COBS Conduct of Business Sourcebook

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COBS 1

Application

COBS 1.1

The general application rule

  • 01/11/2007



[Note: ESMA has issued guidelines under article 16(3) of the ESMA Regulation on certain aspects of the MiFID suitability requirements which also includes guidelines on conduct of business obligations. See http://www.esma.europa.eu/content/Guidelines-certain-aspects-MiFID-suitability-requirements.]

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.

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 2: Where?
Modifications to the general application rule according to location Part 3: Guidance

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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 appropriate regulator 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 20.1.3A

handbook-rule
For an EEA insurer the rules and guidance on treating with-profits policyholders fairly (COBS 20.2.33 G to COBS 20.2.35 G and COBS 20.2.53 R to COBS 20.2.54 R) 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.
  • 01/04/2013

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

COBS 20.2.17C

handbook-rule
A firm must 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.
  • 01/04/2013

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.

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 20.2.35A

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; and
  2. (2) the amount of capital support available.
  • 01/04/2013

Process for reattribution of inherited estates: Policyholder advocate: appointment and role

COBS 20.2.42A

handbook-rule

A firm that is seeking to make a reattribution of its inherited estate must first discuss with the PRA:

  1. (1) its projections for capital required to support existing business, which must include an assessment of:
    1. (a) the firm's future risk appetite for the with-profits fund and other relevant business; and
    2. (b) how much of the margin for prudence can be identified as excessive and removed from the projected capital requirements; and
  2. (2) its projections for capital required to support future new business, which must include an assessment of:
    1. (a) new business volumes
    2. (b) product terms; and
    3. (c) pricing margins.
  • 01/04/2013

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 appropriate regulator 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 appropriate regulator; and
  3. (3) require the reattribution expert to prepare a report which must be available to the appropriate regulator, 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'.

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 appropriate regulator and its with-profits policyholders within 28 days; and
  2. (2) submit a run-off plan to the appropriate regulator 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.

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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 21.2.2

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 21.2.5

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 appropriate regulator in writing as soon as it becomes aware of any failure to meet the requirements of this section.

COBS 21.3

Rules for firms engaged in linked long-term insurance business

  • 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 appropriate regulator 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%.

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