SIFA 9
Conduct of business
SIFA 9.1
Introduction
- 01/12/2004
SIFA 9.1.1
See Notes
Our Conduct of Business sourcebook (COB)
provides the rules that authorised firms must comply with in the conduct of
their business.
- 01/12/2004
SIFA 9.1.2
See Notes
This part of the Overview covers the
rules that IFA firms carrying on typical financial advisory business will
encounter most frequently.
- 01/12/2004
SIFA 9.1.3
See Notes
Some IFA firms will have a permission that includes other activities. For these firms other parts of COB will also be relevant but are not discussed further in this Overview. For example:
(2) Holding client money: COB 9 Client assets (but see section 9.16 of this Overview)
- 01/12/2004
SIFA 9.1.4
See Notes
COB 8.1 requires firms to
send written confirmation to clients promptly after each transaction. This
requirement will not usually apply to IFAs in view of the exceptions at COB
8.1.6 R.
- 01/12/2004
Exclusion of liability
SIFA 9.1.5
See Notes
COB 2.5 applies
to a firm that makes any written or oral communication to a customer in the
course of, or in connection with, its designated investment business. It covers
how firms should handle the duties and liabilities that they have to their
customers.
- 01/12/2004
SIFA 9.1.6
See Notes
COB 2.5.3 R states
that a firm must not, in any written or oral communication, seek to exclude
or restrict, or to rely on any exclusion or restriction of, any duty or liability
it may have to a customer under the regulatory system.
- 01/12/2004
SIFA 9.1.7
See Notes
COB 2.5.4 R states
that a firm must not in any written or oral communication to a private customer
seek to exclude or restrict, or to rely on any exclusion or restriction of,
any duty or liability not referred to in COB 2.5.3 R unless
it is reasonable for it to do so.
- 01/12/2004
Reliance on others
SIFA 9.1.8
See Notes
Principle 2 requires a firm to conduct
its business with due skill, care and diligence. COB 2.3 indicates the extent to which firms can meet this requirement by
relying on others.
- 01/12/2004
SIFA 9.1.9
See Notes
A firm will be taken to be in compliance with any rule in COB that requires a firm to obtain information to the extent that the firm can show that it was reasonable for the firm to rely on information provided to it in writing by another person (COB 2.3.3 R).
- 01/12/2004
SIFA 9.1.10
See Notes
You may generally rely on another authorised
person not connected with your firm to provide you with information in writing
to meet your own obligations to obtain information, and vice versa (COB 2.3.5 G). 'In writing includes the use of electronic
media to make communications (GEN 2.2.14 R).
Additional guidance on electronic communication is given at COB 1.8.2 G.
- 01/12/2004
SIFA 9.2
Clear, fair and not misleading communication
- 01/12/2004
SIFA 9.2.1
See Notes
When you communicate information to a
customer, you must take reasonable steps to communicate in a way that is clear,
fair and not misleading (COB 2.1.3 R).
- 01/12/2004
Why is it important to communicate clearly?
SIFA 9.2.2
See Notes
You will want to communicate clearly
so that your customers understand your advice and the products and services
that you advise them on.
- 01/12/2004
SIFA 9.2.3
See Notes
You will also want to ensure that they
understand why you are recommending certain products or services and therefore
suitability letters should be clear, fair and not misleading.
- 01/12/2004
How should you communicate and where are the relevant rules?
SIFA 9.2.4
See Notes
Section 2.1 of the Conduct of Business
(COB) sourcebook sets out how you should communicate investment-related issues
with a customer.
- 01/12/2004
SIFA 9.2.5
See Notes
You should consider your customer's knowledge
of the particular investment business that the communication relates to and
make reasonable steps to ensure that the communication is clear, fair and
not misleading (COB 2.1.4 G).
- 01/12/2004
SIFA 9.2.6
See Notes
All types of communication are covered
by this requirement (COB 2.1.5 G),
for example:
(1) telephone calls;
(2) financial reports;
(3) any communication that is not a financial
promotion; and
(4) client agreements.
- 01/12/2004
SIFA 9.2.7
See Notes
COB Section 2.1 does not apply to a firm
when it communicates a financial promotion, when COB Chapter 3 will apply
instead (COB 2.1.1 R). In other words,
you have broadly similar obligations whether the communication is a financial
promotion or not.
- 01/12/2004
SIFA 9.2.8
See Notes
|
The
following sections of this Overview are also relevant: •'Financial promotions' - Chapter 9.3; •'Client classification' - Chapter 9.5; •'Know your customer' - Chapter 9.8; •'Suitability' - Chapter 9.9; and •'Assessing your customer's understanding of risk' - Chapter 9.10. |
- 01/12/2004
SIFA 9.3
Financial Promotion
- 01/12/2004
SIFA 9.3.1
See Notes
A financial promotion may be described
as an invitation or inducement to engage in investment activity. Section 21(1)
of the Act prohibits financial promotions unless communicated by an authorised
person, or an authorised person has approved the content of the promotion,
or an exemption applies.
- 01/12/2004
SIFA 9.3.2
See Notes
A primary intention of the rules and
guidance relating to financial promotions is to ensure firms pay due regard
to the interests of their customers and communicate information in a manner
which is clear, fair and not misleading (see COB 3.8.4 R).
- 01/12/2004
SIFA 9.3.3
See Notes
Financial promotions are far wider than
just investment advertisements. They can be either solicited or unsolicited
and may be through any form of media, such as phone conversations, newspaper
advertisements, group presentations and mailshots. For the purposes of COB
3, financial promotions are classed as either real
time or non-real time promotions. Real time promotions are those that are
communicated in the course of a meeting, telephone conversation, or other
interactive dialogue. Non-real time promotions include those made via correspondence,
email, website material, and radio and television.
- 01/12/2004
Real time promotions
SIFA 9.3.4
See Notes
By their very nature it is not possible
for a firm to approve real time financial promotions, and our rules do not
allow this (see COB 3.12.2 R). Instead, the
rules and guidance require that firms make clear their identity and the purpose
of the promotion and do not communicate at an unsociable hour (unless previously
agreed with the customer). Above all, promotions should be clear, fair and
not misleading.
- 01/12/2004
SIFA 9.3.5
See Notes
Your firm must not make an unsolicited
real time financial promotion unless the recipient has an established customer
relationship with you and expects to receive such promotions (see COB
3.10.3 R).
- 01/12/2004
Non-real time promotions
SIFA 9.3.6
See Notes
Before you communicate to a customer
or approve a non-real time financial promotion you must arrange for confirmation
by an individual in your firm with appropriate expertise that the financial
promotion complies with the rules in COB Chapter 3 (see COB 3.6). Firms are also expected to ensure routinely that their financial
promotions continue to comply with the rules.
- 01/12/2004
SIFA 9.3.7
See Notes
COB 3.8 contains
detailed rules and guidance concerning the form and content of financial promotions.
For example, all non-real time financial promotions should contain the name
and address (or contact point) of the firm or its appointed representative.
Any comparisons should be objective, balanced and clear. If a particular investment
or service is promoted then a fair and adequate description of the nature
of the investment, the commitment required, and the risks involved must be
given. As with real time promotions, however, the overriding principle is
that promotions be clear, fair and not misleading.
- 01/12/2004
Direct offer financial promotions
SIFA 9.3.8
See Notes
A direct offer financial promotion is
a non-real time financial promotion that contains an offer for the consumer
to enter into an investment agreement or, specifies the manner of response
or includes a response form (such as a tear-off slip). The rules require such
a promotion to contain enough information to enable the customer to make an
informed assessment of the investment or service to which it relates.
(1) The Table in COB 3.9.3 G is intended to help firms locate the sections of COB 3.9 that are applicable to them when they communicate or approve a
direct offer financial promotion.
(2) The Table in COB 3.9.7A R lists the information that a direct offer financial promotion
should contain.
- 01/12/2004
SIFA 9.3.9
See Notes
Direct offer financial promotions for
packaged products must contain the information required by COB 6.5 (Content
of key features).
- 01/12/2004
SIFA 9.3.10
See Notes
Direct offers for investments whose value
(or income) may fluctuate must make this clear in terms that are likely to
be understood by the kind of customer to whom the promotion is communicated
(COB
3.9.15 R).
- 01/12/2004
Record keeping requirements
SIFA 9.3.11
See Notes
A firm must make an adequate record of
each non-real time financial promotion that it has confirmed as complying
with the rules of COB 3. In addition to a copy
of the actual promotional material, firms should record the name of the individual
who approved the promotion, the date of approval and medium it was authorised
for. (See COB 3.7.2 G and COB 3.7.3 G for further guidance).
- 01/12/2004
SIFA 9.3.12
See Notes
Records must be kept for the following periods:
| Period of Retention | Product Type the Financial Promotion Relates to: |
| Indefinitely | Pension transfer pension opt out, FSAVC |
| Six years | Life policy pension contract stakeholder pension scheme. |
| Three years | All other cases |
- 01/12/2004
Other information
SIFA 9.3.13
See Notes
The following information may be helpful:
(1) Guidance on the restrictions on making
financial promotions under Section 21 of the Act is given in AUTH
App 1 (Financial promotion and related activities). This also explains
the main exemptions.
(2) The Table at COB 3.2.5 R lists the exemptions to the financial promotion rules in the Handbook.
Additionally, some of the main exemptions contained in the Financial Promotion
Order are summarised in COB 3 Annex 1.
- 01/12/2004
SIFA 9.3.14
See Notes
|
The
following sections of this Overview are also relevant:
•'Clear, fair and not misleading communication' - Chapter 9.2; and •'Key features' - Chapter 9.15. |
- 01/12/2004
SIFA 9.4
Inducements
- 01/12/2004
SIFA 9.4.1
See Notes
You must ensure that your firm, or anyone acting on behalf of it, does not conduct business under arrangements that are likely to result in a material conflict with your duty to your customers (COB 2.3.3 R). This includes any inducement being given or received by an unregulated associate.
- 01/12/2004
SIFA 9.4.2
See Notes
Principles 1 (Integrity) and 6 (Consumer's
interest) apply to the issue of inducements.
- 01/12/2004
Where are the relevant sections in the Handbook?
SIFA 9.4.3
See Notes
The following sections are relevant:
(1) Section 2.2 of COB in particular COB 2.2.3 R requires a firm to be satisfied that it or
anyone acting on its behalf does not conduct business under arrangements that
are likely to result in a material conflict with its duty to its customers.
(2) Selling packaged products is on the basis
of disclosable commission or fees. Restrictions on the arrangements under
which commission may be paid to an IFA in relation to the sale of a packaged
product are set out in COB 2.2.5 E.
(3) In addition some indirect benefits are
permitted. These are set out in COB 2.2.6 G and
the table under COB 2.2.7 G.
(4) Record keeping requirements: COB 2.2.20 R.
- 01/12/2004
Other considerations
SIFA 9.4.4
See Notes
For any firms that manage investments, COB
2.2.8 R?COB 2.2.19 R is
relevant as it covers soft commission.
- 01/12/2004
Record keeping requirements
SIFA 9.4.5
See Notes
You must make a record of the following:
- 01/12/2004
SIFA 9.4.6
See Notes
| Information | Required period of retention |
| Each payment of disclosable commission | At least six years from the date of payment. |
| Each benefit given to an independent intermediary | At least six years from the date on which it was given. |
- 01/12/2004
SIFA 9.4.7
See Notes
|
The
sections below are also relevant:
•'Excessive charges' - Chapter 9.12 of this Overview; •'Disclosing charges, remuneration & commission' - Chapter 9.13 of this Overview; and •PRIN 2.1 in the Handbook. |
- 01/12/2004
SIFA 9.5
Client classification
- 01/12/2004
SIFA 9.5.1
See Notes
You need to take reasonable steps to
establish the classification of each client that you intend to conduct investment
business with or for, and classify them appropriately.
- 01/12/2004
Why do you need to classify your clients?
SIFA 9.5.2
See Notes
Classifying your clients is part of the
'know your customer process'. It helps you to recommend suitable products
to your clients while ensuring that they are covered by the appropriate protections.
- 01/12/2004
SIFA 9.5.3
See Notes
We want to ensure that your clients receive
an appropriate level of protection. Private customers are entitled to receive
the most protection under the regulatory system.
- 01/12/2004
When and how should you classify your clients?
SIFA 9.5.4
See Notes
You must classify your clients before
conducting any investment business with them, by taking reasonable steps to
establish which category is most appropriate for them (COB 4.1.4 R).
- 01/12/2004
SIFA 9.5.5
See Notes
| The three client categories are listed below: (the full definitions are in the handbook glossary) | Likelihood of a small personal investment firm dealing with each type of customer | |
| Private customer | Private customers are mainly private individuals. They are given additional protections under COB rules covering financial promotion, know your customer and suitability. | Definitely - the large majority of your clients, if not all of them, will fall into this category. |
| Intermediate customer: | Examples of intermediate customers could include individuals with substantial investment experience. | Possibly |
| Market counterparty: | An example of a market counterparty is a central bank | Very unlikely |
- 01/12/2004
Other considerations when classifying customers:
SIFA 9.5.6
See Notes
Very occasionally, customers who would
normally be classed as one type of customer can be classed differently. To
do this, you are required to obtain written consent from your customer. For
example, an expert private customer could be classed as an intermediate customer
but only if you have taken reasonable care to determine that they are experienced
and have an in-depth knowledge of products and services (i.e. at a similar
level to a financial adviser). COB 4.1.9 R requires
you to give such an individual who it is proposed should be classified as
an intermediate customer, a written warning (you should keep a copy) to say
that they would lose some protections under the regulatory system. You must
also give your client sufficient time to consider the implications of being
classified as an intermediate customer and obtain his written consent.
- 01/12/2004
Where are the relevant Handbook sections?
SIFA 9.5.7
See Notes
The following sections are relevant:
(1) The rules and guidance are in Section
4.1 of COB.
(2) Transitional rules for firms that were
'grandfathered' across to the FSA from the PIA on 1 December 2001 (date also
known as N2): COB Table TR3 'Client Classification Provisions' sets out our
view on client classifications that were made by firms before N2. The table
can be found under COB section TP 1: 'COB TR 1 Transitional Rules for pre-N2
and ex-Section 43 firms'.
(3) Classifying clients under a different
category and when to review the classifications: COB 4.1.9 R?COB 4.1.15 R.
- 01/12/2004
Record keeping
SIFA 9.5.8
See Notes
You must keep a record of the classification
you make for each customer and enough information to support the classification
(COB
4.1.16 R). Listed below are details of how long you
must keep the record to meet our requirements. Each retention period starts
from when the customer ceases to be a customer of your firm.
- 01/12/2004
SIFA 9.5.9
See Notes
| Period of retention | When client classification relates to: |
| Indefinitely | Pension transfer, pension opt-out or FSAVC. |
| At least six years | Life policy or pension contract. |
| At least three years | In any other case |
- 01/12/2004
SIFA 9.5.10
See Notes
| The following sections of this Overview are also relevant: •'Terms of business' - Chapter 9.6; •'Know your customer' - Chapter 9.8; and •'Suitability' - Chapter 9.9. |
- 01/12/2004
SIFA 9.6
Terms of business
- 01/12/2004
SIFA 9.6.1
See Notes
You are required to provide written terms
of business to your customers to explain the terms and conditions on which
you intend to conduct business with them; and to set out particular issues
such as the complaints procedure and payment for services.
- 01/12/2004
Why do you need to provide terms of business?
SIFA 9.6.2
See Notes
When you provide terms of business to
a client it is a useful record for both your client and your firm. It offers
protection to clients if they think that a firm did not provide the services
that they agreed to, and it offers the firm protection if a client incorrectly
queries the services that it has provided to them.
- 01/12/2004
SIFA 9.6.3
See Notes
The requirement to provide terms of business
is in line with Principle 7 (Communications with clients).
- 01/12/2004
When do you need to provide terms of business?
SIFA 9.6.4
See Notes
You need to give a terms of business
document to each customer and you should provide one before conducting any
designated investment business with a private customer. However, the length
of time you have to provide one depends on both the category of customer and
the type of product that forms part of the transaction ( COB 4.2.5 R). Please see the summary below:
- 01/12/2004
SIFA 9.6.5
See Notes
| Type of customer | When to provide terms of business |
| Private customer | Before conducting
any designated investment business, unless: The customer has made an oral offer to enter into an investment agreement relating to an ISA or stakeholder pension scheme; in which case you need to provide it within five days of the offer. |
| Intermediate customer | Within a reasonable period of the firm bringing to conduct designated investment business. |
- 01/12/2004
SIFA 9.6.6
See Notes
Please note that conducting designated
investment business includes advising on investments as well as arranging
and entering into transactions (for a complete definition see the Handbook
glossary).
- 01/12/2004
What should you include in terms of business?
SIFA 9.6.7
See Notes
You must ensure that your terms of business
sets out the basis on which you will conduct business with your customer in
adequate detail (COB 4.2.10 R and COB
4.2.11 E).
- 01/12/2004
SIFA 9.6.8
See Notes
The terms of business information does
not have to be contained in only one document because you might not know a
private customer's investment objectives before you provide him with your
terms of business (see COB 4.2.12 R).
However, you should ensure that:
(1) your customers are aware that any separate
terms of business documents you give to them are collectively the terms of
business; and
(2) the content is still easy to understand.
- 01/12/2004
SIFA 9.6.9
See Notes
We will not approve the content or layout
of your terms of business. You should follow the rules and guidance in COB
4.2 (Terms of business and client agreements with customers)
when designing the content. In particular, see the Table at COB 4.2.15 E.
- 01/12/2004
Where is the relevant information in the Handbook?
SIFA 9.6.10
See Notes
Information is available as follows:
(1) Our requirements for terms of business
and client agreements: COB Chapter 4.2.
(2) A list of the general requirements for
the content of terms of business is given in the Table under COB 4.2.15 E. The following sections will be particularly relevant to a small
personal investment firm: sections 1-7, 9-11, 13, 14, 15-17, 21-25.
- 01/12/2004
Other considerations
SIFA 9.6.11
See Notes
There are the following other considerations:
(1) There are times when you need to issue a client agreement (which the client has to sign before it comes into force) instead of a terms of business : COB 4.2.7 R.
(2) There are occasions when you are not required to provide terms of business: COB 4.2.1 R and Table at COB 4.2.9 R.
(3) If the terms of business provided to a customer allow you to amend the terms of business without your customer's consent you must give the customer at least 10 business days notice before conducting business on the amended terms (COB 4.2.13 R).
(4) There are two transitional provisions that apply to terms of business. COB Table TR1 contains the following: ETP1 located in Section 1.1. (1) of the Table; andTSP2 located in Section 3.3 of the Table. The transitional provisions are applicable to firms that were grandfathered across to the FSA from the PIA at N2. The Table can be found under COB section TP1 'COB TR 1 Transitional Rules for pre-N2 and ex-Section 43 firms'.
(5) A firm can continue to rely on terms of business issued to an existing client under the rules of its previous regulator. If any amendments need to be made or there is a new client, the firm must issue a new terms of business that complies with COB 4.2.13 R.
- 01/12/2004
Record keeping requirements
SIFA 9.6.12
See Notes
You must make a record of each terms of business you provide as soon as it comes into force (COB 4.2.14 R).
- 01/12/2004
SIFA 9.6.13
See Notes
| Listed below are details of how long you must keep records of the terms of business letters to meet our requirements; each period of retention starts from when the customer ceases to be a customer of your firm (COB 4.2.4 G). | |
| Period of retention: | When terms of business relates to: |
| Indefinitely | Pension transfer, pension opt-out or FSAVC. |
| Six years | Life policy, pension contract or stakeholder pension scheme. |
| Three years | In any other case. |
- 01/12/2004
SIFA 9.6.14
See Notes
|
The
following sections are also relevant:
•'Client classification' - Chapter 9.5 of this Overview; •'Know your customer' - Chapter 9.8 of this Overview; •'Suitability' - Chapter 9.9 of this Overview; and •PRIN 2.1 in the Handbook. |
- 01/12/2004
SIFA 9.7
Polarisation: Effect of the rules
- 01/12/2004
SIFA 9.7.1
See Notes
Polarisation only applies to advice relating
to packaged products, which are life policies, personal pensions, collective
investment schemes, stakeholder pensions and investment trust savings schemes.
- 01/12/2004
SIFA 9.7.2
See Notes
Polarisation requires firms that advise
on packaged products to be either:
(1) independent intermediaries (IFAs) who
sell products from the whole market place; or
(2) representatives selling on behalf of
a single company (or group).
- 01/12/2004
Independent advice
SIFA 9.7.3
See Notes
If your firm holds itself out as an independent intermediary then it must offer advice across the whole market of packaged product providers. IFAs need not necessarily provide advice on all product types, but instead may specialise in certain areas (e.g. annuities and pensions). COB 5.1.16 R (1) states that an independent intermediary must at all times act in the best interests of its private customers when advising on packaged products. It must not enter into any commercial arrangement that may adversely affect its ability to provide independent advice (COB 5.1.16 R (2)).
- 01/12/2004
SIFA 9.7.4
See Notes
An IFA can be the appointed representative
of an IFA network or another IFA. In this case, the network, or principal,
is responsible for the training and competence of the IFA and for ensuring
compliance with the FSA rules.
- 01/12/2004
SIFA 9.7.5
See Notes
Offering independent, whole-of-market
advice does not mean that for each and every customer the firm must search
the entire market of packaged products. IFA firms may maintain a panel of
preferred packaged products selected from those generally available in the
market, based on the criteria of quality of product and general suitability
for customers. So long as the panel is made up of products from a sufficiently
large number of providers, is selected against definite criteria which are
applied equally, and is reviewed regularly (and whenever significant market
changes require it) we consider the practice acceptable. We would always expect
an IFA using such a panel to have written instructions describing the criteria
to be applied in selection or review of products and to maintain a full written
record of its initial selection and subsequent reviews.
- 01/12/2004
Exceptions
SIFA 9.7.6
See Notes
The polarisation rules apply only to
packaged products. They do not apply to mortgages or pure protection products
for example. So, an IFA may be restricted to one or more companies for the
purpose of advising on non-packaged products, and still act 'independently'
in relation to packaged products.
- 01/12/2004
Reporting requirements
SIFA 9.7.7
See Notes
Monitoring of business placement: your
firm is required to inform us when it places 20% or more of its business with
a particular provider together with its reasons for doing so. This is a question
in the Annual questionnaire at SUP 16 Ann 7 .
- 01/12/2004
What are the relevant sections of the Handbook?
SIFA 9.7.8
See Notes
The detailed rules and guidance relating
to Polarisation can be found in COB 5.1.
- 01/12/2004
Upcoming developments
SIFA 9.7.9
See Notes
In CP121 and CP166 we have outlined plans
to abolish the polarisation regime. To continue to have 'independent' status
firms that advise on packaged products from the whole of the market will have
to offer customers the opportunity to pay by fee.
- 01/12/2004
SIFA 9.7.10
See Notes
We do not propose to remove the polarisation
rules until a further Consultation Paper (covering the so-called 'menu' and
transitional rules) is published and the necessary changes have been made
to the Handbook. If your firm then wishes to take advantage of the removal
of the polarisation restriction, it may do so, providing that it is at the
same time in a position to comply with the new obligations that go with it.
Following a transitional period all firms will be required to comply with
the new rules.
- 01/12/2004
SIFA 9.7.11
See Notes
For more information on the upcoming
changes to the polarisation regime please see CP166, 'Reforming Polarisation:
Removing the Barriers to Choice'.
- 01/12/2004
SIFA 9.8
Know your customer
- 01/12/2004
SIFA 9.8.1
See Notes
Before you give personal recommendations
regarding investment business to private customers, you must take reasonable
steps to ensure that you have enough personal and financial information about
them. The information you gather should be relevant to the services that you
agree to provide (COB 5.2.5 R).
- 01/12/2004
Why do you have to gather know your customer information?
SIFA 9.8.2
See Notes
Principle 9 (Customers: relationships
of trust) requires you to take reasonable care to ensure the suitability of
your advice and discretionary decisions. You will not be able to comply with
Principle 9 unless you have first obtained enough information about your private
customers to enable you correctly to assess their individual requirements.
This will help you to meet your responsibility to give suitable advice.
- 01/12/2004
SIFA 9.8.3
See Notes
Another key reason for obtaining information
about your customers is to prevent money laundering (see Chapter 14 of this
Overview).
- 01/12/2004
How do you assess a private customer?
SIFA 9.8.4
See Notes
You will need to obtain personal and
financial information to be able to recommend a suitable product. The factors
that you will need to assess include:
(1) the financial needs and objectives of
a private customer;
(2) the affordability of any investment that
you recommend to a private customer;
(3) their attitude to risk; and
(4) any foreseeable future events for your
client.
There is guidance
in the Table at COB 5.2.11 G.- 01/12/2004
SIFA 9.8.5
See Notes
We do not prescribe the method of completing a fact-find and of obtaining personal and financial information about a private customer. Instead, you may design and use a process that is suitable for the market in which you transact business (COB 5.2.11 G).
- 01/12/2004
SIFA 9.8.6
See Notes
Where you advise a customer on a continuing
basis, you should regularly review the information you keep about him ( COB 5.2.6 G).
- 01/12/2004
SIFA 9.8.7
See Notes
If a private customer declines to provide information, you should advise him that this may adversely affect the quality of the services you can provide (COB 5.2.7 G).
- 01/12/2004
Which part of the Handbook is relevant?
SIFA 9.8.8
See Notes
The following parts of the Handbook are
relevant:
(1) Know your customer requirements: COB
Section 5.2
(2) Guidance on how to collect information:
Table 5.2.11G of COB.
- 01/12/2004
Other considerations
SIFA 9.8.9
See Notes
If you arrange an execution-only transaction you will not normally need to obtain personal or financial information. However, you will still need to do money-laundering checks (COB 5.2.2 G).
- 01/12/2004
Record keeping requirements
SIFA 9.8.10
See Notes
You must keep a record of a private customer's personal and financial circumstances. The table below shows details of how long you must keep the records to meet our requirements. Each period of retention starts from the date when the information was obtained (COB 5.2.9 R).
- 01/12/2004
SIFA 9.8.11
See Notes
| Period of retention: | When a private customer's details relate to: |
| Indefinitely | Pension transfer, pension opt-out or FSAVC. |
| At least six years | Life policy or pension contract, or stakeholder pension scheme. |
| At least three years | In any other case. |
- 01/12/2004
SIFA 9.8.12
See Notes
If you arrange a pension transfer or opt-out from an occupational pension scheme for a private customer on an execution-only basis, you will need to make and retain a clear record to confirm that no advice was supplied to the customer (COB 5.2.10 R).
- 01/12/2004
SIFA 9.8.13
See Notes
|
The
following sections are also relevant:
•'Suitability' - Chapter 9.9 of this Overview; •'Assessing your customer's understanding of risk' - Chapter 9.10 of this Overview; •'Money laundering' - Chapter 14 of this Overview; and •PRIN 2.1 in the Handbook. |
- 01/12/2004
SIFA 9.9
Suitability
- 01/12/2004
SIFA 9.9.1
See Notes
The purpose of the Suitability section
(COB 5.3) is that advisers take reasonable steps to ensure
that any investment they recommend is suitable for the customer's requirements.
The adviser must base his recommendation on information disclosed by the customer
and on other relevant facts about the customer of which the adviser is, or
reasonably should be, aware. It applies to all investments, but only in relation
to advice given to private customers - not intermediate customers or market
counterparties (see COB 5.3.5 R).
You should refer to COB 5.3.1 R to
check where section 5.3 applies.
- 01/12/2004
SIFA 9.9.2
See Notes
An adviser may not recommend a packaged
product if they are aware of another more suitable product that is generally
available (see COB 5.3.9 R(1)). Nor may an
adviser recommend the packaged product of a connected product provider unless
that product is better than every other available packaged product (the 'Better
than Best' rule see (COB 5.3.9 R(2)).
To comply with these rules, an adviser is expected to have adequate knowledge
of the products available from the market as a whole.
- 01/12/2004
SIFA 9.9.3
See Notes
COB 5.3.29 G contains
guidance for firms in assessing the suitability of personal pensions and FSAVCs
(compared to stakeholder pensions and AVCs), broker funds, pension transfers
and opt-outs, hybrid products, industrial assurance policies, income withdrawals,
ISA or PEP transfers and contracting out of SERPS.
- 01/12/2004
Suitability letters
SIFA 9.9.4
See Notes
When a private customer decides to act
on the investment advice given, your firm is required to provide the customer
with a written explanation of why it has concluded that the transaction is
suitable. This is commonly referred to as a 'suitability letter', but need
not necessarily take the form of a letter. However, whatever form it takes,
it should explain simply and clearly why the recommendation is viewed as suitable
having regard to the customer's personal and financial circumstances, needs
and priorities, and attitude to risk. It is also essential that a member of
staff who is authorised to advise on the type of product being recommended
signs the 'suitability letter' and accepts responsibility for the advice.
Detailed guidance on the contents of suitability letters can be found in COB 5.3.30 G.
- 01/12/2004
SIFA 9.9.5
See Notes
The requirement for providing a suitability
letter is explained in COB 5.3.14 R.
- 01/12/2004
SIFA 9.9.6
See Notes
When you must provide a suitability letter
is explained in COB 5.3.18 R.
- 01/12/2004
Record keeping
SIFA 9.9.7
See Notes
Record keeping requirements for suitability
letters are listed in COB 5.3.19A R.
- 01/12/2004
SIFA 9.9.8
See Notes
|
The
following section of this Overview is also relevant:
•'Know your customer' - Chapter 9.8. |
- 01/12/2004
SIFA 9.10
Assessing your customer's understanding of risk
- 01/12/2004
SIFA 9.10.1
See Notes
When you conduct investment business for private customers, you must ensure that you take reasonable steps to ensure that they understand the nature of the risks involved with the transaction (COB 5.4.3 R).
- 01/12/2004
Why do you have to assess your customer's understanding of risk?
SIFA 9.10.2
See Notes
You will want to sell products or services
that are suitable for your client's risk profile. This is so that they are
happy with the service that you provide them but it is also a vital part of
the 'know your customer process'.
- 01/12/2004
SIFA 9.10.3
See Notes
Assessing your customers' understanding
of risk will help ensure that you meet the requirements set out in the following
Principles:
- 01/12/2004
SIFA 9.10.4
See Notes
Principle 7 (Communications with clients)
requires you to pay due regard to the information needs of your clients and
to communicate information to them in a clear, fair and not misleading way.
- 01/12/2004
SIFA 9.10.5
See Notes
Principle 9 (Customers: relationships
of trust) requires you to take reasonable care to establish the suitability
of advice that you give.
- 01/12/2004
SIFA 9.10.6
See Notes
You must establish what each client considers
an acceptable level of risk to be for him or her and advise him or her on
that basis. When you have a clear understanding of your client's attitude
to risk (i.e. whether they are risk averse or willing to take some degree
of risk) you will be in a better position to recommend suitable products.
- 01/12/2004
Where is the relevant section in the Handbook?
SIFA 9.10.7
See Notes
The requirements for assessing your customer's
understanding of risk and providing risk warnings are set out in Section 5.4
of COB.
- 01/12/2004
SIFA 9.10.8
See Notes
COB 5.4.3 R refers to the general requirement for an adviser to assess a private customer's understanding of risk for any personal recommendation. Special risk warnings apply in addition for:
(1) warrants and derivatives (COB 5.4.6 E);
(2) retail securitised derivatives (COB 5.4.6A E);
(3) non-readily realisable investments (COB 5.4.7 E);
(4) penny shares (COB 5.4.8 E);
(5) securities subject to stabilisation (COB 5.4.9 E); and
(6) stock lending activity (COB 5.4.10 E).
- 01/12/2004
Other considerations
SIFA 9.10.9
See Notes
Your client may have different attitudes
to risk for different products. You should not assume that they would have
the same attitude to risk for all of their financial planning needs.
- 01/12/2004
SIFA 9.10.10
See Notes
|
The
following sections are also relevant:
•'Clear, fair and not misleading' - Chapter 9.2 of this Overview; •'Know your customer' - Chapter 9.8 of this Overview; •'Suitability' - Chapter 9.9 of this Overview; and •PRIN 2.1 in the Handbook. |
- 01/12/2004
SIFA 9.11
Information about the firm
- 01/12/2004
SIFA 9.11.1
See Notes
You need to disclose certain information
about your firm when you conduct investment business with or for private customers
so as to ensure that they have adequate information.
- 01/12/2004
SIFA 9.11.2
See Notes
The disclosure of information is relevant
to any written communications that:
(1) your firm publishes; or
(2) your employees, agents, representatives,
financial advisers and introducers use such as stationery, business cards,
or other business documentation.
- 01/12/2004
Why is it important for you to disclose the information?
SIFA 9.11.3
See Notes
Disclosing information about your firm
ensures that your clients know who they are conducting business with, both
the identity of the firm and the employee or representative of the firm. This
is in line with Principle 7 (Communications with clients), which requires
you to pay due regard to the information needs of your clients and communicate
information to them in a way that is clear, fair and not misleading.
- 01/12/2004
What information do you need to disclose?
SIFA 9.11.4
See Notes
When you conduct investment business
with private customers you should take reasonable steps to ensure that they
have been given adequate information about:
(1) the identity of your firm and business
address and telephone number;
(2) employees or other agents of the firm;
and
(3) your firm's statutory status;
unless you have
given the information to the client on a previous occasion and it is still
up to date ( COB 5.5.3 R).- 01/12/2004
Which sections of the Handbook apply?
SIFA 9.11.5
See Notes
(1) The rules and guidance on information
about the firm: section 5.5 of COB.
(2) A list of the information that you should
include in your written communications: Table COB 5.5.5 E.
(3) Statutory status disclosure: GEN
4.3.1 R & GEN 4 Annex 1.
The rule has recently changed: see section 9.11.6 below.
- 01/12/2004
SIFA 9.11.6
See Notes
| Statutory status disclosure - changes to the rule |
| • When sending a letter or an email to a private customer you are required to disclose that your firm is "Authorised and regulated by the Financial Services Authority". |
| • If your firm is an appointed representative of a network then you are required to state "[Name of appointed representative] is an appointed representative of [firm] which is authorised and regulated by the Financial Services Authority". |
| • Please note that the abbreviation FSA should no longer be used in this context. |
| You are likely to find it convenient to include the required disclosure on your letterhead. |
| The above rules came into force on 1 March 2003. Firms that are complying with the previous requirement have until 30 September 2004 to make the necessary changes. |
- 01/12/2004
Other considerations
SIFA 9.11.7
See Notes
If you give advice to a private customer
about packaged products you are reminded of the additional disclosure requirements
in COB 5.1 (Polarisation and status disclosure).
- 01/12/2004
SIFA 9.11.8
See Notes
There are further considerations to take
into account if you:
(1) conduct overseas business for UK private
customers ( COB 5.5.7 R); or
(2) conduct business from an overseas place
of business with overseas customers ( COB 5.5.8 G).
- 01/12/2004
SIFA 9.11.9
See Notes
| The following sections are also relevant: |
•'Clear, fair and not misleading' - Chapter 9.2 of this Overview; |
•'Polarisation' - Chapter 9.7 of this Overview; and |
•PRIN 2.1 in the Handbook. |
- 01/12/2004
SIFA 9.12
Excessive charges
- 01/12/2004
SIFA 9.12.1
See Notes
A firm must ensure that the charges it
makes to a private customer, in the course of or in connection with designated
investment business are not excessive. This is in line with Principle 6 (Customer's
interests) which requires you to pay due regard to the interests of your customers
and treat them fairly.
- 01/12/2004
How do you ensure that you do not charge customers excessively?
SIFA 9.12.2
See Notes
COB
5.6.4 G says
that you should consider the following to determine whether a charge is excessive:
(1) how your charges for products or services
compare to similar ones in the market;
(2) to what extent the charges made are an
abuse of the trust that your customer has placed in your firm; and
(3) the nature and extent of the disclosure
of the charges to your private customers.
- 01/12/2004
Where are the relevant sections in the Handbook?
SIFA 9.12.3
See Notes
The following sections of the Handbook are relevant:
(1) The general requirements: Section 5.6 of COB.
(2) There is a special provision for charges in respect of designated investments that are not readily realisable (COB 5.6.5 R).
(3) Section 5.7 of COB deals with the disclosure of charges.
- 01/12/2004
SIFA 9.12.4
See Notes
| The following sections are also relevant: |
•'Inducements' - Chapter 9.4 of this Overview; |
•'Disclosing charges, remuneration and commission' - Chapter 9.13 of this Overview; and |
•PRIN 2.1 in the Handbook |
- 01/12/2004
SIFA 9.13
Disclosing charges, remuneration & commission
- 01/12/2004
SIFA 9.13.1
See Notes
Before you conduct business with or for
private customers, you must communicate in writing ( COB
5.7.3 R(1)):
(1) the basis or amount of charges you will
charge them for conducting the business; and
(2) the nature or amount of any other income
you or your associate will receive.
'Associate'
has a wide meaning and you should consider the definition in the Handbook
glossary.- 01/12/2004
Why do you have to disclose this information?
SIFA 9.13.2
See Notes
The purpose of this requirement is to ensure that you make each private customer aware of the direct or indirect costs he/she will have to pay for financial services. This is so that they are in a better position to make informed choices (COB 5.7.2 G).
- 01/12/2004
SIFA 9.13.3
See Notes
This is in line with Principle 7 (Communications
with clients) which requires you to pay due regard to the information needs
of your clients and communicate information to them in a clear, fair and not
misleading way.
- 01/12/2004
How do you disclose this information?
SIFA 9.13.4
See Notes
You can disclose the required information in a terms of business, in a client agreement, or in a separate written statement. When you advise private customers on packaged products, product-related charges and expenses are normally disclosed in a key features document (COB 5.7.4 G).
- 01/12/2004
Where are the relevant sections in the Handbook?
SIFA 9.13.5
See Notes
The following sections of the Handbook
are relevant:
(1) The requirements: COB 5.7
(2) Key features requirements are set out
in COB 6.2 and COB 6.4 including disclosure
of product charges.
(3) Disclosure of remuneration and commission
for packaged products is covered by COB
5.7.5 R.
- 01/12/2004
Other considerations
SIFA 9.13.6
See Notes
If you conduct business on an execution-only
basis not for a packaged product, there are certain exceptions to the rules.
Full details can be found at COB
5.7.3 R (2).
Any income receivable by an associate also needs to be disclosed.
- 01/12/2004
SIFA 9.13.7
See Notes
| The following sections are also relevant: | |
| 'Clear, fair and not misleading' - Chapter 9.2 of this Overview; | |
| 'Inducements' - Chapter 9.4 of this Overview; | |
| 'Terms of business' - Chapter 9.6 of this Overview; | |
| 'Excessive charges' - Chapter 9.12 of this Overview; | |
| 'Key features' - Chapter 9.15 of this Overview; and | |
| PRIN 2.1 in the Handbook. | |
- 01/12/2004
SIFA 9.14
Projections
- 01/12/2004
SIFA 9.14.1
See Notes
COB 6.6 applies to a firm
in respect of projections for packaged products. A firm must not provide a
projection for a packaged product unless the projection is calculated and
presented in accordance with the rules in COB 6.6 . A firm should
not provide its own unauthorised projections.
- 01/12/2004
Why do you need to follow these rules?
SIFA 9.14.2
See Notes
To avoid committing an offence under
section 397 of the Act (Misleading statements and practices) you should ensure
that all forecasts of future values of investments are not misleading, false
or deceptive. In respect of packaged products COB 6.6 amplifies
Principle 7 which 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. A projection needs to be carried out on a basis of
consistent rates of investment return so that firms do not seek to compete
on the basis of wholly speculative forecasts as to the potential value of
future benefits from an investment.
- 01/12/2004
How do you disclose this information?
SIFA 9.14.3
See Notes
An IFA firm must ensure that a projection
given to a customer is relevant to that customer's circumstances (COB 6.6.7).
- 01/12/2004
SIFA 9.14.4
See Notes
An IFA can hand over the projections
prepared by a product provider. If you wish to make your own calculations
then you must comply with the rules in COB 6.6 .
- 01/12/2004
SIFA 9.14.5
See Notes
COB 6.5 sets out circumstances
in connection with potential sales when projections must be given.
- 01/12/2004
Other considerations
SIFA 9.14.6
See Notes
There is an exception to the rules in
COB 6.6 for pension benefit projections that meet the requirements in COB
6.6.5 .
- 01/12/2004
SIFA 9.14.7
See Notes
The FSA keeps the projection rates on
investment products under review. In June 2003 the FSA announced that it will
take a fundamental look at its role in setting projection rates and the standards
it expects the industry to adopt in illustrating potential returns to its
customers.
- 01/12/2004
SIFA 9.15
Key Features
- 01/12/2004
SIFA 9.15.1
See Notes
Consumers need key features so that they
can understand the product and compare it with different packaged products.
The COB 6 requirements expand on Principle 7 that requires a
firm to pay due regard to the information needs of its customers.
- 01/12/2004
Key features document
SIFA 9.15.2
See Notes
At the core of the regime is the Key
Features Document (KFD) that your firm must give to consumers before they
complete an application for any packaged product or cash deposit ISA. Product
providers must produce key features for every packaged product that they provide.
Under the rules set out in COB 6.5, all KFDs should be split
into a number of sections and the information disclosed will vary depending
on the type of product. COB 6.4 explains the product disclosure
required in some special situations.
- 01/12/2004
SIFA 9.15.3
See Notes
KFDs must contain an illustration of
the effect of charges over time on what the consumer might get back (COB 6.5.24
and COB 6.5.31 ). In many cases, mainly for life products,
an additional illustration is required to show the investor what he might
get back assuming set rates of return (COB 6.5.15 ). Your
firm may provide these illustrations in a document separate from the main
text of the KFD but presented with it.
- 01/12/2004
SIFA 9.15.4
See Notes
In the case where a consumer has responded
to a direct offer financial promotion, the information package that they receive
should contain example-based key features documents. There is no need to provide
a further set of key features for this transaction (COB 6.2.8 ).
- 01/12/2004
SIFA 9.15.5
See Notes
A firm may delay the provision of a KFD
when a customer is buying a life policy (which includes a pension policy)
without making a written application. However, that firm must give an adequate
oral explanation of the main features of the product, and must send the customer
a KFD within five business days of the sale (COB 6.2.9 (2)).
- 01/12/2004
SIFA 9.15.6
See Notes
For the rules relating to the provision
of KFDs when there are variations to existing life policies please refer to
COB 6.2.16 to COB 6.2.19 .
- 01/12/2004
SIFA 9.15.7
See Notes
COB 6.2.12 deals with
the provision of revised key features where the terms of a proposed life policy
are subsequently altered before the private customer completes the application
form.
- 01/12/2004
Financial promotion rules
SIFA 9.15.8
See Notes
You are reminded that key features are
a form of financial promotion and are subject to the rules contained in COB
3 (see also section 9.3 of this Overview on financial
promotions).
- 01/12/2004
Record keeping requirements
SIFA 9.15.9
See Notes
Your firm must keep records of its key features as governed by the rules applying to record keeping of non-real time financial promotions (COB 3.7). Also see section 9.3 in this Overview.
- 01/12/2004
Upcoming developments
SIFA 9.15.10
See Notes
We have set out in CP170 new proposals
for product disclosure at the point of sale, which will see the Key Features
Document and 'illustrations' replaced by a Key Facts Document and 'examples'.
The main focus of our work has been to develop a Key Facts Document consumers
will recognise, read, and understand.
- 01/12/2004
SIFA 9.15.11
See Notes
The proposals make little change to the
disclosure regime in terms of the products to which it relates. The requirement
for full, clear, fair and not misleading product disclosure will remain the
bedrock of the regime. The main costs of the change will be borne by life
and non-life product providers who are responsible for producing the key facts
information.
- 01/12/2004
SIFA 9.15.12
See Notes
A policy statement, RM19, giving feedback
to the responses we received to CP170 will be published in 2004. We expect
to implement the revised rules in 2005. For detailed information on the new
proposals see CP170, 'Informing Consumers: Product Disclosure at the Point
of Sale' (February 2003).
- 01/12/2004
SIFA 9.15.13
See Notes
|
The
following sections of this Overview are also relevant:
•'Financial promotions' - Chapter 9.3; •'Suitability' - Chapter 9.9; and •'Assessing your customer's understanding of risk' - Chapter 9.10. |
- 01/12/2004
SIFA 9.16
Custody and client money
- 01/12/2004
SIFA 9.16.1
See Notes
- 01/12/2004
How can you avoid inadvertently holding client money and custody assets?
SIFA 9.16.2
See Notes
COB 9.1.9 (3)COB 9.1.9(3) states that when a firm temporarily
holds a designated investment belonging to a client (other than in bearer
form) it is exempt from the custody rules if it takes certain steps as set
out in the Rule. You should not rely on this rule as a matter of course, and
should only retain a designated investment for as long as is strictly necessary.
- 01/12/2004
SIFA 9.16.3
See Notes
There is no equivalent exemption for
client money. An example of where a firm may need to act to avoid holding
client money is where a customer sends a cheque intended for the purchase
of a product made payable to the firm rather than the product provider. In
this case you should not cash the cheque if you want to avoid holding client
money instead you should return the cheque to the client with a request for
an amended cheque.
- 01/12/2004
SIFA 9.16.4
See Notes
A further potential client money issue
is that of rebated commission. If a firm makes it clear in its agreement with
the client that any commission remains the firm's until actually paid into
the account of the client, then the client money rules should not apply. However,
as soon as a firm agrees that a part of its commission will belong to the
client, then on receipt it will be part client money and part firm money and
the client money rules may need to be applied.
- 01/12/2004
Mandates
SIFA 9.16.5
See Notes
You will find the rules on mandates at COB 9.2.
The rules apply to those firms that control rather than hold clients' assets,
or are able to create liabilities in the name of the client (COB 9.2.4).
- 01/12/2004
SIFA 9.16.6
See Notes
The rules seek to ensure that firms establish
and maintain records and internal controls to prevent misuse of the authority
granted by the client. Mandates include a firm's authority over a client's
bank account to make direct debits in favour of the firm, and a firm holding
a client's credit card details.
- 01/12/2004
New developments
SIFA 9.16.7
See Notes
We are introducing a new sourcebook -
the Client Assets sourcebook (CASS). This will bring together in one sourcebook
the existing client assets rules from the Conduct of Business sourcebook (COB
chapter 9), and the proposed client money rules from the Insurance and Mortgage
Conduct of Business sourcebooks (ICOB and MCOB).
- 01/12/2004
SIFA 9.16.8
See Notes
Details of the proposals are in CP199:
Miscellaneous amendments (September 2003). We will publish comprehensive Destination
and Derivation tables, and there will be automatic links on the electronic
version of the Handbook from COB chapter 9 to the relevant sections of CASS.
(The COB rules will not change, they will just be re-numbered).
- 01/12/2004