating to the order or the specific aspect of the order.
  4. [Note: article 44(2) of the MiFID implementing Directive]
  • 01/11/2007

COBS 11.2.20

handbook-guidance

When a firm executes an order following specific instructions from the client, it should be treated as having satisfied its best execution obligations only in respect of the part or aspect of the order to which the client instructions relate. The fact that the client has given specific instructions which cover one part or aspect of the order should not be treated as releasing the firm from its best execution obligations in respect of any other parts or aspects of the client order that are not covered by such instructions.

[Note: recital 68 to the MiFID implementing Directive]

  • 01/11/2007

COBS 11.2.21

handbook-guidance

A firm should not induce a client to instruct it to execute an order in a particular way, by expressly indicating or implicitly suggesting the content of the instruction to the client, when the firm ought reasonably to know that an instruction to that effect is likely to prevent it from obtaining the best possible result for that client. However, this should not prevent a firm inviting a client to choose between two or more specified trading venues, provided that those venues are consistent with the execution policy of the firm.

[Note: recital 68 to the MiFID implementing Directive]

  • 01/11/2007

Information about the order execution policy

COBS 11.2.22

handbook-rule

A firm must provide appropriate information to its clients on its order execution policy.

[Note: paragraph 2 of article 21(3) of MiFID]

  • 01/11/2007

COBS 11.2.23

handbook-rule
  1. (1) A firm must provide a retail client with the following details on its execution policy in good time prior to the provision of the service:
    1. (a) an account of the relative importance the firm assigns, in accordance with the execution criteria, to the execution factors, or the process by which the firm determines the relative importance of those factors;
    2. (b) a list of the execution venues on which the firm places significant reliance in meeting its obligation to take all reasonable steps to obtain on a consistent basis the best possible result for the execution of client orders;
    3. (c) a clear and prominent warning that any specific instructions from a client may prevent the firm from taking the steps that it has designed and implemented in its execution policy to obtain the best possible result for the execution of those orders in respect of the elements covered by those instructions.
  2. (2) This information must be provided in a durable medium, or by means of a website (where that does not constitute a durable medium) provided that the website conditions are satisfied.

[Note: article 46(2) of the MiFID implementing Directive]

  • 01/11/2007

COBS 11.2.23A

handbook-rule

A management company must make available appropriate information on its execution policy and on any material changes to that policy to the unitholders of each scheme it manages.

[Note: article 25(3) second part of the second paragraph of the UCITS implementing Directive]

  • 01/07/2011

COBS 11.2.24

handbook-rule

Where the order execution policy provides for the possibility that client orders may be executed outside a regulated market or an MTF, the firm must, in particular, inform its clients about this possibility.


[Note: paragraph 3 of article 21(3) of MiFID]

  • 01/11/2007

Client consent to execution policy and execution of orders outside a regulated market or MTF

COBS 11.2.25

handbook-rule
  1. (1) A firm (other than a management company providing collective portfolio management services for a UCITS scheme or an EEA UCITS scheme) must obtain the prior consent of its clients to the execution policy.
  2. (2) In the case of a management company providing collective portfolio management services for an ICVC that is a UCITS scheme, or for an EEA UCITS scheme that is structured as an investment company, the management company must obtain the prior consent of the ICVC or investment company to the execution policy.
  3. (3) In the case of a management company that is the ACD of an ICVC that is a UCITS scheme, (2) does not apply where the ACD is the sole director of the ICVC.

[Note: paragraph 2 of article 21(3) of MiFID and article 25(3) first part of the second paragraph of the UCITS implementing Directive]

COBS 11.2.26

handbook-rule

A firm must obtain the prior express consent of its clients before proceeding to execute their orders outside a regulated market or an MTF. The firm may obtain this consent either in the form of a general agreement or in respect of individual transactions.

[Note: paragraph 3 of article 21(3) of MiFID]

  • 01/11/2007

Monitoring the effectiveness of execution arrangements and policy

COBS 11.2.27

handbook-rule

A firm must monitor the effectiveness of its order execution arrangements and execution policy in order to identify and, where appropriate, correct any deficiencies. In particular, it must assess, on a regular basis, whether the execution venues included in the order execution policy provide for the best possible result for the client or whether it needs to make changes to its execution arrangements. The firm must notify clients of any material changes to their order execution arrangements or execution policy.

[Note: article 21(4) of MiFID and article 25(4) first paragraph of the UCITS implementing Directive]

Review of the order execution policy

COBS 11.2.28

handbook-rule
  1. (1) A firm must review annually its execution policy, as well as its order execution arrangements.
  2. (2) This review must also be carried out whenever a material change occurs that affects the firm's ability to continue to obtain the best possible result for the execution of its client orders on a consistent basis using the venues included in its execution policy.

[Note: article 46(1) of the MiFID implementing Directive and article 25(4) second paragraph of the UCITS implementing Directive]

Demonstration of execution of orders in accordance with execution policy

COBS 11.2.29

handbook-rule
  1. (1) A firm other than a management company must be able to demonstrate to its clients, at their request, that it has executed their orders in accordance with its execution policy.
  2. (2) A management company must be able to demonstrate that it has executed orders on behalf of any UCITS scheme or EEA UCITS scheme it manages in accordance with its execution policy.

[Note: article 21(5) of MiFID and article 25(5) of the UCITS implementing Directive]

Duty of portfolio managers, receivers and transmitters and management companies to act in clients' best interests

COBS 11.2.30

handbook-rule

A firm must, when providing the service of portfolio management or, for a management company, collective portfolio management, comply with the obligation to act in accordance with the best interests of its clients when placing orders with other entities for execution that result from decisions by the firm to deal in financial instruments on behalf of its client.

[Note: article 45(1) of MiFID implementing Directive and article 26(1) of the UCITS implementing Directive]

COBS 11.2.31

handbook-rule

A firm must, when providing the service of reception and transmission of orders, comply with the obligation to act in accordance with the best interests of its clients when transmitting client orders to other entities for execution.

[Note: article 45(2) of the MiFID implementing Directive]

  • 01/11/2007

COBS 11.2.32

handbook-rule

In order to comply with the obligation to act in accordance with the best interests of its clients when it places an order with, or transmits an order to, another entity for execution, a firm must:
[Note: article 45(3) of the MiFID implementing Directive and article 26(1) of the UCITS implementing Directive]

  1. (1) take all reasonable steps to obtain the best possible result for its clients taking into account the execution factors. The relative importance of these factors must be determined by reference to the execution criteria and, for retail clients, to the requirement to determine the best possible result in terms of the total consideration (see COBS 11.2.7 R).
  2. A firm satisfies its obligation to act in accordance with the best interests of its clients, and is not required to take the steps mentioned above, to the extent that it follows specific instructions from its client when placing an order with, or transmitting an order to, another entity for execution;
  3. [Note: paragraph 1 and 2 of article 45(4) of the MiFID implementing Directive and article 26(2) first paragraph of the UCITS implementing Directive]
  4. (2) establish and implement a policy to enable it to comply with the obligation to take all reasonable steps to obtain the best possible result for its clients. The policy must identify, in respect of each class of instruments, the entities with which the orders are placed or to which the firm transmits orders for execution. The entities identified must have execution arrangements that enable the firm to comply with its obligations under this section or, for a management company, must only enter into arrangements for execution where those arrangements are consistent with the requirements of this section, when it places an order with, or transmits an order to, that entity for execution;
  5. [Note: paragraph 1 of article 45(5) of the MiFID implementing Directive and article 26(2) second paragraph of the UCITS implementing Directive]
  6. (3) provide appropriate information to its clients on the policy established in accordance with COBS 11.2.32R (2) or, for a management company, make available to unit holders appropriate information on that policy and on any material changes to it;
  7. [Note: paragraph 2 of article 45(5) of the MiFID implementing Directive and article 26(2) second paragraph last sentence of the UCITS implementing Directive]
  8. (4) monitor on a regular basis the effectiveness of the policy and, in particular, the execution quality of the entities identified in that policy and, where appropriate, correct any deficiencies; and
  9. [Note: first paragraph of article 45(6) of the MiFID implementing Directive and article 26(3) first paragraph of the UCITS implementing Directive]
  10. (5) review the policy annually. This review must also be carried out whenever a material change occurs that affects the firm's ability to continue to obtain the best possible result for its clients.
  11. [Note: second paragraph of article 45(6) of the MiFID implementing Directive and article 26(3) second paragraph of the UCITS implementing Directive]

COBS 11.2.32A

handbook-rule

A management company must be able to demonstrate that it has placed orders on behalf of any UCITS scheme or EEA UCITS scheme it manages in accordance with the policy referred to in COBS 11.2.32 R (2).

[Note: article 26(4) of the UCITS implementing Directive]

  • 01/07/2011

COBS 11.2.33

handbook-guidance

This section is not intended to require a duplication of effort as to best execution between a firm which provides the service of reception and transmission of orders or portfolio management and any firm to which that firm transmits its orders for execution.

[Note: recital 75 to the MiFID implementing Directive]

  • 01/11/2007

COBS 11.2.34

handbook-rule

The provisions applying to a firm which places orders with, or transmits orders to, other entities for execution (see COBS 11.2.30 R to COBS 11.2.33 G) will not apply when the firm which provides the service of portfolio management or collective portfolio management and/or service of reception and transmission of orders also executes the orders received or the decisions to deal on behalf of its client's portfolio. In those cases the requirements of this section for firms who execute orders apply (see COBS 11.2.1 R to COBS 11.2.29 R).

[Note: article 45(7) of the MiFID implementing Directive and article 25 of the UCITS implementing Directive]

COBS 11.3

Client order handling

  • 01/11/2007

General principles

COBS 11.3.1

handbook-rule
  1. (1) A firm (other than a management company providing collective portfolio management services) which is authorised to execute orders on behalf of clients must implement procedures and arrangements which provide for the prompt, fair and expeditious execution of client orders, relative to other orders or the trading interests of the firm.
  2. [Note: paragraph 1 of article 22(1) of MiFID]
  3. (2) These procedures or arrangements must allow for the execution of otherwise comparable orders in accordance with the time of their reception by the firm.
  4. [Note: paragraph 2 of article 22(1) of MiFID]
  5. (3) A management company providing collective portfolio management services, must establish and implement procedures and arrangements in respect of all client orders it carries out which provide for the prompt, fair and expeditious execution of portfolio transactions on behalf of the UCITS scheme or EEA UCITS scheme it manages.
  6. [Note: article 27(1) first paragraph of the UCITS implementing Directive]

COBS 11.3.2

handbook-rule

A firm must satisfy the following conditions when carrying out client orders:

  1. (1) it must ensure that orders executed on behalf of clients are promptly and accurately recorded and allocated;
  2. (2) it must carry out otherwise comparable orders sequentially and promptly unless the characteristics of the order or prevailing market conditions make this impracticable, or the interests of the client require otherwise; and
  3. (3) it must inform a retail client about any material difficulty relevant to the proper carrying out of orders promptly upon becoming aware of the difficulty.

[Note: article 47(1) of the MiFID implementing Directive, article 19(1) of MiFID and article 27(1) second paragraph of the UCITS implementing Directive]

COBS 11.3.3

handbook-guidance

For the purposes of the provisions of this section, orders should not be treated as otherwise comparable if they are received by different media and it would not be practicable for them to be treated sequentially.

[Note: recital 78 to the MiFID implementing Directive]

  • 01/11/2007

COBS 11.3.4

handbook-rule

Where a firm is responsible for overseeing or arranging the settlement of an executed order or executes the order itself in the course of providing collective portfolio management services, it must take all reasonable steps to ensure that any client financial instruments or client funds received in settlement of that executed order are promptly and correctly delivered to the account of the appropriate client.

[Note: article 47(2) of the MiFID implementing Directive, article 19(1) of MiFID and article 27(1) third paragraph of the UCITS implementing Directive]

COBS 11.3.5

handbook-rule

A firm must not misuse information relating to pending client orders, and shall take all reasonable steps to prevent the misuse of such information by any of its relevant persons.

[Note: article 47(3) of the MiFID implementing Directive, article 19(1) of MiFID and article 27(2) of the UCITS implementing Directive]

COBS 11.3.6

handbook-guidance

Without prejudice to the Market Abuse Directive, for the purposes of the rule on the misuse of information (see COBS 11.3.5 R), any use by a firm of information relating to a pending client order in order to deal on own account in the financial instruments to which the client order relates, or in related financial instruments, should be considered a misuse of that information. However, the mere fact that market makers or bodies authorised to act as counterparties confine themselves to pursuing their legitimate business of buying and selling financial instruments, or that persons authorised to execute orders on behalf of third parties confine themselves to carrying out an order dutifully, should not in itself be deemed to constitute a misuse of information.

[Note: recital 78 to the MiFID implementing Directive]

  • 01/11/2007

Aggregation and allocation of orders

COBS 11.3.7

handbook-rule

A firm is not permitted to carry out a client order or a transaction for own account in aggregation with another client order unless the following conditions are met:

  1. (1) it must be unlikely that the aggregation of orders and transactions will work overall to the disadvantage of any client whose order is to be aggregated;
  2. (2) it must be disclosed to each client whose order is to be aggregated that the effect of aggregation may work to its disadvantage in relation to a particular order;
  3. (3) an order allocation policy must be established and effectively implemented, providing in sufficiently precise terms for the fair allocation of aggregated orders and transactions, including how the volume and price of orders determines allocations and the treatment of partial executions.

[Note: article 48(1) of the MiFID implementing Directive, article 19(1) of MiFID and article 28(1) of the UCITS implementing Directive]

COBS 11.3.8

handbook-rule

If a firm aggregates a client order with one or more other orders and the aggregated order is partially executed, it must allocate the related trades in accordance with its order allocation policy.

[Note: article 48(2) of the MiFID implementing Directive, article 19(1) of MiFID and article 28(2) of the UCITS implementing Directive]

Aggregation and allocation of transactions for own account

COBS 11.3.9

handbook-rule

A firm which has aggregated transactions for own account with one or more client orders must not allocate the related trades in a way which is detrimental to a client.

[Note: article 49(1) of the MiFID implementing Directive, article 19(1) of MiFID and article 28(3) of the UCITS implementing Directive]

COBS 11.3.10

handbook-rule
  1. (1) If a firm aggregates a client order with a transaction for own account and the aggregated order is partially executed, it must allocate the related trades to the client in priority to the firm.
  2. (2) However, if the firm is able to demonstrate on reasonable grounds that without the combination it would not have been able to carry out the order on such advantageous terms, or at all, it may allocate the transaction for own account proportionally, in accordance with its order allocation policy.

[Note: article 49(2) of the MiFID implementing Directive, article 19(1) of MiFID and article 28(4) of the UCITS implementing Directive]

COBS 11.3.11

handbook-rule

A firm must, as part of its order allocation policy, put in place procedures to prevent the reallocation, in a way that is detrimental to the client, of transactions for own account which are executed in combination with client orders.

[Note: article 49(3) of the MiFID implementing Directive and article 19(1) of MiFID]

  • 01/11/2007

COBS 11.3.12

handbook-guidance

For the purposes of the provisions of this section, the reallocation of transactions should be considered as detrimental to a client if, as an effect of that reallocation, unfair precedence is given to the firm or to any particular person.

[Note: recital 77 to the MiFID implementing Directive]

  • 01/11/2007

COBS 11.3.13

handbook-guidance

In this section, carrying out client orders includes:

  1. (1) the execution of orders on behalf of clients;
  2. (2) the placing of orders with other entities for execution that result from decisions to deal in financial instruments on behalf of clients when providing the service of portfolio management or collective portfolio management;
  3. (3) the transmission of client orders to other entities for execution when providing the service of reception and transmission of orders.

COBS 11.4

Client limit orders

  • 01/11/2007

Obligation to make unexecuted client limit orders public

COBS 11.4.1

handbook-rule

Unless a client expressly instructs otherwise, a firm must, in the case of a client limit order in respect of shares admitted to trading on a regulated market which is not immediately executed under prevailing market conditions, take measures to facilitate the earliest possible execution of that order by making public immediately that client limit order in a manner which is easily accessible to other market participants.

[Note: article 22(2) of MiFID]

  • 01/11/2007

COBS 11.4.2

handbook-guidance

In respect of transactions executed between eligible counterparties, the obligation to disclose client limit orders should only apply where the counterparty is explicitly sending a limit order to a firm for its execution.

[Note: recital 42 to MiFID]

  • 01/11/2007

How client limit orders may be made public

COBS 11.4.3

handbook-eu-text
An investment firm shall be considered to disclose client limit orders that are not immediately executable if it transmits the order to a regulated market or MTF that operates an order book trading system, or ensures that the order is made public and can be easily executed as soon as market conditions allow.

[Note: article 31 of MiFID Regulation]

  • 01/11/2007

COBS 11.4.4

handbook-guidance
MAR 5.8.2 EU sets out the conditions required for an arrangement to make client limit orders public under this section. MAR 5.8.3 G and MAR 5.8.4 G provide guidance on these conditions.
  • 01/11/2007

Orders that are large in scale

COBS 11.4.5

handbook-rule

The obligation to make public a limit order will not apply to a limit order that is large in scale compared with normal market size.

[Note: article 22(2) of MiFID]

  • 01/11/2007

COBS 11.4.6

handbook-guidance
MAR 5.7.10 EU and MAR 5.7.11 EU set out when an order shall be considered large in scale compared with normal market size.
  • 01/11/2007

COBS 11.5

Record keeping: client orders and transactions

  • 01/11/2007

Record keeping of client orders and decisions to deal

COBS 11.5.1

handbook-eu-text
An investment firm shall, in relation to every order received from a client, and in relation to every decision to deal taken in providing the service of portfolio management, immediately make a record of the following details, to the extent they are applicable to the order or decision to deal in question:
  1. (1) the name or other designation of the client;
  2. (2) the name or other designation of any relevant person acting on behalf of the client;
  3. (3) the details specified in point 4, 6, and in points 16 to 19, of Table 1 of Annex I;
  4. (4) the nature of the order if other than buy or sell;
  5. (5) the type of the order;
  6. (6) any other details, conditions and particular instructions from the client that specify how the order must be carried out;
  7. (7) the date and exact time of the receipt of the order, or of the decision to deal, by the investment firm.

[Note: article 7 of MiFID Regulation]

  • 01/11/2007

Record-keeping of transactions

COBS 11.5.2

handbook-eu-text
Immediately after executing a client order, or, in the case of investment firms that transmit orders to another person for execution, immediately after receiving confirmation that an order has been executed, investment firms shall record the following details of the transaction in question:
  1. (1) the name or other designation of the client;
  2. (2) the details specified in points 2, 3, 4, 6, and in points 16 to 21, of Table 1 of Annex I;
  3. (3) the total price, being the product of the unit price and the quantity;
  4. (4) the nature of the transaction if other than buy or sell;
  5. (5) the natural person who executed the transaction or who is responsible for the execution.


[Note: article 8(1) of MiFID Regulation]

  • 01/11/2007

COBS 11.5.3

handbook-eu-text
If an investment firm transmits an order to another person for execution, the investment firm shall immediately record the following details after making the transmission:
  1. (1) the name or other designation of the client whose order has been transmitted;
  2. (2) the name or other designation of the person to whom the order was transmitted;
  3. (3) the terms of the order transmitted;
  4. (4) the date and exact time of transmission.

[Note: article 8(2) of MiFID Regulation]

  • 01/11/2007

COBS 11.5.4

handbook-eu-text
Points 2, 3, 4, 6, 16 - 21 of Table 1 of Annex 1 of the MiFID Regulation
  • 01/11/2007

COBS 11.6

Use of dealing commission

  • 01/11/2007

COBS 11.6.1

handbook-guidance
This section deals with the acceptance of certain inducements by investment managers and builds upon the rule on inducements (COBS 2.3.1 R). Investment managers should ensure they comply with both this section and the rule on inducements.
  • 01/11/2007

Application

COBS 11.6.2

handbook-rule

This section applies to a firm that acts as an investment manager when it executes customer orders that relate to:

  1. (1) shares; and
  2. (2)
    1. (a) warrants;
    2. (b) certificates representing certain securities;
    3. (c) options; and
    4. (d) rights to or interests in investments of the nature referred to in (a) to (c);
to the extent that they relate to shares.
  • 01/11/2007

Use of dealing commission to purchase goods or services

COBS 11.6.3

handbook-rule
  1. (1) An investment manager must not accept goods or services in addition to the execution of its customer orders if it:
    1. (a) executes its customer orders through a broker or another person;
    2. (b) passes on the broker's or other person's charges to its customers; and
    3. (c) is offered goods or services in return for the charges referred to in (b).
  2. (2) This prohibition does not apply if the investment manager has reasonable grounds to be satisfied that the goods or services received in return for the charges:
    1. (a)
      1. (i) are related to the execution of trades on behalf of the investment manager's customers; or
      2. (ii) comprise the provision of research; and
    2. (b) will reasonably assist the investment manager in the provision of its services to its customers on whose behalf the orders are being executed and do not, and are not likely to, impair compliance with the duty of the investment manager to act in the best interests of its customers.
  • 01/11/2007

COBS 11.6.4

handbook-evidential-provisions
  1. (1) Where the goods or services relate to the execution of trades, an investment manager should have reasonable grounds to be satisfied that the requirements of the rule on use of dealing commission (COBS 11.6.3 R) are met if the goods or services are:
    1. (a) linked to the arranging and conclusion of a specific investment transaction (or series of related transactions); and
    2. (b) provided between the point at which the investment manager makes an investment or trading decision and the point at which the investment transaction (or series of related transactions) is concluded.
  2. (2) Compliance with (1) may be relied upon as tending to establish compliance with the rule on use of dealing commission (COBS 11.6.3 R)
  • 01/11/2007

COBS 11.6.5

handbook-evidential-provisions
  1. (1) Where the goods or services relate to the provision of research, an investment manager will have reasonable grounds to be satisfied that the requirements of the rule on use of dealing commission (COBS 11.6.3 R) are met if the research:
    1. (a) is capable of adding value to the investment or trading decisions by providing new insights that inform the investment manager when making such decisions about its customers' portfolios;
    2. (b) whatever form its output takes, represents original thought, in the critical and careful consideration and assessment of new and existing facts, and does not merely repeat or repackage what has been presented before;
    3. (c) has intellectual rigour and does not merely state what is commonplace or self-evident; and
    4. (d) involves analysis or manipulation of data to reach meaningful conclusions.
  2. (2) Compliance with (1) may be relied upon as tending to establish compliance with the rule on use of dealing commission (COBS 11.6.3 R).
  • 01/11/2007

COBS 11.6.6

handbook-guidance
An example of goods or services relating to the execution of trades that the FSA does not regard as meeting the requirements of the rule on use of dealing commission (COBS 11.6.3 R) is post-trade analytics.
  • 01/11/2007

COBS 11.6.7

handbook-guidance
Examples of goods or services that relate to the provision of research that the FSA does not regard as meeting the requirements of the rule on use of dealing commission (COBS 11.6.3 R) include price feeds or historical price data that have not been analysed or manipulated to reach meaningful conclusions.
  • 01/11/2007

COBS 11.6.8

handbook-guidance

Examples of goods or services that relate to the execution of trades or the provision of research that the FSA does not regard as meeting the requirements of either evidential provisions COBS 11.6.4 E or COBS 11.6.5 E include:

  1. (1) services relating to the valuation or performance measurement of portfolios;
  2. (2) computer hardware;
  3. (3) connectivity services such as electronic networks and dedicated telephone lines;
  4. (4) seminar fees;
  5. (5) subscriptions for publications;
  6. (6) travel, accommodation or entertainment costs;
  7. (7) order and execution management systems;
  8. (8) office administrative computer software, such as word processing or accounting programmes;
  9. (9) membership fees to professional associations;
  10. (10) purchase or rental of standard office equipment or ancillary facilities;
  11. (11) employees' salaries;
  12. (12) direct money payments;
  13. (13) publicly available information; and
  14. (14) custody services relating to designated investments belonging to, or managed for, customers other than those services that are incidental to the execution of trades.
  • 01/11/2007

COBS 11.6.9

handbook-guidance
The reference to research in the rule on use of dealing commission (COBS 11.6.3 R) is not confined to investment research as defined in the Glossary. The FSA's view is that research can include, for example, the goods or services encompassed by investment research, provided that they are directly relevant to and are used to assist in the management of investments on behalf of customers. In addition, any goods or services that relate to the provision of research that the FSA regards as not acceptable under COBS 11.6.6 G or COBS 11.7.6 R should be viewed as not meeting the requirements of COBS 11.6.3R (2), notwithstanding that their content might qualify as investment research.
  • 01/11/2007

COBS 11.6.10

handbook-guidance
This section applies only to arrangements under which an investment manager receives from brokers or other persons goods or services that relate to the execution of trades or the provision of research. It has no application in relation to execution and research generated internally by an investment manager itself.
  • 01/11/2007

COBS 11.6.11

handbook-guidance
An investment manager should not enter into any arrangements that could compromise its ability to comply with its best execution obligations (COBS 11.2).
  • 01/11/2007

Rule on prior disclosure

COBS 11.6.12

handbook-rule
An investment manager that enters into arrangements under this section must make adequate prior disclosure to customers concerning the receipt of goods or services that relate to the execution of trades or the provision of research. This prior disclosure should form part of the summary form disclosure under the rule on inducements (COBS 2.3.1 R).
  • 01/11/2007

Guidance on prior disclosure

COBS 11.6.13

handbook-guidance
The rule on prior disclosure of goods and services under this section complements the requirements on the disclosure of inducements (COBS 2.3.1 R (2)(b)). Investment managers should ensure they comply with both requirements where relevant.
  • 01/11/2007

COBS 11.6.14

handbook-guidance
  1. (1) The prior disclosure required by this section should include an adequate disclosure of the firm's policy relating to the receipt of goods or services that relate to the execution of trades or the provision of research in accordance with the rule on use of dealing commission (COBS 11.6.3 R).
  2. (2) The prior disclosure should explain generally why the firm might find it necessary or desirable to use dealing commission to purchase goods or services, bearing in mind the practices in the markets in which it does business on behalf of its customers. While the appropriate method of making such a disclosure is for the firm to decide, this could, for example, be achieved in a client agreement.
  • 01/11/2007

Rule on periodic disclosure

COBS 11.6.15

handbook-rule
If an investment manager enters into arrangements in accordance with the rule on use of dealing commission (COBS 11.6.3 R), it must in a timely manner make adequate periodic disclosure to its customers of the arrangements entered into.
  • 01/11/2007

Adequate prior and periodic disclosure

COBS 11.6.16

handbook-rule
Adequate prior and periodic disclosure under this section must include details of the goods or services that relate to the execution of trades and, wherever appropriate, separately identify the details of the goods or services that are attributable to the provision of research.
  • 01/11/2007

COBS 11.6.17

handbook-guidance
In assessing the adequacy of prior and periodic disclosures made by an investment manager under this section, the FSA will have regard to the extent to which the investment manager adopts disclosure standards developed by industry associations such as the Investment Management Association, the National Association of Pension Funds and the London Investment Banking Association.
  • 01/11/2007

Making periodic disclosures in a timely manner

COBS 11.6.18

handbook-evidential-provisions
  1. (1) A firm will make periodic disclosure to its customers under this section in a timely manner if it is made at least once a year.
  2. (2) Compliance with (1) may be relied upon as tending to establish compliance with the rule on periodic disclosure (COBS 11.6.16 R).
  • 01/11/2007

Record keeping

COBS 11.6.19

handbook-rule
An investment manager must make a record of each prior and periodic disclosure it makes to its customers in accordance with this section and must maintain each such record for at least five years from the date on which it is provided.
  • 01/11/2007

COBS 11.7

Personal account dealing

  • 01/11/2007

Rule on personal account dealing

COBS 11.7.1

handbook-rule

A firm that conducts designated investment business must establish, implement and maintain adequate arrangements aimed at preventing the following activities in the case of any relevant person who is involved in activities that may give rise to a conflict of interest, or who has access to inside information as defined in the Market Abuse Directive or to other confidential information relating to clients or transactions with or for clients by virtue of an activity carried out by him on behalf of the firm:

  1. (1) entering into a personal transaction which meets at least one of the following criteria:
    1. (a) that person is prohibited from entering into it under the Market Abuse Directive;
    2. (b) it involves the misuse or improper disclosure of that confidential information;
    3. (c) it conflicts or is likely to conflict with an obligation of the firm to a customer under the regulatory system or any other obligation of the firm under MiFID or the UCITS Directive;
  2. (2) advising or procuring, other than in the proper course of his employment or contract for services, any other person to enter into a transaction in designated investments which, if a personal transaction of the relevant person, would be covered by (1) or a relevant provision;
  3. (3) disclosing, other than in the normal course of his employment or contract for services, any information or opinion to any other person if the relevant person knows, or reasonably ought to know, that as a result of that disclosure that other person will or would be likely to take either of the following steps:
    1. (a) to enter into a transaction in designated investments which, if a personal transaction of the relevant person, would be covered by (1) or a relevant provision;
    2. (b) to advise or procure another person to enter into such a transaction.

[Note: article 12(1) of MiFID implementing Directive and article 13(1) of the UCITS implementing Directive]

COBS 11.7.2

handbook-rule

For the purposes of this section, the relevant provisions are:

  1. (1) the rules on personal transactions undertaken by financial analysts in COBS 12.2.5 R (1) and (2);
  2. (2) the rule on the misuse of information relating to pending client orders in COBS 11.3.5 R.
  • 01/11/2007

COBS 11.7.2A

handbook-guidance
The requirements of this section are without prejudice to article 3(a) of the Market Abuse Directive which prohibits any person who possesses inside information under article 2 of that directive from disclosing that information to any other person unless that disclosure is made in the normal course of the exercise of his employment, profession or duties.
  • 01/11/2007

COBS 11.7.3

handbook-guidance
For the purposes of COBS 11.7.1R (1)(c), any other obligation of the firm under MiFID refers to a firm's obligations under the regulatory system that are not owed to a customer and any of the firm's obligations under another EEA States' implementation of MiFID where it operates a branch in the EEA.
  • 01/11/2007

COBS 11.7.4

handbook-rule

The arrangements required under this section must in particular be designed to ensure that:

  1. (1) each relevant person covered by this section is aware of the restrictions on personal transactions, and of the measures established by the firm in connection with personal transactions and disclosure, in accordance with this section;
  2. (2) the firm:
    1. (a) is informed promptly of any personal transaction entered into by a relevant person, either by notification of that transaction or by other procedures enabling the firm to identify such transactions; or
    2. (b) in the case of outsourcing arrangements, ensures that the service provider to which the activity is outsourced maintains a record of personal transactions entered into by any relevant person and provides that information to the firm promptly on request;
  3. (3) a record is kept of the personal transaction notified to the firm or identified by it, including any authorisation or prohibition in connection with such a transaction.

[Note: article 12(2) of MiFID implementing Directive and article 13(2) of the UCITS implementing Directive]

Disapplication of rule on personal account dealing

COBS 11.7.5

handbook-rule

This section does not apply to the following kinds of personal transaction:

  1. (1) personal transactions effected under a discretionary portfolio management service where there is no prior communication in connection with the transaction between the portfolio manager and the relevant person or other person for whose account the transaction is executed;
  2. (2) personal transactions in units or shares in collective undertakings that comply with the conditions necessary to enjoy the rights conferred by the UCITS Directive or are subject to supervision under the law of an EEA State which requires an equivalent level of risk spreading in their assets, where the relevant person and any other person for whose account the transactions are effected, are not involved in the management of that undertaking;
  3. (3) personal transactions in life policies.

[Note: article 12(3) of MiFID implementing Directive and article 13(3) of the UCITS implementing Directive]

COBS 11.7.6

handbook-rule

For the purposes of this section, a person who is not:

  1. (1) a director, partner or equivalent, manager or appointed representative (or, where applicable, a tied agent) of the firm; or
  2. (2) a director, partner or equivalent, or manager of any appointed representative (or where applicable, a tied agent) of the firm;

will only be a relevant person to the extent that they are involved in the provision of designated investment business or collective portfolio management services.

Successive personal transactions

COBS 11.7.7

handbook-rule

Where successive personal transactions are carried out on behalf of a person in accordance with prior instructions given by that person, the obligations under this section do not apply:

  1. (1) separately to each successive transaction if those instructions remain in force and unchanged; or
  2. (2) to the termination or withdrawal of such instructions, provided that any financial instruments which had previously been acquired pursuant to the instructions are not disposed of at the same time as the instructions terminate or are withdrawn.

Obligations under this section do apply in relation to a personal transaction, or the commencement of successive personal transactions, that are carried out on behalf of the same person if those instructions are changed or if new instructions are issued.


[Note: recital 17 to MiFID implementing Directive]

  • 01/11/2007

COBS 11.8

Recording telephone conversations and electronic communications

  • 06/03/2009

Application - Who?

COBS 11.8.1

handbook-rule

This section applies to a firm:

  1. (1) which carries out any of the following activities:
    1. (a) receiving client orders;
    2. (b) executing client orders;
    3. (c) arranging for client orders to be executed;
    4. (d) carrying out transactions on behalf of the firm, or another person in the firm's group, and which are part of the firm's trading activities or the trading activities of another person in the firm's group;
    5. (e) executing orders that result from decisions by the firm to deal on behalf of its client;
    6. (f) placing orders with other entities for execution that result from decisions by the firm to deal on behalf of its client;
  2. (2) to the extent that the activities referred to in (1) relate to:
    1. (a) qualifying investments admitted to trading on a prescribed market;
    2. (b) qualifying investments in respect of which a request for admission to trading on such a market has been made;
    3. (c) investments which are related investments in relation to such qualifying investments.
  • 06/03/2009

COBS 11.8.2

handbook-rule

This section does not apply to the carrying on of the following activities:

  1. (1) activities carried on between operators, or between operators and depositories, of the same collective investment scheme (when acting in that capacity);
  2. (2) corporate finance business;
  3. (3) corporate treasury functions.
  • 06/03/2009

COBS 11.8.3

handbook-rule

This section does not apply to the following firms or persons:

  1. (1) a service company;
  2. (2) a non-directive friendly society;
  3. (3) a non-directive insurer;
  4. (4) a UCITS qualifier.
  • 06/03/2009

Application - Where?

COBS 11.8.4

handbook-rule
This section applies only with respect to a firm's activities carried on from an establishment maintained by the firm in the United Kingdom.
  • 06/03/2009

Recording telephone conversations, etc

COBS 11.8.5

handbook-rule

A firm must take reasonable steps to record relevant telephone conversations, and keep a copy of relevant electronic communications, made with, sent from or received on equipment:

  1. (1) provided by the firm to an employee or contractor; or
  2. (2) the use of which by an employee or contractor has been sanctioned or permitted by the firm;

to enable that employee or contractor to carry out any of the activities referred to in COBS 11.8.1 R.

  • 06/03/2009

COBS 11.8.5A

handbook-rule
A firm must take reasonable steps to prevent an employee or contractor from making, sending or receiving relevant telephone conversations and electronic communications on privately-owned equipment which the firm is unable to record or copy.
  • 14/11/2011

COBS 11.8.6

handbook-rule

The obligation in COBS 11.8.5 R and COBS 11.8.5A R does not apply to:

  1. (1) [deleted]
  2. (2) a discretionary investment manager, in respect of telephone conversations or electronic communications made with, sent to or received from a firm which the discretionary investment manager reasonably believes is subject to the recording obligation in COBS 11.8.5 R in respect of that conversation or communication; or
  3. (3) a discretionary investment manager, in respect of telephone conversations or electronic communications made with, sent to or received from a person who is not subject to the recording obligation in COBS 11.8.5 R, provided that such telephone conversations or electronic communications are made with, sent to or received from such persons on an infrequent basis, and represent a small proportion of the total telephone conversations and electronic communications made, sent or received by the discretionary investment manager to which COBS 11.8.5 R apply.

COBS 11.8.7

handbook-guidance
Electronic communications includes communications made by way of facsimile, email and instant messaging devices.
  • 06/03/2009

COBS 11.8.8

handbook-rule

For the purposes of COBS 11.8.5 R and COBS 11.8.5A R a relevant conversation or communication is any one of the following:

  1. (1) a conversation or communication between an employee or contractor of the firm with a client, or when acting on behalf of a client, with another person, which concludes an agreement by the firm to carry out the activities referred to in COBS 11.8.1 R as principal or as agent;
  2. (2) a conversation or communication between an employee or contractor of the firm with a professional client or an eligible counterparty, or when acting on behalf of a professional client or an eligible counterparty, with another person, which is carried on with a view to the conclusion of an agreement referred to in (1) above, and whether or not it is part of the same conversation or communication as in (1).

COBS 11.8.9

handbook-guidance
  1. (1) COBS 11.8.8R (2) includes conversations and communications relating to specific transactions which are intended to lead to the conclusion of an agreement by the firm to deal with or on behalf of the client as principal or agent, even if those conversations or communications do not lead to the conclusion of such an agreement. It does not include conversations or communications which are not intended to lead to the conclusion of such an agreement, such as general conversations or communications about market conditions.
  2. (2) The FSA would not usually expect the obligation in COBS 11.8.5 R to include conversations or communications made by investment analysts, retail financial advisers, and persons carrying on back office functions, as such persons will not normally make relevant conversations or communications when acting in those capacities.
  • 06/03/2009

Retention of records

COBS 11.8.10

handbook-rule

A firm must take reasonable steps to retain all records made by it under COBS 11.8.5 R:

  1. (1) for a period of at least 6 months from the date the record was created;
  2. (2) in a medium that allows the storage of the information in a way accessible for future reference by the FSA, and so that the following conditions are met:
    1. (a) the FSA must be able to access the records readily;
    2. (b) it must be possible for any corrections or other amendments, and the contents of the records prior to such corrections and amendments, to be easily ascertained;
    3. (c) it must not be possible for the records to be otherwise manipulated or altered.
  • 06/03/2009

Export chapter as

COBS 12

Investment research

COBS 12.1

Purpose and application

  • 01/11/2007

Purpose

COBS 12.1.1

handbook-guidance

The purpose of this chapter is to:

  1. (1) set out specific requirements relating to the production and dissemination of investment research and non-independent research; and
  2. (2) implementing the provisions of the Market Abuse Directive relating to the disclosures to be made in, and about, research recommendations.
  • 01/11/2007

Application: Who?

COBS 12.1.2

handbook-rule

This chapter applies to a firm.

  1. (1) [deleted]
  2. (2) [deleted]
  • 01/11/2007

Application: Where?

COBS 12.1.3

handbook-guidance
The EEA territorial scope rule modifies the general rule of application to the extent necessary to be compatible with European law (see paragraph 1.1 of Part 2 of COBS 1 Annex 1). This means that COBS 12.2 and COBS 12.3.4 G also apply to passported activities carried on by a UK MiFID investment firm from a branch in another EEA state, but do not apply to the United Kingdom branch of an EEA MiFID investment firm in relation to its MiFID business.
  • 01/11/2007

COBS 12.2

Investment research

  • 01/11/2007

Application

COBS 12.2.1

handbook-rule

This section applies to a firm which produces, or arranges for the production of, investment research that is intended or likely to be subsequently disseminated to clients of the firm or to the public, under its own responsibility or that of a member of its group.

[Note: article 25(1) of the MiFID implementing Directive]

  • 01/11/2007

COBS 12.2.2

handbook-guidance

The concept of dissemination of investment research to clients or to the public is not intended to include dissemination exclusively to persons within the group of the firm.

[Note: recital 33 of the MiFID implementing Directive]

  • 01/11/2007

Measures and arrangements required for investment research

COBS 12.2.3

handbook-rule

A firm must ensure the implementation of all of the measures for managing conflicts of interest in SYSC 10.1.11 R in relation to the financial analysts involved in the production of investment research and other relevant persons whose responsibilities or business interests may conflict with the interests of the persons to whom investment research is disseminated.

[Note: article 25 (1) of the MiFID implementing Directive]

  • 01/11/2007

COBS 12.2.4

handbook-guidance

Persons whose responsibilities or business interests may reasonably be considered to conflict with the interests of the persons to whom investment research is disseminated include corporate finance personnel and persons involved in sales and trading on behalf of clients or the firm.

[Note: recital 30 of the MiFID implementing Directive]

  • 01/11/2007

COBS 12.2.5

handbook-rule

A firm must have in place arrangements designed to ensure that the following conditions are satisfied:

  1. (1) if a financial analyst or other relevant person has knowledge of the likely timing or content of investment research which is not publicly available or available to clients and cannot readily be inferred from information that is so available, that financial analyst or other relevant person must not undertake personal transactions or trade on behalf of any other person, including the firm, other than as market maker acting in good faith and in the ordinary course of market making or in the execution of an unsolicited client order, in financial instruments to which the investment research relates, or in any related financial instruments, until the recipients of the investment research have had a reasonable opportunity to act on it;
  2. [Note: article 25(2)(a) of the MiFID implementing Directive]
  3. (2) in circumstances not covered by (1), financial analyst and any other relevant persons involved in the production of investment research must not undertake personal transactions in financial instruments to which the investment research relates, or in any related financial instrument, contrary to current recommendations, except in exceptional circumstances and with the prior approval of a member of the firm's legal or compliance function;
  4. [Note: article 25(2)(b) of the MiFID implementing Directive]
  5. (3) the firm itself, financial analysts, and other relevant persons involved in the production of investment research must not accept inducements from those with a material interest in the subject matter of the investment research;
  6. [Note: article 25(2)(c) of the MiFID implementing Directive]
  7. (4) the firm itself, financial analysts, and other relevant persons involved in the production of investment research must not promise issuers favourable research coverage; and
  8. [Note: article 25(2)(d) of the MiFID implementing Directive]
  9. (5) issuers, relevant persons other than financial analysts, and any other persons must not, before the dissemination of investment research, be permitted to review a draft of the investment research for the purpose of verifying the accuracy of factual statements made in that investment research, or for any other purpose other than verifying compliance with the firm's legal obligations, if the draft includes a recommendation or a target price.
  10. [Note: article 25(2)(e) of the MiFID implementing Directive]
  • 01/11/2007

COBS 12.2.5A

handbook-guidance
Firms are reminded that they must also comply with COBS 11.7 (Rule on personal account dealing).
  • 01/11/2007

COBS 12.2.6

handbook-guidance
Knowledge by a financial analyst or other relevant person that the firm intends to produce or disseminate investment research to its clients or to the public (including in circumstances where research material has not yet been written) could constitute knowledge of the likely timing and content of investment research under COBS 12.2.5 R (1).
  • 01/11/2007

COBS 12.2.7

handbook-guidance

For the purposes of COBS 12.2.5 R (2):

  1. (1) current recommendations should be considered to be those recommendations contained in investment research which have not been withdrawn and which have not lapsed; and
  2. [Note: recital 34 of the MiFID implementing Directive]
  1. (2) exceptional circumstances in which financial analysts and other relevant persons may, with prior written approval, undertake personal transactions in financial instruments to which investment research relates should include those circumstances where, for personal reasons relating to financial hardship, the financial analyst or other relevant person is required to liquidate a position.
  2. [Note: recital 31 of the MiFID implementing Directive]
  • 01/11/2007

COBS 12.2.8

handbook-guidance

Small gifts or minor hospitality below a level specified in the firm's conflicts of interest policy and mentioned in the description of that policy that is made available to clients in accordance with COBS 6.1.4 R (8) should not be considered as inducements for the purposes of COBS 12.2.5 R (3).

[Note: recital 32 of the MiFID implementing Directive]

  • 01/11/2007

COBS 12.2.9

handbook-guidance

A financial analyst should not become involved in activities other than the preparation of investment research where such involvement is inconsistent with the maintenance of the financial analysts objectivity. The following should ordinarily be considered as inconsistent with the maintenance of a financial analyst's objectivity:

  1. (1) participating in investment banking activities such as corporate finance business and underwriting; or
  2. (2) participating in 'pitches' for new business or 'road shows' for new issues of financial instruments; or
  3. (3) being otherwise involved in the preparation of issuer marketing.

[Note: recital 36 of the MiFID implementing Directive]

  • 01/11/2007

Exemption from investment research measures and arrangements

COBS 12.2.10

handbook-rule

A firm which disseminates investment research produced by another person to the public or to clients is exempt from complying with the requirements in COBS 12.2.3 R and COBS 12.2.5 R if the following criteria are met:

  1. (1) the person that produces the investment research is not a member of the group to which the firm belongs;
  2. (2) the firm does not substantially alter the recommendations within the investment research;
  3. (3) the firm does not present the investment research as having been produced by it; and
  4. (4) the firm verifies that the producer of the investment research is subject to requirements equivalent to those in COBS 12.2.3 R and COBS 12.2.5 R in relation to the production of that investment research, or has established a policy setting such requirements.

[Note: article 25(3) of the MiFID implementing Directive]

  • 01/11/2007

Means and timing of publication of investment research

COBS 12.2.11

handbook-guidance

The FSA would expect a firm's conflicts of interest policy to provide for investment research to be published or distributed to its clients in an appropriate manner. For example, the FSA considers it will be:

  1. (1) appropriate for a firm to take reasonable steps to ensure that its investment research is published or distributed only through its usual distribution channels; and
  2. (2) inappropriate for an employee (whether or not a financial analyst) to communicate the substance of any investment research, except as set out in the firm's conflicts of interest policy.
  • 01/11/2007

COBS 12.2.12

handbook-guidance
The FSA would expect a firm to consider whether or not other business activities of the firm could create the reasonable perception that its investment research may not be an impartial analysis of the market in, or the value or prospects of, a financial instrument. A firm would therefore be expected to consider whether its conflicts of interest policy should contain any restrictions on the timing of the publication of investment research. For example, a firm might consider whether it should restrict publication of relevant investment research around the time of an investment offering.
  • 01/11/2007

Investment research for internal use

COBS 12.2.13

handbook-guidance
The FSA considers that the significant conflicts of interest which could arise are likely to mean it is inappropriate for a financial analyst or other relevant person to prepare investment research which is intended firstly for internal use for the firm's own advantage, and then for later publication to its clients (in circumstances in which it might reasonably be expected to have a material influence on its clients' investment decisions).
  • 01/11/2007

COBS 12.3

Non-independent research

  • 01/11/2007

Application

COBS 12.3.1

handbook-rule

This section applies to a firm that produces or disseminates non-independent research.

[Note: article 24(2) of the MiFID implementing Directive]

  • 01/11/2007

Labelling of non-independent research

COBS 12.3.2

handbook-rule

A firm which produces or disseminates non-independent research must ensure that it:

  1. (1) is clearly identified as a marketing communication; and
  2. (2) contains a clear and prominent statement that (or, in the case of an oral recommendation, to the effect that) it:
    1. (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research; and
    2. (b) is not subject to any prohibition on dealing ahead of the dissemination of investment research.

[Note: article 24(2) of the MiFID implementing Directive]

  • 01/11/2007

COBS 12.3.3

handbook-rule

The financial promotion rules apply to non-independent research as though it were a marketing communication.

[Note: article 24(2) of the MiFID implementing Directive]

  • 01/11/2007

Management of conflicts of interest in area of non-independent research

COBS 12.3.4

handbook-guidance

In accordance with SYSC 10, a firm will be expected to take reasonable steps to identify and manage conflicts of interest which may arise in the production of non-independent research. Situations where conflicts of interest can arise include:

  1. (1) relevant persons trading in financial instruments that are the subject of non-independent research which they know the firm has published or intends to publish before clients have had a reasonable opportunity to act on it (other than when the firm is acting as market maker in good faith and in the ordinary course of market making, or in the execution of an unsolicited client order); and
  2. (2) preparation of non-independent research which is intended firstly for internal use by the firm and then for later publication to clients.
  • 01/11/2007

COBS 12.4

Research recommendations: required disclosures

  • 01/11/2007

Application

COBS 12.4.1

handbook-rule
  1. (1) This section applies to a firm that prepares or disseminates research recommendations.
  2. (2) This section does not apply to the extent that the Investment Recommendation (Media) Regulations 2005 apply to a firm.
  3. (3) If a firm is a media firm subject to equivalent appropriate regulation, only COBS 12.4.2 G, COBS 12.4.4 R, COBS 12.4.15 R and COBS 12.4.16 R apply.

[Note: articles 2(4), 3(4), 5(5) of the MAD Investment Recommendations Directive]

  • 01/11/2007

COBS 12.4.2

handbook-guidance
Appropriate regulatory or self-regulatory arrangements are sufficient to meet the condition in COBS 12.4.1 R (3). Examples include those listed in regulation 3(5) of the Investment Recommendation (Media) Regulations 2005, that is the Code of Practice issued by the Press Complaints Commission, the Producers' Guidelines issued by the British Broadcasting Corporation, and any code published by the Office of Communications pursuant to section 324 of the Communications Act 2003.
  • 01/11/2007

Use of information barriers

COBS 12.4.3

handbook-guidance

Obligations to disclose information do not require those producing research recommendations to breach effective information barriers put in place to prevent and avoid conflicts of interest.

[Note: recital 7 of the MAD Investment Recommendations Directive]

  • 01/11/2007

Fair presentation and disclosure

COBS 12.4.4

handbook-rule

A firm must take reasonable care:

  1. (1) to ensure that a research recommendation produced or disseminated by it is fairly presented; and
  2. (2) to disclose its interests or indicate conflicts of interest concerning relevant investments.

[Note: article 6(5) of the Market Abuse Directive]

  • 01/11/2007

Identity of producers of recommendations

COBS 12.4.5

handbook-rule
  1. (1) A firm must, in a research recommendation produced by it:
    1. (a) disclose clearly and prominently the identity of the person responsible for its production, and in particular:
      1. (i) the name and job title of the individual who prepared the research recommendation; and
      2. (ii) the name of the firm; and
    2. (b) (where the firm is an investment firm or a credit institution) disclose the identity of the competent authority of the firm.
  2. (2) The requirements in (1) may be met for non-written research recommendations by referring to a place where the disclosures can be directly and easily accessed by the public, such as an appropriate internet site of the firm.

[Note: article 2 of the MAD Investment Recommendations Directive]

  • 01/11/2007

General standard for fair presentation of recommendations

COBS 12.4.6

handbook-rule
  1. (1) A firm must take reasonable care to ensure that:
    1. (a) facts in a research recommendation are clearly distinguished from interpretations, estimates, opinions and other types of non-factual information;
    2. (b) its sources for a research recommendation are reliable or if there is any doubt as to whether a source is reliable, this is clearly indicated;
    3. (c) all projections, forecasts and price targets in a research recommendation are clearly labelled as such and the material assumptions made in producing or using them are indicated; and
    4. (d) the substance of its research recommendations can be substantiated as reasonable, upon request by the FSA.
  2. (2) The requirements in (1) do not apply, in the case of non-written research recommendations, to the extent that they would be disproportionate.
  3. (3) A firm must make and retain sufficient records to disclose the basis of the substantiation required in (1)(d).

[Note: article 3 of the MAD Investment Recommendations Directive]

  • 01/11/2007

Additional obligations in relation to fair presentation of recommendations

COBS 12.4.7

handbook-rule
  1. (1) In addition a firm must take reasonable care to ensure that, in a research recommendation, at least:
    1. (a) all substantially material sources are indicated, including, if appropriate, the issuer, and in particular the research recommendation indicates whether the research recommendation has been disclosed to that issuer and amended following this disclosure before its dissemination;
    2. (b) any basis of valuation or methodology used to evaluate a security, a derivative or an issuer, or to set a price target for a security or a derivative, is adequately summarised;
    3. (c) the meaning of any recommendation made, such as "buy", "sell" or "hold", which may include the time horizon of the security or derivative to which the research recommendation relates, is adequately explained and any appropriate risk warning, including a sensitivity analysis of the relevant assumptions, indicated;
    4. (d) reference is made to the planned frequency, if any, of updates of the research recommendation and to any major changes in the coverage policy previously announced;
    5. (e) the date at which the research recommendation was first released for distribution is indicated clearly and prominently, as well as the relevant date and time for any security or derivative price mentioned; and
    6. (f) if the substance of a research recommendation differs from the substance of an earlier research recommendation, concerning the same security, derivative or issuer issued during the 12-month period immediately preceding its release, this change and the date of the earlier research recommendation are indicated clearly and prominently.
  2. (2) If the requirements in (1)(a), (b) or (c) would be disproportionate in relation to the length of the research recommendation, a firm may, instead, make clear and prominent reference in the research recommendation to the place where the required information can be directly and easily accessed by the public (such as a hyperlink to that information on an appropriate internet site of the firm) provided that there has been no change in the methodology or basis of valuation used.
  3. (3) In the case of a non-written research recommendation, the requirements of (1) do not apply to the extent that they would be disproportionate.

[Note: article 4 of the MAD Investment Recommendations Directive]

  • 01/11/2007

COBS 12.4.8

handbook-guidance
The disclosures required under COBS 12.4.7 R (1)(e) and COBS 12.4.7R (1)(f) may, if the firm so chooses, be made by graphical means (for example by use of a line graph).
  • 01/11/2007

General standard for disclosure of interests and conflicts of interest

COBS 12.4.9

handbook-rule
  1. (1) A firm must disclose, in a research recommendation:
    1. (a) all of its relationships and circumstances that may reasonably be expected to impair the objectivity of the research recommendation, in particular a significant financial interest in any relevant investment which is the subject of the research recommendation, or a significant conflict of interest with respect to a relevant issuer; and
    2. (b) relationships and circumstances, of the sort referred to in (a), of each legal or natural person working for the firm who was involved in preparing the substance of the research recommendation, including, in particular, for a firm which is an investment firm, disclosure of whether his remuneration is tied to investment banking transactions performed by the firm or any affiliated company.
  2. (2) If the firm is a legal person, the information to be disclosed in accordance with (1) must at least include the following:
    1. (a) any interests or conflicts of interest of the firm or of an affiliated company that are accessible, or reasonably expected to be accessible, to the persons involved in the preparation of the substance of the research recommendation; and
    2. (b) any interests or conflicts of interest of the firm or of affiliated companies known to persons who, although not involved in the preparation of the substance of the research recommendation, had or could reasonably be expected to have access to the substance of the research recommendation prior to its dissemination, other than persons whose only access to the research recommendation is to ensure compliance with relevant regulatory or statutory obligations, including the disclosures required under this section.
  3. (3) If the disclosures required under (1) and (2) would be disproportionate in relation to the length of the research recommendation distributed, a firm may, instead, make clear and prominent reference in the research recommendation to the place where such disclosures can be directly and easily accessed by the public (such as a hyperlink to the disclosure on an appropriate internet site of the firm).
  4. (4) The requirements in (1) do not apply, in the case of non-written research recommendations, to the extent that they are disproportionate.

[Note: article 5 of the MAD Investment Recommendations Directive]

  • 01/11/2007

Additional obligations for producers of research recommendations in relation to disclosure of interests or conflicts of interest

COBS 12.4.10

handbook-rule
  1. (1) A research recommendation produced by a firm must disclose clearly and prominently the following information on its interests and conflicts of interest:
    1. (a) major shareholdings that exist between it or any affiliated company on the one hand and the relevant issuer on the other hand, including at least:
      1. (i) shareholdings exceeding 5% of the total issued share capital in the relevant issuer held by the firm or any affiliated company; or
      2. (ii) shareholdings exceeding 5% of the total issued share capital of the firm or any affiliated company held by the relevant issuer;
    2. (b) any other financial interests held by the firm or any affiliated company in relation to the relevant issuer which are significant in relation to the research recommendation;
    3. (c) if applicable, a statement that the firm or any affiliated company is a market maker or liquidity provider in the securities of the relevant issuer or in any related derivatives;
    4. (d) if applicable, a statement that the firm or any affiliated company has been lead manager or co-lead manager over the previous 12 months of any publicly disclosed offer of securities of the relevant issuer or in any related derivatives;
    5. (e) if applicable, a statement that the firm or any affiliated company is party to any other agreement with the relevant issuer relating to the provision of investment banking services, provided that:
      1. (i) this would not entail the disclosure of any confidential commercial information; and
      2. (ii) the agreement has been in effect over the previous 12 months or has given rise during the same period to a payment or to the promise of payment; and
    6. (f) if applicable, a statement that the firm or any affiliated company is party to an agreement with the relevant issuer relating to the production of the research recommendation.
  2. (2) A firm must disclose, in general terms, in the research recommendation the effective organisational and administrative arrangements set up within the firm for the prevention and avoidance of conflicts of interest with respect to research recommendations, including information barriers.
  3. (3) In the case of an investment firm or a credit institution, if a legal or natural person working for the firm who is involved in the preparation of a research recommendation, receives or purchases shares of the relevant issuer prior to a public offering of those shares, the price at which the shares were acquired and the date of acquisition must also be disclosed in the research recommendation.
  4. (4) A firm, which is an investment firm or a credit institution, must publish the following information on a quarterly basis, and must disclose it in its research recommendations:
    1. (a) the proportion of all research recommendations published during the relevant quarter that are "buy", "hold", "sell" or equivalent terms; and
    2. (b) the proportion of relevant investments in each of these categories, issued by issuers to which the firm supplied material investment banking services during the previous 12 months.
  5. (5) If the requirements under (1) to (4) would be disproportionate in relation to the length of the research recommendation, a firm may, instead, make clear and prominent reference in the research recommendation to the place where such disclosure can be directly and easily accessed by the public (such as a hyperlink to the disclosure on an appropriate internet site of the firm, or, if relevant, to the firm's conflicts of interest policy).
  6. (6) In the case of non-written research recommendations, the requirements of (1) do not apply to the extent that they are disproportionate.

[Note: article 6 of the MAD Investment Recommendations Directive]

  • 01/11/2007

COBS 12.4.11

handbook-guidance
Nothing in COBS 12.4.10 R (1)(a) prevents a firm from choosing to disclose significant shareholdings above a lower threshold (for example, 1%) than is required by COBS 12.4.10 R (1)(a).
  • 01/11/2007

COBS 12.4.12

handbook-guidance
COBS 12.4.10 R (1)(a) and COBS 12.4.10 R (1)(b) only require a firm to aggregate its shareholdings with those of affiliated companies if they act in concert in relation to those shareholdings.
  • 01/11/2007

COBS 12.4.13

handbook-guidance
In relation to companies limited by shares and incorporated in Great Britain, the most meaningful measure of "total issued share capital" is likely to be the concept of "paid up and issued share capital" under the Companies Act 1985 or Companies Act 2006 (as applicable).
  • 01/11/2007

COBS 12.4.14

handbook-guidance
The FSA considers that it is important for the proportions published in compliance with COBS 12.4.10 R (4) to be consistent and meaningful to the recipients of the research recommendations. Accordingly for non-equity material, the relevant categories should be meaningful to the recipients in terms of the course of action being recommended.
  • 01/11/2007

Identity of disseminators of recommendations

COBS 12.4.15

handbook-rule

If a firm disseminates a research recommendation produced by a third party, the research recommendation must identify the firm clearly and prominently.

[Note: article 7 of the MAD Investment Recommendations Directive]

  • 01/11/2007

General standard for dissemination of third party recommendations

COBS 12.4.16

handbook-rule
  1. (1) If a research recommendation produced by a third party is substantially altered before dissemination by a firm:
    1. (a) the disseminated material must clearly describe that alteration in detail; and
    2. (b) if the substantial alteration consists of a change of the direction of the recommendation (such as changing a "buy" recommendation into a "hold" or "sell" recommendation or vice versa), the requirements laid down in COBS 12.4.5 R to COBS 12.4.11 G on producers must be met by the firm, to the extent of the substantial alteration.
  2. (2) A firm which disseminates a substantially altered research recommendation must have a formal written policy so that the persons receiving the information may be directed to where they can have access to the identity of the producer of the research recommendation, the research recommendation itself and the disclosure of the producer's interests or conflicts of interest, provided that these elements are publicly available.
  3. (3) If a firm disseminates a summary of a research recommendation produced by a third party, it must:
    1. (a) ensure that the summary is fair, clear and not misleading;
    2. (b) identify the source research recommendation; and
    3. (c) identify where (to the extent that they are publicly available) the third party's disclosures relating to the source research recommendation can be directly and easily accessed by the public.
  4. (4) Paragraphs (1) and (2) do not apply to news reporting on research recommendations produced by a third party where the substance of the research recommendation is not altered.

[Note: article 8 of the MAD Investment Recommendations Directive]

  • 01/11/2007

Additional obligations for investment firms and credit institutions disseminating third party recommendations

COBS 12.4.17

handbook-rule

If a firm, which is an investment firm or a credit institution, disseminates a research recommendation produced by a third party:

  1. (1) the name of the competent authority of the firm must be clearly and prominently indicated on the disseminated material;
  2. (2) if the producer of the research recommendation has not already disseminated it, the requirements in COBS 12.4.10 R must be met by the firm as if it had produced the research recommendation itself; and
  3. (3) if the firm has substantially altered the research recommendation, the requirements laid down in COBS 12.4.4 R to COBS 12.4.10 R must be met by the firm as if it had produced the research recommendation itself.

[Note: article 9 of the MAD Investment Recommendations Directive]

  • 01/11/2007

Export chapter as

COBS 13

Preparing product information

COBS 13.1

The obligation to prepare product information

  • 01/11/2007

COBS 13.1.1

handbook-rule

A firm must prepare:

  1. (1) a key features document for each packaged product, cash-deposit ISA and cash-deposit CTF it produces; and
  2. (2) a key features illustration for each packaged product it produces;
in good time before those documents have to be provided.
  • 01/11/2007

COBS 13.1.2

handbook-rule

A firm must prepare the Consolidated Life Directive information for each life policy it effects, in good time before that information has to be provided.
in good time before that information has to be provided.

[Note: article 36(1) of, and Annex III to, the Consolidated Life Directive]

  • 01/11/2007

Exceptions

COBS 13.1.3

handbook-rule

A firm is not required to prepare:

  1. (1) a document, if another firm has agreed to prepare it; or
  2. (2) a key features document for:
    1. (a) a unit in a UCITS scheme or a simplified prospectus scheme; or
    2. (b) a unit in an EEA UCITS scheme which is a recognised scheme; or
    3. (c) a unit in a key features scheme, if it prepares a simplified prospectus, or the information appears with due prominence in another document, instead; or
    4. (d) a stakeholder pension scheme, or personal pension scheme that is not a personal pension policy, if the information appears with due prominence in another document; or
  3. (3) a key features illustration:
    1. (a) for a unit in a UCITS scheme or a simplified prospectus scheme; or
    2. (b) for a unit in an EEA UCITS scheme which is a recognised scheme; or
    3. (c) if it includes the information from the key features illustration in a key features document; or
  4. (4) the Consolidated Life Directive information, if the policy is a reinsurance contract or a pure protection contract.

COBS 13.1.4

handbook-rule
A single document prepared for more than one key features scheme or simplified prospectus scheme may combine more than one key features document, simplified prospectus or EEA simplified prospectus or any combination of them, if the schemes are offered through a funds supermarket service and the document clearly describes the difference between the schemes.

COBS 13.2

Product information: production standards, form and contents

  • 01/11/2007

COBS 13.2.1

handbook-guidance

When a firm prepares documents or information in accordance with this chapter, the firm should consider the rules on providing product information (COBS 14). Those rules require a firm to provide the product information in a durable medium or via a website that meets the website conditions (if the website is not a durable medium).

[Note: article 29(4) of the MiFID implementing Directive]

  • 01/11/2007

COBS 13.2.2

handbook-rule

A key features document and a key features illustration must also:

  1. (1) (if it is a key features document) be produced and presented to at least the same quality and standard as the sales or marketing material used to promote the relevant product;
  2. (2) (if it is a key features document) display the firm's brand at least as prominently as any other;
  3. (3) (if it is a key features document or a key features illustration which does not form an integral part of the key features document) include the 'keyfacts' logo in a prominent position at the top of the document; and
  4. (4) (if it is a key features document or a key features illustration which does not form an integral part of the key features document) include the following statement in a prominent position:
"The Financial Services Authority is the independent financial services regulator. It requires us, [provider name], to give you this important information to help you to decide whether our [product name] is right for you. You should read this document carefully so that you understand what you are buying, and then keep it safe for future reference".
  • 01/11/2007

COBS 13.2.3

handbook-guidance
  • 01/11/2007

COBS 13.2.4

handbook-rule
The documents and information prepared in accordance with the rules in this chapter must not include anything that might reasonably cause a retail client to be mistaken about the identity of the firm that produced, or will produce, the product.
  • 01/11/2007

COBS 13.3

Contents of a key features document

  • 01/11/2007

General requirements

COBS 13.3.1

handbook-rule

A key features document must:

  1. (1) include enough information about the nature and complexity of the product, how it works, any limitations or minimum standards that apply and the material benefits and risks of buying or investing for a retail client to be able to make an informed decision about whether to proceed; and
  2. (2) explain:
    1. (a) the arrangements for handling complaints about the product;
    2. (b) that compensation might be available from the FSCS if the firm cannot meet its liabilities in respect of the product (if applicable);
    3. (c) that a right to cancel or withdraw exists, or does not exist, and, if it does exist, its duration and the conditions for exercising it, including information about the amount a client may have to pay if the right is exercised, the consequences of not exercising it and practical instructions for exercising it, indicating the address to which any notice must be sent;
    4. (d) (for a CTF) that stakeholder CTFs, cash-deposit CTFs and security-based CTFs are available and which type the firm is offering; and
    5. (e) (for a personal pension scheme) clearly and prominently, that stakeholder pension schemes are generally available and might meet the client's needs as well as the scheme on offer.

Additional requirements for packaged products

COBS 13.3.2

handbook-rule
Table
  • 01/11/2007

Money market funds

COBS 13.3.3

handbook-rule
A key features document for a short-term money market fund, a money market fund or a qualifying money market fund must include a statement identifying it as such a fund and a statement that the authorised fund's investment objectives and policies will meet the conditions of the definition of short-term money market fund, money market fund or qualifying money market fund, as appropriate.
  • 01/07/2011

Feeder NURS

COBS 13.3.4

handbook-rule

A key features document for a feeder NURS must include:

  1. (1) a statement identifying it as such a scheme;
  2. (2) information specific to the feeder NURS and its qualifying master scheme which enables investors to understand the qualifying master scheme's key particulars; and
  3. (3) a description and explanation of any material differences between the risk profile of the feeder NURS and that of the qualifying master scheme.
  • 27/04/2012

COBS 13.3.5

handbook-guidance
When producing the key features document, the authorised fund manager of the feeder NURS should have due regard to the provisions in COLL 4.6.8 R (Contents of the simplified prospectus) in terms of additional information appropriate to a feeder NURS and its qualifying master scheme. In particular, the appropriate charges information required by COBS 13.4.1 R and COBS 13 Annex 3 (Charges) should represent the aggregate of the charges of the feeder NURS and its qualifying master scheme as disclosed in the feeder NURS' most up-to-date prospectus.
  • 27/04/2012

COBS 13.4

Contents of a key features illustration

  • 01/11/2007

COBS 13.4.1

handbook-rule

A key features illustration must include appropriate charges information and, if it is a packaged product which is not a financial instrument:

  1. (1) must include a standardised deterministic projection;
  2. (2) the projection and charges information must be consistent with each other;
  3. (3) it may also include alternative projections except that the most prominent projection must be a standardised deterministic projection.
  • 01/11/2007

Exceptions

COBS 13.4.2

handbook-rule

A key features illustration must not include a generic projection unless:

  1. (1) there are reasonable grounds for believing that that projection will be sufficient to enable a retail client to make an informed decision about whether to invest; or
  2. (2) it is a direct offer financial promotion.

COBS 13.4.3

handbook-guidance
A generic projection is unlikely to be sufficient to enable a retail client to make an informed decision about whether to invest if the premium or investment returns on the product will be materially affected by the personal characteristics of the investor.

COBS 13.4.4

handbook-rule

There is no requirement to include a projection in a key features illustration:

  1. (1) for a single premium life policy bought as a pure investment product, a product with benefits that do not depend on future investment returns or any other product if it is reasonable to believe that a retail client will not need one to be able to make an informed decision about whether to invest; or
  2. (2) if the product is:
    1. (a) a SIPP from which no income withdrawals are being taken; or
    2. (b) a life policy that will be held in a CTF or sold with basic advice (unless the policy is a stakeholder pension scheme).

COBS 13.4.5

handbook-guidance
Although there may be no obligation to include a projection in a key features illustration, where a firm chooses to include one, the projection must follow the appropriate requirements, as outlined in this section, or for financial instruments under COBS 4.6.7 R.
  • 01/11/2007

COBS 13.5

Preparing product information: other projections

  • 01/11/2007

Projections for in-force products

COBS 13.5.1

handbook-rule

A firm that communicates a projection for an in-force packaged product which is not a financial instrument:

  1. (1) must include a standardised deterministic projection;
  2. (2) may also include an alternative projection except that the most prominent projection must be a standardised deterministic projection; and

must follow the projection rules in COBS 13 Annex 2.

  • 01/11/2007

Projections: other situations

COBS 13.5.2

handbook-rule

A firm that communicates a projection for a packaged product which is not a financial instrument,

  1. (1) for which a key feature illustration is not required to be provided; and
  2. (2) which is not an in-force packaged product;

must ensure that such a projection is either a standardised deterministic projection or an alternative projection in accordance with COBS 13 Annex 2.

  • 01/11/2007

Exceptions to the projection rules: projections for more than one product

COBS 13.5.3

handbook-rule
A firm that communicates a projection of benefits for a packaged product which is not a financial instrument, as part of a combined projection where other benefits being projected include those for a financial instrument or structured deposit, is not required to comply with the projection rules in COBS 13.4, COBS 13.5 and COBS 13 Annex 2 to the extent that it complies with the future performance rule (COBS 4.6.7 R).
  • 01/11/2007

COBS 13.5.4

handbook-guidance
The general requirement that communications be fair, clear and not misleading will nevertheless mean that a firm that elects to comply with the future performance rule in COBS 4.6.7 R will need to explain how the combined projection differs from other information that has been or could be provided to the client, including a projection provided under the projection rules in COBS 13.4, COBS 13.5 and COBS 13 Annex 2.
  • 01/11/2007

COBS 13 Annex 1

The Consolidated Life Directive Information

  • 01/11/2007

handbook-rule
This annex belongs to COBS 13.1.2 R (The Consolidated Life Directive Information)
  • 01/11/2007

COBS 13 Annex 2

Projections

  • 01/11/2007

This annex belongs to COBS 13.4.1 R (Contents of a key features illustration), COBS 13.5.1 R (Projections for in-force products) and COBS 13.5.2 R (Projections: other situations).

  • 01/11/2007

COBS 13 Annex 3

Charges



This annex belongs to COBS 13.4.1 R (Contents of a key features illustration)

  • 01/11/2007

2.2 The effect of charges table:
(1) for a life policy, personal pension scheme or stakeholder pension scheme must be in the following form: (2) for any other packaged product must be in the following form: (3) must be completed in accordance with the following notes:

  • 01/11/2007

Export chapter as

COBS 14

Providing product information to clients

COBS 14.1

Interpretation

  • 01/11/2007

COBS 14.1.1

handbook-rule

In this chapter:

  1. (1) 'retail client' includes the trustee or operator of a stakeholder pension scheme or personal pension scheme and the trustee of a money-purchase occupational pension scheme; and
  2. (2) 'sell' includes 'sell, personally recommend or arrange the sale of' in relation to a designated investment and equivalent activities in relation to a cash-deposit ISA and cash-deposit CTF.
  • 01/11/2007

COBS 14.2

Providing product information to clients

  • 01/11/2007

The provision rules

COBS 14.2.1

handbook-rule

A firm that sells:

  1. (1) a packaged product to a retail client, must provide a key features document and a key features illustration to that client (unless the packaged product is a unit in a UCITS scheme, simplified prospectus scheme or an EEA UCITS scheme which is a recognised scheme);
  2. (2) a life policy that is not a reinsurance contract to a client, must provide the Consolidated Life Directive information to that client;
  3. (3) the variation of a life policy or personal pension scheme to a retail client, must provide that client with sufficient information about the variation for the client to be able to understand the consequences of the variation (unless the policy or scheme is a SIPP);
  4. (3A) [deleted]
  5. (3B) the variation of a personal pension scheme to a retail client, which involves an election by the client to make income withdrawals or a purchase of a short-term annuity, must provide that client with such information as is necessary for the client to understand the consequences of the variation, including where relevant, the information required by COBS 13 Annex 2.2.9 R (Additional requirements: drawdown pensions);
  6. (4) a cash-deposit ISA or cash-deposit CTF to a retail client, must provide a key features document to that client;
  7. (5) a unit in a simplified prospectus scheme to a client, must offer the scheme's current simplified prospectus to that client. In addition, if the client is a retail client present in the EEA, the firm must provide the simplified prospectus to the client together with:
    1. (a) enough information for the client to be able to make an informed decision about whether to hold the units in a wrapper (if the units will, or may, be held in that way); and
    2. (b) information about the three types of CTF that are generally available (stakeholder CTFs, cash-deposit CTFs and security-based CTFs), and the type of CTF the firm is offering (if the units will, or may, be held in a CTF);
  8. (6) [deleted]
  9. (7) a unit in a UCITS scheme, or in an EEA UCITS scheme which is a recognised scheme, to a client, must:
    1. (a) provide a copy of the scheme's key investor information document or, as the case may be, EEA key investor information document to that client; and
    2. (b) where the client is a retail client, provide separately (unless already provided) the information required by COBS 13.3.1R (2) (General requirements) and, if that client is present in the EEA, the information required by (5)(a) and (b);
  10. (8) where the operator of a non-UCITS retail scheme has a dispensation from the FSA in the form of a general waiver by consent under which it may market units of the scheme on the basis of a key investor information document (as modified by the general waiver direction, a "NURS KII document"), rather than on the basis of a key features document or simplified prospectus, a firm that sells units in the scheme must comply with its obligations under this rule by:
    1. (a) providing the retail client with the relevant NURS KII document; and
    2. (b) offering any client that is not a retail client the relevant NURS KII document;
  11. on condition that it complies with each of the other rules in this section in relation to the provision of the document, as if references in those rules to a "key features document" or "simplified prospectus" were a reference to the "NURS KII document".
[Note: in respect of (2) article 36(1) of, and Annex III to, the Consolidated Life Directive]

[Note: in respect of (7), articles 1 and 80 of the UCITS Directive]

Provision of key investor information document

COBS 14.2.1A

handbook-rule
  1. (1) This rule applies to an authorised fund manager of a UCITS scheme that is either an authorised unit trust or an ICVC, and an ICVC that is a UCITS scheme.
  2. (2) An authorised fund manager and an ICVC in (1) that sells units in a UCITS scheme directly, or through another natural or legal person who acts on its behalf and under its full and unconditional responsibility, must ensure that investors are provided with the key investor information document for the scheme.
  3. (3) An authorised fund manager and an ICVC in (1) that does not sell units in a UCITS scheme directly, or through another natural or legal person who acts on its behalf and under its full and unconditional responsibility, must ensure that the key investor information document for the scheme is provided on request to product manufacturers and intermediaries selling, or advising investors on, potential investments in those UCITS schemes or in products offering exposure to them.
  4. (4) The key investor information document must be provided to investors free of charge.
  5. (5) An authorised fund manager and an ICVC in (1) may, instead of providing the key investor information document to investors in paper copy in accordance with (2), provide it in a durable medium other than paper or by means of a website that meets the website conditions, in which case the authorised fund manager and ICVC must:
    1. (a) deliver a paper copy of the key investor information document to the investor on request and free of charge; and
    2. (b) make available an up-to-date version of the key investor information document to investors on the website of the ICVC or authorised fund manager.

[Note: articles 80 and 81 of the UCITS Directive]

  • 01/07/2011

COBS 14.2.2

handbook-rule
The documents or information required to be provided or offered by the first provision rule (COBS 14.2.1 R ) must be in a durable medium or made available on a website (where that does not constitute a durable medium) that meets the website conditions.

COBS 14.2.3

handbook-rule
  1. (1) A firm that personally recommends that a retail client holds a particular asset in a SIPP must provide that client with sufficient information for the client to be able to make an informed decision about whether to buy or invest.
  2. (2) This rule does not apply if the asset is described in COBS 14.2.1 R.
  • 01/11/2007

Firm not to cause confusion about the identity of the producer of a product

COBS 14.2.4

handbook-rule
When a firm provides a document or information in accordance with the rules in this section, it must not do anything that might reasonably cause a retail client to be mistaken about the identity of the firm that has produced, or will produce, the product.
  • 01/11/2007

Exception to the provision rules: key features documents, simplified prospectuses and key investor information documents

COBS 14.2.5

handbook-rule

A firm is not required to provide:

  1. (1) a document, if the firm produces the product and the rules in this section require another firm to provide the document;
  2. (2) a key features document or key features illustration, if another person is required to provide the distance marketing information by the rules of another EEA State;
  3. (3) the Consolidated Life Directive information, if another person is required to provide that information by the rules of another EEA State;
  4. (4) a simplified prospectus if:
    1. (a) [deleted]
    2. (b)
      1. (i) the client is buying or investing in response to a direct offer financial promotion without receiving a personal recommendation to buy or invest; and
      2. (ii) the firm offers an up-to-date copy of the simplified prospectus to the client and provides materially the same information to the client in some other way.

[Note: in respect of (3), article 36(4) of, and Annex III to, the Consolidated Life Directive]

Exception: key features illustrations

COBS 14.2.6

handbook-rule
A firm is not required to provide a key features illustration for a product if the information that would have been included in that illustration is included in the key features document provided to the client.
  • 01/11/2007

Exception to the provision rules: key features documents and key features illustrations

COBS 14.2.7

handbook-rule

A firm is not required to provide a key features document or a key features illustration for:

  1. (1) a key features scheme if it provides a simplified prospectus instead;
  2. (2) a life policy that is not a reinsurance contract if:
    1. (a) the firm is operating from an establishment in another EEA State and the sale is by distance contract; or
    2. (b) the client is habitually resident outside the United Kingdom and the sale is not by distance contract.
  3. (3) a traded life policy.

[Note: in respect of (2), articles 4(1) and 16 of the Distance Marketing Directive and article 36 of the Consolidated Life Directive]

  • 01/11/2007

Exception to the provision rules: key features documents and key features illustrations

COBS 14.2.8

handbook-rule

A firm is not required to provide a key features document or a key features illustration, if:

  1. (1) the client is buying or investing in response to a direct offer financial promotion without receiving a personal recommendation to buy or invest; and
  2. (2) the firm provides materially the same information in some other way.
  • 01/11/2007

Exception to the provision rules: key features documents, key features illustrations, simplified prospectuses and key investor information documents

COBS 14.2.9

handbook-rule

A firm is not required to provide a key features document, a key features illustration or a simplified prospectus for a key features scheme or simplified prospectus scheme if:

  1. (1) the client is habitually resident outside the EEA and not present in the EEA when the relevant application is signed; or
  2. (2) the purchase is by a discretionary investment manager on behalf of a retail client; or
  3. (3) the sale is arranged or personally recommended by an investment manager and the client has agreed that a key features document or simplified prospectus is not required; or
  4. (4) a retail client is purchasing a holding in a scheme in which the client already has a holding, or the client is switching from one class of shares or units to another in the same scheme, and the relevant document has already been provided to that client.

COBS 14.2.9A

handbook-rule

For the purposes of the provision rules in relation to a key investor information document, a firm:

  1. (1) may satisfy the requirement to provide the document to the investor by providing it to a person who has written authority to make investment decisions on that investor's behalf; and
  2. (2) is not required to consider as a new transaction:
    1. (a) a subscription to units in a UCITS scheme or an EEA UCITS scheme in which the client already holds units; or
    2. (b) a series of connected transactions undertaken as the consequence of a single investment decision; or
    3. (c) a decision by the client to switch from one class of units to another in the same scheme;
if an up-to-date version of the key investor information document for the scheme or the relevant class of units has already been provided to that client.

[Note: article 80 of the UCITS Directive]

  • 01/07/2011

COBS 14.2.10

handbook-guidance
  1. (1) Although a firm is not always required to provide a simplified prospectus to a client (COBS 14.2.9 R), the obligation to offer the prospectus to the client (COBS 14.2.1R (5)) remains.
  2. (2) The FSA would regard a decision to subscribe to a regular monthly savings plan as a single investment decision for the purpose of COBS 14.2.9AR (2)(a). However, a subsequent decision by the client to increase the amount of the regular contributions to be invested in units of a particular scheme or to direct the contributions to a different scheme, would in each case constitute a new transaction.

Exception to the provision rules: aggregated scheme documents

COBS 14.2.11

handbook-rule

A firm may provide a single document, which describes more than one key features scheme or simplified prospectus scheme, or any combination of those schemes, if:

  1. (1) the schemes are offered through a funds supermarket service;
  2. (2) the document clearly describes the difference between the relevant schemes; and
  3. (3) (in the case of a simplified prospectus scheme) the firm also offers a copy of the relevant prospectus to the client.

Exception: successive operations

COBS 14.2.12

handbook-rule
In the case of a distance contract comprising an initial service agreement, followed by successive operations or a series of separate operations of the same nature performed over time, the rules in this section only apply to the initial agreement.
  • 01/11/2007

COBS 14.2.13

handbook-rule

If there is no initial service agreement but the successive operations or separate operations of the same nature performed over time are performed between the same contractual parties, the rules in this section only apply:

  1. (1) when the first operation is performed; and
  2. (2) if no operation of the same nature is performed for more than a year, when the next operation is performed (the next operation being deemed to be the first in a new series of operations).
  • 01/11/2007

The timing rules

COBS 14.2.14

handbook-rule

When the rules in this section require a firm to:

  1. (1) offer a simplified prospectus to a client, that prospectus must be offered free of charge before the conclusion of the contract; or
  2. (2) provide a key features document, a simplified prospectus, or any other document or information to a client, the document or information must be provided free of charge and in good time before the firm carries on the relevant business; or
  3. (3) provide a key investor information document or EEA key investor information document to a client, it must be provided in good time before the client's proposed subscription for units in the scheme.

[Note: article 80 of the UCITS Directive]

Exception to the timing rules: child trust funds

COBS 14.2.15

handbook-rule
A key features document for an HMRC allocated CTF must be provided as soon as reasonably possible after the CTF has been opened.
  • 01/11/2007

Exception to the timing rules: distance contracts and voice telephony communications

COBS 14.2.16

handbook-rule
  1. (1) A firm may provide a document, or the information required to be provided by the rules in this section, in a durable medium immediately after the conclusion of a distance contract, if the contract has been concluded at a client's request using a means of distance communication that does not enable the document or information to be provided in that form in good time before the client is bound by the contract.
  2. (2) The exception in (1) does not apply in relation to the provision of an EEA key investor information document or a key investor information document required to be provided under COBS 14.2.1 R and COBS 14.2.1A R.

COBS 14.2.17

handbook-rule
  1. (1) Where the rules in this section require a document or information to be provided, in the case of a voice telephony communication, a firm must:
    1. (a) if the client gives explicit consent to receiving only limited information, provide the abbreviated distance marketing disclosure information () orally to the client;
    2. (b) if the client does not give explicit consent to only receiving limited information, and the parties wish to proceed by voice telephony communication, provide the distance marketing information () orally to the client;
    3. (c) in the case of (a) or (b), send the documents or information to the client in a durable medium immediately after the contract is concluded.
  2. (2) The exception in (1) does not apply in relation to the provision of an EEA key investor information document or a key investor information document required to be provided under COBS 14.2.1 R and COBS 14.2.1A R.

COBS 14.3

Information about designated investments

  • 01/11/2007

Application

COBS 14.3.1

handbook-rule

This section applies to a firm in relation to:

  1. (1) MiFID or equivalent third country business; and
  2. (2) the following regulated activities when carried on for a retail client:
    1. (a) making a personal recommendation about a designated investment; or
    2. (b) managing investments that are designated investments; or
    3. (c) arranging, (bringing about) or executing a deal in a warrant or derivative; or
    4. (d) engaging in stock lending activity.
  • 01/11/2007

Providing a description of the nature and risks of designated investments

COBS 14.3.2

handbook-rule

A firm must provide a client with a general description of the nature and risks of designated investments, taking into account, in particular, the client's categorisation as a retail client or a professional client. That description must:

  1. (1) explain the nature of the specific type of designated investment concerned, as well as the risks particular to that specific type of designated investment, in sufficient detail to enable the client to take investment decisions on an informed basis; and
  2. (2) include, where relevant to the specific type of designated investment concerned and the status and level of knowledge of the client, the following elements:
    1. (a) the risks associated with that type of designated investment including an explanation of leverage and its effects and the risk of losing the entire investment;
    2. (b) the volatility of the price of designated investments and any limitations on the available market for such investments;
    3. (c) the fact that an investor might assume, as a result of transactions in such designated investments, financial commitments and other additional obligations, including contingent liabilities, additional to the cost of acquiring the designated investments; and
    4. (d) any margin requirements or similar obligations, applicable to designated investments of that type.

[Note: article 31(1) and (2) of the MiFID implementing Directive]

  • 01/11/2007

COBS 14.3.3

handbook-rule

If a firm provides a retail client with information about a designated investment that is the subject of a current offer to the public and a prospectus has been published in connection with that offer in accordance with the Prospectus Directive, that firm must inform the retail client where that prospectus is made available to the public.

[Note: article 31(3) of the MiFID implementing Directive]

  • 01/11/2007

COBS 14.3.4

handbook-rule

Where the risks associated with a designated investment composed of two or more different designated investments or services are likely to be greater than the risks associated with any of the components, a firm must provide an adequate description of the components of that designated investment and the way in which its interaction increases the risks.

[Note: article 31(4) of the MiFID implementing Directive]

  • 01/11/2007

COBS 14.3.5

handbook-rule

In the case of a designated investment that incorporates a guarantee by a third party, the information about the guarantee must include sufficient detail about the guarantor and the guarantee to enable the retail client to make a fair assessment of the guarantee.

[Note: article 31(5) of the MiFID implementing Directive]

  • 01/11/2007

Satisfying the provision rules

COBS 14.3.6

handbook-guidance
  1. (1) A firm need not treat each of several transactions in respect of the same type of financial instrument as a new or different service and so does not need to comply with the provision rules (COBS 14.3.2 R to COBS 14.3.5 R) in relation to each transaction.
  2. (2) But a firm should ensure that the client has received all relevant information in relation to a transaction, such as details of product charges that differ from those already disclosed.

[Note: in respect of (1), recital 50 to to the MiFID implementing Directive]

  • 01/11/2007

COBS 14.3.7

handbook-guidance

Product information: form

COBS 14.3.8

handbook-rule

The documents and information provided in accordance with the rules in this section must be in a durable medium or available on a website (where that does not constitute a durable medium) that meets the website conditions.

[Note: article 29(4) of the MiFID implementing Directive]

  • 01/11/2007

The timing rules

COBS 14.3.9

handbook-rule
  1. (1) The information to be provided in accordance with the rules in this section must be provided in good time before a firm carries on designated investment business or ancillary services with or for a retail client.
  2. (2) A firm may provide that information immediately after it begins to carry on that business if:
    1. (a) the firm was unable to comply with (1) because, at the request of the client, the agreement was concluded using a means of distance communication which prevented the firm from complying with that rule; and
    2. (b) in any case where the rule on voice telephony communications (COBS 5.1.12 R) does not otherwise apply, the firm complies with that rule as if the client was a consumer.

[Note: article 29(2) and (5) of the MiFID implementing Directive]

  • 01/11/2007

Keeping the client up-to-date

COBS 14.3.10

handbook-rule

A firm must notify a client in good time about any material change to the information provided under the rules in this section which is relevant to a service that the firm is providing to that client. That notification must be given in a durable medium if the information to which it relates is given in a durable medium.

[Note: article 29(6) of the MiFID implementing Directive]

  • 01/11/2007

Information about UCITS schemes

COBS 14.3.11

handbook-rule

If a firm provides a client with a key investor information document or EEA key investor information document that meets the requirements of articles 78 and 79 of the UCITS Directive (see COLL 4.7 (Key investor information and marketing communications)) and the KII Regulation, it will have provided appropriate information for the purpose of the requirement to disclose information on:

  1. (1) designated investments and investment strategies (COBS 2.2.1R (1)(b)); and
  2. (2) costs and associated charges (COBS 2.2.1R (1)(d) and COBS 6.1.9 R;

in relation to the costs and associated charges in respect of the UCITS scheme itself, including the exit and entry commissions.

[Note: article 34 of the MiFID implementing Directive]

COBS 14.3.12

handbook-guidance

A key investor information document and EEA key investor information document provide sufficient information in relation to the costs and associated charges in respect of the UCITS itself. However, a firm distributing units in a UCITS should also inform a client about all of the other costs and associated charges related to the provision of its services in relation to units in the UCITS.

[Note: recital 55 to the MiFID implementing Directive]

Export chapter as

COBS 15

Cancellation

COBS 15.1

Application

  • 01/11/2007

COBS 15.1.1

handbook-guidance

This chapter is relevant to a firm that enters into a contract cancellable under this chapter. In summary, this means it is relevant to:

  1. (1) most providers of retail financial products that are based on designated investments; and
  2. (2) firms that enter into distance contracts with consumers that relate to designated investment business; and
  3. (3) firms that enter into distance contracts the making or performance of which by the firm constitutes, or is part of, the activity of issuing electronic money.

COBS 15.2

The right to cancel

  • 01/11/2007

Cancellable contracts

COBS 15.2.1

handbook-rule

A consumer has a right to cancel any of the following contracts with a firm:



[Note: article 35 of the Consolidated Life Directive, article 6(1) of the Distance Marketing Directive]

COBS 15.2.2

handbook-guidance
  1. (1) If the same transaction attracts more than one right to cancel, the firm should apply the longest cancellation period applicable.
  2. (2) A firm may provide longer or additional cancellation rights voluntarily, but if it does these should be on terms at least as favourable to the consumer as those in this chapter, unless the differences are clearly explained.
  3. (3) If the right to cancel applies to a wrapper or pension wrapper and underlying investments, the firm may give the consumer the option of cancelling individual components separately if it wishes.
  • 01/11/2007

Start of cancellation period

COBS 15.2.3

handbook-rule

The cancellation period begins:

  1. (1) either from the day of the conclusion of the contract, except in respect of contracts relating to life policies where the time limit will begin from the time when the consumer is informed that the contract has been concluded; or
  2. (2) from the day on which the consumer receives the contractual terms and conditions and any other pre-contractual information required under this sourcebook, if that is later than the date referred to above.

[Note: article 35 of the Consolidated Life Directive, article 6(1) of the Distance Marketing Directive]

  • 01/11/2007

COBS 15.2.4

handbook-guidance
If a firm does not give a consumer the required information about the right to cancel and other matters, the contract remains cancellable and the consumer will not be liable for any shortfall.
  • 01/11/2007

Disclosing a right to cancel or withdraw

COBS 15.2.5

handbook-rule
  1. (1) The firm must disclose to the consumer:
    1. (a) in good time before or, if that is not possible, immediately after the consumer is bound by a contract that attracts a right to cancel or withdraw; and
    2. (b) in a durable medium;
  2. the existence of the right to cancel or withdraw, its duration and the conditions for exercising it including information on the amount which the consumer may be required to pay, the consequences of not exercising it and practical instructions for exercising it indicating the address to which the notification of cancellation or withdrawal should be sent.
  1. (2) This rule applies only where a consumer would not otherwise receive similar information under a rule in this sourcebook from the firm or another authorised person (such as under the distance marketing disclosure rules (COBS 5.1.1 R to 5.1.4 R) or COBS 14 (Providing product information)).

COBS 15.3

Exercising a right to cancel

  • 01/11/2007

Notice of exercise

COBS 15.3.1

handbook-rule

If a consumer exercises his right to cancel he must, before the expiry of the relevant deadline, notify this following the practical instructions given to him. The deadline shall be deemed to have been observed if the notification, if in a durable medium available and accessible to the recipient, is dispatched before the deadline expires.

[Note: article 6 (6) of the Distance Marketing Directive]

  • 01/11/2007

COBS 15.3.2

handbook-rule

A consumer need not give any reason for exercising his right to cancel.

[Note: article 6(1) of the Distance Marketing Directive]

  • 01/11/2007

COBS 15.3.3

handbook-guidance
The firm should accept any indication that the consumer wishes to cancel as long as it satisfies the conditions for notification. In the event of any dispute, unless there is clear written evidence to the contrary, the firm should treat the date cited by the consumer as the date when the notification was dispatched.
  • 01/11/2007

Record keeping

COBS 15.3.4

handbook-rule

The firm must make adequate records concerning the exercise of a right to cancel or withdraw and retain them:

  1. (1) indefinitely in relation to a pension transfer, pension opt-out or FSAVC;
  2. (2) for at least five years in relation to a life policy, pension contract, personal pension scheme or stakeholder pension scheme; and
  3. (3) for at least three years in any other case.
  • 01/11/2007

COBS 15.4

Effects of cancellation

  • 01/11/2007

Termination of contract

COBS 15.4.1

handbook-rule
By exercising a right to cancel, the consumer withdraws from the contract and the contract is terminated.
  • 01/11/2007

Payment for the service provided before cancellation

COBS 15.4.2

handbook-rule
  1. (1) This rule applies in relation to a distance contract that is not a life policy, personal pension scheme, cash deposit ISA or CTF.
  2. (2) When the consumer exercises his right to cancel he may be required to pay, without any undue delay, for the service actually provided by the firm in accordance with the contract. The performance of the contract may only begin after the consumer has given his approval. The amount payable must not:
    1. (a) exceed an amount which is in proportion to the extent of the service already provided in comparison with the full coverage of the contract;
    2. (b) in any case be such that it could be construed as a penalty.
  3. (3) The firm may not require the consumer to pay any amount on the basis of this rule unless it can prove that the consumer was duly informed about the amount payable, in conformity with the distance marketing disclosure rules. However, in no case may the firm require such payment if it has commenced the performance of the contract before the expiry of the cancellation period without the consumer's prior request.

[Note: article 7(1), (2) and (3) of the Distance Marketing Directive]

  • 01/11/2007

Shortfall

COBS 15.4.3

handbook-rule
  1. (1) The firm may require the consumer to pay for any loss under a contract caused by market movements that the firm would reasonably incur in cancelling it. The period for calculating the loss shall end on the day on which the firm receives the notification of cancellation.
  2. (2) This rule:
    1. (a) does not apply for a distance contract or for a contract established on a regular or recurring premium or payment basis; and
    2. (b) only applies if the firm has complied with its obligations to disclose information concerning the right to cancel.
  • 01/11/2007

Obligations on cancellation

COBS 15.4.4

handbook-rule

The firm must, without any undue delay and no later than within 30 calendar days, return to the consumer any sums it has received from him in accordance with the contract, except for any amount that the consumer may be required to pay under this section. This period shall begin from the day on which the firm receives the notification of cancellation.

[Note: article 7(4) of the Distance Marketing Directive]

COBS 15.4.5

handbook-rule

The firm is entitled to receive from the consumer any sums and/or property he has received from the firm without any undue delay and no later than within 30 calendar days. This period shall begin from the day on which the consumer dispatches the notification of cancellation.

[Note: article 7(5) of the Distance Marketing Directive]

  • 01/11/2007

COBS 15.4.6

handbook-rule
Any sums payable under this section on cancellation of a contract are owed as simple contract debts and may be set off against each other.
  • 01/11/2007

COBS 15.5

Special situations

  • 01/11/2007

Contracts with trustees and operators of pension schemes

COBS 15.5.1

handbook-rule

In this chapter:

  1. (1) references to a consumer include the trustees of an occupational pension scheme and the trustees or operator of a personal pension scheme or stakeholder pension scheme; and
  2. (2) any contract with such persons is to be treated as a non-distance contract.
  • 01/11/2007

Other legislation including for child trust funds

COBS 15.5.2

handbook-rule
This chapter applies as modified to the extent necessary for it to be compatible with any enactment.
  • 01/11/2007

COBS 15.5.3

handbook-guidance

For example:

  1. (1) the Child Trust Fund Regulations contain provisions relevant to cancellation rights; in particular they provide that any uninvested sums held in connection with a CTF should be held in a designated bank account; and the effect of conditions 4(a) and (b) in regulation 5 of the Child Trust Fund Regulations (applicable to non-HMRC allocated CTF) is that a CTF opened by way of distance contract has a cancellable management agreement in all cases and the CTF cannot be opened until the cancellation period has expired, therefore the price fluctuation exemption is not engaged;
  2. (2) where legislation does not permit sums within a personal pension scheme or CTF to be returned to a consumer, the requirement to do so on cancellation is modified to permit payment to another provider on behalf of the consumer; the firm should notify him, where relevant, as soon as possible that it holds money awaiting re-investment instructions; if that money is held in a non-interest bearing account this should be drawn to his attention.

Automatic cancellation of an attached distance contract

COBS 15.5.4

handbook-guidance
When a consumer cancels a distance contract under this chapter, his notice may also operate to cancel any attached contract which is also a distance financial services contract unless the consumer gives notice that cancellation of the main contract is not to operate to cancel the attached contract (see regulation 12 of the Distance Marketing Regulations). Where relevant, this should be disclosed to the consumer along with other information on cancellation.
  • 01/11/2007

Appointed representatives

COBS 15.5.5

handbook-guidance
This chapter does not act to cancel distance contracts entered into by an appointed representative or where applicable, by a tied agent, as principal such as a distance contract to provide advisory services, but the Distance Marketing Regulations (regulations 9 to 13, see regulation 4(3)) may have this effect.
  • 01/11/2007

Maxi-ISAs

COBS 15.5.6

handbook-guidance
Where a life policy or unit bought on opening or transferring an ISA is cancellable, the right to cancel, or substitute right to withdraw, applies to the entire arrangement. For example, a maxi-ISA comprising a life policy in the stocks and shares component and a cash component would be cancellable as a whole with a cancellation period of 30 calendar days. However, a firm is free to give the consumer the option of cancelling individual components separately with the same cancellation period if it wishes.
  • 01/11/2007

COBS 15 Annex 1

Exemptions from the right to cancel

  • 01/11/2007

Export chapter as

COBS 16

Reporting information to clients

COBS 16.1

General client reporting requirement

  • 01/11/2007

COBS 16.1.1

handbook-rule

A firm must ensure in relation to MiFID or equivalent third country business that a client receives adequate reports on the services provided to it by the firm. The reports must include, where applicable, the costs associated with the transactions and services undertaken by the firm on behalf of the client.

[Note: article 19(8) of MiFID]

  • 01/11/2007

COBS 16.2

Occasional reporting

  • 01/11/2007

Execution of orders other than when managing investments

COBS 16.2.1

handbook-rule
  1. (1) If a firm has carried out an order in the course of its designated investment business on behalf of a client, it must:
    1. (a) promptly provide the client, in a durable medium, with the essential information concerning the execution of the order;
    2. (b) in the case of a retail client, send the client a notice in a durable medium confirming the execution of the order and such of the trade confirmation information (COBS 16 Annex 1R) as is applicable:
      1. (i) as soon as possible and no later than the first business day following that execution; or
      2. (ii) if the confirmation is received by the firm from a third party, no later than the first business day following receipt of the confirmation from the third party; and
    3. (c) supply a client, on request, with information about the status of his order.
  2. (2) Paragraph (1) does not apply to a firm managing investments.
  3. (3) Paragraph (1)(b) does not apply if the confirmation would contain the same information as a confirmation that is to be promptly dispatched to the client by another person.
  4. (4) Paragraphs (1)(a) and (b) do not apply to an order executed on behalf of a client that relates to a bond funding a mortgage loan agreement with the client. The report on the transaction must be made at the same time as the terms of the mortgage loan are communicated, but no later than one month after the execution of the order.
  5. (5) If a firm carries out an order for a retail client relating to units or shares in a collective investment undertaking that is part of a series of orders that are executed periodically, it must:
    1. (a) comply with paragraph (1)(b) in relation to that order; or
    2. (b) provide the client at least once every six months with such of the trade confirmation information (COBS 16 Annex 1R) as is applicable in relation to each transaction in that series carried out in the relevant reporting period.
  6. (6) In relation to subscription and redemption orders for units in a UCITS scheme or EEA UCITS scheme executed by an authorised fund manager, paragraphs (1), (3) and (5) of this rule apply as if references to:
    1. (a) a client and to a retail client were references to a unit holder in the scheme; and
    2. (b) trade confirmation information in paragraphs (1)(b) and (5)(b) were to the information in paragraph (7).
  7. (7) The notice referred to in paragraph (1)(b) must, where applicable, for subscription and redemption orders for units in a UCITS scheme or EEA UCITS scheme executed by an authorised fund manager, include the following information:
    1. (a) the identification of the management company;
    2. (b) the name or other designation of the unit holder;
    3. (c) the date and time of receipt of the order and method of payment;
    4. (d) the date of execution;
    5. (e) the identification of the UCITS scheme or EEA UCITS scheme;
    6. (f) the nature of the order (subscription or redemption);
    7. (g) the number of units involved;
    8. (h) the unit price at which the units were subscribed or redeemed;
    9. (i) the reference valuation date;
    10. (j) the gross value of the order including charges for subscription or net amount after charges for redemptions; and
    11. (k) the total sum of the commissions and expenses charged and where the investor so requests, an itemised breakdown.

[Note: article 40 paragraphs (1) to (4) of the MiFID implementing Directive and article 24 of the UCITS implementing Directive]

COBS 16.2.2

handbook-guidance
The requirement concerning orders relating to bonds funding a mortgage loan agreement is unlikely to be relevant to products in the United Kingdom market.
  • 01/11/2007

COBS 16.2.3

handbook-rule

For the purposes of calculating the unit price in the trade confirmation information, where the order is executed in tranches, the firm may supply the client with information about the price of each tranche or the average price. If the average price is provided, the firm must supply the retail client with information about the price of each tranche upon request.

[Note: article 40(4) of the MiFID implementing Directive]

  • 01/11/2007

COBS 16.2.3A

handbook-guidance

In determining what is essential information, a firm should consider including:

  1. (1) for transactions in a derivative:
    1. (a) the maturity, delivery or expiry date of the derivative;
    2. (b) in the case of an option, a reference to the last exercise date, whether it can be exercised before maturity and the strike price;
    3. (c) if the transaction closes out an open futures position, all essential details required in respect of each contract comprised in the open position and each contract by which it was closed out and the profit or loss to the client arising out of closing out that position (a difference account);
  2. (2) for the exercise of an option:
    1. (a) the date of exercise, and either the time of exercise or that the client will be notified of that time on request;
    2. (b) whether the exercise creates a sale or purchase in the underlying asset; and
    3. (c) the strike price of the option (for a currency option, the rate of exchange will be the same as the strike price) and, if applicable, the total consideration from or to the client; and
  3. (3) the fact that the transaction involves any dividend or capitalisation or other right which has been declared, but which has not been paid, allotted or otherwise become effective in respect of the investment, and under the terms of the transaction the benefit of which will not pass to the purchaser.
  • 01/11/2007

Guidance on the requirements

COBS 16.2.4

handbook-guidance
Where a firm executes an order in tranches, the firm may, where appropriate, indicate the trading time and the execution venue in a way that is consistent with this, such as, "multiple". In accordance with the client's best interests rule, a firm should provide additional information at the client's request.
  • 01/11/2007

COBS 16.2.5

handbook-guidance
In accordance with COBS 2.4.9 R, a firm may dispatch a confirmation to an agent, other than the firm or an associate of the firm, nominated by the client in writing.
  • 01/11/2007

Special cases

COBS 16.2.6

handbook-rule

In relation to business that is not MiFID or equivalent third country business, a firm need not despatch a confirmation if:

  1. (1) the firm has agreed with the client (in the case of a retail client, in writing and with the client's informed consent) that confirmations need not be supplied, either generally or in specified circumstances; or
  2. (2) the designated investment is a life policy, stakeholder pension scheme or a personal pension scheme (other than a SIPP); or
  3. (3) the designated investment is held within a CTF and the statement provided under the CTF Regulations includes the information that would have been contained in a confirmation under this section (other than information that has since become irrelevant).

Record keeping: occasional reporting

COBS 16.2.7

handbook-rule

A firm must retain a copy of any confirmation despatched to a client under this section:

  1. (1) for MiFID or equivalent third country business, for a period of at least five years; or
  2. (2) for business that is not MiFID or equivalent third country business, for a period of at least three years;
from the date of despatch.

[Note: see article 51(3) of the MiFID implementing Directive]

  • 01/11/2007

COBS 16.3

Periodic reporting

  • 01/11/2007

Provision by the firm and contents

COBS 16.3.1

handbook-rule
  1. (1) If a firm is managing investments on behalf of a client, it must provide the client with a periodic statement in a durable medium unless such a statement is provided by another person.
  2. (2) If the client is a retail client, the periodic statement must include such of the periodic information (COBS 16 Annex 2R) as is applicable.

[Note: article 41(1) and (2) of the MiFID implementing Directive]

COBS 16.3.2

handbook-rule
  1. (1) In the case of a retail client, the periodic statement must be provided once every six months, except in the following cases:
    1. (a) if the retail client so requests, the periodic statement must be provided every three months;
    2. (b) if the retail client elects to receive information about executed transactions on a transaction-by-transaction basis (COBS 16.3.3 R) and there are no transactions in derivatives or other securities giving the right to acquire or sell a transferable security or giving rise to a cash settlement determined by reference to transferable securities, currencies, interest rates or yields, commodities or other indices or measures, the periodic statement must be provided at least once every twelve months;
    3. (c) if the agreement between a firm and a retail client for the managing of investments authorises a leveraged portfolio, the periodic statement must be provided at least once a month.
  2. (2) A firm must inform a retail client that he has the right to request the provision of a periodic statement every three months.

[Note: article 41(3) of the MiFID implementing Directive]

  • 01/11/2007

COBS 16.3.3

handbook-rule
  1. (1) If the client elects to receive information about executed transactions on a transaction-by-transaction basis, a firm managing investments must provide promptly to the client, on the execution of a transaction, the essential information concerning that transaction in a durable medium.
  2. (2) If the client is a retail client, the firm must send him a notice confirming the transaction and containing such of the information identified in column (1) of the table in COBS 16 Annex 1R as is applicable:
    1. (a) no later than the first business day following that execution; or
    2. (b) if the confirmation is received by the firm from a third party, no later than the first business day following receipt of the confirmation from the third party;
  3. unless the confirmation would contain the same information as a confirmation that is to be promptly dispatched to the retail client by another person.

[Note: article 41(4) of the MiFID implementing Directive]

  • 01/11/2007

COBS 16.3.4

handbook-guidance
In accordance with COBS 2.4.9 R, a firm may dispatch a periodic statement to an agent, other than the firm or an associate of the firm, nominated by the client in writing.
  • 01/11/2007

COBS 16.3.5

handbook-rule

For the purposes of calculating the unit price in the trade confirmation information or periodic information, where the order is executed in tranches, the firm may supply the client with information about the price of each tranche or the average price. If the average price is provided, the firm must supply the retail client with information about the price of each tranche upon request.

[Note: article 40(4) of the MiFID implementing Directive]

  • 01/11/2007

COBS 16.3.6

handbook-rule
  1. (1) If a firm:
    1. (a) manages investments for a retail client; or
    2. (b) operates a retail client account that includes an uncovered open position in a contingent liability transaction,
  2. it must report to the retail client any losses exceeding any predetermined threshold, agreed between it and the retail client.
  3. (2) The firm must report:
    1. (a) no later than the end of the business day in which the threshold is exceeded; or
    2. (b) if the threshold is exceeded on a non-business day, the close of the next business day.

[Note: article 42 of the MiFID implementing Directive]

  • 01/11/2007

COBS 16.3.7

handbook-rule

For the purposes of this section, a contingent liability transaction is one that involves any actual or potential liability for the client that exceeds the cost of acquiring the instrument.

[Note: recital 63 of the MiFID implementing Directive]

  • 01/11/2007

COBS 16.3.8

handbook-rule
[intentionally blank]
  • 01/11/2007

Guidance on contingent liability transaction

COBS 16.3.9

handbook-guidance

When providing a periodic statement to a retail client, a firm should consider whether to include:

  1. (1) the collateral value in respect of any contingent liability transaction in the client's portfolio during the relevant period; and
  2. (2) option account valuations in respect of each open option written by the client in the client's portfolio at the end of the relevant period; stating:
    1. (a) the share, future, index or other investment involved;
    2. (b) the trade price and date for the opening transaction, unless the valuation statement follows the statement for the period in which the option was opened;
    3. (c) the market price of the contract; and
    4. (d) the exercise price of the contract.
  3. (3) Option account valuations may show an average trade price and market price in respect of an option series if the retail client buys a number of contracts within the same series.
  • 01/11/2007

Periodic reporting: special situations

COBS 16.3.10

handbook-rule

In relation to business that is not MiFID or equivalent third country business, a firm need not provide a periodic statement:

  1. (1) to a client habitually resident outside the United Kingdom if the client concerned has so requested or the firm has taken reasonable steps to establish that he does not wish to receive it;
  2. (2) in respect of a CTF, if the statement provided under the CTF Regulations contains the periodic information.

Record keeping: periodic reporting

COBS 16.3.11

handbook-rule

A firm must make, and retain, a copy of any periodic statement:

  1. (1) for MiFID or equivalent third country business, for a period of at least five years; or
  2. (2) for business that is not MiFID or, for a period of at least three years;
from the date of despatch.

[Note: see article 51(3) of the MiFID implementing Directive]

  • 01/11/2007

COBS 16.4

Statements of client designated investments or client money

  • 01/11/2007

COBS 16.4.1

handbook-rule
  1. (1) A firm that holds client designated investments or client money for a client must send that client at least once a year a statement in a durable medium of those designated investments or that client money unless such a statement has been provided in a periodic statement.
  2. (2) A credit institution need not send a statement in respect of deposits held by it.
  3. (3) This rule does not apply in relation to a firm holding client designated investments or client money under a personal pension scheme or a stakeholder pension scheme where doing so is not MiFID or equivalent third country business.
  4. (4) A CTF account provider holding client designated investments or client money under a CTF where doing so is not MiFID or equivalent third country business must provide a statement but need not do so more frequently than required by Regulation 10 of the CTF Regulations.

[Note: article 43(1) of the MiFID implementing Directive]

COBS 16.4.2

handbook-rule

A firm must include in a statement of client assets referred to under this section the following information:

  1. (1) details of all the designated investments or client money held by the firm for the client at the end of the period covered by the statement;
  2. (2) the extent to which any client designated investments or client money have been the subject of securities financing transactions; and
  3. (3) the extent of any benefit that has accrued to the client by virtue of participation in any securities financing transactions, and the basis on which that benefit has accrued.

[Note: article 43(2) of the MiFID implementing Directive]

  • 01/11/2007

COBS 16.4.3

handbook-rule

In cases where the portfolio of a client includes the proceeds of one or more unsettled transactions, the information in a statement provided under this section may be based either on the trade date or the settlement date, provided that the same basis is applied consistently to all such information in the statement.

[Note: article 43(2) of the MiFID implementing Directive]

  • 01/11/2007

COBS 16.4.4

handbook-rule
A firm which holds designated investments or client money and is managing investments for a client may include the statement under this section in the periodic statement it provides to that client.

[Note: article 43(3) of the MiFID implementing Directive]

  • 01/11/2007

COBS 16.4.5

handbook-guidance

In reporting to a client in accordance with this section, a firm should consider whether to provide details of any assets loaned or charged including:

  1. (1) which investments (if any) were at the end of the relevant period loaned to any third party and which investments (if any) were at that date charged to secure borrowings made on behalf of the portfolio; and
  2. (2) the aggregate of any interest payments made and income received during the period in respect of loans or borrowings made during that period
  • 01/11/2007

COBS 16.5

Quotations for surrender values

  • 01/11/2007

COBS 16.5.1

handbook-rule
When a long-term insurer receives any indication that a retail client wishes to surrender a life policy which is of the type that may be traded on an existing secondary market for life policies, it must, before accepting a surrender, make the policy holder aware that he may be able to sell his policy instead, how he may do so and that there may be financial benefits in doing so.
  • 01/11/2007

COBS 16.6

Communications to clients - life insurance, long term care insurance and income withdrawals

Disclosure for life insurance contracts: information to be provided during the term of the contract

COBS 16.6.1

handbook-rule
  1. (1) This section applies to a long-term insurer, unless, at the time of application, the client, other than an EEA ECA recipient, was habitually resident:
    1. (a) in an EEA State other than the United Kingdom; or
    2. (b) outside the EEA and he was not present in the United Kingdom.
  2. (2) In addition, COBS 16.6.8 R applies to an operator of a personal pension scheme or stakeholder pension scheme in relation to a retail client who elects to make income withdrawals.

COBS 16.6.2

handbook-rule

If during the term of a life policy entered into on or after 1 July 1994 there is any proposed change in the information referred to in paragraphs (1) to (12) of the Consolidated Life Directive information (COBS 13 Annex 1) the long-term insurer must inform the policyholder of the effect of the change before the change is made.

[Note: article 36(2) of the Consolidated Life Directive]

  • 01/11/2007

COBS 16.6.3

handbook-rule

If a life policy entered into on or after 1 July 1994 provides for the payment of bonuses and the amounts of bonuses are unspecified, the long-term insurer must, in every calendar year except the first, either:

  1. (1) notify the policyholder in writing of the amount of any bonus which has become payable under the contract, and which has not previously been notified under this rule; or
  2. (2) give the policyholder in writing sufficient information to enable him to determine the amount of any such bonus.
  • 01/11/2007

COBS 16.6.4

handbook-rule
  1. (1) When a firm provides information in accordance with this section, it must provide the information in a durable medium, unless (2) applies.
  2. (2) If the contract is being made by telephone, the firm may give the information orally to the customer. If the customer enters into the contract, a written version of the required information must be sent to the customer within five business days of the contract being entered into.
  • 01/11/2007

COBS 16.6.5

handbook-rule
Where a life policy is effected jointly, the information required by this section may be sent to the first named client.
  • 01/11/2007

COBS 16.6.6

handbook-rule
A firm must make an adequate record of information provided to a customer under this section and retain that record for a minimum period after the information is provided of five years.
  • 01/11/2007

Long term care insurance

COBS 16.6.7

handbook-rule

At each anniversary of the date on which a long-term care insurance contract which is based on single premium investment bonds was entered into, the insurer must:

  1. (1) provide the retail client with a table based on the format of COBS 13 Annex 3 2.2R containing at least the current fund value and projected future policy values (as in column "What you might get back");
  2. (2) where it is the case, inform the retail client of the possibility that future policy values may be insufficient to fulfil the original purpose of the contract; and
  3. (3) inform the retail client how to obtain advice on investments in respect of long-term care insurance contracts, and that it is in his best interest to do so.
  • 01/11/2007

Income withdrawals

COBS 16.6.8

handbook-rule

At intervals no longer than 12 months from the date of an election by a retail client to make income withdrawals, the relevant operator of a personal pension scheme or stakeholder pension scheme must:

  1. (1) provide the retail client with such information as is necessary for the retail client to review the election, including where relevant the information required by COBS 13 Annex 2 2.9R; and
  2. (2) inform the retail client how to obtain advice on investments in respect of his income withdrawals, and that it would be in his best interests to do so.

COBS 16 Annex 1R

Trade confirmation and periodic information

  • 01/11/2007

handbook-rule
This annex forms part of COBS 16.2.1 R

COBS 16 Annex 2R

Information to be included in a Periodic report

  • 01/11/2007

handbook-rule
This annex forms part of COBS 16.3.1 R.
  • 01/11/2007

Export chapter as

COBS 17

Claims handling for long-term care
insurance

COBS 17.1

Providing information to claimants and dealing with claims

  • 01/11/2007

COBS 17.1.1

handbook-rule

When an insurer or managing agent receives a claim under a long-term care insurance contract, it must respond promptly by providing the policyholder, or the person acting on the policyholder's behalf, with:

  1. (1) a claim form (if it requires one to be completed);
  2. (2) a summary of its claims handling procedure; and
  3. (3) appropriate information about the medical criteria that must be met, and any waiting periods that apply, under the terms of the policy.
  • 01/11/2007

Responding to a claim

COBS 17.1.2

handbook-rule

As soon as reasonably practicable after receipt of a claim, the insurer or managing agent must tell the policyholder, or the person acting on the policyholder's behalf:

  1. (1) (for each part of the claim it accepts), whether the claim will be settled by paying the policyholder, providing goods or services to the policyholder or paying another person to provide those goods or services; and
  2. (2) (for each part of the claim it rejects), why the claim has been rejected and whether any future rights to claim exist.
  • 01/11/2007

Rejecting a claim

COBS 17.1.3

handbook-rule

An insurer and a managing agent must not:

  1. (1) unreasonably reject a claim; or
  2. (2) except where there is evidence of fraud, reject a claim for:
    1. (a) non-disclosure of a fact material to the risk which the policyholder could not reasonably have been expected to disclose; or
    2. (b) misrepresentation of a fact material to the risk, unless the misrepresentation is negligent; or
    3. (c) breach of warranty, unless the circumstances of the claim are connected to the breach, the warranty is material to the risk and was drawn to the policyholder's attention before the conclusion of the contract.
  • 01/11/2007

Export chapter as

COBS 18

Specialist Regimes

COBS 18.1

Trustee Firms

  • 01/11/2007

Application

COBS 18.1.1

handbook-rule
(1) This section applies to the MiFID or equivalent third country business carried on by a trustee firm.
(2) It does not apply to a trustee firm when acting as:
(a) a depositary; or
(b) the trustee of a personal pension scheme or stakeholder pension scheme.
  • 01/11/2007

Application of COBS to trustee firms

COBS 18.1.2

handbook-rule
The provisions of COBS in the table do not apply to a trustee firm to which this section applies:

COBS 18.1.3

handbook-guidance
The provisions of COBS in the table are unlikely to be relevant in relation to a trustee firm to which this section applies:
  • 01/11/2007

Duties of trustee firms under the general law

COBS 18.1.4

handbook-guidance

To the extent a rule in COBS applies to a trustee firm, that rule:

  1. (1) applies in addition to any duties or powers imposed or conferred upon a trustee by the general law; and
  2. (2) does not qualify or restrict the duties or powers that the general law imposes or confers upon a trustee; trustee firms will be under a duty to observe the provisions of their trust instrument; if its provisions conflict with any applicable rule, trustee firms will need to take advice in resolving the conflict.
  • 01/11/2007

Considering and complying with applicable COBS rules

COBS 18.1.5

handbook-guidance
In considering and reaching decisions as to how applicable rules in COBS apply in the context of a particular trust arrangement, a trustee firm should consider the nature of that arrangement and the provisions of the relevant trust instrument.
  • 01/11/2007

References to "client" in applicable COBS rules

COBS 18.1.6

handbook-guidance
Where an applicable rule in COBS requires the doing of anything in relation to a client, the trustee firm should consider who, in the context of that rule and having regard to the particular trust arrangement, is the most appropriate person to treat as its client. This might, for example, be the beneficiary, another trustee or the trust, depending on the particular circumstances.
  • 01/11/2007

COBS 18.2

Energy market activity and oil market activity

  • 01/11/2007

Energy market activity and oil market activity - MiFID business

COBS 18.2.1

handbook-rule
The provisions of COBS in the table do not apply in relation to any energy market activity or oil market activity carried on by a firm which is MiFID or equivalent third country business:

COBS 18.2.2

handbook-guidance
The provisions of COBS in the table are unlikely to be relevant to any energy market activity or oil market activity carried on by a firm which is MiFID or equivalent third country business:
  • 01/11/2007

Energy market activity and oil market activity - non-MiFID business

COBS 18.2.3

handbook-rule

Only the COBS provisions in the table apply to energy market activity or oil market activity carried on by a firm which is not:

  1. (1) MiFID or equivalent third country business; or
  2. (2) energy market activity or oil market activity set out in COBS 18.2.4 R.

Energy market activity and oil market activity - dealings with or through authorised persons

COBS 18.2.4

handbook-rule
Only the COBS provisions in the table apply to energy market activity or oil market activity carried on by a firm which is not MiFID or equivalent third country business but which, if the firm were not authorised, would not be a regulated activity because of article 16 of the Regulated Activities Order (Dealing in contractually based investments) or article 22 of the Regulated Activities Order (Deals with or through authorised persons etc.).
  • 01/11/2007

Other non-MiFID business related to commodity or exotic derivative instruments

COBS 18.2.5

handbook-rule

COBS applies as set out in the table to firms in respect of activities referred to in the general application rule related to:

  1. (1) commodity futures; or
  2. (2) commodity options; or
  3. (3) contracts for differences related to an underlying commodity; or
  4. (4) other futures or contracts for differences which are not related to commodities, financial instruments or cash;
  5. which is not MiFID or equivalent third country business and energy market activity or oil market activity.
  • 01/11/2007

Best execution for other non-MIFID business related to commodity and exotic derivative instruments

COBS 18.2.6

handbook-rule
A firm that executes a customer order in the course of carrying out activities referred to in COBS 18.2.5 R must provide best execution.
  • 01/11/2007

Exceptions to best execution

COBS 18.2.7

handbook-rule

The duty to provide best execution does not apply where:

  1. (1) the firm has agreed with a professional client that it does not owe a duty of best execution to him; or
  2. (2) the firm relies on another person to whom it passes a customer order for execution to provide best execution, but only if it has taken reasonable care to ensure that he will do so.
  • 01/11/2007

Providing best execution

COBS 18.2.8

handbook-rule

To provide best execution, a firm must:

  1. (1) take reasonable care to ascertain the price which is the best available for the customer order in the relevant market at the time for transactions of the kind and size concerned; and
  2. (2) execute the customer order at a price which is no less advantageous to the customer, unless the firm has taken reasonable steps to ensure that it would be in the customer's best interests not to do so.
  • 01/11/2007

COBS 18.2.9

handbook-evidential-provisions
  1. (1) In order to take reasonable care to ascertain the price which is the best available, a firm:
    1. (a) should disregard any charges and commission made by it or its agents that are disclosed to the customer under COBS 6.1.9 R (Information about costs and associated charges);
    2. (b) need not have access to competing exchanges, or to all, or a minimum number of, available price sources; but if a firm can access prices displayed by different exchanges and trading platforms and make a direct and immediate comparison, it should execute the customer order at the best price available to the firm on such exchanges or trading platforms, if this is in the best interests of the customer;
    3. (c) should pass on to the customer the price at which it executes the transaction to meet the customer order; and
    4. (d) should not take a mark-up or mark-down from the price at which it executes the customer order.
  2. (2) Compliance with (1) may be relied on as tending to establish compliance with the requirement to take reasonable care to ascertain the price which is the best available for the customer order (see COBS 18.2.8 R (1))
  3. (3) Contravention of (1) may be relied on as tending to establish contravention of the requirement to take reasonable care to ascertain the price which is the best available for the customer order (see COBS 18.2.8 R (1))
  • 01/11/2007

COBS 18.3

Corporate finance business

  • 01/11/2007

Corporate finance business - MiFID business

COBS 18.3.1

handbook-rule
The provisions of COBS in the table do not apply in respect of any corporate finance business carried on by a firm which is MiFID or equivalent third country business:

COBS 18.3.2

handbook-guidance
The provisions of COBS in the table are unlikely to be relevant to any corporate finance business carried on by a firm which is MiFID or equivalent third country business:
  • 01/11/2007

Corporate finance business - non-MiFID business

COBS 18.3.3

handbook-rule
Only the provisions of COBS in the table apply to corporate finance business carried on by a firm which is not MiFID or equivalent third country business.
  • 01/11/2007

COBS 18.3.4

handbook-guidance
COBS 15 (Cancellation) is likely to be of limited application to corporate finance business. Distance contracts concluded with consumers in the course of corporate finance business will be exempt from COBS 15 if the price of the financial service is dependent on fluctuations in the financial market outside the firm's control.
  • 01/11/2007

COBS 18.4

Stock lending activity

  • 01/11/2007

COBS 18.4.1

handbook-rule
The provisions of COBS in the table do not apply in relation to any stock lending activity carried on by a firm which is MiFID or equivalent third country business:

COBS 18.4.2

handbook-guidance
The provisions of COBS in the table are unlikely to be relevant in relation to any stock lending activity carried on by a firm which is MiFID or equivalent third country business:
  • 01/11/2007

COBS 18.5

Operators of collective investment schemes

  • 01/11/2007

Application

COBS 18.5.1

handbook-rule
This section applies to a firm which is an operator of a collective investment scheme.
  • 01/11/2007

Application or modification of general COBS rules for operators

COBS 18.5.2

handbook-rule

An operator when it is carrying on scheme management activity:

  1. (1) must comply with the COBS rules specified in the table, as modified by this section; and
  2. (2) need not comply with any other rule in COBS.

Table: Application of conduct of business rules
Application of conduct of business rules

Additional application of COBS rules for management companies

COBS 18.5.2A

handbook-rule

A management company must:

  1. (1) in addition to complying with the COBS rules specified in COBS 18.5.2 R, comply with COBS 11.7 (Personal account dealing); and
  2. (2) comply with COBS 2.3 (Inducements) as modified by COBS 2.3.2A R

[Note: article 13(1) to 13(4) of the UCITS implementing Directive]

  • 01/07/2011

General modifications

COBS 18.5.3

handbook-rule

The COBS rules specified in the table in COBS 18.5.2 R apply to an operator when it is carrying on scheme management activity with the following modifications:

  1. (1) subject to (2), references to customer or client are to be construed as references to any scheme in respect of which the operator is acting or intends to act, and with or for the benefit of which the relevant activity is to be carried on;
  2. (2) in the case of an unregulated collective investment scheme, when an operator is required by the rules in COBS to provide information to, or obtain consent from, a customer or client, the operator must ensure that the information is provided to, or consent obtained from, a participant or a potential participant in the scheme as the case may be; and
  3. (3) references to the service of portfolio management in COBS 11.2 and 11.3 and COBS 11.5 (Record keeping: client orders and transactions) are to be construed as references to the management by an operator of financial instruments held for or within the scheme of which it is the operator.
  • 01/11/2007

Modification of best execution for operators of unregulated collective investment schemes

COBS 18.5.4

handbook-rule

The best execution provisions applying to an operator of a collective investment scheme do not apply in relation to an unregulated collective investment scheme whose scheme documents include a statement that best execution does not apply in relation to the scheme and in which:

  1. (1) no participant is a retail client; or
  2. (2) no current participant in the scheme was a retail client on joining the scheme as a participant.
  • 01/11/2007

Scheme documents for an unregulated collective investment scheme

COBS 18.5.5

handbook-rule
An operator of an unregulated collective investment scheme must not accept a retail client as a participant in the scheme unless it has taken reasonable steps to offer and, if requested, provide to the potential participant scheme documents which adequately describe how the operation of the scheme is governed.
  • 01/11/2007

Format and content of scheme documents

COBS 18.5.6

handbook-guidance
An operator's scheme documents may consist of any number of documents provided that it is clear that collectively they constitute the scheme documents and provided the use of several documents in no way diminishes the significance of any of the statements which are required to be given to the potential participant.
  • 01/11/2007

COBS 18.5.7

handbook-guidance
The scheme documents of an unregulated collective investment scheme (if they exist) should make it clear that if a participant is reclassified as a retail client, this reclassification will not affect certain scheme management activities of the operator of the scheme. In particular, despite such a reclassification, the operator will not be required to comply with the best execution provisions applying to an operator of a collective investment scheme. It should be noted that there is no requirement that scheme documents must be produced for an unregulated collective investment scheme.
  • 01/11/2007

COBS 18.5.8

handbook-rule

Where the scheme is an unregulated collective investment scheme and no current participant in the scheme was a retail client on joining the scheme as a participant, the scheme documents must include a statement that:

  1. (1) explains that if a participant is reclassified as a retail client subsequent to joining the scheme as a participant, then the operator may continue to treat all participants in the scheme as though they were not retail clients;
  2. (2) explains that if a participant is reclassified as a retail client subsequent to joining the scheme as a participant, then the modification of best execution (see COBS 18.5.5 R) will continue to apply to that scheme; and
  3. (3) explains that, in the event of such a reclassification, the operator will not be required to provide best execution in relation to the scheme.
  • 01/11/2007

COBS 18.5.9

handbook-guidance
The operator will still have to comply with other COBS provisions as a result of the reclassification of a participant as a retail client, for example, the requirement to provide periodic statements to participants who are retail clients in an unregulated collective investment scheme (see the rule on periodic statements for an unregulated collective investment scheme (COBS 18.5.11)).
  • 01/11/2007

Adequate information

COBS 18.5.10

handbook-evidential-provisions
  1. (1) In order to provide adequate information to describe how the operation of the scheme is governed, an operator of an unregulated collective investment scheme should include in the scheme documents a provision about each of the items of relevant information set out in the following table (Content of scheme documents).
  2. (2) Compliance with (1) may be relied on as tending to establish compliance with COBS 18.5.5 R.
  3. (3) Contravention of (1) may be relied on as tending to establish contravention of COBS 18.5.5 R.
Table: Content of scheme documents
Content of scheme documents
  • 01/11/2007

Periodic statements for an unregulated collective investments scheme

COBS 18.5.11

handbook-rule
An operator of an unregulated collective investment scheme must, subject to the exceptions from the requirement to provide a periodic statement, provide to participants in the scheme, promptly and at suitable intervals, a statement in a durable medium which contains adequate information on the value and composition of the portfolio of the scheme at the beginning and end of the period of the statement.
  • 01/11/2007

Promptness, suitable intervals and adequate information

COBS 18.5.12

handbook-evidential-provisions
  1. (1) An operator should act in accordance with the provisions in the right hand column of the periodic statements table (see COBS 18.5.15E) to fulfil the requirement to prepare and issue periodic statements indicated in the left hand column against these provisions.
  2. (2) Compliance with (1) may be relied on as tending to establish compliance with the requirement to prepare and issue periodic statements.
  3. (3) Contravention of (1) may be relied on as tending to establish contravention of the requirement to prepare and issue periodic statements.
  • 01/11/2007

Exceptions from the requirement to provide a periodic statement

COBS 18.5.13

handbook-rule
  1. (1) An operator of an unregulated collective investment scheme need not provide a periodic statement:
    1. (a)
      1. (i) to a participant in the scheme who is a retail client ordinarily resident outside the United Kingdom; or
      2. (ii) to a participant in the scheme who is a professional client; if the participant has so requested or the operator has taken reasonable steps to establish that the participant does not wish to receive it; or
    2. (b) if it would duplicate a statement to be provided by someone else.
  2. (2) For a firm acting as an outgoing ECA provider, the exemption for retail client participants ordinarily resident outside the United Kingdom applies only to a participant in the scheme who is a retail client ordinarily resident outside the EEA.
  • 01/11/2007

Record keeping requirements

COBS 18.5.14

handbook-rule
An operator of an unregulated collective investment scheme must make a copy of any periodic statement it has provided in accordance with the requirement to prepare and issue periodic statements to participants in the scheme. The record must be retained for a minimum period of three years.
  • 01/11/2007

COBS 18.5.15

handbook-evidential-provisions
Table: Periodic statements
This table belongs to COBS 18.5.12 E.
  • 01/11/2007

COBS 18.5.16

handbook-guidance

Examples of uncovered open positions include:

  1. (1) selling a call option on an investment not held in the portfolio;
  2. (2) unsettled sales of call options on currency in amounts greater than the portfolio's holding of that currency in cash or in readily realisable investments denominated in that currency; and
  3. (3) transactions having the effect of selling an index to an amount greater than the portfolio's holdings of investments included in that index.
  • 01/11/2007

COBS 18.5.17

handbook-evidential-provisions
Table: General contents of a periodic statement
This table belongs to COBS 18.5.15 E.
  • 01/11/2007

COBS 18.5.18

handbook-evidential-provisions
Table: Contents of a periodic statement in respect of contingent liability investments
This table belongs to COBS 18.5.15 E.
  • 01/11/2007

COBS 18.6

Lloyd's

  • 01/11/2007

Application

COBS 18.6.1

handbook-rule
This section applies to a firm when it carries on Lloyd's market activities.
  • 01/11/2007

COBS rules that apply to Lloyd's market activities

COBS 18.6.2

handbook-rule
Only COBS 3 (Client categorisation) and the financial promotion rules apply when a firm is carrying out Lloyd's market activities.
  • 01/11/2007

COBS 18.6.3

handbook-guidance
Firms are reminded that syndicate business plans may be used in ways that bring them within the definition of a financial promotion.
  • 01/11/2007

Definitions and modifications

COBS 18.6.4

handbook-rule

When a firm is carrying on Lloyd's market activities, any reference in COBS to the term:

  1. (1) designated investment is to be taken to include the following specified investments:
    1. (a) the underwriting capacity of a Lloyd's syndicate;
    2. (b) membership of a Lloyd's syndicate; and
    3. (c) rights to or interests in the specified investments in (a) or (b);
  2. (2) designated investment business is to be taken to include the following regulated activities:
    1. (a) advising on syndicate participation at Lloyd's;
    2. (b) managing the underwriting capacity of a Lloyd's syndicate as a managing agent at Lloyd's; and
    3. (c) agreeing to carry on the regulated activities in (a) or (b).
  • 01/11/2007

The Principles and Lloyd's market activities

COBS 18.6.5

handbook-guidance
Whilst COBS has limited application to Lloyd's market activities, firms conducting Lloyd's market activities are reminded that they are required to comply with the Principles.
  • 01/11/2007

COBS 18.7

Depositaries

  • 01/11/2007

COBS 18.7.1

handbook-rule
Only the COBS provisions in the table apply to a depositary when acting as such, when carrying on business which is not MiFID or equivalent third country business:
  • 01/11/2007

COBS 18.8

OPS firms - non scope business

  • 01/11/2007

COBS 18.8.1

handbook-rule

COBS applies to an OPS firm when it carries on business which is not MiFID or equivalent third country business, with the following modifications:

  1. (1) references to client are to be taken to be references to the OPS or welfare trust, as the case may be, in respect of which the OPS firm is acting or intends to act, and with or for the benefit of whom the relevant business is to be carried on;
  2. (2) if an OPS firm is required by any COBS rule to provide information to, or obtain consent from, a client, that firm must ensure that the information is provided to, or consent obtained from, each of the trustees of the OPS or welfare trust for whom that firm is acting; and
  3. (3) COBS is modified by the addition of the rules in the table below:

  • 01/11/2007

COBS 18.8.2

handbook-rule
Where an OPS firm conducts OPS activity and is obliged to provide a periodic statement, the periodic statement must contain the information in the table below.
  • 01/11/2007

COBS 18.8.3

handbook-rule
COBS 8 (Client agreements) does not apply to an OPS firm, where the OPS firm is carrying on designated investment business as part of its OPS activity in relation to an occupational pension scheme of which it is a trustee.
  • 01/11/2007

COBS 18.9

ICVCs

  • 01/11/2007

COBS 18.9.1

handbook-rule
(1) The financial promotion rules in COBS apply to an ICVC, except that COBS 4.13 (UCITS) applies only to an ICVC that is a UCITS scheme.
(2) COBS 14.2 (Providing product information to clients) applies to an ICVC that is a UCITS scheme.

COBS 18.9.2

handbook-guidance
Firms should note that the operator of an ICVC when it is undertaking scheme management activity will be subject to COBS 18.5.2R.
  • 01/11/2007

COBS 18.10

UCITS qualifiers and service companies

  • 01/11/2007

COBS 18.10.1

handbook-rule
The COBS provisions in the table apply to a UCITS qualifier and a service company:
  • 01/11/2007

COBS 18.11

Authorised professional firms

  • 01/11/2007

COBS 18.11.1

handbook-rule
COBS applies to an authorised professional firm, except that its application in relation to non-mainstream regulated activities and financial promotion is modified as set out below.
  • 01/11/2007

COBS 18.11.2

handbook-rule

COBS does not apply to an authorised professional firm with respect to its non-mainstream regulated activities, except that:

  1. (1) the fair, clear and not misleading rule applies;
  2. (2) the financial promotion rules apply as modified below;
  3. (3) COBS 7 (Insurance mediation) applies but only if the designated professional body of the firm does not have rules approved by the FSA under section 332(5) of the Act that implement articles 12 and 13 of the Insurance Mediation Directive and that apply to the firm;
  4. (4) COBS 8.1.3 R (Client agreements) applies, except for the requirement to provide information on conflicts of interest; and
  5. (5) COBS 5.2 (E-commerce) applies.

COBS 18.11.3

handbook-rule

The financial promotion rules do not apply to an authorised professional firm in relation to the communication of a financial promotion if:

  1. (1) the firm's main business is the practice of its profession (see IPRU(INV) 2.1.2R(3));
  2. (2) the financial promotion is made for the purposes of and incidental to the promotion or provision by the firm of its professional services or its non-mainstream regulated activities; and
  3. (3) the financial promotion is not communicated on behalf of another person who would not be able lawfully to communicate the financial promotion if he were acting in the course of business;
however, a firm may use the exemptions for promoting unregulated collective investment schemes in COBS 4 (Communicating with clients, including financial promotions) if it wishes.
  • 01/11/2007

COBS 18.11.4

handbook-guidance
The rules on approving financial promotions continue to apply.
  • 01/11/2007

Export chapter as

COBS 19

Pensions supplementary provisions

COBS 19.1

Pension transfers and opt-outs

  • 01/11/2007

Preparing and providing a transfer analysis

COBS 19.1.1

handbook-rule
If an individual who is not a pension transfer specialist gives a personal recommendation about a pension transfer or pension opt-out on a firm's behalf, the firm must ensure that the recommendation is checked by a pension transfer specialist.
  • 01/11/2007

COBS 19.1.2

handbook-rule

A firm must:

  1. (1) compare the benefits likely (on reasonable assumptions) to be paid under a defined benefits pension scheme with the benefits afforded by a personal pension scheme or stakeholder pension scheme, before it advises a retail client to transfer out of a defined benefits pension scheme;
  2. (2) ensure that that comparison includes enough information for the client to be able to make an informed decision;
  3. (3) give the client a copy of the comparison, drawing the client's attention to the factors that do and do not support the firm's advice, no later than when the key features document is provided; and
  4. (4) take reasonable steps to ensure that the client understands the firm's comparison and its advice.
  • 01/11/2007

COBS 19.1.3

handbook-guidance

In particular, the comparison should:

  1. (1) take into account all of the retail client's relevant circumstances;
  2. (2) have regard to the benefits and options available under the ceding scheme and the effect of replacing them with the benefits and options under the proposed scheme;
  3. (3) explain the assumptions on which it is based and the rates of return that would have to be achieved to replicate the benefits being given up; and
  4. (4) be illustrated on rates of return which take into account the likely expected returns of the assets in which the retail client's funds will be invested.

COBS 19.1.4

handbook-rule

When a firm compares the benefits likely to be paid under a defined benefits pension scheme with the benefits afforded by a personal pension scheme or stakeholder pension scheme (COBS 19.1.2R (1)), it must:

  1. (1) assume that:
  1. or use more cautious assumptions;
  2. (2) calculate the interest rate in deferment; and
  3. (3) have regard to benefits which commence at difference times.

COBS 19.1.4A

handbook-evidential-provisions
For any year commencing 6 April, the use of the male and female annual CMI Mortality Projections Models in the series CMI(20YY-1)_M_[1.25%] and CMI(20YY-1)_F_[1.25%], where YY-1 is the year of the Model used, will tend to show compliance with COBS 19.1.4R (1)(g).
  • 01/05/2012

COBS 19.1.4B

handbook-rule
Firms must apply the annual provisions at COBS 13 Annex 2 3.1R(6) on a monthly basis in any month where the yields on the 15th of the relevant month would give a rolling 12 month average annuity rate that varies by at least 0.2% from the previous rate.
  • 01/05/2012

COBS 19.1.5

handbook-rule
If a firm arranges a pension transfer or pension opt-out for a retail client as an execution-only transaction, the firm must make, and retain indefinitely, a clear record of the fact that no personal recommendation was given to that client.
  • 01/11/2007

Suitability

COBS 19.1.6

handbook-guidance
When advising a retail client who is, or is eligible to be, a member of a defined benefits occupational pension scheme whether to transfer or opt-out, a firm should start by assuming that a transfer or opt-out will not be suitable. A firm should only then consider a transfer or opt-out to be suitable if it can clearly demonstrate, on contemporary evidence, that the transfer or opt-out is in the client's best interests.
  • 01/11/2007

COBS 19.1.7

handbook-guidance
When a firm advises a retail client on a pension transfer or pension opt-out, it should consider the client's attitude to risk in relation to the rate of investment growth that would have to be achieved to replicate the benefits being given up.
  • 01/11/2007

COBS 19.1.7A

handbook-guidance

When giving a personal recommendation about a pension transfer, a firm should clearly inform the retail client about the loss of the fixed benefits and the consequent transfer of risk from the defined benefits pension scheme to the retail client, including:

  1. (1) the extent to which benefits may fall short of replicating those in the defined benefits pension scheme;
  2. (2) the uncertainty of the level of benefit that can be obtained from the purchase of a future annuity and the prior investment risk to which the retail client is exposed until an annuity is purchased with the proceeds of the proposed personal pension scheme or stakeholder pension scheme; and
  3. (3) the potential lack of availability of annuity types (for instance, annuity increases linked to different indices) to replicate the benefits being given up in the defined benefits pension scheme.
  • 01/05/2012

COBS 19.1.7B

handbook-guidance
In considering whether to make a personal recommendation, a firm should not regard a rate of return which may replicate the benefits being given up from the defined benefits pension scheme as sufficient in itself.
  • 01/05/2012

COBS 19.1.8

handbook-guidance

When a firm prepares a suitability report it should include:

  1. (1) a summary of the advantages and disadvantages of its personal recommendation;
  2. (2) an analysis of the financial implications (if the recommendation is to opt-out); and
  3. (3) a summary of any other material information.
  • 01/11/2007

COBS 19.1.9

handbook-guidance
If a firm proposes to advise a retail client not to proceed with a pension transfer or pension opt-out, it should give that advice in writing.
  • 01/11/2007

COBS 19.2

Personal pensions, FSAVCs and AVCs

  • 01/11/2007

Financial promotions

COBS 19.2.1

handbook-guidance
A financial promotion for a FSAVC should contain a prominent warning that, as an alternative an AVC arrangement exists, and that details can be obtained from the scheme administrator (if that is the case).
  • 01/11/2007

Suitability

COBS 19.2.2

handbook-rule

When a firm prepares a suitability report it must:

  1. (1) (in the case of a personal pension scheme), explain why it considers the personal pension scheme to be at least as suitable as a stakeholder pension scheme; and
  2. (2) (in the case of an FSAVC), explain why it considers the FSAVC to be at least as suitable as any stakeholder pension scheme, AVC or facility to make additional contributions to an occupational pension scheme which is available to the retail client.

COBS 19.2.3

handbook-rule

When a firm promotes a personal pension scheme, including a group personal pension scheme, to a group of employees it must:

  1. (1) be satisfied on reasonable grounds that the scheme is likely to be at least as suitable for the majority of the employees as a stakeholder pension scheme; and
  2. (2) record why it thinks the promotion is justified.
  • 01/11/2007

COBS 19.3

Product disclosure to members of occupational pension schemes

  • 01/11/2007

COBS 19.3.1

handbook-rule
  1. (1) When a firm sells, personally recommends or arranges the payment of an AVC contribution by a member of an occupational pension scheme to be secured by a packaged product purchased by the scheme trustees, it must give the trustees sufficient information to pass to the relevant member for that member to be able to make informed comparisons between the AVC and any alternative personal pension schemes and stakeholder pension schemes available.
  2. (2) This rule applies to an AVC where members' benefits are linked to the earmarked segments of a life policy or scheme, but it does not apply to an AVC where the trustees make pooled investments and have their own arrangements for allocating investment returns to determine members' AVC benefits.
  • 01/11/2007

COBS 19.4

Open market options

  • 01/11/2007

COBS 19.4.1

handbook-rule

In this section:

  1. (1) 'intended retirement date' means:
    1. (a) the date (according to the most recent recorded information available to the provider) when the scheme member intends to retire, or to bring the benefits in the scheme into payment, whichever is the earlier; or
    2. (b) if there is no such date, the scheme member's state pension age;
  2. (2) 'open market option' means the option to use the proceeds of a personal pension scheme, stakeholder pension scheme, FSAVC, retirement annuity contract or pension buy-out contract to purchase an annuity on the open market; and
  3. (3) 'open market option statement 'means:
    1. (a) the fact sheet "Your pension: it's time to choose" available on www.moneyadviceservice.org.uk, together with a written summary of the retail client's open market option, which is sufficient for the client to be able to make an informed decision about whether to exercise, or to decline to exercise, an open market option; or
    2. (b) a written statement that gives materially the same information.

When to send open market options statement and six-week reminder

COBS 19.4.2

handbook-rule
  1. (1) If a retail client asks a firm for a retirement quotation more than four months before the client's intended retirement date, the firm must give the client an open market option statement with or as part of its reply, unless the firm has given the client such a statement in the last 12 months.
  2. (2) If a firm does not receive such a request, it must provide a retail client with an open market option statement between four and six months before the client's intended retirement date.
  • 01/11/2007

COBS 19.4.3

handbook-rule
The firm must:
  1. (1) remind the retail client about the open market option statement; and
  2. (2) tell the client what sum of money will be available to purchase an annuity on the open market;
at least six weeks before the client's intended retirement date.
  • 01/11/2007

COBS 19.4.4

handbook-rule

If a retail client with an open market option tells a firm that he is considering, or has decided:

  1. (1) to discontinue an income withdrawal arrangement; or
  2. (2) to take a further sum of money from his pension to buy an annuity as part of a phased retirement,
the firm must give the client an open market option statement, unless the firm has given the client such a statement in the last 12 months.
  • 01/11/2007

Export chapter as

COBS 20

With-profits

COBS 20.1

Application

  • 01/11/2007

COBS 20.1.1

handbook-rule
This chapter applies to a firm carrying on with-profits business, except to the extent modified in the following rules.

COBS 20.1.2

handbook-rule
  1. (1) The section on the process for reattribution (COBS 20.2.42 R to COBS 20.2.52 G):
    1. (a) applies to a firm that is proposing to make a reattribution of its inherited estate;
    2. (b) but not if, and to the extent that, it would require the firm to breach, or would prevent the firm from complying with, an order made by a court of competent jurisdiction.
  2. (2) If a firm proposes to seek an order from a court of competent jurisdiction that would allow or require it to act in a way that is contrary to the rules on reattribution (COBS 20.2.42 R to COBS 20.2.52 G) (through, or because of, the exception in (1)(b)), the firm must:
    1. (a) tell the FSA that that is what it proposes to do;
    2. (b) seek the order at the earliest opportunity; and
    3. (c) if it wishes to take a step that would be contrary to those rules in anticipation of such an order, secure a waiver before it does so.

COBS 20.1.3

handbook-rule

For an EEA insurer:

  1. (1) the rules and guidance on treating with-profits policyholders fairly (COBS 20.2.1 G to COBS 20.2.41 G and COBS 20.2.53 R to COBS 20.2.60 G) apply only in so far as responsibility for the matter in question has not been reserved to the firm's Home State regulator by an EU instrument;
  2. (2) COBS 20.3 (Principles and Practices of Financial Management) does not apply;
  3. (3) the rule on providing information to with-profits policyholders who are habitually resident in the United Kingdom (COBS 20.4.4 R) and the rule on production and provision of a CFPPFM (COBS 20.4.5 R) apply, but the rest of COBS 20.4 (Communications with with-profits policyholders) does not; and
  4. (4) the rule on production and provision of a CFPPFM (COBS 20.4.5 R) applies as if a reference to a firm was a reference to an EEA insurer in relation to any of its with-profits policyholders who are habitually resident in the United Kingdom.

COBS 20.1.4

handbook-rule

The following do not apply to a non-directive friendly society:

  1. (1) COBS 20.3 (Principles and Practices of Financial Management);
  2. (2) COBS 20.4 (Communications with with-profits policyholders); and
  3. (3) COBS 20.5 (With-profits governance).

COBS 20.1.5

handbook-rule
This chapter does not apply to with-profits business that consists of effecting or carrying out Holloway sickness policies.

COBS 20.2

Treating with-profits policyholders fairly

  • 01/11/2007

Introduction

COBS 20.2.1

handbook-guidance
  1. (1) With-profits business, by virtue of its nature and the extent of discretion applied by firms in its operation, involves numerous potential conflicts of interest that might give rise to the unfair treatment of policyholders. Potential conflicts of interest may arise between shareholders and with-profits policyholders, between with-profits policyholders and non-profit policyholders within the same fund, between with-profits policyholders and the members of mutually-owned firms, between with-profits policyholders and management, and between different classes of with-profits policyholders, for example those with and without guarantees. The rules in this section address specific situations where the risk may be particularly acute.
  2. (2) With-profits policyholders have an interest in the whole and in every part of the with-profits fund into which their policies are written and from which the amounts payable in connection with their policies are to be paid. Those amounts include those required to satisfy their contractual rights and such other amounts as the firm is required to pay in order to treat them fairly (including but not limited to the amounts required to satisfy their reasonable expectations).
  3. (3) The fair treatment of with-profits policyholders requires the firm's pay-outs on individual with-profits policies to be fair (see COBS 20.2.3 R et seq.) and, if the firm makes a distribution from the with-profits fund into which their policies are written, the receipt by the with-profits policyholders of at least the required percentage (see COBS 20.2.17 R).

COBS 20.2.1A

handbook-rule
A firm must take reasonable care to ensure that all aspects of its operating practice are fair to the interests of its with-profits policyholders and do not lead to an undisclosed, or otherwise unfair, benefit to shareholders or to other persons with an interest in the with-profits fund.
  • 01/04/2012

COBS 20.2.1B

handbook-guidance
  1. (1) Notwithstanding that there may not be a rule in the remainder of this section addressing a particular aspect of a firm's operating practices, firms will need to ensure that they take reasonable care to ensure that all aspects of their operating practice comply with COBS 20.2.1A R.
  2. (2) For the avoidance of doubt COBS 20.2.1A R does not exhaust or restrict the scope of Principle 6. Firms will in any event need to ensure that their operating practices are consistent with Principle 6.
  • 01/04/2012

COBS 20.2.1C

handbook-guidance
When considering the provisions in this chapter a firm will need to ensure that, if applicable, it complies with the with-profits governance requirements in COBS 20.5.
  • 01/04/2012

COBS 20.2.1D

handbook-guidance
For the purposes of COBS 20.2.1A R the FSA expects a firm to be able to demonstrate that it has taken reasonable care to ensure its operating practices are fair, including being able to produce appropriate evidence to show that it has followed relevant governance procedures.
  • 01/04/2012

COBS 20.2.2

handbook-rule
Neither Principle 6 (Customers' interests) nor the rules on treating with-profits policyholders fairly (COBS 20.2) relieve a firm of its obligation to deliver each policyholder's contractual entitlement.
  • 01/11/2007

Amounts payable under with-profits policies

COBS 20.2.3

handbook-rule
A firm must have good reason to believe that its pay-outs on individual with-profits policies are fair.
  • 01/11/2007

Amounts payable under with-profits policies: Maturity payments

COBS 20.2.4

handbook-guidance
In this section, maturity payments include payments made when a with-profits policy provides for a minimum guaranteed amount to be paid.
  • 01/11/2007

COBS 20.2.5

handbook-rule
  1. (1) Unless a firm cannot reasonably compare a maturity payment with a calculated asset share, it must:
    1. (a) set a target range for the maturity payments that it will make on:
      1. (i) all of its with-profits policies; or
      2. (ii) each group of its with-profits policies;
    2. (b) ensure that each target range:
      1. (i) is expressed as a percentage of unsmoothed asset share; and
      2. (ii) includes 100% of unsmoothed asset share; and
    3. (c) manage its with-profits business, and the business of each with-profit fund, with the aim of making on each with-profit policy a maturity payment that falls within the relevant target range.
  2. (2) Unsmoothed asset share means:
    1. (a) the unsmoothed asset share of the relevant with-profits policy; or
    2. (b) an estimate of the unsmoothed asset share of the relevant with-profits policy derived from the unsmoothed asset share of one or more specimen with-profits policies, which a firm has selected to represent a group, or all, of the with-profits policies effected in the same with-profits fund.
  3. (3) A firm must calculate unsmoothed asset share by:
    1. (a) applying the methods in INSPRU 1.3.119 R to INSPRU 1.3.123 R;
    2. (b) including any amounts that have been added to the policy as the result of a distribution from an inherited estate; and
    3. (c) subject to (d), and where the terms of the policy so provide, adding or subtracting an amount that reflects the experience of the insurance business in the relevant with-profits fund; but
    4. (d) if a with-profits fund has suffered adverse experience, which results from a firm's failure to comply with the rules and guidance on treating with-profits policyholders fairly (COBS 20.2.1 G to COBS 20.2.41 G and COBS 20.2.53 R to COBS 20.2.60 G), that adverse experience may only be taken into account if, and to the extent that, in the reasonable opinion of the firm's governing body, the amount referred to in (c) cannot be met from:
      1. (i) the firm's inherited estate (if any); or
      2. (ii) any assets attributable to shareholders, whether or not they are held in the relevant with-profits fund.
  • 01/11/2007

COBS 20.2.6

handbook-rule
Notwithstanding that a firm must aim to make maturity payments that fall within the relevant target range, a firm may make a maturity payment that falls outside the target range if it has a good reason to believe that at least 90% of maturity payments on with-profits policies in that group have fallen, or will fall, within the relevant target range.
  • 01/11/2007

COBS 20.2.7

handbook-guidance
If it is not fair or reasonable to calculate or assess a maturity payment using the prescribed asset share methodology, a firm may use another methodology to set bonus rates, if that methodology properly reflects its representations to with-profits policyholders and it applies that methodology consistently.
  • 01/11/2007

COBS 20.2.8

handbook-rule
A firm may make deductions from asset share to meet the cost of guarantees, or the cost of capital, only under a plan approved by its governing body and described in its PPFM. A firm must ensure that any deductions are proportionate to the costs they are intended to offset.
  • 01/11/2007

COBS 20.2.9

handbook-rule
If a firm has approved a plan to make deductions from asset share, it must ensure that its planned deductions do not change unless justified by changes in the business or economic environment, or changes in the nature of the firm's liabilities as a result of policyholders exercising options in their policies.
  • 01/11/2007

COBS 20.2.10

handbook-rule
If a firm calculates maturity payments using the prescribed asset share methodology, it must manage its with-profits business, and each with-profits fund, with the longer term aim that it will make aggregate maturity payments of 100% of unsmoothed asset share.
  • 01/11/2007

Amounts payable under with-profits policies: Surrender payments

COBS 20.2.11

handbook-guidance
A firm may use its own methodology to calculate surrender payments, but it should have good reason to believe that its methodology produces a result which, in aggregate across all similar policies, is not less than the result of the prescribed asset share methodology. A firm might, for example, test the surrender payments on a suitable range of specimen with-profits policies.
  • 01/11/2007

COBS 20.2.12

handbook-rule
If a firm calculates surrender payments using the prescribed asset share methodology, it must first calculate what the surrender payment would be if it was a maturity payment calculated by that methodology.
  • 01/11/2007

COBS 20.2.13

handbook-rule
A firm may then make a deduction from unsmoothed asset share if necessary, in the reasonable opinion of the firm's governing body, to protect the interests of the firm's remaining with-profits policyholders.
  • 01/11/2007

COBS 20.2.14

handbook-guidance

Amounts that might be deducted include:

  1. (1) the firm's unrecovered costs, including any financing costs incurred in effecting or carrying out the surrendered with-profits policy to the date of surrender, including the costs that might have been recovered if the policy had remained in force;
  2. (2) costs that would fall on the with-profits fund, if the surrender value is calculated by reference to an assumed market value of assets which exceeds the true market value of those assets;
  3. (3) the firm's costs incurred in administering the surrender; and
  4. (4) a fair contribution towards the cost of any contractual benefits due on the whole, or an appropriate part, of the continuing policies in the with-profits fund which would otherwise result in higher costs falling on the continuing with-profits policies.
  • 01/11/2007

COBS 20.2.15

handbook-guidance
The provisions dealing with the calculation of surrender payments (COBS 20.2.11 G to COBS 20.2.12 R) do not prevent a firm from setting a target range for surrender payments where the top-end of the range is lower than the top-end of the relevant range for maturity payments.
  • 01/11/2007

COBS 20.2.16

handbook-rule

A firm must not, in so far as is reasonably practicable, make a market value reduction to the face value of the units of an accumulating with-profits policy unless:

  1. (1) the market value of the with-profits assets in the relevant with-profits fund is, or is expected to be, less than the assumed value of the assets on which the face value of the units of the policy has been based; and
  2. (2) the market value reduction is no greater than is necessary to reflect the impact of the difference in value referred to in (1) on the relevant payment out to the policyholder.

COBS 20.2.16A

handbook-guidance
If a firm is able to satisfy COBS 20.2.16R (1), then the volume of surrenders, transfers, or other exits from the with-profits fund that there has been, or is expected to be, is a factor that a firm may take into account when it is considering whether to make a market value reduction, and if so, its amount, subject to the limit in COBS 20.2.16R (2).
  • 01/04/2012

COBS 20.2.17

handbook-rule

A firm must:

  1. (1) not make a distribution from a with-profits fund, unless the whole of the cost of that distribution can be met without eliminating the regulatory surplus in that with-profits fund; and
  2. (2) ensure that the amount distributed to policyholders from a with-profits fund, taking into account any adjustments required by COBS 20.2.17A R, is not less than the required percentage of the total amount distributed.

COBS 20.2.17A

handbook-rule
  1. (1) Where a firm adjusts the amounts distributed to policyholders, either by market value reduction or otherwise, in a way that would result in a distribution to policyholders of less than the required percentage, taking both the relevant distributions and the adjustment into account, then the firm must apply a proportionate adjustment to amounts distributed to shareholders so that the distribution to policyholders will not be less than the required percentage.
  2. (2) The adjustments referred to in (1) include but are not limited to a situation where such an adjustment has the effect of retrospectively reducing past policyholder distributions.
  • 01/04/2012

COBS 20.2.17B

handbook-guidance
An example of the application of COBS 20.2.17A R, without limitation to its scope generally, is where a firm reduces, for any reason, the amounts of a bonus or of bonus units added to policies in force. The firm should treat this as effectively a 'negative distribution', calculated by making the same assumptions regarding discount rates and other relevant factors as would be used for positive bonus additions. The amount so calculated should then be taken into account in ensuring that the amount distributed to policyholders from a with-profits fund is not less than the required percentage for the purposes of COBS 20.2.17 R.
  • 01/04/2012

COBS 20.2.18

handbook-rule
A realistic basis life firm must not make a distribution from a with-profits fund to any person who is not a with-profits policyholder, unless the whole of the cost of that distribution (including the cost of any obligations that will or may arise from the decision to make a distribution) can be met from the excess of the realistic value of assets over the realistic value of liabilities in that with-profits fund.

COBS 20.2.19

handbook-rule
A distribution to a person who is not a with-profits policyholder includes a transfer of assets out of a with-profits fund that is not made to satisfy a liability of that fund.

COBS 20.2.20

handbook-rule

If, on a distribution, a firm incurs a tax liability on a transfer to shareholders, it must not attribute that tax liability to a with-profits fund, unless:

  1. (1) the firm can show that attributing the tax liability to that with-profits fund is consistent with its established practice;
  2. (2) that established practice is explained in the firm's PPFM; and
  3. (3) that liability is not charged to asset shares.
  • 01/11/2007

Requirement relating to distribution of an excess surplus

COBS 20.2.21

handbook-rule
At least once a year (or, in the case of a non-directive friendly society, at least once in every three years) and whenever a firm is seeking to make a reattribution of its inherited estate, a firm's governing body must determine whether the firm's with-profits fund, or any of the firm's with-profits fund, has an excess surplus.

COBS 20.2.22

handbook-evidential-provisions
  1. (1) If a with-profits fund has an excess surplus, and to retain that surplus would be a breach of Principle 6 (Customers' interests), the firm should make a distribution from that with-profits fund.
  2. (2) Compliance with (1) may be relied on as tending to establish compliance with Principle 6 (Customers' interests).
  3. (3) Contravention of (1) may be relied on as tending to establish a contravention of Principle 6 (Customers' interests).

Charges to a with-profits fund

COBS 20.2.23

handbook-rule
A firm must only charge costs to a with-profits fund which have been, or will be, incurred in operating the with-profits fund. This may include a fair proportion of overheads.

COBS 20.2.24

handbook-rule
Subject to COBS 20.2.25 R, COBS 20.2.25A R and COBS 20.2.25B R, a firm must not pay compensation or redress from a with-profits fund.

COBS 20.2.25

handbook-rule
A proprietary firm may pay compensation or redress due to a policyholder, or former policyholder, from assets attributable to shareholders, whether or not they are held within a long-term insurance fund.

COBS 20.2.25A

handbook-rule
A mutual may pay compensation or redress due to a policyholder, or former policyholder, from a with-profits fund, but may only pay from assets that would otherwise be attributable to asset shares if, in the reasonable opinion of the firm's governing body, the compensation or redress cannot be paid from any other assets in the with-profits fund.
  • 31/07/2009

COBS 20.2.25B

handbook-rule
A payment or transfer of liabilities made to correct an error and which has the effect of restoring a policyholder, or former policyholder, and the with-profits fund to the position they would have been in if the error had not occurred (a "rectification payment"), is not a payment of compensation or redress for the purposes of COBS 20.2.24 R.
  • 31/07/2009

COBS 20.2.25C

handbook-guidance
Rectification payments may include, for example, a payment to a policyholder or former policyholder to correct an erroneous underpayment of policy proceeds, or a reimbursement of premiums overpaid. The effect of COBS 20.2.25B R is that a firm may make rectification payments using assets in a with-profits fund.
  • 31/07/2009

COBS 20.2.25D

handbook-guidance
COBS TP 2.14 R has the effect that payments of compensation and redress arising out of events which took place before 31 July 2009 are subject to COBS 20.2.23 R to COBS 20.2.25 R as in force at 30 July 2009.
  • 31/07/2009

COBS 20.2.26

handbook-rule
A proprietary firm must not charge to a with-profits fund any amounts paid or payable to a skilled person in connection with a report under section 166 of the Act (Reports by skilled persons) if the report indicates that the firm has, or may have, materially failed to satisfy its obligations under the regulatory system.

Tax charge to a with-profits fund

COBS 20.2.27

handbook-rule
A firm must not charge a contribution to corporation tax to a with-profits fund, if that contribution exceeds the notional corporation tax liability that would be charged to that with-profits fund if it were assessed to tax as a separate body corporate.
  • 01/11/2007

New business

COBS 20.2.28

handbook-rule

A firm must not effect new contracts of insurance in an existing with-profits fund unless:

  1. (1) the firm's governing body is satisfied, so far as it reasonably can be, and can demonstrate, having regard to the analysis in (2), that the terms on which each type of contract is to be effected are likely to have no adverse effect on the interests of the with-profits policyholders whose policies are written into that fund; and
  2. (2) the firm has:
    1. (a) carried out or obtained appropriate analysis, based on relevant evidence and proportionate to the risks involved, as to the likely impact on with-profits policyholders, having regard to relevant factors including:
      1. (i) the volumes of each type of contract that the firm expects to be effected; and
      2. (ii) the periods over which the contracts are expected to remain in force; and
    2. (b) provided the analysis referred to in (a) to its with-profits committee or, if applicable, its with-profits advisory arrangement and to its governing body for the purposes of (1).

COBS 20.2.28A

handbook-guidance
  1. (1) Writing new insurance business into a with-profits fund is not, of itself, automatically adverse to the interests of with-profits policyholders. For example, new insurance business which defers the emergence or distribution of surplus to a limited extent for a number of policyholders, or which leads to a marginal change in the equity backing ratio, may, subject to satisfying the guidance in COBS 20.2.60 G and COBS 20.2.29 G, reasonably be considered not to have an adverse effect on the with-profits policyholders in a with-profits fund, if the firm's governing body is satisfied (and can demonstrate based on appropriate analysis) that each new line of insurance business is likely to be financially self-supporting over the periods during which the contracts are expected to remain in force and is likely to add sufficient value to the with-profits fund.
  2. (2) Conversely, if the particular line of new insurance business is priced on loss-making terms or the terms are such that the new insurance business is not likely to generate sufficient value after covering all the costs associated with it (in either case when considered in aggregate over the periods over which the contracts are expected to remain in force), then in the FSA's view, the terms of that insurance business are likely to have an adverse impact on with-profits policyholders interests in the relevant fund.
  3. (3) Firms will need to ensure that they comply with COBS 20.2.28 R at all times, but in practice firms will be expected to pay particular attention when they are designing and pricing or re-pricing products, when they are preparing their financial plans that take into account their expected costs and levels of new business, and, in particular, when reviewing their financial performance, if that reveals that costs or levels of new business have varied significantly from those expected previously.
  4. (4) New business for the purposes of COBS 20.2.28 R will not, in general, include increments on existing policies or business written as a result of the exercise of options by an existing policyholder.

COBS 20.2.29

handbook-guidance

In some circumstances, it may be difficult or impossible for a firm to mitigate the risk of an adverse effect on its existing, or new, with-profits policyholders, unless it establishes a new bonus series or with-profits fund. Circumstances that might cause a firm to establish a new bonus series or with-profits fund include:

  1. (1) where the firm has a high level of guarantees or options in its existing with-profits policies, which might place an excessive burden on new with-profits policies, or vice versa; and
  2. (2) where the potential risks are likely to be so great that a single with-profits fund cannot provide adequately for the interests of new and existing policyholders, even after allowing for any beneficial effects of diversification. Such potential risks are likely to arise from significant differences in the terms and conditions of the new and existing with-profits policies, including the basis on which charges are levied and reviewed.

COBS 20.2.30

handbook-guidance
  1. (1) When a firm prices the new insurance business that it proposes to effect in an existing with-profits fund, it should estimate the volume of new insurance business that it is likely to effect and then build in adequate margins that will allow it to recover any acquisition costs to be charged to the with-profits fund.
  2. (2) COBS 20.2.28 R requires firms to obtain appropriate analysis and evidence and this should include at least a profitability analysis on a marginal cost basis.

COBS 20.2.31

handbook-guidance
When a firm sets a target volume for new insurance business in an existing with-profits fund, it should pay particular attention to the risk of disadvantage to existing with-profits policyholders. Those policyholders might be disadvantaged, for example, by the need to retain additional capital to support a rapid growth in new business, when that capital might have been distributed in the ordinary course of the firm's existing business.
  • 01/11/2007

Relationship of a with-profits fund with the firm and any connected persons

COBS 20.2.32

handbook-rule

A firm carrying on with-profits business must not:

  1. (1) make a loan to a connected person using assets in a with-profits fund; or
  2. (2) give a guarantee to, or for the benefit of, a connected person, where the guarantee will be backed using assets in a with-profits fund;
  3. unless that loan or guarantee:
  4. (3) will be on commercial terms;
  5. (4) will, in the reasonable opinion of the firm's senior management, be beneficial to the with-profits policyholders in the relevant with-profits fund; and
  6. (5) will not, in the reasonable opinion of the firm's senior management, expose those policyholders to undue credit or group risk.
  • 01/11/2007

Contingent loans and other forms of support for the with-profits fund

COBS 20.2.33

handbook-guidance
  1. (1) If a firm, or a connected person, provides support to a with-profits fund (for example, by a contingent loan), no reliance should be placed on that support when the firm assesses the with-profits fund's financial position unless there are clear and unambiguous criteria governing any repayment obligations to the support provider.
  2. (2) The degree of reliance placed on that support should depend on the subordination of the support to the fair treatment of with-profits policyholders and clarification of what fair treatment means in various circumstances. For a realistic basis life firm this would normally be evidenced by the liability for such support being capable, under stress, of a progressively lower valuation in the future policy-related liabilities.

COBS 20.2.34

handbook-guidance
Where assets from outside a with-profits fund are made available to support that fund (and there is no ambiguity in the criteria governing any repayment obligations to the support provider), a firm should manage the fund disregarding the liability to repay those assets, at least in so far as that is necessary for its policyholders to be treated fairly.

Other rules and guidance on the conduct of with-profits business

COBS 20.2.35

handbook-guidance

When a firm determines its investment strategy, and the acceptable level of risk within that strategy, it should take into account:

  1. (1) the extent of the guarantee in its with-profits policies;
  2. (2) any representation that it has made to its with-profits policyholders;
  3. (3) its established practice; and
  4. (4) the amount of capital support available.
  • 01/11/2007

COBS 20.2.36

handbook-rule

A firm must not:

  1. (1) use with-profits assets to finance the purchase of a strategic investment, directly or by or through a connected person; or
  2. (2) retain an investment referred to in (1);
unless its governing body is satisfied, so far as it reasonably can be, and can demonstrate, that the purchase or retention is likely to have no adverse effect on the interests of its with-profits policyholders whose policies are written into the relevant fund.

COBS 20.2.36A

handbook-rule
A firm must keep adequate records setting out the strategic purpose for which a strategic investment has been purchased or retained.
  • 01/04/2012

COBS 20.2.36B

handbook-guidance
  1. (1) In order for a firm to comply with COBS 20.2.36 R, a firm's governing body should consider:
    1. (a) the size of the investment in relation to the with-profits fund;
    2. (b) the expected rate of return on the investment;
    3. (c) the risks associated with the investment, including, but not limited to, liquidity risk, the capital needs of the acquired business or investment and the difficulty of establishing fair value (if any);
    4. (d) any costs that would result from divestment;
    5. (e) whether the with-profits actuary would regard the investment as having no adverse effect on the interests of with-profits policyholders as a class;
    6. (f) in the case of a proprietary firm, whether it would be more appropriate for the investment to be made using assets other than those in the with-profits fund; and
    7. (g) any other relevant material factors.
  2. (2) A firm should also consider whether making or retaining the investment should be disclosed to with-profits policyholders.
  3. (3) Examples of strategic investments include, but are not limited to, a significant investment in another business or significant real estate assets used within the business of the firm.
  • 01/04/2012

COBS 20.2.37

handbook-guidance
If a firm carries out non-profit insurance business in a with-profits fund, it should review the profitability of the non-profit insurance business regularly.
  • 01/11/2007

COBS 20.2.38

handbook-guidance
If a firm has reinsured its with-profits insurance business into another insurance undertaking, it should take reasonable steps to discharge its responsibilities to its with-profits policyholders, in respect of the reinsured business. Those steps should include maintaining adequate controls.
  • 01/11/2007

Significant changes in with-profits funds

COBS 20.2.39

handbook-rule
A firm must not enter into a material transaction relating to a with-profits fund unless, in the reasonable opinion of the firm's governing body, the transaction is unlikely to have a material adverse effect on the interests of that fund's existing with-profits policyholders.
  • 01/11/2007

COBS 20.2.40

handbook-rule
A material transaction includes a series of related non-material transactions which, if taken together, are material.
  • 01/11/2007

COBS 20.2.41

handbook-guidance

Examples of material transactions include:

  1. (1) a significant bulk outwards reinsurance contract;
  2. (2) inwards reinsurance of with-profits business from another insurance undertaking;
  3. (3) a financial engineering transaction that would materially change the profile of any surplus expected to emerge on the with-profits fund's existing insurance business; and
  4. (4) a significant restructuring of the with-profits fund, especially if it involves the creation of new sub-funds.
  • 01/11/2007

COBS 20.2.41A

handbook-rule

A firm must contact the FSA as soon as is reasonably practicable to make arrangements to discuss what actions may be required to ensure the fair treatment of with-profits policyholders if, in relation to any with-profits fund it operates:

  1. (1) the firm reasonably expects, or if earlier, there has been, a sustained and substantial fall in either the volume of new non-profit insurance contracts, or in the volume of new with-profits policies (effected other than by reinsurance), or in both, effected into the with-profits fund; or
  2. (2) the firm cedes by way of reinsurance most or all of the new with-profits policies which it continues to effect.
  • 01/04/2012

COBS 20.2.41B

handbook-guidance
  1. (1) The aim of the discussions in COBS 20.2.41A R is to:
    1. (a) allow the FSA to comment on the adequacy of the firm's planning; and
    2. (b) seek agreement with the firm on any other appropriate actions to ensure with-profits policyholders are treated fairly.
  2. (2) If the firm is no longer effecting a material volume of new with-profits policies (other than by reinsurance) into a with-profits fund; or if it is ceding by way of reinsurance most or all of the new with-profits policies which it continues to effect, then it may also be appropriate to consider whether, in the particular circumstances of the firm, it should be regarded as ceasing to effect new contracts of insurance for the purposes of COBS 20.2.54R (3).
  3. (3) In the discussions the FSA will have with regard to COBS 20.2.28 R (New business), if the volumes of new business are expected to be profitable and, in relation to non-profit insurance business, it is demonstrated that a fair distribution to with-profits policyholders out of the fund can be achieved and the economic value of any expected future profits is likely to be available for distribution during the lifetime of the with-profits business for the purposes of COBS 20.2.60 G, then, in the FSA's view, it is likely to be reasonable for a firm to be satisfied that there will be no adverse effect for with-profits policyholders, and accordingly that such business may continue to be written.
  • 01/04/2012

Process for reattribution of inherited estates: Policyholder advocate: appointment and role

COBS 20.2.42

handbook-rule

A firm that is seeking to make a reattribution of its inherited estate must:

  1. (1) first discuss with the FSA (as part of its determination under COBS 20.2.21 R):
    1. (a) its projections for capital required to support existing business, which must include an assessment of:
      1. (i) the firm's future risk appetite for the with-profits fund and other relevant business; and
      2. (ii) how much of the margin for prudence can be identified as excessive and removed from the projected capital requirements; and
    2. (b) its projections for capital required to support future new business, which must include an assessment of:
      1. (i) new business volumes;
      2. (ii) product terms; and
      3. (iii) pricing margins;
  2. (2) following the discussions referred to in (1), identify at the earliest appropriate point a policyholder advocate, who is free from any conflicts of interest that may be, or may appear to be, detrimental to the interests of policyholders, to negotiate with the firm on behalf of relevant with-profits policyholders and seek the approval of the FSA for the appointment of the policyholder advocate as soon as he is identified, or appoint a policyholder advocate nominated by the FSA if its approval is not granted; and
  3. (3) involve the policyholder advocate designate at the earliest possible opportunity to enable him to participate effectively in the negotiations about the proposals for the reattribution.

COBS 20.2.43

handbook-guidance
The firm should include an independent element in the policyholder advocate selection process, which may include consulting representative groups of policyholders or using the services of a recruitment consultant. When considering an application for approval of a nominee to perform the policyholder advocate role, the FSA will have regard to the extent to which the firm has involved others in the selection process.
  • 01/11/2007

COBS 20.2.44

handbook-guidance

The precise role of the policyholder advocate in any particular case will depend on the nature of the firm and the reattribution proposed. A firm will need to discuss, with a view to agreeing, with the FSA the precise role of the policyholder advocate in a particular case (COBS 20.2.45 R). However, the role of the policyholder advocate should include:

  1. (1) negotiating with the firm, on behalf of the relevant with-profits policyholders, the benefits to be offered to them in exchange for the rights or interests they will be asked to give up;
  2. (2) commenting to with-profits policyholders, on:
    1. (a) the methodology used for the allocation of benefits amongst the relevant (or groups of) with-profits policyholders and the form of those benefits;
    2. (b) the criteria used for determining the eligibility of the various with-profits policyholders;
    3. (c) the terms and conditions of the proposals (to the extent that they materially affect the benefits to be offered, or the bonuses that may be added to with-profits policies); and
    4. (d) the views expressed by the independent expert or the reattribution expert (as the case may be), and the firm's with-profits actuary on the allocation of any benefits amongst the relevant with-profits policyholders; and
  3. (3) telling with-profits policyholders, or each group of with-profits policyholders, with reasons, whether the firm's proposals are in their interests.

Process for reattribution of inherited estates: Policyholder advocate: terms of appointment

COBS 20.2.45

handbook-rule

A firm must:

  1. (1) notify the FSA of the terms on which it proposes to appoint a policyholder advocate (whether or not the candidate was nominated by the FSA); and
  2. (2) ensure that the terms of appointment for the policyholder advocate:
    1. (a) include a description of the role of the policyholder advocate as agreed with the FSA under COBS 20.2.44 G;
    2. (aA) stress the independent nature of the policyholder advocate's appointment and function, and are consistent with it;
    3. (b) define the relationship of the policyholder advocate to the firm and its policyholders;
    4. (c) set out arrangements for communications between the policyholder advocate and policyholders;
    5. (d) make provision for the resolution of any disputes between the firm and the policyholder advocate;
    6. (e) specify when and how the policyholder advocate's appointment may be terminated;
    7. (f) allow the policyholder advocate to communicate freely and in confidence with the FSA.;
    8. (g) require the policyholder advocate to communicate with policyholders:
      1. (i) as soon as is practicable after his appointment, having regard to (h)(i) and (iii); and
      2. (ii) thereafter no less frequently than every six months for the duration of the policyholder advocate's appointment; and
    9. (h) require the policyholder advocate:
      1. (i) to make reasonable endeavours to agree with the firm the contents of any proposed policyholder communications;
      2. (ii) to allow sufficient time for the process in (i) in order to meet any timescales in (g); and
      3. (iii) to provide copies of the final draft of the intended policyholder communications, whether or not agreement has been reached in accordance with (i) above, both to the firm and to the FSA at least seven days in advance of the date on which the policyholder advocate intends to make the communications.

COBS 20.2.46

handbook-guidance
A firm may include, within the policyholder advocate's terms of appointment, arrangements for the policyholder advocate to be indemnified in respect of certain claims that may be made against him in connection with the performance of his functions. If such indemnity is included, it should not include protection against any liability arising from acts of bad faith.
  • 01/11/2007

Process for reattribution of inherited estates: Reattribution expert

COBS 20.2.47

handbook-rule

Where a firm is not otherwise required to appoint an independent expert, it must:

  1. (1) appoint a reattribution expert to undertake an objective assessment of its reattribution proposals, who must be:
    1. (a) nominated or approved by the FSA before he is appointed; and
    2. (b) free from any conflicts of interest that may, or may appear to, undermine his independence or the quality of his report;
  2. (2) ensure that the reattribution expert's terms of appointment allow him to communicate freely and in confidence with the FSA; and
  3. (3) require the reattribution expert to prepare a report which must be available to the FSA, the policyholder advocate and the court (if it is relevant to any court proceedings).

COBS 20.2.48

handbook-guidance

A reattribution expert's report should comply with the applicable rules on expert evidence. The scope and content of the report should be substantially similar to that of the report required of an independent expert under SUP 18.2 (Insurance business transfers), as if (where appropriate) a reference to:

  1. (1) the 'scheme report' was a reference to the 'reattribution expert's report';
  2. (2) the 'independent expert' was a reference to the 'reattribution expert'; and
  3. (3) the 'scheme' was a reference to the proposal for a 'reattribution'.

Process for reattribution of inherited estates: Information to policyholders

COBS 20.2.49

handbook-rule

A firm must ensure that every policyholder that may be affected by the proposed reattribution is sent appropriate and timely information about:

  1. (1) the reattribution process, including the role of the policyholder advocate, the independent expert or reattribution expert, as the case may be, and other individuals appointed to perform particular functions;
  2. (2) the reattribution proposals and how they affect the relevant policyholders, including an explanation of any benefits they are likely to receive and the rights and interests that they are likely to be asked to give up;
  3. (3) the policyholder advocate's views on the reattribution proposals and any benefits the relevant policyholders are likely to receive and the rights and interests that they are likely to be asked to give up; and
  4. (4) the outcome of the negotiations between the firm and the policyholder advocate about the benefits that will be offered to relevant with-profits policyholders, in exchange for the rights and interests that they will be asked to give up.
  • 01/11/2007

COBS 20.2.50

handbook-rule
An adequate summary of the report by the reattribution expert must be made available to every policyholder that may be affected by the proposed reattribution.
  • 01/11/2007

Process for reattribution of inherited estates: Consent of policyholders

COBS 20.2.51

handbook-rule

A firm must give relevant with-profits policyholders the option to:

  1. (1) individually accept or reject the final proposals for the reattribution; or
  2. (2) (if the legal process to be followed allows the majority of policyholders to bind the minority) vote on whether the firm should go ahead with those proposals.
  • 01/11/2007

Process for reattribution of inherited estates: Costs

COBS 20.2.52

handbook-guidance
  1. (1) Reattribution and insurance business transfer costs (excluding policyholder advocate costs) should be met from shareholder funds. A firm may present alternative arrangements if it can show good reasons for doing so.
  2. (2) Shareholders should pay a reasonable proportion of the policyholder advocate's costs.
  3. (3) If a reattribution proposal is not successful, the FSA would expect the costs of the policyholder advocate to be met by the person initiating the proposal. That will usually be the shareholders of the firm.
  • 01/11/2007

Ceasing to effect new contracts of insurance in a with-profits fund

COBS 20.2.53

handbook-rule

A firm must:

  1. (1) inform the FSA and its with-profits policyholders within 28 days; and
  2. (2) submit a run-off plan to the FSA as soon as reasonably practicable and, in any event, within three months;
of first ceasing to effect new contracts of insurance in a with-profits fund.

COBS 20.2.54

handbook-rule

A firm will be taken to have ceased to effect new contracts of insurance in a with-profits fund:

  1. (1) when any decision by the governing body to cease to effect new contracts of insurance takes effect; or
  2. (2) where no such decision is made, when the firm is no longer:
    1. (a) actively seeking to effect new contracts of insurance in that fund; or
    2. (b) effecting new contracts of insurance in that fund, except by increment; or
  3. (3) if the firm:
    1. (a)
      1. (i) is no longer effecting a material volume of with-profits policies (other than by reinsurance), into the with-profits fund; or
      2. (ii) is ceding by way of reinsurance most or all of the new with-profits policies which it continues to effect; and
    2. (b) cannot demonstrate that it will treat with-profits policyholders fairly if it does not cease to effect new contracts of insurance.

COBS 20.2.55

handbook-guidance
For the purposes of COBS 20.2.54R (3) the FSA will have regard to, amongst other things, the factors set out in COBS 20.2.41BG (3).

COBS 20.2.56

handbook-rule

The run-off plan required by COBS 20.2.53 R must:

  1. (1) include an up-to-date plan to demonstrate how the firm will ensure a fair distribution of the closed with-profits fund, and its inherited estate (if any); and
  2. (2) be approved by the firm's governing body.

COBS 20.2.57

handbook-guidance
  1. (1) A firm should also include the information described in Appendix 2.15 (Run-off plans for closed with-profits funds) of the Supervision manual in its run-off plan.
  2. (2) A firm should periodically review and update its run-off plan and submit updated versions to the FSA when requested to do so.

COBS 20.2.58

handbook-guidance

When a firm tells its with-profits policyholders that it has ceased to effect new contracts of insurance in a with-profits fund, it should also explain:

  1. (1) why it has done so;
  2. (2) what changes it has made, or proposes to make, to the fund's investment strategy (if any);
  3. (3) how closure may affect with-profits policyholders (including any reasonably foreseeable effect on future bonus prospects);
  4. (4) the options available to with-profits policyholders and an indication of the potential costs associated with the exercise of each of those options; and
  5. (5) any other material factors that a policyholder may reasonably need to be aware of before deciding how to respond to this information.
  • 01/11/2007

COBS 20.2.59

handbook-guidance

A firm may not be able to provide its with-profits policyholders with all of the information described above until it has prepared the run-off plan. In those circumstances, the firm should:

  1. (1) tell its with-profits policyholders that that is the case;
  2. (2) explain what is missing and give a time estimate for its supply; and
  3. (3) provide the missing information as soon as possible, and within the time estimate given.
  • 01/11/2007

COBS 20.2.60

handbook-guidance
  1. (1) If non-profit insurance business is written in a with-profits fund, a firm should take reasonable steps to ensure that the economic value of any future profits expected to emerge on the non-profit insurance business is available for distribution during the lifetime of the with-profits business.
  2. (1A) Where a with-profits fund contains assets which may not be readily realisable, the firm should take reasonable steps to ensure that the economic value of those assets is made available as part of a fair distribution to with-profits policyholders.
  3. (2) Where it is agreed by its with-profits policyholders, and subject to meeting the requirements for effecting new contracts of insurance in an existing with-profits fund (COBS 20.2.28 R), a mutual may make alternative arrangements for continuing to carry on non-profit insurance business, and a non-directive friendly society may make alternative arrangements for continuing to carry on non-insurance related business.

COBS 20.3

Principles and Practices of Financial Management

  • 01/11/2007

Production of PPFM

COBS 20.3.1

handbook-rule
  1. (1) A firm must:
    1. (a) establish and maintain the PPFM according to which its with-profits business is conducted (or, if appropriate, separate PPFM for each with-profits fund); and
    2. (b) retain a record of each version of its PPFM for five years.
  2. (2) A firm's with-profits principles must:
    1. (a) be enduring statements of the standards it adopts in managing with-profits funds; and
    2. (b) describe the business model it uses to meet its duties to with-profits policyholders and to respond to longer-term changes in the business and economic environment.
  3. (3) A firm's with-profits practices must:
    1. (a) describe how a firm manages its with-profits funds and how it responds to shorter-term changes in the business and economic environment; and
    2. (b) be sufficiently detailed for a knowledgeable observer to understand the material risks and rewards from effecting or maintaining a with-profits policy with it.
  4. (4) A firm must not change its PPFM unless, in the reasonable opinion of its governing body, that change is justified to:
    1. (a) respond to changes in the business or economic environment; or
    2. (b) protect the interests of policyholders; or
    3. (c) change the firm's with-profits practices better to achieve its with-profits principles.
  5. (5) A firm may change its PPFM if that change:
    1. (a) is necessary to correct an error or omission; or
    2. (b) would improve clarity or presentation without materially affecting the PPFM's substance; or
    3. (c) is immaterial.
  • 01/11/2007

Scope and content of PPFM

COBS 20.3.4

handbook-rule
A firm's PPFM must cover the issues set out in the table in COBS 20.3.6 R.
  • 01/11/2007

COBS 20.3.5

handbook-rule

A firm's PPFM must cover any matter that has, or it is reasonably foreseeable may have, a significant impact on the firm's management of with-profits funds, including but not limited to:

  1. (1) any requirements or constraints that apply as a result of previous dealings, including previous business transfer schemes; and
  2. (2) the nature and extent of any shareholder commitment to support the with-profits fund.
  • 01/11/2007

COBS 20.3.6

handbook-rule
Table: Issues to be covered in PPFM
  • 01/11/2007

COBS 20.3.7

handbook-guidance
The table in COBS 20.3.8 G sets out guidance on how various information relevant to some of the issues covered in a firm's PPFM (COBS 20.3.6 R) might be split between with-profits principles and with-profits practices. This is an example of the matters a firm should address in its with-profits principles and with-profits practices and is not exhaustive. A firm should consider carefully the scope and content of its PPFM as appropriate.
  • 01/11/2007

COBS 20.3.8

handbook-guidance
Table: Guidance on with-profits principles and practices
  • 01/11/2007

COBS 20.4

Communications with with-profits policyholders

  • 01/11/2007

Provision and publication of PPFM

COBS 20.4.1

handbook-rule

A firm must:

  1. (1) on request, provide its PPFM, or the PPFM applicable to specified with-profits funds:
    1. (a) free of charge to its with-profits policyholders; or
    2. (b) for a reasonable charge to any person who is not its with-profits policyholder; and
  2. (2) if the firm publishes its PPFM on its website, prominently signpost its location there.
  • 01/11/2007

Notification of changes

COBS 20.4.2

handbook-rule

A firm must send its with-profits policyholders who are affected by any change in its PPFM, written notice, setting out any:

  1. (1) proposed changes to the with-profits principles, three months in advance of the effective date; and
  2. (2) changes to the with-profits practices, within a reasonable time.
  • 01/11/2007

COBS 20.4.3

handbook-rule

A firm need not give the notice required if the change to its PPFM:

  1. (1) is necessary to correct an error or omission; or
  2. (2) would improve clarity or presentation without materially affecting the PPFM's substance; or
  3. (3) is immaterial.
  • 01/11/2007

Requirements on EEA insurers

COBS 20.4.4

handbook-rule

In relation to any with-profits policyholder who is habitually resident in the United Kingdom, an EEA insurer must:

  1. (1) on request, provide the information necessary to enable that policyholder properly to understand the insurer's commitment under the policy;
  2. (2) ensure that the information provided is not narrower in scope or less detailed in content than the equivalent PPFM; and
  3. (3) send the policyholder who is affected by any information being changed written notice, setting out:
    1. (a) any proposed changes to information that is equivalent to the with-profits principles, three months in advance of the effective date; and
    2. (b) any changes to information that is equivalent to the with-profits practices, within a reasonable time.
  • 01/11/2007

Consumer-friendly PPFM

COBS 20.4.5

handbook-rule

A firm must:

  1. (1) produce a CFPPFM describing the most important information set out under each of the headings in its PPFM and keep it up to date as the PPFM changes over time;
  2. (2) express its CFPPFM in clear and plain language that can be easily understood by a with-profits policyholder, or potential with-profits policyholder who does not possess any specialist or technical knowledge;
  3. (3) provide its CFPPFM free of charge with any:
    1. (a) written notice sent to with-profits policyholders on proposed changes to its with-profits principles (where the firm must provide the version of the CFPPFM in use before the changes if this has not already been provided);
    2. (b) annual statements sent to its with-profits policyholders (unless there has been no material change in the CFPPFM since it was last supplied); and
    3. (c) key features document for a with-profits policy; and
  4. (4) make its CFPPFM publicly available and prominently signpost the availability on its website.
  • 01/11/2007

COBS 20.4.6

handbook-guidance
A firm may include the information set out in its CFPPFM in any other document it produces.
  • 01/11/2007

Annual report to with-profits policyholders

COBS 20.4.7

handbook-rule

A firm must produce an annual report to its with-profits policyholders, which must:

  1. (1) state whether, throughout the financial year to which the report relates, the firm believes it has complied with its obligations relating to its PPFM and setting out its reasons for that belief;
  2. (2) address all significant relevant issues, including the way in which the firm has:
    1. (a) exercised, or failed to exercise, any discretion that it has in the conduct of its with-profits business; and
    2. (b) addressed any competing or conflicting rights, interests or expectations of its policyholders (or groups of policyholders) and, if applicable, shareholders (or groups of shareholders), including the competing interests of different classes and generations.
  • 01/11/2007

COBS 20.4.8

handbook-guidance

The following documents should be annexed to the annual report in this section:

  1. (1) the report to with-profits policyholders made by a with-profits actuary in respect of each financial year (see SUP 4.3.16AR(4)); and
  2. (2) any statement or report provided by the person or committee who provides the independent judgement under the firm's governance arrangements for its with-profits business.
  • 01/11/2007

COBS 20.4.9

handbook-guidance
In preparing the annual report to with-profits policyholders, a firm should take advice from a with-profits actuary.
  • 01/11/2007

COBS 20.4.10

handbook-guidance
A firm should make the annual report available to with-profits policyholders within six months of the end of the financial year to which it relates. A firm should notify its with-profits policyholders in any annual statements how copies of the report can be obtained.
  • 01/11/2007

COBS 20.5

With-profits governance

  • 01/04/2012

Requirement to appoint a with-profits committee or advisory arrangement

COBS 20.5.1

handbook-rule

A firm must, in relation to each with-profits fund it operates:

  1. (1) appoint:
    1. (a) a with-profits committee; or
    2. (b) a with-profits advisory arrangement (referred to in this section as an 'advisory arrangement'), but only if appropriate, in the opinion of the firm's governing body, having regard to the size, nature and complexity of the fund in question;
  2. (2) ensure that the with-profits committee or advisory arrangement operates in accordance with its terms of reference; and
  3. (3) make available a copy of any terms of reference on the firm's website, or if the firm does not have a website, at the request of policyholders.
  • 01/04/2012

COBS 20.5.2

handbook-guidance
  1. (1) Ultimate responsibility for managing a with-profits fund rests with the firm through its governing body. The role of the with-profits committee or advisory arrangement is, in part, to act in an advisory capacity to inform the decision-making of a firm's governing body. The with-profits committee or advisory arrangement also acts as a means by which the interests of with-profits policyholders are appropriately considered within a firm's governance structures. The with-profits committee or advisory arrangement should address issues affecting policyholders as a whole or as separately identifiable groups of policyholders generally rather than dealing with individual policyholder complaints or taking management decisions with respect to a with-profits fund.
  2. (2) If a firm considers that it is appropriate to appoint an advisory arrangement, a firm's governing body will need to decide whether it is appropriate to appoint an independent person or one or more non-executive directors to carry out the role. The FSA expects firms to make this determination according to the nature, size and complexity of the fund in question. So the larger or more complex the fund is, the more likely it would be that it would be appropriate to appoint an independent person.
  3. (3) Where a firm has appointed a with-profits committee to one of its with-profits funds it may also decide to appoint that with-profits committee to some or all of its other with-profits funds, even if the firm would not have determined it appropriate to appoint a with-profits committee to those other funds when considered individually having regard to their size, nature or complexity.
  • 01/04/2012

Terms of reference of with-profits committee or advisory arrangement

COBS 20.5.3

handbook-rule

A firm must ensure that the terms of reference contain, as a minimum, terms having the following effect:

  1. (1) the role of the with-profits committee or advisory arrangement is, as relevant, to assess, report on, and provide clear advice and, where appropriate, recommendations to the firm's governing body on:
    1. (a) the way in which each with-profits fund is managed by the firm and, if a PPFM is required, whether this is properly reflected in the PPFM;
    2. (b) if applicable, whether the firm is complying with the principles and practices set out in the PPFM;
    3. (c) whether the firm has addressed effectively the conflicting rights and interests of with-profits policyholders and other policyholders or stakeholders including, if applicable, shareholders, in a way that is consistent with Principle 6 (treating customers fairly); and
    4. (d) any other issues with which the firm's governing body, with-profits committee or advisory arrangement considers with-profits policyholders might reasonably expect the with-profits committee or advisory arrangements to be involved;
  2. (2) that the with-profits committee or advisory arrangement must:
    1. (a) decide on the specific matters it will consider in order to enable it to carry out its role described in (1)(a) to (d) as appropriate to the particular circumstances of the with-profits fund(s); and
    2. (b) in any event give appropriate consideration to the following non-exhaustive list of specific matters:
      1. (i) the identification of surplus and excess surplus, the merits of its distribution or retention and the proposed distribution policy;
      2. (ii) how bonus rates, smoothing and, if relevant, market value reductions have been calculated and applied;
      3. (iii) if relevant, the relative interests of policyholders with and without valuable guarantees;
      4. (iv) the firm's with-profits customer communications such as annual policyholder statements and product literature and whether the with-profits committee or advisory arrangement wishes to make a statement or report to with-profits policyholders in addition to the annual report made by a firm;
      5. (v) any significant changes to the risk or investment profile of the with-profits fund including the management of material illiquid investments and the firm's obligations in relation to strategic investments;
      6. (vi) the firm's strategy for future sales supported by the assets of the with-profits fund and its impact on surplus;
      7. (vii) the impact of any management actions planned or implemented;
      8. (viii) relevant management information such as customer complaints data (but not necessarily information relating to individual customer complaints);
      9. (ix) the drafting, review, updating of and compliance with run-off plans, court schemes and similar matters; and
      10. (x) the costs incurred in operating the with-profits fund;
  3. (3) that any person appointed as a member of the with-profits committee or as a person carrying out the advisory arrangement must have the appropriate skills, knowledge and experience to perform, or contribute to, as appropriate, the role set out in (1) and (2);
  4. (4) if the firm appoints a with-profits committee:
    1. (a) that there must be three or more members;
    2. (b) that the quorum for any meeting (or decision by written procedure) must be at least half of the number of, and no less than two, members; and
  5. (5) that the with-profits committee or advisory arrangement must:
    1. (a) advise the governing body on the suitability of candidates proposed for appointment as the with-profits actuary; and
    2. (b) assess the performance of the with-profits actuary at least annually, and report its view to the governing body of the firm.
  • 01/04/2012

COBS 20.5.4

handbook-guidance
  1. (1) The FSA expects that a with-profits committee will meet at least quarterly and ad hoc if required.
  2. (2) The FSA expects that, in general, a with-profits committee or advisory arrangement will work closely with the with-profits actuary, and obtain his opinion and input as appropriate.
  • 01/04/2012

Role of with-profits committee or advisory arrangement in the firm's governance

COBS 20.5.5

handbook-rule

A firm must:

  1. (1) ensure that its governing body, in the context of its consideration of issues referred to in COBS 20.5.3R (1)(a) to (d) and (2)(b)(i) to (x):
    1. (a) obtains, as relevant, assessments, reports, advice and/or recommendations of the with-profits committee or advisory arrangement, if the governing body, the with-profits committee or advisory arrangement considers that significant issues concerning the interests of with-profits policyholders need to be considered by the firm;
    2. (b) allows the with-profits committee or advisory arrangement sufficient time to enable it to provide fully considered input on the issues to be considered;
    3. (c) considers fully and gives due regard to the input of the with-profits committee or advisory arrangement when determining issues concerning the management of the with-profits funds and the interests of with-profits policyholders;
    4. (d) if the governing body decides to depart in any material way from the advice or recommendations of the with-profits committee or advisory arrangement, sets out fully its reasons and allows the with-profits committee or advisory arrangement a reasonable period to consider them and respond; and
    5. (e) considers any further representations from the with-profits committee or advisory arrangement and, if appropriate, sets out fully any additional reasons if it continues to depart from the with-profits committee or advisory arrangement's advice or recommendation;
  2. (2) provide a with-profits committee or advisory arrangement with sufficient resources as it may reasonably require to enable it to perform its role effectively;
  3. (3) notify the FSA of the decision of the governing body to depart from the advice or recommendation of the with-profits committee or advisory arrangement if the with-profits committee or advisory arrangement considers that the issue is sufficiently significant and requests of the governing body that the FSA be informed; and
  4. (4) consult the with-profits actuary on the appointment of a new member of the with-profits committee or of the person or persons carrying out the advisory arrangement.
  • 01/04/2012

COBS 20.5.6

handbook-guidance
  1. (1) COBS 20.5.5R (2) requires that a firm provides a with-profits committee or advisory arrangement with sufficient resources. A with-profits committee or advisory arrangement should be able to obtain external professional, including actuarial, advice, at the expense of the firm, if the with-profits committee or advisory arrangement considers the advice to be necessary to perform its role effectively. In a proprietary firm the with-profits committee or advisory arrangement should be able to request that the cost of the external professional advice either is not chargeable to the with-profits fund in question, or is shared with the with-profits fund, according to whether the issue under consideration is wholly or partly to the benefit of the firm rather than policyholders. A with-profits committee or advisory arrangement should also be adequately supported by the firm's own internal resources and support functions. This may include the firm ensuring that relevant employees, including the with-profits actuary, are made sufficiently available, and provide relevant information and input, to assist the with-profits committee in its role, as required.
  2. (2) If the with-profits committee or advisory arrangement wishes to make a statement or report to with-profits policyholders in addition to the annual report made by a firm, the effect of COBS 20.5.5R (2) is that a firm will need to facilitate this.
  3. (3) In order to comply with SYSC 3.2.20 R the FSA expects firms to keep full records of all requests of, and material produced by, the with-profits committee or advisory arrangement, and of all decisions and reasons of the governing body as described in COBS 20.5.5R (1)(d) and (e).
  4. (4) For the purposes of COBS 20.5.5R (3), the FSA expects that it will only be in exceptional circumstances that a with-profits committee or alternative arrangement will consider a departure from a recommendation or advice to be sufficiently significant to warrant its making a request of the governing body that the FSA be informed.
  • 01/04/2012

Assessment of independence by governing body

COBS 20.5.7

handbook-guidance
  1. (1) The FSA expects the governing body of the firm to decide whether a member of the with-profits committee or a person (other than a non-executive director) carrying out the advisory arrangement is independent. The FSA expects a firm's governing body to adopt the following approach and have regard to the following factors when making this assessment:
    1. (a) the governing body should determine whether the person is independent in character and judgment and whether there are relationships or circumstances which are likely to affect, or could appear to affect, the person's judgment; and
    2. (b) the governing body should state its reasons if it determines that a person is independent notwithstanding the existence of relationships or circumstances which may appear relevant to its determination, including if the person:
      1. (i) has been an employee of the firm or group within the last five years; or
      2. (ii) has, or has had within the last three years, a material business relationship with the firm either directly, or as a partner, shareholder, director or senior employee of a body that has such a relationship with the firm; or
      3. (iii) has received or receives additional remuneration from the firm, participates in the firm's share option or a performance-related pay scheme, or is a member of the firm's pension scheme; or
      4. (iv) has close family ties with any of the firm's advisers, directors or senior employees; or
      5. (v) has significant links with the firm's directors through involvement in other companies or bodies; or
      6. (vi) represents a significant shareholder; or
      7. (vii) has served on the governing body for more than nine years from the date of their first election.
  2. (2) If a firm appoints one or more non-executive directors to carry out the advisory arrangement, the FSA expects the governing body of the firm to be satisfied that that person or persons is or are adequately able to provide independent judgment.
  • 01/04/2012

Governance arrangements in relation to the PPFM

COBS 20.5.8

handbook-guidance

In complying with the rule on systems and controls in relation to compliance, financial crime and money laundering (SYSC 3.2.6 R), a firm should maintain governance arrangements designed to ensure that it complies with, maintains and records, any applicable PPFM. These arrangements should:

  1. (1) be appropriate to the scale, nature and complexity of the firm's with-profits business; and
  2. (2) include the approval of the firm's PPFM by its governing body.
  • 01/04/2012

Export chapter as

COBS 21

Permitted Links

COBS 21.1

Application

  • 01/11/2007

COBS 21.1.1

handbook-rule

The rules in this section apply on an ongoing basis to linked long-term contracts that are effected by:

  1. (1) insurers other than EEA insurers; and
  2. (2) EEA insurers in the United Kingdom.

COBS 21.1.2

handbook-rule

The rules in this section do not apply to:

  1. (1) contracts that were effected before 1 July 1994, and under which linked benefits were permitted to be determined before that date;
  2. (2) contracts effected by an insurer that are linked long-term contracts only because the policyholder is eligible to participate in any established surplus;
  3. (3) contracts effected by an EEA insurer that are linked long-term contracts only because the policyholder is eligible to participate in an excess of assets representing the whole or a particular part of the long-term insurance fund over the liabilities, or a particular part of the liabilities, of the insurer as determined by the law of the EEA state in which the head office of the insurer is situated;
  4. (4) [deleted]
  5. (5) contracts effected before 30 June 1995, to the extent that they provide for benefits to be determined by reference to a collective investment scheme that was a listed security immediately before 1 July 1994; and
  6. (6) contracts linked to permitted units that were effected before 1 February 1992, except to the extent that they relate to acts or omissions on or after that date.

COBS 21.2

Principles for firms engaged in linked long-term insurance business

  • 01/11/2007

COBS 21.2.1

handbook-rule
A firm must ensure that the values of its permitted links are determined fairly and accurately.

COBS 21.2.1B

handbook-guidance
  • 01/11/2007

COBS 21.2.2

handbook-rule

A firm must ensure that its linked assets:

  1. (1) are capable of being realised in time for it to meet its obligations to linked policyholders; and
  2. (2) are matched with its linked liabilities as required by the close matching rules.

COBS 21.2.3

handbook-rule
A firm must ensure that there is no reasonably foreseeable risk that the aggregate value of any of its linked funds will become negative.

COBS 21.2.4

handbook-rule

A firm must notify its linked policyholders of the risk profile and investment strategy for the linked fund:

  1. (1) at inception, and
  2. (2) before making any material changes.
  • 01/11/2007

COBS 21.2.5

handbook-rule
A firm must ensure that its systems and controls and other resources are appropriate for the risks associated with its linked assets and linked liabilities.

COBS 21.2.6

handbook-rule
  1. (1) A firm must ensure when selecting linked assets that there is no reasonably foreseeable risk of a conflict of interest with its linked policyholders.
  2. (2) If a conflict does arise, the firm must take reasonable steps to ensure that the interests of the linked policyholders are safeguarded.

COBS 21.2.7

handbook-rule
In applying the rules in this section, a firm must consider the economic effect of its permitted links and linked assets ahead of their legal form.

COBS 21.2.8

handbook-rule
A firm must notify the FSA in writing as soon as it becomes aware of any failure to meet the requirements of this section.

COBS 21.2.9

handbook-guidance
In considering what action to take in response to written notification of a failure to meet the requirements of this section, the FSA will have regard to the extent to which the relevant circumstances are exceptional and temporary and to any other reasons for the failure.
  • 01/11/2007

COBS 21.3

Rules for firms engaged in linked long-term insurance business

  • 01/11/2007

COBS 21.3.1

handbook-rule

An insurer must not contract to provide benefits under linked long-term contracts of insurance that are determined:

  1. (1) wholly or partly, or directly or indirectly, by reference to fluctuations in any index other than an approved index;
  2. (2) wholly or partly by reference to the value of, or the income from, or fluctuations in the value of, property other than any of the following:
    1. (a) approved securities;
    2. (b) listed securities;
    3. (c) permitted unlisted securities;
    4. (d) permitted land and property;
    5. (e) permitted loans;
    6. (f) permitted deposits;
    7. (g) permitted scheme interests;
    8. (h) [deleted]
    9. (i) cash;
    10. (j) permitted units;
    11. (k) permitted stock lending; and
    12. (l) permitted derivatives contracts.

COBS 21.3.2

handbook-guidance
  1. (1) Nothing in these rules prevents a firm making allowance in the value of any permitted link for any notional tax loss associated with the relevant linked assets for the purposes of fair pricing.
  2. (2) In the FSA's view the Consumer Prices Index, as well as the Retail Prices Index, is a national index of retail prices and so may be used as an approved index for the purposes of COBS 21.3.1R (1).

COBS 21.3.3

handbook-rule
A firm that has entered into a reinsurance contract in respect of its linked long-term insurance business must nevertheless discharge its responsibilities under its linked long-term insurance contracts as if no reinsurance contract had been effected.
  • 01/11/2007

COBS 21.3.4

handbook-guidance

In order to comply with the requirements of COBS 21.3.3 R a firm should:

  1. (1) disclose to policyholders the implications of any credit risk exposure they may face in relation to the solvency of the reinsurer; and
  2. (2) suitably monitor the way the reinsurer manages the business in order to discharge its continuing responsibilities to policyholders.
  • 01/11/2007

COBS 21.3.5

handbook-rule
  1. (1) Except in the case specified in (2), a firm which proposes to undertake linked long-term insurance business, which is linked to the average earnings index and used for the purposes of orders made by the Department for Work and Pensions under section 148 of the Social Security Administration Act 1992, must notify the FSA in writing of its intention to do so in good time before effecting any such business for the first time, or if there is a material change in the volume of such business, and explain how the risks associated with this business will be safely managed.
  2. (2) These requirements do not apply in respect of liabilities for which a limited revaluation premium has been paid to the Department for Work and Pensions so that the liability for revaluation, while still linked to orders made under section 148 of the Social Security Administration Act 1992, is limited to 5%.

Export chapter as

Transitional Provisions and Schedules

COBS TP 1

Transitional Provisions relating to Client Categorisation

COBS TP 2

Other Transitional Provisions

COBS Sch 1

Record keeping requirements

  • 01/11/2007

COBS Sch 1.1

handbook-guidance
  • 06/02/2008

COBS Sch 1.2

handbook-guidance
  • 06/02/2008

COBS Sch 1.3

handbook-guidance

COBS Sch 2

Notification requirements

  • 01/11/2007

COBS Sch 2.1

handbook-guidance

COBS Sch 3

Fees and other required payments

  • 01/11/2007

COBS Sch 3.1

handbook-guidance
  • 06/02/2008

COBS Sch 4

Powers exercised

  • 01/11/2007

COBS Sch 4.1

handbook-guidance

COBS Sch 4.2

handbook-guidance

COBS Sch 5

Rights of action for damages

  • 01/11/2007

COBS Sch 5.1

handbook-guidance
  • 06/02/2008

COBS Sch 5.2

handbook-guidance
  • 06/02/2008

COBS Sch 5.3

handbook-guidance
  • 06/02/2008

COBS Sch 5.4

handbook-guidance
  • 06/02/2008

COBS Sch 6

Rules that can be waived

  • 01/11/2007

COBS Sch 6.1

handbook-guidance

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