COB 5

Advising
and selling

COB 5.1

Advising on packaged products

Application

COB 5.1.1

See Notes

handbook-rule
This section applies to a firm which gives advice on investments to a private customer on packaged products.

Purpose

COB 5.1.2

See Notes

handbook-guidance
This section gives support to Principle 6 (Customers' interests) and Principle 7 (Communications with clients) which require firms to have due regard to the information needs of their customers and treat them fairly. The purpose of this section is to ensure that private customers are adequately informed about the nature of the advice on investments which they may receive from a firm in relation to packaged products. In particular firms need to be clear to private customers about the scope and range of the products and product providers on which their advice on investments is based.

Scope and range of advice on packaged products: general

COB 5.1.6A

See Notes

handbook-rule
  1. (1) A firm which gives advice on investments to private customers about packaged products must, subject to (2), take reasonable steps to ensure that the scope of the advice on investments given to a private customer is based upon a selection from one of the following:
    1. (a) the whole market (or the whole of a named sector of the market); or
    2. (b) a limited number of product providers; or
    3. (c) a single company or single group of companies.
  2. (2) A firm may change the scope of the advice on investments it gives to a particular private customer by widening the scope from that in (1)(c) through to that in (b) or (a) or from (b) to (a), but it must take reasonable steps to ensure that before doing so the customer is made aware of the proposed change by a communication in a durable medium.
  3. (3) If a firm:
    1. (a) extends the scope of the advice on investments it will give a private customer; or
    2. (b) extends the range of packaged products on which its advice on investments will be based;
and as a consequence the firm's arrangements for its remuneration are materially altered, the firm must provide the customer with a new and appropriate fees and commission statement.

COB 5.1.6B

See Notes

handbook-guidance
  1. (1) COB 5.1.6A R requires a firm when giving advice on investments to a private customer to do so on the basis that the scope of its advice on investments will involve a selection from the whole market (or from the whole of a sector of the market), or from a limited number of product provider or from a single provider and to adhere to such a scope during the advisory process unless the firm decides, and if necessary secures the customer's agreement, to widen the scope for the customer and, if necessary, any changes in the arrangements by which the firm will be remunerated (see COB 4.3.7 R). A firm can choose to offer both whole of market and more limited advice on investments. The scope of the advice which the customer subsequently receives should always however be made clear and explained in a way which is likely to be understood.
  2. (2) The scope of advice on investments prescribed in each of COB 5.1.6AR (1)(a) will require different competencies on the part of a firm's representatives to enable the firm to discharge its advisory functions.
  3. (3) A firm selecting packaged products from a limited number of product providers or from a single provider may do so on the basis of a range of packaged products which comprises a selection of products available from those providers and accordingly a firm may have one or more such ranges. COB 4.3.3 R requires a firm to give each customer some initial disclosure information - an initial disclosure document - which must indicate the scope of the advice on investments which the customer can expect to receive. This initial information must also invite the customer to ask for a copy of the range of packaged products from which the firm will make a selection. A firm which has several ranges of packaged products will need to ensure that each customer who asks for it is given information about the range which is appropriate for that customer.
  4. (4) If a firm holds itself out as giving advice on investments to private customers on packaged products from the whole market (or the whole of any sector of that market; see (5)), the firm's selection for this purpose will need to be sufficiently large to enable the firm to satisfy the suitability requirement in COB 5.3.9 R (Requirement for suitability: whole-of-market advisers). One way in which such firm may wish to satisfy this requirement is by using "panels" of product providers which are sufficient for the purpose of giving advice from the whole market and which are reviewed on a regular basis. A firm which provides advice on investments from the whole market (or from the whole of a sector of the market) should ensure that its analysis of the market and the available packaged products is kept adequately up to date.
  5. (5) References to a firm advising on packaged products from the whole of a sector of the market are to a firm which, though holding itself out as giving advice on investments from the whole market, advise on investments in practice only on a relatively limited selection of packaged products which are available to meet the needs of a specialist sector or niche market (for example pension annuities). In such circumstances the quality of the firm's analysis of the sector or niche market should be commensurate with that which a firm would apply for the purposes of selecting products from the market as a whole.
  6. (6) IPRU(INS) 1.3 (Restriction of business to insurance) in practice restricts the range of packaged products that a long-term insurer may have and CIS 16.5.1 R (Managers of UCITS schemes) restricts the range of packaged products that a manager of a UCITS scheme may have.
  7. (7) If a firm gives advice on investments to a private customer on a packaged product produced by another person, the key features must be "appropriate" (see COB 6.2.7 (Provision of key features: life policies) COB 6.2.22R (1) (Provision of key features: schemes) and COB 6.4.15 (Stakeholder pension schemes)). Therefore, if the terms of the packaged product are different from the terms of the product for which the key features was originally prepared by the product provider, for example there are additional charges, then the key features will need to be amended.
  8. (8) There are restrictions on communicating and approving a financial promotion relating to a life policy produced by an unauthorised person (see COB 3.13.1 R (Additional requirements for financial promotions for an overseas long-term insurer)).
  9. (9) When a firm gives advice on investments relating to a packaged product which is not produced by the firm, it is responsible for the advice on investments given. The product provider is responsible for the relevant terms and conditions of the packaged product.
  10. (10) The rules in COB 5.1 are mainly concerned to ensure that firms can offer a wide range of advisory services in relation to packaged products. In the course of giving such advice a firm's representative may also need to consider the merits of whether a customer should give up, surrender or cease contributing to an existing packaged product and the rules in this section do not place a restriction on this (subject always to such advice on investments being suitable having regard to the customer's circumstances).

Range of packaged products: appointed representatives

COB 5.1.6C

See Notes

handbook-rule
  1. (1) A firm must maintain in writing and keep up to date a statement of:
    1. (a) the scope of advice on investments (within the meaning of COB 5.1.6AR (1)) which each of its appointed representatives is, through its contract with the firm, permitted to give; and including
    2. (b) the range (or ranges) of packaged products on which each appointed representative advises.
  2. (2) In applying the rules in COB to a firm in respect of its appointed representatives, references to a firm's scope or range of packaged products are to be taken as references to the scope (or scopes) and to the range (or ranges) of its appointed representatives.

COB 5.1.6D

See Notes

handbook-guidance
An appointed representative's range of packaged products may be defined by a particular category of packaged product or by individual product, as long as it is clear (for example, "all pension products of ABC Co Limited"). It may be set out in a document separate from the appointed representative's contract of appointment and should, in any event, be separate from the main body of the contract for clarity.

Range of packaged products: records

COB 5.1.6E

See Notes

handbook-rule
  1. (1) A firm must make, and keep up to date, a record of the scope (or scopes) of the advice (within the meaning of COB 5.1.6AR (1)) which it provides, its range (or ranges) of packaged products and the associate or ranges of each of its appointed representatives (if different from the firm's).
  2. (2) The record in (1) must be retained for six years from the date on which it was superseded by a more up-to-date record.
  3. (3) The record for distribution to a customer must be the particular range of packaged products which is appropriate for the services provided to that customer and include details of:
    1. (a) the identity of the product providers within the range whose packaged products the firm may sell; and
    2. (b) a list of the categories of their products the firm may sell.
  4. (4) In the case of a firm whose scope of advice on investments is the selection of packaged products from the whole of the market (or from the whole of a sector of the market) and which provides no other scope of advice on investments, it will be sufficient if the firm's record is restricted to confirming that the advice on investments it provides is given on this basis (and in the case of a firm which provides advice on investments on the whole of a sector of the market, confirms the nature and parameters of that sector).
  5. (5) For the purposes of the record in (1), (3) and (6), in relation to the packaged products within a particular category available from a product provider:
    1. (a) where a firm provides services to a particular customer in relation to all of the products within that category the record may refer simply to that category and the product provider and not each particular product within the category; and
    2. (b) notwithstanding (3)(b), where a firm does not provide services to a particular customer in relation to all of the products within that category the record must give details of each of the products in the category on which it does provide services.
  6. (6) A firm must maintain a record of the particular range of packaged products on which its advice on investments to each private customer is based and such a record must be kept for six years from the date on which the advice on investments is given.

Branding packaged products

COB 5.1.6F

See Notes

handbook-rule

If a firm gives advice on investments to a private customer on a packaged product produced by another person, it must not:

  1. (1) hold itself out as the packaged product's producer; or
  2. (2) do or say anything which might reasonably lead a private customer to be mistaken as to the identity of the product's producer.

COB 5.1.6G

See Notes

handbook-rule
A firm must display the brand of the product provider at least as prominently as any other brand in the documentation that it makes available to its customer's in relation to a packaged product.

Staying within the range of advice of packaged products

COB 5.1.7

See Notes

handbook-rule
  1. (1) A firm must, subject to (2), take reasonable steps to ensure that neither it nor any of its representatives gives advice on investments to a private customer about the purchase of a packaged product unless the product is:
    1. (a) within the firm's range (or ranges) of packaged products; and
    2. (b) is within the particular range of packaged products on which advice on investments is given to that customer.
  2. (2) The restriction in (1) does not apply where COB 5.3.8A R (Suitability of packaged products: out-of-range recommendations) applies.

COB 5.1.9

See Notes

handbook-guidance

COB 5.1.7 R (1) does not inhibit the sale by a firm:

  1. (1) where the sale does not involve the provision of advice on investments to a private customer; a firm may act as an intermediary for a transaction in a packaged product where that transaction is an execution-only transaction (long-term insurers are reminded of IPRU(INS) 1.3 (Restriction of business to insurance) and managers of UCITS schemes are reminded of CIS 16.5.1 R (Managers of UCITS schemes); or
  2. (2) when the firm acts a discretionary investment manager.

COB 5.1.10

See Notes

handbook-guidance
COB 5.1.7 R (1) applies to advice on investments given to private customers about the components of an ISA which are packaged products.

Restriction on holding out

COB 5.1.11A

See Notes

handbook-rule
  1. (1) A firm that, in relation to packaged products, provides advice on investments to a private customer, must not hold itself out as acting independently unless it intends to:
    1. (a) provide advice on investments to that customer that is on packaged products from the whole market (or the whole of a sector of the market); and
    2. (b) offers the customer the opportunity of paying fee for the provision of such advice.
  2. (2) A firm which in accordance with (1) holds itself out as independent must ensure that the advice on investments subsequently given to the private customer concerned is on packaged products from the whole market (or the whole of a sector of the market).
  3. (3) A firm will not contravene (2) and does not need to offer the option of fee based advice on investments in accordance with (1), if it acts in accordance with COB 4.3.27 R.

COB 5.1.11B

See Notes

handbook-guidance
  1. (1) COB 5.1.11A R stipulates what a firm must do if it is to hold itself out to any particular client that it will act independently. Firms which wish to hold themselves out generally as acting independently should ensure that doing so (for example through a trading name or advertising) is consistent with the kind of service which private customers receive in relation to packaged products.
  2. (2) A firm that carries on business both in relation to packaged products and regulated mortgage contracts can do so in relation to the whole market and therefore be "independent" for one but offer only a limited service for the other. If this is the case the firm should explain the different nature of the services in a way which meets the requirement for clear, fair and not misleading communications in COB 2.1.3 R (Clear, fair and not misleading communications).
  3. (3) COB 5.1.11AR (1)(b) means that a firm wishing to hold itself out as independent will need to give customers 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 customer does not acquire a product. A firm offering a fee-based service may, in addition, provide the customer with other payment options, such as by commission.

Representatives to have access to whole range

COB 5.1.12

See Notes

handbook-rule
  1. (1) A firm must, subject to (2), take reasonable steps to ensure that those of its representatives who give advice on investments on packaged products are able to sell with advice on investments each packaged product within the particular range of packaged products from which products are selected for a customer.
  2. (2) A firm may restrict the packaged products it authorises a particular representative to sell, if:
    1. (a) that representative is not sufficiently competent to sell certain types of product; and
    2. (b) it requires that representative to identify instances when another packaged product within the relevant range packaged products ought to be recommended; the representative must then be required to refer the private customer to another representative of the firm who is authorised and competent to sell that product.

Remuneration structure and referrals

COB 5.1.13

See Notes

handbook-rule

A firm must take reasonable steps to ensure that none of its representatives:

  1. (1) is likely to be influenced by the structure of his or her remuneration to give unsuitable advice on investments to a private customer; and
  2. (2) refers private customers to another firm in circumstances which would amount to the provision of an inducement under COB 2.2.3 R (Prohibition of inducements).

Excess charges on price-capped products

COB 5.1.14

See Notes

handbook-rule
A firm must, if it gives advice on investments to a private customer on a stakeholder pensions scheme or other price capped product for which the firm is not the product provider, ensure that it does so only in accordance with arrangements under which the firm discloses any charges imposed by the firm in excess of those charged by the producer of the packaged product.

COB 5.1.14A

See Notes

handbook-guidance
Products subject to price caps within COB 5.1.14 R would include ISAs marketed as "CAT standard".

COB 5.2

Know your customer

Application

COB 5.2.1

See Notes

handbook-rule

This section applies to a firm that:

  1. (1) gives a personal recommendation concerning a designated investment to a private customer; or
  2. (2) acts as an investment manager for a private customer; or
  3. (3) arranges a pension opt-out or pension transfer from an occupational pension scheme for a private customer; or
  4. (4) is not an insurer and makes a personal recommendation to take out a life policy to an intermediate customer or a market counterparty; or
  5. (5) is not an insurer and is arranging (but not merely by introducing) a life policy;
  6. (6) is not an insurer and arranges (but not merely by introducing) a life policy for an intermediate customer or a market counterparty.

COB 5.2.2

See Notes

handbook-guidance
A firm that arranges an execution-only transaction for a private customer is not generally required to obtain any personal or financial information about that customer, except when the Money Laundering sourcebook applies. However, the Insurance Mediation Directive requires that a statement of the demands and needs of a client is provided to the client, whether advice is given or not. This is required whatever the status of the client. Accordingly the demands and needs provisions in COB 5.2.12 R to COB 5.2.17 G apply to all circumstances relating to life policies.

COB 5.2.3

See Notes

handbook-guidance
When a firm provides limited advice on investments to a private customer, the firm should not treat any resulting transaction as an execution-only one.

Purpose

COB 5.2.4

See Notes

handbook-guidance
Principle 9 (Customers: relationships of trust) requires a firm to take reasonable care to ensure the suitability of its advice and discretionary decisions. To comply with this, a firm should obtain sufficient information about its private customer to enable it to meet its responsibility to give suitable advice. A firm acting as a discretionary investment manager for a private customer should also ensure that before acting in the exercise of discretion it has sufficient information about its private customer to enable it to act in a way which is suitable for that private customer.

Requirement to know your customer

COB 5.2.5

See Notes

handbook-rule
Before a firm gives a personal recommendation concerning a designated investment to a private customer, or acts as an investment manager for a private customer, it must take reasonable steps to ensure that it is in possession of sufficient personal and financial information about that customer relevant to the services that the firm has agreed to provide.

COB 5.2.6

See Notes

handbook-guidance
A firm that advises a private customer, or exercises discretion for a private customer, on a continuing basis should keep its information about that customer under regular review. A firm that acts for a private customer on an occasional basis should undertake such a review whenever that customer seeks advice.

COB 5.2.7

See Notes

handbook-guidance
If a private customer declines to provide relevant personal and financial information, a firm should not proceed to provide the services described in COB 5.2.5 R without promptly advising that customer that the lack of such information may affect adversely the quality of the services which it can provide. The firm should consider sending written confirmation of that advice.

COB 5.2.8

See Notes

handbook-guidance
The information to be obtained and enquiries made to satisfy COB 5.2.5 R may vary significantly depending on the type of customer concerned. COB 5.2.11 G provides some guidance on the process of collecting personal and financial information.

Record keeping: personal and financial circumstances

COB 5.2.9

See Notes

handbook-rule

A firm must make and retain a record of a private customer's personal and financial circumstances that it has obtained in satisfying COB 5.2.5 R. The record must be retained for a minimum period after the information is obtained, as follows:

  1. (1) indefinitely for a record relating to a pension transfer, pension opt-out or free-standing additional voluntary contribution (FSAVC);Unless (2) applies, a firm must make and retain a record of a private customer's personal and financial circumstances that it has obtained in satisfying COB 5.2.5 R. The firm must retain the record for a minimum period after the information is obtained, as follows:
    1. (a) indefinitely for a record relating to a pension transfer, pension opt-out or free-standing additional voluntary contribution (FSAVC);
    2. (b) six years for a record relating to a life policy, pension contract or stakeholder pension scheme; or
    3. (c) three years in any other case.
  2. (2) six years for a record relating to a life policy, pension contract or stakeholder pension scheme; A firm need not retain the record where following a personal recommendation to a private customer in connection with a designated investment, the private customer does not proceed with the recommendation or any part of it.
  3. (3) three years in any other case.

Record keeping: execution-only pension opt-outs and pension transfers

COB 5.2.10

See Notes

handbook-rule
When a firm arranges a pension opt-out or pension transfer from an OPS for a private customer as an execution-only transaction, the firm must make and retain indefinitely a clear record to evidence that no advice on investments was supplied to the private customer.

COB 5.2.11

See Notes

handbook-guidance

Guidance on the collection of information about a private customer.

This table belongs to COB 5.2.8 G.

COB 5.2.18

See Notes

handbook-guidance
Firms are reminded of the record keeping obligations under SYSC 3.2.20 R

COB 5.3

Suitability

Application

COB 5.3.1

See Notes

handbook-rule

This section applies to a firm when it:

  1. (1) makes a personal recommendation concerning a designated investment to a private customer; or
  2. (2) acts as an investment manager for a private customer; or
  3. (3) manages the assets of an occupational pension scheme (OPS) or a stakeholder pension scheme; or
  4. (4) promotes a personal pension scheme by means of a direct offer financial promotion to a group of employees; or
  5. (5) if the firm is not an insurer, makes a personal recommendation to an intermediate customer or a market counterparty to take out a life policy.

COB 5.3.2

See Notes

handbook-guidance
This section does not apply to a firm in respect of a direct offer financial promotion, except in respect of a promotion of a personal pension scheme under COB 5.3.28 R.

COB 5.3.3

See Notes

handbook-guidance
Firms are reminded of the requirements of COB 3.9.6 R (Direct offer financial promotions: general requirements). A direct offer financial promotion must make it clear that, if a private customer is in any doubt about the suitability of the agreement which is the subject of the promotion, he should contact the firm, or another appropriate firm if the firm does not offer advice.

Purpose

COB 5.3.4

See Notes

handbook-guidance
Principle 9 (Customers: relationships of trust) requires a firm to take reasonable care to ensure the suitability of its advice and discretionary decisions. The purpose of this section is to amplify this requirement. The nature of the steps firms need to take will vary greatly, depending on the needs and priorities of the private customer, the type of investment or service being offered, and the nature of the relationship between the firm and the private customer and, in particular, whether the firm is giving a personal recommendation or acting as a discretionary investment manager.

Requirement for suitability generally

COB 5.3.5

See Notes

handbook-rule
  1. (1) A firm must take reasonable steps to ensure that, if in the course of designated investment business:
    1. (a) it makes any personal recommendation to a private customer to:
      1. (i) buy, sell, subscribe for or underwrite a designated investment (or to exercise any right conferred by such an investment to do so); or
      2. (ii) elect to make income withdrawals; or
      3. (iii) enter into a pension transfer or pension opt-out from an occupational pension scheme; or
    2. (b) it effects a discretionary transaction for a private customer (except as in (5)); or
    3. (c) it makes a personal recommendation to an intermediate customer or a market counterparty to take out a life policy;
  2. the advice on investments or transaction is suitable for the client.
  3. (2) If the recommendation or transaction in (1) relates to a packaged product:
    1. (a) it must, subject to COB 5.3.8 G - COB 5.3.10 R, be the most suitable from the range of packaged products, on which advice on investments is given to the client as determined by COB 5.1.7 R; and
    2. (b) if there is no packaged product in the firm's relevant range of packaged products which is suitable for the client, no recommendation must be made.
  4. (3) In making the recommendation or effecting the transaction in (1), the firm must have regard to:
    1. (a) the facts disclosed by the client; and
    2. (b) other relevant facts about the client of which the firm is, or reasonably should be, aware.
  5. (4) A firm which acts as an investment manager for a private customer must take reasonable steps to ensure that the private customer's portfolio or account remains suitable, having regard to the facts disclosed by the private customer and other relevant facts about the private customer of which the firm is or reasonably should be aware.
  6. (5) Where, with the agreement of the private customer, a firm has pooled his funds with those of others with a view to taking common discretionary management decisions, the firm must take reasonable steps to ensure that a discretionary transaction is suitable for the fund, having regard to the stated investment objectives of the fund.

COB 5.3.5A

See Notes

handbook-guidance
  1. (1) If circumstances arise in which a firm reasonably concludes that there are several packaged products in the relevant range which would satisfy the test in COB 5.3.5 R (2), it will act in conformity with that rule if it recommends only one of those products.
  2. (2) If a client does not wish to proceed in accordance with a recommendation, a firm may nonetheless make further recommendations providing any such recommendation is suitable for the client in accordance with the obligation in COB 5.3.5 R.

Suitability of packaged products: out-of-range recommendations

COB 5.3.8A

See Notes

handbook-rule
  1. (1) A firm when not selecting packaged products from the whole market (and notwithstanding COB 5.3.5 R (2)) may recommend a packaged product outside the range of packaged products on which it provides advice to a particular client if the recommended packaged product is suitable for the client and had it been included would have been at least as suitable as the most suitable packaged product in that range.
  2. (2) A firm must take reasonable steps to ensure that an appointed representative of a firm only acts as in (1) with its explicit written permission, either generally or in relation to the specific recommendation.

COB 5.3.8B

See Notes

handbook-guidance
COB 5.3.8A R enables a firm to advise on packaged products from outside a particular range of packaged product. This will enable such advising on investments to be given on a one-off basis by firms which have only one range of packaged products and by other firms which may have more than one but without the firm needing to change the scope or range of the advice on investments which the client is expecting to receive.

Requirement for suitability: whole-of-market advisers

COB 5.3.10A

See Notes

handbook-rule
  1. (1) A firm which holds itself out as giving personal recommendations to private customers on packaged products from the whole market (or the whole of a sector of that market) must not give any such personal recommendation unless it:
    1. (a) has carried out a reasonable analysis of a sufficiently large number of packaged products which are generally available from the market (or sector of the market); and
    2. (b) conducts the analysis in (a) on the basis of criteria which reflect adequate knowledge of the packaged products generally available from the market as a whole (or from a relevant sector).
  2. (2) A firm in (1) must satisfy the obligation in COB 5.3.5 R (2) by taking reasonable steps to ensure that a personal recommendation given to a private customer is:
    1. (a) in accordance with its analysis carried out under (1); and
    2. (b) is the packaged product which on the basis of that analysis is the most suitable to meet the customer's needs.

COB 5.3.10B

See Notes

handbook-rule
  1. (1) A firm which holds itself out as giving personal recommendations to intermediate customers or market counterparties on life policies from the whole market (or from a relevant sector) must not give any such personal recommendation unless it:
    1. (a) has carried out an analysis of a sufficiently large number of life policies which are generally available from the market (or sector of the market); and
    2. (b) conducts the analysis in (a) on the basis of criteria which reflect adequate knowledge of the life policies generally available from the market as a whole (or from a relevant sector).
  2. (2) A firm in (1) must satisfy the obligation in COB 5.3.5 R (2) by taking reasonable steps to ensure that a personal recommendation given to a client is:
    1. (a) in accordance with its analysis carried out under (1); and
    2. (b) for a life policy which on the basis of that analysis is suitable to meet the client's needs.

Requirement for suitability: manager of OPS and stakeholder pension scheme

COB 5.3.12

See Notes

handbook-rule
A firm that manages the assets of an occupational pension scheme or stakeholder pension scheme must take reasonable steps to ensure the suitability of specific transactions and of the investment portfolio under management with regard to the investment objectives specified in the portfolio mandate.

Requirements for suitability: other specific requirements

COB 5.3.13

See Notes

handbook-guidance
  1. (1) COB 5.3.20 R contains specific rules applicable to the suitability of broker funds.
  2. (2) COB 5.3.21 R - COB 5.3.27 R contain specific rules applicable to the suitability of pension transfers and pension opt-outs.
  3. (3) COB 5.3.28 R contains specific rules applicable to the promotion of personal pension schemes, including group personal pension schemes by means of direct offer financial promotions.
  4. (4) COB 5.3.29 G contains guidance which is relevant for assessing the suitability of:
    1. (a) pension transfers and pension opt-outs;
    2. (b) personal pension schemes and free-standing additional voluntary contributions (FSAVCs) compared to stakeholder pension schemes;
    3. (c) hybrid products;
    4. (d) industrial assurance policies;
    5. (e) income withdrawals ;
    6. (f) ISA, PEP or CTF transfers; and
    7. (g) contracting out of SERPS; and
    8. (h) borrowing to invest.

Requirement for a suitability letter: other specific requirements

COB 5.3.14

See Notes

handbook-rule
  1. (1) A firm that gives a personal recommendation, in relation to a life policy, to a person who is a policyholder or a prospective policyholder of a life policy, must provide the person with a suitability letter prior to the conclusion of the contract, unless one of the exceptions in COB 5.3.19 R applies.
  2. (2) If, following a personal recommendation by a firm that does not fall within (1), a private customer:
    1. (a) buys, sells, surrenders, converts, cancels, or suspends premiums for or contributions to, a pension contract or a stakeholder pension scheme; or
    2. (b) elects to make income withdrawals; or
    3. (c) acquires a holding in, or sells all or part of a holding in, a scheme; or
    4. (d) enters into a pension transfer or pension opt-out from an OPS;
  3. the firm must provide the customer with a suitability letter, within the time period stipulated by COB 5.3.18 R, unless one of the exceptions in COB 5.3.19 R applies.

COB 5.3.15

See Notes

handbook-guidance
A suitability letter is not required in respect of a personal recommendation made by a firm to buy or sell shares or units in a regulated collective investment scheme when the firm is acting as an investment manager for a private customer (see COB 5.3.19 R (1)).

COB 5.3.16

See Notes

handbook-rule

The suitability letter in COB 5.3.14 R must:

  1. (1) explain why the firm has concluded that the transaction is suitable for the customer, having regard to his personal and financial circumstances;
  2. (2) contain a summary of the main consequences and any possible disadvantages of the transaction;
  3. (3)
    1. (a) in the case of a personal pension scheme which is not a stakeholder pension scheme, explain the reasons why the firm considers the personal pension scheme to be at least as suitable as a stakeholder pension scheme;
    2. (b) in the case of an FSAVC:
      1. (i) if the customer has the alternative of a stakeholder pension scheme, explain the reasons why the firm considers the recommended contract to be at least as suitable as a stakeholder pension scheme or as any additional voluntary contribution (AVC) or the facility to make additional contributions to the occupational pension scheme which may be available; or
      2. (ii) if the customer does not have the alternative of a stakeholder pension scheme, explain the reasons why the firm considers the recommended contract to be at least as suitable as any AVC or the facility to make additional contributions to the occupational pension scheme which may be available;
  4. (4) identify the individual who is authorised by the firm to advise on the type of product that has been recommended;
  5. (5) if the recommended product is from a product provider (or if relevant, an undertaking in the immediate group of that provider) which is identified in section 6 of the firm's initial disclosure document given in accordance with COB 4.3.3R (1), include the information given in section 6 or in section 6 of the firm's combined initial disclosure document; and
  6. (6) in the case of a recommendation by a firm under COB 5.3.8A R (Suitability of packaged products: out-of-range recommendations) explain why it has recommended a packaged product outside the firm's range of packaged products, including why it is suitable for the customer.

COB 5.3.17

See Notes

handbook-guidance
COB 5.3.30 G provides guidance on the contents of suitability letters.

COB 5.3.18

See Notes

handbook-rule

The firm must provide the letter required by COB 5.3.14 R (2) to the customer:

  1. (1) in the case of a pension contract or stakeholder pension scheme, where the cancellation rules require notification of the right to cancel, no later than the fourteenth day after the contract is concluded; or
  2. (2) in any other case, when or as soon as possible after the transaction is effected.

Exceptions from requirement to provide a suitability letter

COB 5.3.19

See Notes

handbook-rule

COB 5.3.14 R does not apply:

  1. (1) if the firm is acting as an investment manager for a private customer and makes a personal recommendation relating to a regulated collective investment scheme;
  2. (2) if the firm is not acting as an outgoing ECA provider, and the customer is habitually resident in another EEA State at the time of acknowledging consent to the proposal form to which the personal recommendation relates;
  3. (3) if the customer is habitually resident outside the EEA and the customer is not present in the United Kingdom (or EEA in the case of a firm acting as an outgoing ECA provider) at the time of acknowledging consent to the proposal form to which the personal recommendation relates;
  4. (4) to any personal recommendation by a friendly society for a life policy sold by it with a premium not exceeding £50 a year or, if payable weekly, £1 a week;
  5. (5) to any personal recommendation to increase a regular premium to an existing contract; and
  6. (6) to any personal recommendation 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.

Record keeping requirements

COB 5.3.19A

See Notes

handbook-rule

A firm must make and retain a record of a private customer's suitability letter that it has provided in satisfying COB 5.3.14 R. The record must be retained for a minimum period after the letter is provided, as follows:

  1. (1) for a record relating to a pension transfer, pension opt-out or free-standing additional voluntary contribution (FSAVC), indefinitely;
  2. (2) for a record relating to a life policy, pension contract or stakeholder pension scheme, six years;
  3. (3) in any other case, three years.

Suitability of broker funds

COB 5.3.20

See Notes

handbook-rule

A firm acting as a broker fund adviser for a private customer must:

  1. (1) take account of the characteristics of the broker fund, including the charging arrangements, in total, when assessing the suitability of the arrangements;
  2. (2) review on a regular basis the customer's current investment objectives and strategies relative to those at the time of any previous periodic report to the customer in accordance with COB 8.2.4 R (Requirement for a periodic statement);
  3. (3) follow up the review with a recommendation in writing to the customer, to be provided at least annually, either to continue with the investment or to withdraw, and in either case to supply reasons for the recommendation;
  4. (4) provide the customer with an alternative recommendation if the broker fund arrangement is no longer suitable; and
  5. (5) ensure that any significant change in the investment strategy of the fund, where known to the firm, is notified to the customer in advance together with confirmation why the fund continues to be suitable for the customer's circumstances or an alternative recommendation.

Suitability of pension transfers and opt-outs

COB 5.3.21

See Notes

handbook-rule

If a personal recommendation about a pension transfer or pension opt-out is to be made on a firm's behalf by an individual who is not one of its pension transfer specialists, the firm must have established procedures for checking:

  1. (1) the individual's compliance with the firm's procedures;
  2. (2) the correctness of the application of the transfer value analysis system, where applicable; and
  3. (3) the merits of the proposed transaction and the suitability of the recommendation;

and any such recommendation must be assessed by one of the firm's designated pension transfer specialists to ensure the procedures have been followed.

COB 5.3.22

See Notes

handbook-rule
  1. (1) A firm must ensure that a transfer value analysis is carried out in accordance with COB 6.6.87 R - COB 6.6.93 R (Projections) before it makes any recommendation to a customer to transfer out of a defined benefits pension scheme.
  2. (2) A copy of the analysis must be delivered with the key features document or otherwise provided to the customer before he gives consent to the application to transfer.
  3. (3) The firm must take reasonable steps to ensure the customer understands the analysis, drawing attention to factors which do and do not support the recommendation to transfer.

COB 5.3.23

See Notes

handbook-rule

A firm must provide a projection of the possible future benefits of the proposed individual pension contract before it makes any personal recommendation to a customer to opt out of, or transfer from, an occupational pension scheme.

  1. (1) The format and nature of the benefits given in the projection must, so far as possible, be the same as those which apply under the occupational pension scheme of which the customer is, or is eligible to become, a member.
  2. (2) If it is not possible for the benefits shown in the projection to replicate those of the occupational pension scheme, an explanation must be given.
  3. (3) If the customer has expressed an interest in changing the structure of his eventual benefits, an additional projection may also be prepared on that basis.

COB 5.3.24

See Notes

handbook-rule

A suitability letter relating to a personal recommendation to opt out of or transfer from an occupational pension scheme must include:

  1. (1) a summary of the disadvantages as well as the advantages of opting out or transferring; and
  2. (2) in the case of a pension opt out, a financial analysis explaining the decision to opt-out.

COB 5.3.25

See Notes

handbook-rule

If, contrary to the advice of the firm, a private customer instructs the firm to arrange a pension opt-out or pension transfer, the firm must:

  1. (1) make and retain a clear record of the firm's advice that the private customer should not proceed with the pension opt-out or pension transfer and the private customer's instructions to proceed with the transaction; and
  2. (2) provide a further confirmation and explanation, in writing, to the private customer that the firm's advice is that the private customer should not proceed with the pension opt-out or pension transfer.

COB 5.3.26

See Notes

handbook-rule

[deleted]

  1. (1) Every six months, a firm must notify the FSA, in writing, of the number of pension opt-out and the number of pension transfer transactions which it has arranged during the previous six months. A firm need not make a notification if it has not arranged any such transactions.
  2. (1A) A firm must also notify the FSA, in writing, at quarterly intervals, of the following details in respect of the preceding quarter:
    1. (a) the number of execution-only:
      1. (i) pension opt-outs arranged if they exceed 1% of all the firm's pension opt-outs arranged during the quarter; and
      2. (ii) pension transfers arranged if they exceed 1% of all the firm's pension transfers arranged during the quarter;
    2. (b) the number of:
      1. (i) pension opt-outs arranged against the firm's advice if they exceed 1% of all the firm's pension opt-outs arranged by the firm during the quarter; and
      2. (ii) pension transfers arranged against the firm's advice if they exceed 1% of all the firm's pension transfers arranged by the firm during the quarter; and
    3. (c) the number of pension opt outs and the number of pension transfers arranged on a correspondence-only basis by the firm during that quarter.
  3. (1B) A firm must provide the information required by (1) and (1A) as soon as reasonably practicable after the end of the period.
  4. (2) A firm must make records of the notifications required by (1) and (1A) and retain them indefinitely.

COB 5.3.27

See Notes

handbook-rule
A firm must keep separate records for each private customer of every pension transfer, pension opt-out or free-standing additional voluntary contribution (FSAVC) which it has arranged, whether advised or not, and retain these records indefinitely.

Suitability of personal pension schemes: promotions to employees

COB 5.3.28

See Notes

handbook-rule

When a firm promotes a personal pension scheme including a group personal pension scheme, by means of a direct offer financial promotion to a group of employees, the firm must;

  1. (1) be satisfied on reasonable grounds that the pension scheme is likely to be at least as suitable for the majority of the employees as a stakeholder pension scheme;
  2. (2) record why it thinks the promotion is justified; and
  3. (3) retain the record for a minimum period of six years after the financial promotion is last communicated.

COB 5.3.29

See Notes

handbook-guidance

Guidance on matters which should be taken into account when assessing the suitability of various personal recommendations. This table belongs to COB 5.3.13 G (4).

COB 5.3.30

See Notes

handbook-guidance

Guidance on the contents of suitability letters.

This table belongs to COB 5.3.17 G.

COB 5.4

Customers' understanding of risk

Application

COB 5.4.1

See Notes

handbook-rule
This section applies to a firm that conducts designated investment business with or for a private customer

Purpose

COB 5.4.2

See Notes

handbook-guidance
Principle 7 (Communications with clients) requires a firm to pay due regard to the information needs of its clients and communicate information to them in a way that is clear, fair and not misleading. Principle 9 (Customers: relationships of trust) requires a firm to take reasonable care to ensure the suitability of its advice and discretionary decisions. The purpose of this section is to ensure that a firm takes reasonable steps to ensure that a private customer understands the nature of the risks inherent in certain transactions.

Requirement for risk warnings

COB 5.4.3

See Notes

handbook-rule

A firm must not:

  1. (1) make a personal recommendation of a transaction; or
  2. (2) act as a discretionary investment manager; or
  3. (3) arrange (bring about) or execute a deal in a warrant or derivative; or
  4. (4) engage in stock lending activity;

with, to or for a private customer unless it has taken reasonable steps to ensure that the private customer understands the nature of the risks involved.

COB 5.4.3A

See Notes

handbook-guidance
A securitised derivative (as defined in the Glossary) is a derivative, and COB rules relevant to derivatives therefore apply. Firms should note that the Glossary definition of securitised derivative is slightly different from the definition in chapter 24 of the listing rules. An instrument listed under that chapter, which is not an option or contract for differences, is not a securitised derivative for the purposes of COB.

COB 5.4.4

See Notes

handbook-evidential-provisions
The reasonable steps in COB 5.4.3 R should include the steps set out in COB 5.4.6 E to COB 5.4.12 E as appropriate, in relation to transactions in the following types of investment or activity:
  1. (1) warrants and derivatives (see COB 5.4.6 E, COB 5.4.6A E or COB 5.4.6C E as appropriate);
  2. (2) non-readily realisable investments (see COB 5.4.7 E);
  3. (3) penny shares (see COB 5.4.8 E);
  4. (4) securities subject to stabilisation (see COB 5.4.9 E);
  5. (5) stock lending activity (see COB 5.4.10 E);
  6. (6) a security or an investment trust savings scheme which satisfies the conditions specified in COB 3.8.9 G (6) (see COB 5.4.11 E);
  7. (7) structured capital-at-risk products (see COB 5.4.12 E).

COB 5.4.5

See Notes

handbook-evidential-provisions
Contravention of COB 5.4.4 E may be relied on as tending to establish contravention of COB 5.4.3 R.

Risk warnings in respect of warrants and derivatives (other than retail securitised derivatives and certain EEA listed derivatives)

COB 5.4.6

See Notes

handbook-evidential-provisions
  1. (1) In relation to a transaction in a warrant or derivative (other than a retail securitised derivative or an option or contract for differences to which COB 5.4.6C E applies), the firm should:
    1. (a) provide the private customer with the notice in COB 5 Annex 1 E (Warrants and derivatives risk warning notice); and
    2. (b) require the private customer to acknowledge receipt of the notice and confirm acceptance of its contents, in writing.
  2. (2) A firm need not undertake steps COB 5.4.6 E (1) (a) and (b) in respect of a private customer who is ordinarily resident outside the United Kingdom, if it has taken reasonable steps to determine that the private customer does not wish to receive the notice.
  3. (3) The notice in COB 5 Annex 1 E (Warrants and derivatives risk warning notice) need not be sent in relation to the realisation of a warrant that is already held by the private customer, or of a warrant attached to another designated investment.
  4. (4) For a firm acting as an outgoing ECA provider, the exemption contained in COB 5.4.6 E (2) applies only if the private customer is ordinarily resident outside the EEA and if the outgoing ECA provider has taken reasonable steps to ensure that the private customer does not want to receive the notice.

Risk warnings in respect of retail securitised derivatives

COB 5.4.6A

See Notes

handbook-evidential-provisions
  1. (1) In relation to a transaction in a retail securitised derivative, the firm should provide the private customer with:
    1. (a) the notice in COB 5 Annex 1 E (Warrants and derivatives risk warning notice); or
    2. (b) a copy of the listing particulars prepared for the securitised derivative in accordance with chapter 24 of the listing rules, in a manner calculated to bring to the attention of the private customer the description of risk factors required by paragraphs 24.36 and 24.37 of the listing rules (Disclosure about risk factors); or
    3. (c) a notice containing a clear, fair and adequate description of the securitised derivative which is to be the subject of the transaction, in a manner calculated to bring to the attention of the private customer the risks involved, and in particular (and if applicable):
      1. (i) that the securitised derivative gives rise to risks similar to those arising when an investor buys or sells an option;
      2. (ii) that the securitised derivative is 'geared' or 'leveraged', which means that a relatively small movement in the price of the underlying instrument, whether favourable or adverse, could result in a larger movement in the price of the securitised derivative;
      3. (iii) that the price of the securitised derivative may therefore be volatile;
      4. (iv) that the securitised derivative has a limited life, and may expire worthless if the underlying instrument (such as a share or index) does not perform as expected;
      5. (v) that, consequently, the private customer should not enter into the transaction unless he is prepared to lose all of the money he has invested, plus any commission or other charges;
      6. (vi) that the private customer should satisfy himself that the securitised derivative is suitable for him, in the light of his circumstances and financial position, and if the private customer is in any doubt he should seek professional advice; and
      7. (vii) a clear, fair and adequate description of any other relevant risks affecting the value, trading price, and realisation of the value of the securitised derivative.
  2. (2) A firm should either:
    1. (a) require the private customer to acknowledge receipt of the document provided in accordance with (1)(a), (b) or (c) and confirm acceptance of its contents, in writing; or
    2. (b) be otherwise able to demonstrate that the private customer has received the document and had a proper opportunity to consider its terms.
  3. (3) A firm need not undertake steps (1) and (2) in respect of a private customer who is ordinarily resident outside the United Kingdom, if it has taken reasonable steps to determine that the private customer does not wish to receive the notice.

COB 5.4.6B

See Notes

handbook-guidance
  1. (1) It is appropriate for a notice provided to a private customer in accordance with COB 5.4.6A E (1)(c) to explain, where applicable, the existence and extent of any factors that reduce the risks to which the private customer is exposed (for example, the fact that the securitised derivative is listed, or subject to some form of guarantee), but the firm should ensure that any such statement does not, obscure or diminish the significance of the notice taken as a whole.
  2. (2) The document provided to a private customer in accordance with COB 5.4.6A E (1) (b) or (c) may use another term (such as "covered warrant") to describe a securitised derivative, if it is generally accepted market practice to do so.
  3. (3) In relation to (1) and (2), firms are also reminded of the requirements of COB 2.1 (Clear, fair and not misleading communication).

Risk warnings in respect of certain derivatives listed in other EEA States

COB 5.4.6C

See Notes

handbook-evidential-provisions
In relation to an option or contract for differences which is included on the official list of an EEA State other than the United Kingdom, a firm should comply with COB 5.4.6A E if:
  1. (1) the investment is not a contingent liability investment; and
  2. (2) (if it provides a right of exercise) the investment would comply with paragraph 24.7 of the listing rules (Method of exercising retail securitised derivatives), if it were listed on the UK official list.

Risk warnings in respect of non readily realisable investments

COB 5.4.7

See Notes

handbook-evidential-provisions
In relation to a transaction in a designated investment that is not a readily realisable investment, a firm should:
  1. (1) warn the private customer that there is a restricted market for such designated investments, and that it may therefore be difficult to deal in the designated investment or to obtain reliable information about its value; and
  2. (2) disclose any position knowingly held by the firm or any of its associates in the designated investment or in a related designated investment.

Risk warnings in respect of penny shares

COB 5.4.8

See Notes

handbook-evidential-provisions
In respect of penny shares, a firm should provide the risk warnings required by COB 3.9.17 G (12) (Investments that can fluctuate in value).

Risk warnings in respect of securities that may be subject to stabilisation

COB 5.4.9

See Notes

handbook-evidential-provisions
In respect of securities that may be subject to stabilisation, a firm should send to the private customer the notice in COB 5 Annex 2 E (Dealing in securities which may be subject to stabilisation) unless it has taken reasonable steps to establish that the customer requires an oral explanation only.

Stock lending activity

COB 5.4.10

See Notes

handbook-evidential-provisions
A firm should not engage in stock lending activity with or for a private customer unless it has notified him:
  1. (1) that this may affect his tax position and that he should consult a tax adviser before proceeding; and
  2. (2) of the consequences of the stock lending activity, including what impact it may have on the rights of the holder of the designated investments concerned.

Risk warnings in respect of listed securities where gearing is involved

COB 5.4.11

See Notes

handbook-evidential-provisions
In relation to a transaction in a security or an investment trust savings scheme for dealing in securities which satisfies the conditions specified in COB 3.8.9 G (6) a firm should provide to the private customer a notice to warn the private customer that the strategy which the issuer of securities uses or proposes to use may result in:
  1. (1) movements in the price of the securities being more volatile than the movements in the price of underlying investments;
  2. (2) the investment being subject to sudden and large falls in value; and
  3. (3) the private customer getting back nothing at all if there is a sufficiently large fall in value in the investment.

COB 5.4.12

See Notes

handbook-evidential-provisions
  1. (1) Unless (2) applies, in relation to a transaction in a structured capital-at-risk product, the firm should provide the private customer with a notice containing a clear, fair and adequate description of the structured capital-at-risk product which is to be the subject of the transaction, in a manner calculated to bring to the attention of the private customer the risks involved, in particular (and if applicable):
    1. (a) that the return of initial capital invested at the end of the investment period is not guaranteed and therefore the private customer may get back less then what was originally invested;
    2. (b) that the amount of initial capital repaid may be geared, which means that a small percentage fall in the related index may result in a larger reduction in the amount paid out to the private customer;
    3. (c) that any maximum benefit advertised to the private customer is only available after a set period, indicating how long that period is;
    4. (d) that redeeming a product early may result in redemption penalties and a poor return;
    5. (e) that the initial capital invested may be placed into high risk investments, such as non-investment grade bonds;
    6. (f) that the rate of income or growth advertised to private customers may depend on specified conditions being met, indicating what these conditions are;
    7. (g) that the private customer should not enter into the transaction unless he is prepared to lose some or all of the money he has invested;
    8. (h) that the private customer should satisfy himself that the structured capital-at-risk product is suitable for him, in the light of his circumstances and financial position, and if the private customer is in any doubt he should seek professional advice; and
    9. (i) a clear, fair and adequate description of any other relevant risks affecting the value, trading price, and realisation of the value of the structured capital-at-risk product.
  2. (2) If the firm is acting as an investment manager, it should provide the notice referred to in (1) as part of its terms of business, but need not provide a notice before each transaction in a structured capital-at-risk product, provided that the structured capital-at-risk product is within the range of structured capital-at-risk products described in the terms of business.

COB 5.4.13

See Notes

handbook-guidance
In relation to a transaction in a structured capital-at-risk product, if it is relevant, firms should comply with COB 5.4.7 E.

COB 5.5

Information about the firm

Application

COB 5.5.1

See Notes

handbook-rule
  1. (1) This section applies to a firm that conducts designated investment business with or for a private customer.
  2. (2) This section does not apply when a firm communicates or approves a financial promotion.

Purpose

COB 5.5.2

See Notes

handbook-guidance
Principle 7 (Communications with clients) requires a firm to pay due regard to the information needs of its clients and communicate information to them in a way that is clear, fair and not misleading. COB 5.5 aims to ensure that a firm provides its private customers with adequate information about the firm.

Information required to be disclosed

COB 5.5.3

See Notes

handbook-rule

When it conducts designated investment business, a firm must take reasonable steps to ensure that a private customer is given adequate information about:

  1. (1) the identity and business address of the firm and any relevant agent of the firm;
  2. (2) the identity and status, or relationship with the firm, of employees and other agents with whom the customer may have contact; and
  3. (3) the firm's statutory status (in accordance with GEN 4 Annex 1 (Statutory status disclosure));

unless the private customer has been given the information on a previous occasion and that information is still up to date.

COB 5.5.4

See Notes

handbook-evidential-provisions
  1. (1) For the purposes of COB 5.5.3 R, the reasonable steps should include the relevant measures detailed in COB 5.5.5 E.
  2. (2) Compliance with (1) may be relied as tending to establish compliance with COB 5.5.3 R.
  3. (3) Contravention of (1) may be relied as tending to establish contravention of COB 5.5.3 R.

COB 5.5.5

See Notes

handbook-evidential-provisions

Table of information to be disclosed in written communications.

This table belongs to COB 5.5.4 E

COB 5.5.5A

See Notes

handbook-guidance
Firms are reminded of GEN 4.3 (Letter disclosure), which requires a disclosure in letters to private customers.

Overseas business for UK private customers

COB 5.5.7

See Notes

handbook-rule
  1. (1) A firm must not conduct designated investment business:
    1. (a) from an office of its own (or of any appointed representative) outside the United Kingdom;
    2. (b) with or for a private customer who is in the United Kingdom;
  2. unless it has, where relevant, made a disclosure in accordance with (2) to the private customer.
  3. (2) The required disclosure in (1) means a written statement making it clear that in some or all respects the regulatory system applying, including any compensation arrangements, will be different from that of the United Kingdom. The statement may also indicate the protections or compensation available under another system of regulation.
  4. (3) A firm must not make an introduction or make arrangements or give advice on investments with a view to another person conducting designated investment business;
    1. (a) from an office outside the United Kingdom;
    2. (b) with or for a private customer (or a person who, if a client, would be a private customer), who is in the United Kingdom;
  5. unless the firm has, where relevant, made a disclosure in accordance with (2) and there are no reasonable grounds for the firm to doubt that the private customer will be dealt with in an honest and reliable way.

Business conducted from non-UK offices

COB 5.5.8

See Notes

handbook-guidance
GEN 4.4 (Business for private customers from non-UK offices), requires a firm to give information, similar to that in COB 5.5.7 R, in certain circumstances in connection with business conducted from an office outside the United Kingdom with both UK and non-UK private customers.

ISD investment firms: compensation information

COB 5.5.9

See Notes

handbook-rule
An ISD investment firm providing or offering to provide a core investment service or custody must make available to every client, who has used or intends to use those services, information on whether or not compensation may be available from the compensation scheme or a compensation scheme established in another EEA State in accordance with the Investor Compensation Directive should the firm be unable to meet its liabilities, and the extent and level of cover and how further information can be obtained.

COB 5.5.10

See Notes

handbook-guidance
The obligation in COB 5.5.9 R is to "make information available". This does not require the firm to inform every client. A firm may make the information available in a number of ways, for example, by including it in explanatory literature or on the firm's website.

Example of compensation information for a UK domestic investment firm operating from the United Kingdom

COB 5.5.11

See Notes

handbook-guidance
This is an example of how a UK domestic firm, carrying on a regulated activity from a UK establishment, could present the information required by COB 5.5.9 R:COMPENSATION We are covered by the Financial Services Compensation Scheme. You may be entitled to compensation from the scheme if we cannot meet our obligations. This depends on the type of business and the circumstances of the claim. Most types of investment business are covered for 100% of the first £30,000 and 90% of the next £20,000, so the maximum compensation is £48,000. Further information about compensation arrangements is available from the Financial Services Compensation Scheme

ISD investment firms: language of compensation information

COB 5.5.12

See Notes

handbook-rule

Information about compensation arrangements made available by an ISD investment firm under COB 5.5.9 R must:

  1. (1) (if it relates to the activities of an establishment in the United Kingdom) be in English; or
  2. (2) (if it relates to the activities of a branch in another EEA State) be in an official language of that EEA State.

COB 5.6

Excessive charges

Application

COB 5.6.1

See Notes

handbook-rule
This section applies to a firm that makes a charge to a private customer in the course of, or in connection with its designated investment business.

Purpose

COB 5.6.2

See Notes

handbook-guidance
Principle 6 (Customers' interests) requires a firm to pay due regard to the interests of its customers and treat them fairly. The purpose of this section is to ensure that the charges a firm makes to its private customer are not excessive. The obligation to disclose to a private customer the charges that a firm intends to make are set out in COB 4.3 (Disclosing information about services, fees and commission - packaged products) and COB 5.7 (Disclosure of charges, remuneration and commission).

Charges to a private customer

COB 5.6.3

See Notes

handbook-rule
A firm must ensure that its charges to a private customer made in connection with the conduct of designated investment business are not excessive.

COB 5.6.4

See Notes

handbook-guidance

When determining whether a charge is excessive, a firm should consider:

  1. (1) the amount of its charges for the services or product in question compared with charges for similar services or products in the market;
  2. (2) the degree to which the charges are an abuse of the trust that the customer has placed in the firm; and
  3. (3) the nature and extent of the disclosure of the charges to the private customer.

Charges in respect of designated investments that are not readily realisable

COB 5.6.5

See Notes

handbook-rule
When a firm's charges for advising on or managing a private customer's assets are dependent on the value of designated investments that are not readily realisable investments, the valuation of those designated investments must be based upon the price likely to be agreed between a willing buyer and a willing seller dealing at arm's length who are both in possession of all freely available information concerning those investments.

COB 5.6.6

See Notes

handbook-guidance
In appropriate cases it may be necessary for the basis of a valuation referred to in COB 5.6.5 R to be confirmed or approved by an independent expert.

COB 5.7

Disclosure of charges, remuneration and commission

Application

COB 5.7.1

See Notes

handbook-rule
This section applies to a firm that conducts designated investment business with or for a private customer.

Purpose

COB 5.7.2

See Notes

handbook-guidance
Principle 7 (Communications with clients) requires a firm to pay due regard to the needs of its clients and communicate information to them in a way that is clear, fair and not misleading. The purpose of this section is to ensure that a private customer is made aware of the costs to him, directly or indirectly, of financial services, so that he is better able to make informed choices.

Disclosure of charges

COB 5.7.3

See Notes

handbook-rule
  1. (1) Before a firm conducts designated investment business with or for a private customer, the firm must disclose in writing to that private customer the basis or amount of its charges for conducting that business and the nature or amount of any other income receivable by it or, to its knowledge, by its associate and attributable to that business.
  2. (2) If the designated investment business in (1) is in respect of an execution-only transaction:
    1. (a) which does not relate to a packaged product; and
    2. (b) where prior written disclosure would delay the transaction;
    3. the firm may instead:
    4. (c) make the disclosure required by (1) orally before the transaction is executed; and
    5. (d) provide written confirmation of the matters disclosed to the private customer within five business days of the execution.

COB 5.7.4

See Notes

handbook-guidance
  1. (1) A firm may make the disclosures required by COB 5.7.3 R in its terms of business, in a client agreement, or in a separate written statement. Disclosure should indicate any product-related charges that are deducted from the private customer's investment. If the product is a packaged product, product-related charges and expenses will be disclosed in the key features document or in the minimum information that the firm is required to provide to the private customer in accordance with COB 6.2 (Provision of key features) and COB 6.4 (Product disclosure: special situations). When a firm is a broker fund adviser, disclosure should include any fees payable to the firm or its associate in connection with that activity by a provider firm. In the case of advice provided in connection with packaged products a firm should, in accordance with COB 4.3.3 R, have provided its customer with a fees and commission statement setting out the maximum rates of any fees which the customer will pay and/or with an indication of the maximum rates of commission (or equivalent) which it, or its representatives, may retain in connection with the sale of packaged products. COB 5.7.3 R does not require any further disclosure of a firm's fees if, in accordance with COB 4.3.5 R it has confirmed the exact amount or rate that it will charge.
  2. (2) In addition it is necessary that a private customer should, as soon as is practicable, be informed of the exact rate or the exact amount in cash terms of any commission (or equivalent) which the firm or its representatives will receive in respect of a specific transaction.
  3. (3) In the case of a packaged product, product related charges and expenses will be disclosed in the key features document or in the minimum information that the firm is required to provide to private customers in accordance with COB 6.2 (Provision of key features) and COB 6.4 (Product disclosure: special situations). When a firm is a broker fund adviser, disclosure should include any fees payable to the firm or its associate in connection with that activity by a product provider.

Disclosure of commission (or equivalent) for packaged products

COB 5.7.5

See Notes

handbook-rule
  1. (1) When a firm sells, personally recommends or arranges the sale of a packaged product to a private customer, and subsequently on the request of a private customer, the firm must disclose to the private customer, in cash terms:
    1. (a) any commission equivalent payable by it to a representative or appointed representative; and
    2. (b) any commission or commission equivalent receivable by it, or by any of its associates in connection with the transaction
  2. unless COB 5.7.9 R or COB 5.7.10 R applies.
  3. (2) In (1)(b) a firm is, in respect of any transaction, to be regarded as receiving commission equivalent if:
    1. (a) it is received from a product provider ("P"), or an associate of P; and
    2. (b) either P or its associate is in the same immediate group as the firm; and
    3. (c) the value of the commission equivalent (as assessed in accordance with these rules) is greater than the amount of commission in cash terms.
  4. (3) In (1) and (2) "cash terms" in relation to commission does not include the value of any indirect benefits which the firm may receive in accordance with COB 2.2.

COB 5.7.6

See Notes

handbook-rule
In determining the amount to be disclosed as commission equivalent in accordance with COB 5.7.5 R, a firm must put a proper value on the cash payments, benefits and services provided to its representatives in connection with the transaction.

COB 5.7.8

See Notes

handbook-evidential-provisions
  1. (1) When determining the value of cash payments, benefits and services under COB 5.7.6 R, a firm should follow the provisions of COB 5.7.16 E.
  2. (2) Compliance with COB 5.7.8 E (1) may be relied on as tending to establish compliance with COB 5.7.6 R.
  3. (3) Contravention of COB 5.7.8 E (1) may be relied on as tending to establish contravention of COB 5.7.6 R.

Exceptions to the disclosure for packaged products

COB 5.7.9

See Notes

handbook-rule

COB 5.7.5 R does not apply if:

  1. (1) the firm is acting as an investment manager; or
  2. (2) the firm is not acting as an outgoing ECA provider and the transaction is effected for a private customer who is habitually resident overseas; or
  3. (3) the firm is not acting as an outgoing ECA provider and the packaged product is a life policy and the private customer is not present in the United Kingdom at the time the application is made; or
  4. (4) the firm is acting as an outgoing ECA provider and the transaction is effected for a private customer who is habitually resident outside the EEA; or
  5. (5) the firm is acting as an outgoing ECA provider, the packaged product is a life policy and the private customer is not present in the EEA at the time the application is made.

COB 5.7.10

See Notes

handbook-rule
The requirement in COB 5.7.5 R to disclose to a private customer the amount or value, in cash terms, of commission or equivalent does not apply if the firm provides the private customer with example key features, in accordance with COB 6.2.7 R (Life policies) and COB 6.2.22 R (Schemes), provided that the firm discloses to the private customer the actual amount or value of commission or equivalent within five business days of effecting the transaction.

Guidance on disclosure requirements for packaged products

COB 5.7.11

See Notes

handbook-guidance
The disclosures required by COB 5.7.5 R should be made in a manner that is clear, fair and not misleading, as required by COB 2.1.3 R (Clear, fair and not misleading communication), and that indicates the timing of any payment. For example, when 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.

COB 5.7.12

See Notes

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.

COB 5.7.13

See Notes

handbook-guidance
The disclosures required by COB 5.7.5 R should normally be made in writing. For example, if a specific key features document or projection is provided to a private customer, the required disclosures should either be contained in the projection or the key features document, or be given to the private customer in a separate written statement at the time these documents are given to the private customer. When a private customer does not make a written application to enter into a transaction contemplated by COB 5.7.5 R, for example, when the transaction is a telephone deal for units in a regulated collective investment scheme, the firm may disclose the amount or value of commission or equivalent orally. In these circumstances, the firm should give written confirmation as soon as possible after the date of the transaction, and in any event within five business days. In preparing its written disclosure statement, a firm may wish to follow the guidance on content and wording set out in COB 5.7.17 G.

COB 5.7.14

See Notes

handbook-guidance
The collection of premiums payable under a life policy by introducers acting as the appointed collecting agents of a product provider will not be treated by the FSA as a transaction for the purposes of COB 5.7.5 R.

COB 5.7.15

See Notes

handbook-rule
If the terms of a packaged product are varied in circumstances that require the issue of a cancellation notice, a firm must disclose to a private customer in writing any consequent increase in commission or equivalent receivable by it in relation to that transaction.

COB 5.7.16

See Notes

handbook-evidential-provisions

Calculating commission equivalent

This table forms part of COB 5.7.8 E.

COB 5.7.17

See Notes

handbook-guidance

Remuneration and commission disclosure statements: content and wording.

This table forms part of COB 5.7.13 G.

COB 5.8

Customers introduced to clearing firms by introducing brokers and overseas introducing brokers

Application

COB 5.8.1

See Notes

handbook-guidance
This section should be considered by a firm that, in the course of carrying on designated investment business, acts as a clearing firm to which an introducing broker or an overseas introducing broker introduces a transaction for its customer.

Purpose

COB 5.8.2

See Notes

handbook-guidance
Principle 1 (Integrity) requires a firm to conduct its business with integrity and Principle 6 (Customers' interests) requires a firm to pay due regard to the interests of its customers and treat them fairly. This section supports and clarifies these requirements in respect of the relationship that exists between a clearing firm and a customer for whom the clearing firm executes and clears business, when the business has been introduced by a third party.

Clearing firms and introducing brokers and overseas introducing brokers

COB 5.8.3

See Notes

handbook-guidance
A clearing firm to which an overseas introducing broker has introduced a transaction on behalf of its customer should ensure that the customer is aware of the nature of the services that the clearing firm will be providing to that customer and that only these services, but not those of the overseas introducing broker, will be regulated under the Act.

COB 5.8.4

See Notes

handbook-guidance
As a matter of good practice, and preferably before accepting orders, a clearing firm should enter into a written contract with the introducing broker or overseas introducing broker specifying that the clearing firm will be responsible for all dealing and settlement obligations to the customer. The contract should also specify that the introducing broker or overseas introducing broker will act as agent for the customer in introducing transactions and will be responsible for advising the customer or managing his assets (or both).

COB 5.8.5

See Notes

handbook-guidance
A clearing firm should, by appropriate disclosures, ensure that the customer is aware of the nature of the services to be provided to him by the clearing firm.

COB 5.8.6

See Notes

handbook-guidance
When a clearing firm knows or suspects that the activities of an introducing broker or an overseas introducing broker are or may be damaging to its customers, it should take reasonable steps to address the situation and, as far as possible, to protect its customers' interests.

COB 5.8.7

See Notes

handbook-guidance

When a clearing firm operates an omnibus account for an overseas introducing broker (that is, an account operated in the name of the overseas introducing broker for more than one underlying client) a clearing firm should:

  1. (1) establish that the overseas introducing broker is authorised in his own country;
  2. (2) where there is no formal regulatory regime in the overseas introducing broker's own country, take reasonable steps to establish that the overseas introducing broker is legally empowered to undertake the proposed business to be transacted; and
  3. (3) have regard to the requirements of UK law on money laundering and financial crime.

COB 5.9

Information about stakeholder pension schemes

Application

COB 5.9.1

See Notes

handbook-rule
This section applies to a firm that provides information about stakeholder pension schemes at a meeting arranged for a group of employees.

Requirement

COB 5.9.2

See Notes

handbook-rule
When a firm provides information about stakeholder pension schemes to a group of five or more employees at a meeting which has been sponsored by one or more employers, that information must be given by an adviser appointed by the firm to give advice to private customers on packaged products.

Exception

COB 5.9.3

See Notes

handbook-rule
COB 5.9.2 R does not apply to a firm that provides information about stakeholder pension schemes to a group of four or less employees at a meeting.

COB 5.10

Corporate finance business issues

Application

COB 5.10.1

See Notes

handbook-rule
This section applies to a firm that conducts corporate finance business.

Purpose

COB 5.10.2

See Notes

handbook-guidance
The purpose of this section is to provide guidance on the management of conflicts of interest in particular situations arising in the context of corporate finance business. The FSA expects that in most corporate finance business Principle 1 (Integrity), Principle 2 (Due skill, care and diligence), Principle 5 (High standards of market conduct), Principle 6 (Customers' interests) and Principle 8 (Conflicts of interest), will be particularly relevant. The guidance in this section is not intended to be exhaustive, and is in addition to other provisions which apply to the firm (see COB 1.6 which specifies these). It also supplements other provisions in the Handbook (see, in particular, COB 2.2 (Inducements and soft commission), COB 7.1 (Conflict of interest and material interest) and COB 7.16 (Investment research)).

Securities offerings

COB 5.10.3

See Notes

handbook-guidance
The Principles referred to in COB 5.10.2 G are highly relevant to the management of an offering of a security by a firm. They require a firm to manage conflicts of interest which may arise in a way which ensures that all its clients are treated fairly and which ensures that the firm is conducting its business with integrity and according to proper standards of business.

COB 5.10.4

See Notes

handbook-guidance

The overriding responsibility of the firm is to have in place systems, controls and procedures to ensure that the duties which the firm owes to its clients are identified effectively and discharged appropriately. In particular, the firm's processes and procedures will need to take account of the following:

  1. (1) when carrying out a mandate to manage an offering of securities, the firm's duty for that business is to its corporate finance client (in many cases, the corporate issuer or seller of the relevant securities);
  2. (2) a firm's responsibilities to provide services to the firm's investment clients (that is, those on the investment client side of the Chinese wall (see COB 5.10.5 G)) are unchanged, even if they have an interest in acquiring securities in the offering. The firm will need to ensure that it complies with the relevant regulatory obligations to its investment clients, such as COB 5.3 (Suitability).

COB 5.10.5

See Notes

handbook-guidance

Firms will need to have in place systems, controls and procedures, appropriate to its structure and business, and to the sorts of offerings in which they are involved, for identifying and managing conflicts of interest (and see SYSC 3 (Systems and controls)). Examples which the FSA considers that a firm should consider (not every example will be relevant or appropriate to every situation or firm) include:

  1. (1) at an early stage, for example before it accepts a mandate to manage the offering, discussing or agreeing with its corporate finance client relevant aspects of the offering process, such as:
    1. (a) the process the firm proposes to follow in order to determine what recommendations it will make about allocations for the offering;
    2. (b) details of how the target investor group, to whom it is planned to offer the securities, will be identified;
    3. (c) the process through which recommendations on allocation and pricing are prepared, and by whom; and
    4. (d) (if relevant) that it may recommend placing securities with an investment client of the firm for whom the firm provides other services, with the firm's own proprietary book, or with an associate, and that this represents a potential conflict of interest;
  2. (2) having internal arrangements designed to ensure that the firm will give unbiased and full advice to the corporate finance client about the valuation and pricing for an offering (the FSA accepts that valuation is a complex process and great precision may not always be possible in a security offering);
  3. (3) having internal arrangements under which individuals or business units in the firm, whose responsibilities are ordinarily to provide services to the firm's investment clients (that is, those on the investment client side of the Chinese wall), are not involved directly in decisions about recommendations to a corporate finance client on pricing (although they might, for example, be permitted to provide information about likely investor interest to those advising the corporate finance client);
  4. (4) ensuring that its systems, controls and procedures to identify and manage conflicts of interest also cover the allocation process for an offering of securities; for example:
    1. (a) having internal arrangements under which the allocation process and the development of recommendations on allocation (names and amounts proposed to be allocated) are made to the corporate finance client only by staff who do not have any responsibilities for servicing investment clients;
    2. (b) inviting the corporate finance client to participate actively in the allocation process so that its proper interests can be taken into account effectively, including making available to the corporate finance client appropriate information to support the proposed recommendations on allocation;
    3. (c) basing recommendations about allocation and pricing on objectives agreed with the corporate finance client;
    4. (d) making the initial recommendation for allocation to private customers of the firm as a single block and not on a named basis;
    5. (e) having internal arrangements under which senior personnel in the department (or equivalent business unit), who are responsible for providing services to private customers, make the individual allocation recommendations for allocation to private customers of the firm; and
    6. (f) disclosing to the issuer, after completion of the transaction, details of the allocations which were actually made; and
  5. (5) having internal arrangements under which allocation recommendations are not determined by the level of business which a firm does or hopes to do with any other client (see also COB 2.2 (Inducements and soft commission)); for example:
    1. (a) any allocation to a private customer of the firm should be justifiable in terms of the process for developing allocation recommendations which was disclosed to the corporate finance client at the outset (as well as in terms of any other obligations which the firm may have - for example under COB 5.3 (Suitability) or COB 7.7 (Aggregation and allocation)); and
    2. (b) any recommendation for allocation to the proprietary trading desk of the firm or to an associate or affiliate of the firm should be justifiable in terms of the objectives of the allocation policy and should be consistent with the process for developing allocation recommendations disclosed by the firm at the outset.

COB 5.10.6

See Notes

handbook-guidance
One control which a firm might use is a review by the compliance function after the event of how well the firm's conflicts of interest management processes worked in relation to an issue. This might be of particular use if there are significant differences between the recommendation on price and subsequent market behaviour. The review might examine how the recommendations of the firm on pricing were reflected in market dealings after the issue. If significant differences are observed, it may be appropriate to identify why, and what that discloses about the way in which the firm's systems and controls operated in relation to that offering. The frequency of any review is a matter for the firm, in the light of its business and structure.

Securities offerings: behaviour in breach of the Principles

COB 5.10.7

See Notes

handbook-guidance
  1. (1) For the avoidance of doubt, the FSA considers that the following would each be a breach of the Principles referred to in COB 5.10.2 G, and a breach of COB 2.2.3 R:
    1. (a) an allocation made as an inducement for the payment of excessive compensation in respect of unrelated services provided by the firm; for example, very high rates of commissions paid to the firm by an investment client, or an investment client providing very high volumes of business at normal levels of commission (which may also be a breach of COB 7.2 (Churning and switching));
    2. (b) an allocation made to a senior executive or a corporate officer of an existing or potential corporate finance client, or of a listed company, in consideration for the future or past award of corporate finance business; and
    3. (c) an allocation which is expressly or implicitly conditional upon the receipt of orders or the purchase of any other service from the firm by the investor, or any body corporate of which the investor is a corporate officer.
  2. (2) A firm's systems, controls and procedures should, therefore, be designed to prevent these sorts of behaviour.

COB 5 Annex 1

Warrants and derivatives risk warning notice (E)

See Notes

handbook-evidential-provisions

COB 5 Annex 2

Dealing in securities which may be subject to stabilisation (E)

See Notes

handbook-evidential-provisions