SIFA 9
Conduct of business
SIFA 9.1
Summary
- 09/09/2005
SIFA 9.1.1
See Notes
Our
Conduct of Business sourcebook (COB) provides the rules that you must comply
with in the conduct of your investment business. If you undertake mortgage
and/or general insurance intermediation you will also need to be familiar
with the conduct of business source books for mortgages (MCOB) and insurance
(ICOB). You may find it helpful to refer to the special guides (MIGI, MOGI,
and GIGI).
- 09/09/2005
SIFA 9.1.2
See Notes
This part of the Guide covers the conduct of business rules that
small personal investment firms will encounter most frequently. These are:
•clear, fair
and not misleading communication•financial promotions•inducements•client classification•terms of business•depolarisation•know your customer•suitability•assessing your
customer's understanding of risk•information
about the firm•excessive charges•disclosing charges,
remuneration and commission•projections•key features•custody and
client money•basic advice
on stakeholder products
- 09/09/2005
SIFA 9.1.3
See Notes
Some small personal
investment firms will have a wider permission that includes other activities.
For these firms other parts of the Handbook will also be relevant but these
are not discussed further in the Guide. For example:
| • | Managing investments: | COB 7 Dealing and managing |
| COB 8 Reporting to customers | ||
| • | Holding client money: | Client Assets Sourcebook (CASS) (but see comments at section 9.16 of the Guide) |
- 09/09/2005
SIFA 9.1.4
See Notes
COB 8.1 requires firms to
send a written confirmation to clients promptly after each transaction. This
requirement will not usually apply to small personal investment firms in view
of the exceptions at COB
8.1.6 R.
- 09/09/2005
Exclusion of liability
SIFA 9.1.5
See Notes
Under COB 2.5 you must not seek to exclude or restrict any duty
or liability you may have to a customer under the regulatory system. This
applies whenever you make any written or oral communication to a customer
in the course of, or in connection with, designated investment business. COB 2.5 also required you not to exclude or restrict any
other duty or liability when you are communicating with a private customer
unless it is reasonable to do so. You also need to bear in mind your obligations
under the Unfair Terms in Consumer Contracts Regulations 1999.
- 09/09/2005
Reliance on Others
SIFA 9.1.6
See Notes
Principle 2 requires you to conduct your
business with due skill, care and diligence. COB 2.3 indicates
the extent to which you can meet this requirement by relying on others. You
may generally rely on another competent person not connected with your firm
to provide you with information in writing to meet your own obligations to
obtain information, and vice versa. This is providing that you can show that
it was reasonable to do so (COB 2.3.5 G provides
guidance on when it will be reasonable). You may also send information to
a third party (unconnected with the firm) on the instructions of the customer.
- 09/09/2005
SIFA 9.1.7
See Notes
'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.
- 09/09/2005
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). This is a requirement in COB, MCOB and ICOB. However MCOB and
ICOB are more prescriptive about the terms that must or must not be used.
- 09/09/2005
Why is it important to communicate clearly?
SIFA 9.2.2
See Notes
You will want to communicate clearly so that your customers understand
the scope of advice, the range of products on which you will advise and the
payment options. For example, a firm holding itself out as independent must
provide whole-of-market advice and offer customers the option to pay by fee
for that advice.
- 09/09/2005
SIFA 9.2.3
See Notes
You will also want
to ensure that they understand why you are recommending certain products or
services and so suitability letters and statements of demands and needs should
be clear, fair and not misleading.
- 09/09/2005
SIFA 9.2.4
See Notes
Where
your communications have been clear, fair and not misleading you face a reduced
risk of complaints as your customers should be fully aware of the advantages
and risks of the products you have recommended.
- 09/09/2005
How should you communicate and where are the relevant rules?
SIFA 9.2.5
See Notes
COB 2.1 sets out the basic requirements for all types of communication
to be clear, fair and not misleading.
- 09/09/2005
SIFA 9.2.6
See Notes
COB 2.1 embraces all communications with customers. Communication with
customers is not a one-off process. It begins with the initial disclosure
document and fees and commission statement (also known as the menu) and continues
through the advice and selling process ending with the production of the suitability
letter and key features. The detailed requirements for these communications
are found in COB 4, COB 5 and COB 6.
- 09/09/2005
SIFA 9.2.7
See Notes
This is not to suggest that communications do not need to be clear,
fair and not misleading once the suitability letter has been provided. The
requirement to be clear, fair and not misleading continues throughout the
customer relationship, for example, when dealing with a complaint or providing
a report. It also applies to intermediate customers who do not receive initial
disclosure documents and menus.
- 09/09/2005
A further consideration:
SIFA 9.2.8
See Notes
COB Section 2.1 does not apply to a firm
in respect of the communication and approval of financial promotions. This
is dealt with separately under COB 3 (COB 2.1.1 R) but the same overarching standard of clear,
fair and not misleading applies to all communications.
| The following sections of the Guide are also relevant: | |
| • | 'Financial promotions' - Chapter 9.3 |
| • | 'Client classification' - Chapter 9.5 |
| • | 'Know your customer' - Chapter 9.8 |
| • | 'Suitability' - Chapter 9.9 |
| • | 'Assessing your customer's understanding of risk' - Chapter 9.10 |
| If you do mortgage and general insurance business you should also refer to MOGI 2 and GIGI 3. | |
- 09/09/2005
SIFA 9.3
Financial Promotions
- 09/09/2005
SIFA 9.3.1
See Notes
A financial promotion is an invitation or inducement to engage
in investment activity and so is far wider than just investment advertisements.
Section 21(1) of FSMA prohibits financial promotions unless communicated by
an authorised person, or an authorised person has approved the content of
the promotion, or an exemption applies.
- 09/09/2005
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).
- 09/09/2005
SIFA 9.3.3
See Notes
Financial promotions can be either solicited
or unsolicited and may be communicated through any form of media - such as
phone conversations, newspaper advertisements, websites, group presentations
and mail shots. 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 through correspondence, email, website material, and radio
and television.
- 09/09/2005
SIFA 9.3.4
See Notes
The
general rules on the content and form of both real and non-real time promotions
are given in COB 3.8. There are major differences
between the financial promotion requirements for investment business and mortgage
or general insurance business. Firms that undertake mortgage or general insurance
intermediation should consult MCOB 3 and ICOB 3 and the relevant guides for small firms.
- 09/09/2005
Real Time Promotions
SIFA 9.3.5
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
(see COB 3.8.22 R).
- 09/09/2005
SIFA 9.3.6
See Notes
Your firm must not make an unsolicited
real time financial promotion (see COB
3.10.3 R)
unless:
•the recipient
has an established customer relationship with you and expects to receive such
promotions; or•the financial
promotion relates to a generally marketable packaged product which does not
involve higher volatility funds; or•the financial
promotion relates to a controlled activity carried out by an authorised person
involving readily realisable securities and generally marketable non-geared
packaged products only.
- 09/09/2005
Non-Real Time Promotions
SIFA 9.3.7
See Notes
Before you communicate to a customer
or approve a non-real time financial promotion you must arrange for an individual
with appropriate expertise to confirm that the financial promotion complies
with the rules in COB 3 (see COB 3.6). Firms are also expected to ensure routinely that their financial
promotions continue to comply with the rules.
- 09/09/2005
SIFA 9.3.8
See Notes
Firms may communicate
non-real time financial promotions produced by other firms (e.g. product providers)
in the circumstances set out in COB
3.6.5 R.
However you should remember that if you pass on to your client someone else's
promotional material such as product provider literature, you are responsible
for taking reasonable care to ensure that the product provider has confirmed
compliance and that the literature has not ceased to be clear, fair and not
misleading.
- 09/09/2005
SIFA 9.3.9
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.
- 09/09/2005
Direct Offer Financial Promotions
SIFA 9.3.10
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 and 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.
- 09/09/2005
SIFA 9.3.11
See Notes
You should bear in mind that an unsolicited letter to clients
which contains direct offer marketing material will (in the absence of an
exemption) be a financial promotion if any reference is made to the benefits
or risks of the products. So these will need to be approved before issue.
- 09/09/2005
SIFA 9.3.12
See Notes
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.
- 09/09/2005
SIFA 9.3.13
See Notes
The information
that a direct offer financial promotion should contain is set out in COB 3.9.6 R. Among other things, a direct offer financial
promotion must contain the information set out in COB Appendix 1.
- 09/09/2005
SIFA 9.3.14
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) and with due prominence.
- 09/09/2005
SIFA 9.3.15
See Notes
Following implementation of the Distance
Marketing Directive in October 2004, all direct offers must be in a durable
medium. This can be paper, or another medium that enables the person receiving
the information to store it so that it can be accessed in the future and remains
unchanged (COB 3.9.6 R (1)). Retail
customers must also be provided with all contractual terms on which your service
will be provided in a durable medium before the customer is bound by the offer,
unless an exemption applies.
- 09/09/2005
Record keeping requirements
SIFA 9.3.16
See Notes
You must make an adequate record of each
non-real time financial promotion that your firm has confirmed as complying
with the rules of COB 3. In addition to a copy
of actual promotional material, you should record the name of the individual
who approved the promotion, the date of approval and the medium it was authorised
for (see COB
3.7.2 G and COB
3.7.3 G for further guidance).
- 09/09/2005
SIFA 9.3.17
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. |
- 09/09/2005
SIFA 9.3.18
See Notes
A summary of record-keeping requirements
is set out in schedule 1 to each sourcebook (COB, MCOB and ICOB). The summaries
are intended as guides and are not a complete statement of our requirements - you
will also need to refer to the rules in the body of the sourcebook. These
are minimum requirements and you may decide to keep material for longer. Remember
that other organisations you deal with e.g. PII insurers and auditors may
have different record-keeping requirements.
- 09/09/2005
Other useful information
SIFA 9.3.19
See Notes
The following information may be helpful:
•Guidance on
the restrictions on making financial promotions under section 21 of FSMA is
given in PERG Chapter 8 (Financial promotion and related activities). This
also explains the main exemptions from this restriction.•The table at COB
3.2.5 R lists the exemptions to the financial promotion
rules. Additionally, some of the main exemptions are summarised in COB 3 Annex 1 G.•There is information
about financial promotions on our website under 'Doing Business with the FSA'
- 'Being Regulated'.•'Financial Promotion:
taking stock and moving forward' published in February 2005 www.fsa.gov.uk/pubs/other/promo_forward.pdf explains our approach to regulating financial promotions, some of our
major concerns about promotions and systems and controls and how we will continue
to review promotions, visit firms and communicate with the industry. The document
is available on our website under 'FSA Library' - 'Other publications'.•If you see an
advertisement that you feel is unfair, unclear or misleading you can report
it to us using the Financial Promotions Hotline on 08457 300 168.
| The following sections of the Guide are also relevant: | |
| • | 'Clear, fair and not misleading communication' - Chapter 9.2 |
| • | 'Key features' - Chapter 9.15 |
| If you do mortgage or general insurance business you should also refer to MOGI 2.1 and GIGI 3.2. | |
- 09/09/2005
SIFA 9.4
Inducements and Commissions
- 09/09/2005
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 2.2.3 R). This includes any inducement being given or received by an unregulated
associate. There are similar requirements in COB, ICOB and MCOB but the nature
of business covered results in specific requirements for each. COB 5.7 covers disclosure of charges, remuneration and commission. In relation
to business involving packaged products, remuneration and commission information
is included in the menu (COB
4.3).
- 09/09/2005
SIFA 9.4.2
See Notes
Principles 1 (Integrity) and 6 (Customers'
interests) apply to the issue of inducements.
- 09/09/2005
Where are the relevant sections in the Handbook?
SIFA 9.4.3
See Notes
The following
sections are relevant.
•Section 2.2
of COB and 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. This rule is relevant to firms who may consider
making or receiving payments to secure their distribution arrangements following
depolarisation.•Selling packaged
products is on the basis of disclosable commission or fees. Restrictions on
the arrangements under which commission may be paid to a firm in relation
to the sale of a packaged product are set out in COB 2.2.5 E. Financial assistance from product providers is covered by COB 2.2.5A E.•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.
Reasonable indirect benefits now include assistance for the development of
software or other computer facilities but only to the extent that the indirect
benefits will generate equivalent cost savings to the provider (who must not
be part of your immediate group) or to consumers.•Record-keeping
requirements: COB 2.2.20 R.
- 09/09/2005
Other considerations
SIFA 9.4.4
See Notes
For any firms that deal in investments, COB 2.2.8 R to COB 2.2.19 R is relevant,
as it discusses soft commission. We issued CP05/5 'Bundled brokerage and soft
commission arrangements' in March 2005 which includes proposed rule changes.
Hence you should check your understanding of these rules remains current.
- 09/09/2005
Record keeping requirements
SIFA 9.4.5
See Notes
You must make
a record of the following:
These are minimum requirements and you may decide to keep material for longer.
| Information | Required period of retention |
| Each payment of disclosable commission | At least six years from the date of payment. |
| Each indirect benefit given to a firm | At least six years from the date on which it was given. |
These are minimum requirements and you may decide to keep material for longer.
| The sections below are also relevant: | |
| • | 'Depolarisation - Chapter 9.7 |
| • | 'Excessive charges' - Chapter 9.12 |
| • | 'Disclosing charges, remuneration & commission' - Chapter 9.13 |
| • | PRIN 2.1 in the Handbook |
| • | If you do mortgage or general insurance business you should also refer to MOGI 2.2 and GIGI 3.3. |
- 09/09/2005
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. Provisions in MCOB
relate to customers and
in ICOB relate to retail
customers and commercial
customers, so firms must be guided by the specific provisions
for advising and selling in each sourcebook.
- 09/09/2005
Why do you need to classify your customers?
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.
- 09/09/2005
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.
- 09/09/2005
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).
|
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 promotions, know your customer and suitability. | Most of your clients will fall into this category |
| Intermediate customer: | Examples of intermediate customers could include individuals with substantial investment experience and businesses for whom the firm is arranging group schemes. | Possibly |
| Market counterparty: | An example of a market counterparty is a central bank. A large intermediate customer may be classified as a market counterparty in some circumstances. | Very unlikely |
- 09/09/2005
Other considerations when classifying customers:
SIFA 9.5.5
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 this is only if you have taken reasonable care to determine that they
have sufficient experience and understanding of the relevant products and
services.
- 09/09/2005
SIFA 9.5.6
See Notes
If you propose
classifying an individual as an intermediate customer, COB 4.1.9 R requires you to give them a written warning to say that they would
lose some protections under the regulatory system. You should keep a copy
of this warning letter. You must also give your client sufficient time to
consider the implications of being classified as an intermediate customer
and obtain their written consent. The contents of the warning are set out
at COB 4.1.11 E. This should include advising the client that
they will lose the protection afforded by the rules in COB 5.1: Advising on packaged products.
- 09/09/2005
Where are the relevant Handbook sections?
SIFA 9.5.7
See Notes
There are two
relevant sections:
•the rules and
guidance in section 4.1 of COB; and•classifying
clients under a different category and when to review the classifications
in COB 4.1.9 R to COB 4.1.15 R.
- 09/09/2005
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. Each retention period starts from when the customer
ceases to be a customer of your firm. These are minimum requirements and you
may decide to keep material for longer.
| 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 |
| The following sections of the Guide are also relevant: | |
| • | 'Terms of business' - Chapter 9.6 |
| • | 'Know your customer' - Chapter 9.8 |
| • | 'Suitability' - Chapter 9.9 |
| If you do mortgage and general insurance business you should also refer to MOGI 2 and GIGI 3. | |
- 09/09/2005
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 conducting business with them; and to set out particular issues
such as the complaints procedure and payment for services. The requirements
for terms of business are included in COB 4.2.
If your firm carries on business in relation to packaged products it must
also comply with COB
4.3 which covers the contents
of the initial disclosure document (IDD) and fees and commission statement
(menu). The terms of business do not need to duplicate information in the
IDD and menu.
- 09/09/2005
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 it has provided to them.
- 09/09/2005
SIFA 9.6.3
See Notes
The requirement to provide terms of business
is in line with Principle 7 (Communications with clients).
- 09/09/2005
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 investment business customer. This must be provided to the
customer 'in good time' before the business is conducted (COB 4.2.5 R). This means that the customer must have enough time to fully consider
all the information before they are bound by the contract (COB 4.2.6A G).
- 09/09/2005
What should you include in terms of business?
SIFA 9.6.5
See Notes
You must ensure that your terms of business
set out the basis on how you will conduct business with your customer in adequate
detail (COB 4.2.10 R and COB 4.2.11 E).
For distance contracts, where there is no face-to-face contact with the customer
('distance contract' is defined in the Glossary), you must provide further
information (COB
4.2.10 R (2)). This information
is set out in COB Appendix 1.
- 09/09/2005
SIFA 9.6.6
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:
•your customers
are aware that any separate terms of business documents you give to them collectively
amount to being the terms of business; and•the content
is still easy to understand.
- 09/09/2005
SIFA 9.6.7
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
and in particular the table at COB 4 Annex 2E.
- 09/09/2005
Where is the relevant information in the Handbook?
SIFA 9.6.8
See Notes
Information
is available as follows:
•requirements
for terms of business and client agreements: COB 4.2;
and•a list of the
general requirements for the content of terms of business: COB 4 Annex 2E.
- 09/09/2005
Other considerations
SIFA 9.6.9
See Notes
There
are the following other considerations:
•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•There are occasions
when you are not required to provide terms of business: COB 4.2.5 R and COB 4 Annex 1R.•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)•A firm can continue
to rely on terms of business issued to an existing client under the rules
of its previous regulator. However it must also inform such clients in writing
of the matters set out at COB 4 Annex 2E Notes
2, 20 and 21 which deal with FSA regulation and the protections available
from the Financial Ombudsman Service (FOS) and the Financial Services Compensation
Scheme (FSCS). If you need to make any amendments to the terms of business,
or there is a new client, you must issue new terms.
- 09/09/2005
Record keeping requirements
SIFA 9.6.10
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).
- 09/09/2005
SIFA 9.6.11
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 4.2.14 R). These are minimum
requirements and you may decide to keep material for longer.
| 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. |
| The following sections are also relevant: | |
| • | 'Client classification' - Chapter 9.5 |
| • | 'Depolarisation' - Chapter 9.7 |
| • | 'Know your customer' - Chapter 9.8 |
| • | 'Suitability' - Chapter 9.9 |
| • | PRIN 2.1 in the Handbook |
| If you do mortgage or general insurance business you should also refer to MOGI 2 and GIGI 3. | |
- 09/09/2005
SIFA 9.7
Depolarisation
- 09/09/2005
SIFA 9.7.1
See Notes
Polarisation
required firms that advise on packaged products to be either independent financial
advisers (IFAs) who sell products from the whole market place and charge fees;
or representatives selling on behalf of a single company (or group). These
rules changed on 1 December 2004 when the depolarisation rules came into effect.
Under these rules firms may offer advice with the following scope (COB 5.1.6A R):
•from the whole
of the market, or•from a limited
number of providers, or•from a single
provider.
- 09/09/2005
SIFA 9.7.2
See Notes
There is guidance
on the scope and range of advice on packaged products at COB 5.1.6B G. You can expand the scope of advice beyond the scope previously
arranged with the customer provided you make the customer aware of the proposed
change in advance in a durable medium.
- 09/09/2005
SIFA 9.7.3
See Notes
The Insurance Mediation Directive requires enhanced disclosure
when business relates to life policies - see COB 4.3.19 R to COB 4.3.26 R. Firms can comply
using the IDD. Firms will also need to provide a 'statement of demands and
needs' (unless these points are covered in the suitability letter before conclusion
of the contract) - see COB 5.2.12 R to COB 5.2.17 G.
- 09/09/2005
SIFA 9.7.4
See Notes
A firm must not hold itself out as independent unless:
This means that a firm cannot use the word independent in its name unless it offers customers the opportunity of paying by fee.
•it provides
advice from the whole market (or the whole of a sector of the market), and•it offers the
customer the opportunity of paying fees for the provision of such advice (COB 5.1.11A R).
This means that a firm cannot use the word independent in its name unless it offers customers the opportunity of paying by fee.
- 09/09/2005
Initial disclosure document (IDD)
SIFA 9.7.5
See Notes
The IDD may be found at COB
4 Annex 4 R. On first making contact with a private customer with a view to
advising etc on packaged products you should provide an IDD. The activities
that require this disclosure are set out at COB
4.3.3 R (1)(a). Any loans to the firm as well as share ownership of 10% or more
must be disclosed in the IDD. Where the IDD is provided by an appointed representative,
it must cover loans made to or by that appointed representative or holdings
in or held by that appointed representative.
- 09/09/2005
SIFA 9.7.6
See Notes
Downloadable templates of the document are on our website at: http://www.fsa.gov.uk/Pages/Doing/Info/disclosure/index.shtml. Any terms of business not covered by the IDD may be attached to the
IDD or provided to the client as a separate document.
- 09/09/2005
Menu (fees and commission statement)
SIFA 9.7.7
See Notes
The menu may be found
at COB
4 Annex 6 R. You should give out a menu on first making
contact with a private customer with a view to providing advice on packaged
products (COB 4.3.3 R), or on request
(COB 4.3.5 R).
- 09/09/2005
SIFA 9.7.8
See Notes
If you allow
payment by commission you will need to disclose the higher of commission or
commission equivalent if you are in the same immediate group as a product
provider (i.e. you are more than 50% owned by a provider or otherwise controlled
by a provider) (COB
5.7.5 R). A firm can have
more than one menu as it may offer a different charging structure to different
groups of clients. The menu disclosures are in addition to the existing disclosure
of actual commission in cash terms.
- 09/09/2005
SIFA 9.7.9
See Notes
To help firms to complete their menus,
we have developed a calculator using Excel software. This will help you to
identify your firm's own maximum commission levels by comparing different
commission shapes and giving you the corresponding market average. The calculator
is available on our website.
- 09/09/2005
Other Considerations
SIFA 9.7.10
See Notes
A
small investment business firm can be the appointed representative of a network
or another firm (the principal). In this case, the network, or principal,
is responsible for the training and competence of the appointed representative
and for ensuring compliance with the FSA rules, including the depolarisation
rules. Appointed representatives will need to agree the scope and range of
advice they give with their principal.
- 09/09/2005
SIFA 9.7.11
See Notes
Offering independent, whole-of-market advice does not mean that
you must search the entire market of packaged products for each and every
customer. You may maintain a panel of 'preferred' packaged products
selected from those generally available in the market. As long as the panel
is made up of products from a sufficiently large number of providers, is selected
following a reasonable analysis against definite criteria reflecting adequate
knowledge of the products available on the market which are applied equally,
and is reviewed regularly (and whenever significant market changes require
it) we consider the practice acceptable (see further COB
5.1.6B G (4)). We would always expect a firm using such a panel to have written
instructions describing the criteria to be applied in selecting or reviewing
products and to maintain a full written record of its initial selection and
subsequent reviews.
- 09/09/2005
SIFA 9.7.12
See Notes
Both the IDD and menu must carry the
keyfacts logo. The logo may not be used on any document where its use is not
mandated by FSA rules (GEN 5.1).
- 09/09/2005
SIFA 9.7.13
See Notes
Firms need to secure customer agreement
to fee charging arrangements before starting to act for a private client (COB
4.3.6 R (1)). If charging solely by fee you may only
retain trail commission where it would be manifestly disproportionate for
your firm to be required to account to the customer and you have agreed a
maximum amount to be retained each year with your customer (COB
4.3.6 R (2)). Paragraphs 2.119-2.122 of PS04/27 set out what we mean by a fee.
- 09/09/2005
SIFA 9.7.14
See Notes
If the firm receives a complaint that
is the responsibility of another party to the transaction you must have procedures
in place to refer it to the appropriate party (DISP
1.2.1 R and DISP
1.4.18 R). The records
you keep should also include the documentation relating to the referral of
a complaint under DISP
1.4.18 R (DISP
1.5.2 G).
- 09/09/2005
SIFA 9.7.15
See Notes
The scope of advice of the firm (whole-of-market,
multi-tied, single-tied) will require different competences on the part of
the firm's advisers to enable it to discharge its advisory functions.
- 09/09/2005
Record keeping Requirements
SIFA 9.7.16
See Notes
You must keep records of each particular
menu provided to a private customer (other than one given merely in reference
to a request). Firms need to keep a copy of each menu for six years from when
it was updated or replaced (COB 4.3.11 R).
These are minimum requirements and you may decide to keep material for longer.
| The following sections are also relevant: | |
| • | Terms of business - Chapter 9.6 |
| • | Suitability - Chapter 9.9 |
| • | Training and Competence - Chapter 10 |
| • | Complaints - Chapter 11 |
- 09/09/2005
SIFA 9.8
Know your customer
- 01/12/2004
SIFA 9.8.1
See Notes
Before you give personal
recommendations regarding investment or mortgage 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).
For general insurance the required information is ascertained in the preparation
of the statement of demands and needs. When arranging a life policy for any
client, you may be required to give them a statement of their demands and
needs (COB 5.2.12 R to COB 5.2.17 G).
- 09/09/2005
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 for any
customers who are entitled to rely on this. You will not be able to comply
with Principle 9 unless you have first obtained enough information about your
private customers to enable you to assess correctly their individual requirements.
This will help you to meet your responsibility to give suitable advice.
- 09/09/2005
SIFA 9.8.3
See Notes
Another
key reason for obtaining information about your customers is to prevent money
laundering (see Chapter 14 of the Guide).
- 09/09/2005
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 process is often described as fact-finding and the document that records
the information is generally referred to as a fact-find. The factors that
you will need to assess include:
There is guidance in the table at COB 5.2.11 G.
•the financial
needs and objectives of a private customer;•the customer's
current income and expenditure and any likely changes to income and expenditure
- to assess the affordability of any investment or mortgage product that you
recommend to a private (or retail) customer;•their attitude
to risk; and•any foreseeable
future events for your client.
There is guidance in the table at COB 5.2.11 G.
- 09/09/2005
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. You may design and use a process that
is suitable for the market you transact business in (COB 5.2.11 G).
- 09/09/2005
SIFA 9.8.6
See Notes
Where you advise customers on a continuing basis, you should regularly
review the information you keep about them (COB 5.2.6 G).
- 09/09/2005
SIFA 9.8.7
See Notes
If a private
customer declines to provide relevant personal and financial information,
you should not proceed without promptly advising them that this may adversely
affect the quality of the services you can provide (COB 5.2.7 G). You should consider sending written confirmation of that advice.
Note that provision of certain information e.g. income / expenditure is not
optional when dealing with mortgage products where it is a requirement to
ensure responsible lending. Fact-finds for these products are specific and
vary according to the nature of the loan e.g. property purchase, equity release
or lifetime mortgages.
- 09/09/2005
Which part of the Handbook is relevant?
SIFA 9.8.8
See Notes
The following
parts of the Handbook are relevant:
•know your customer
requirements: COB Section 5.2;•guidance on
how to collect information: table at COB 5.2.11 G;•statement of
demands and needs: COB 5.2.12 R to COB 5.2.17 G; and•in MCOB and
ICOB - advising and selling standards.
- 09/09/2005
Other considerations
SIFA 9.8.9
See Notes
If
you arrange an execution-only transaction (a transaction where no advice is
sought or given) you will not normally need to obtain personal or financial
information. However, you may still need to do money-laundering checks and
provide a demands and needs statement in relation to any life policy business
(COB 5.2.2 G).
- 09/09/2005
SIFA 9.8.10
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).
- 09/09/2005
SIFA 9.8.11
See Notes
- 09/09/2005
Record keeping requirements
SIFA 9.8.12
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). These are minimum
requirements and you may decide to keep material for longer.
| 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. |
| The following sections are also relevant: | |
| • | 'Suitability' - Chapter 9.9 |
| • | 'Assessing your customer's understanding of risk' - Chapter 9.10 |
| • | 'Money laundering' - Chapter 14 |
| • | PRIN 2.1 in the Handbook |
| If you do mortgage or general insurance business you should also refer to MOGI 2 and GIGI 3. | |
- 09/09/2005
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
product they recommend is suitable for the customer's requirements.
A firm must take reasonable steps to ensure that the advice on investments
is suitable for the client. Any recommendation it makes must have regard to
the facts the client disclosed and any other relevant facts about the client
of which the firm is - or reasonably should be - aware (COB 5.3.5 R). The section applies to all investments, but only in relation
to advice given to private customers. It does not generally apply to firms'
direct offer financial promotions and does not apply to providing basic advice
on a stakeholder product.
- 09/09/2005
SIFA 9.9.2
See Notes
However you are reminded of the requirement
in COB 3.9.6 R (Direct offer financial promotions: general
requirements). Under this, if you issue a direct offer promotion, you 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, they should seek advice.
- 09/09/2005
SIFA 9.9.3
See Notes
If the recommendation relates to a packaged
product, it must be the most suitable from the range of packaged products
on which you give investment advice to the client. If there is no packaged
product in the firm's relevant range of packaged products which is suitable
for the client, you must not make a recommendation (COB 5.3.5 R (2)). However please see paragraph 9.9.4 below.
- 09/09/2005
SIFA 9.9.4
See Notes
Following depolarisation firms have the opportunity to make out-of-range
recommendations. COB 5.3.8A R sets out the
procedure that must be followed when a firm wishes to go out of range. Before
doing so a firm will want to consider whether its systems and controls and
training and competence arrangements are adequate to enable it to go out of
range and still comply with its regulatory obligations. COB 5.3.10A R sets out the requirements which whole-of-market advisers must follow
if their recommendations are to be suitable.
- 09/09/2005
SIFA 9.9.5
See Notes
COB 5.3.13 G lists where you can find the specific rules and guidance for firms
in assessing the suitability of personal pensions and FSAVCs (relative 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 the State Second Pension (formerly SERPS).
- 09/09/2005
Suitability Letters
SIFA 9.9.6
See Notes
When a private customer
decides to act on the investment advice given, your firm is required to provide
them 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. 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 should also contain a summary
of the main consequences and any possible disadvantages of the transaction.
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 and
there is additional information on our website.
- 09/09/2005
SIFA 9.9.7
See Notes
The requirement
for providing a suitability letter is listed at COB 5.3.14 R. The timing of when you must provide a suitability letter is at COB 5.3.18 R
- 09/09/2005
Record Keeping
SIFA 9.9.8
See Notes
Record-keeping requirements for suitability
letters are listed in COB 5.3.19A R.
These are minimum requirements and you may decide to keep material for longer.
| The following sections of the Guide are also relevant: | |
| • | 'Depolarisation' - Chapter 9.7 |
| • | 'Know your customer' - Chapter 9.8 |
| If you do mortgage and general insurance business you should also refer to MOGI 2 and GIGI 3. | |
- 09/09/2005
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).
- 09/09/2005
Why do you have to assess your customer's understanding of risk?
SIFA 9.10.2
See Notes
Assessing attitude to risk is a fundamental part of the 'know
your customer' process and of suitability. You will want to recommend products
or services that are suitable for your client's risk profile. This is
so that they are happy with the service you have provided.
- 09/09/2005
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:
•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.•Principle 9
(Customers: relationships of trust) requires you to take reasonable care to
establish the suitability of advice that you give.
- 09/09/2005
SIFA 9.10.4
See Notes
You must establish
what each client considers an acceptable level of risk to be for them and
advise them 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.
- 09/09/2005
Where is the relevant section in the Handbook?
SIFA 9.10.5
See Notes
The requirements for assessing your customers' understanding
of risk and providing risk warnings are set out in COB 5.4.
- 09/09/2005
SIFA 9.10.6
See Notes
COB 5.4 refers to the requirement for an adviser to assess a private customer's
understanding of risk for any personal recommendation (COB
5.4.3 R). Special risk warnings apply in addition for:
•warrants and
derivatives (COB
5.4.6 E);•retail securitised
derivatives (COB
5.4.6A E);•non-readily
realisable investments (COB
5.4.7 E);•penny shares
(COB
5.4.8 E);•securities subject
to stabilisation (COB
5.4.9 E); and•stock-lending
activity (COB
5.4.10 E).
- 09/09/2005
SIFA 9.10.7
See Notes
A
firm has a general duty to ensure that it has taken reasonable steps to ensure
that its private customers understand the risks involved with any investment
product that the firm recommends to them (COB
5.4.3 R)
and, similarly, with the risks involved in mortgage and/or general insurance
products.
- 09/09/2005
Other considerations
SIFA 9.10.8
See Notes
Your client
may have different attitudes to risk for different products. You should not
assume they would have the same attitude to risk for all their financial planning
needs.
- 09/09/2005
SIFA 9.10.9
See Notes
COB Section
5.4 does not apply if you are providing basic advice on a stakeholder product
- see COB 5A and Chapter 9.17 of the Guide.
| The following sections are also relevant: | |
| • | 'Clear, fair and not misleading' - Chapter 9.2 |
| • | 'Know your customer' - Chapter 9.8 |
| • | 'Suitability' - Chapter 9.9 |
| • | PRIN 2.1 in the Handbook |
| If you do mortgage or general insurance business you should also refer to MOGI 2 and GIGI 3. | |
- 09/09/2005
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,
to ensure they have adequate information about the firm.
- 09/09/2005
SIFA 9.11.2
See Notes
The disclosure
of information is relevant to any written communications that:
such as stationery, business cards, or other business documents.
•your firm publishes;
or•your employees,
agents, representatives, financial advisers and introducers use
such as stationery, business cards, or other business documents.
- 09/09/2005
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.
- 09/09/2005
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:
This is 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). For business involving packaged products this information is included in the IDD which is given to the private customer on first contact.
•the identity
and business address of the firm;•the identity
and status or relationship that employees - or other agents of the firm the
customer may have contact with - have with the firm; and•the fact that
the firm is authorised and regulated by the FSA (or is an appointed representative
of such a firm).
This is 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). For business involving packaged products this information is included in the IDD which is given to the private customer on first contact.
- 09/09/2005
Which section of the Handbook applies?
SIFA 9.11.5
See Notes
•the rules and
guidance on information about the firm: COB 5.5;•a list of the
information you should include in your written communications: Table 5.5.5E
in COB; and•statutory status
disclosure: GEN
4.3.1 R & GEN 4 Annex 1 R.
| Statutory status disclosure | |
| • | 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 you are required to state '[Name of appointed representative] is an appointed representative of [name of principal] which is authorised and regulated by the Financial Services Authority'. |
| • | Please note that the abbreviation 'FSA' should no longer be used in this context. |
| • | Authorised Professional Firms may also disclose that they are regulated by their professional body, as long as - when taken together - the whole disclosure is clear, fair and not misleading. |
| It may be convenient for you to include the required disclosure on your letterhead. | |
- 09/09/2005
Other considerations
SIFA 9.11.6
See Notes
If you give advice to a private customer
about packaged products there are additional disclosure requirements in COB
4.3 (Disclosing information about services, fees and
commission - packaged products).
- 09/09/2005
SIFA 9.11.7
See Notes
There are further
considerations to take into account if you:
• conduct
overseas business for UK private customers (COB 5.5.7 R);
or• conduct
business from an overseas place of business with overseas customers (COB 5.5.8 G).
| The following sections are also relevant: | |
| • | 'Clear, fair and not misleading' - Chapter 9.2 |
| • | 'Depolarisation' - Chapter 9.7 |
| • | PRIN 2.1 in the Handbook |
| If you do mortgage or general insurance business you should also refer to MOGI 2 and GIGI 3. | |
- 09/09/2005
SIFA 9.12
Excessive charges
- 01/12/2004
SIFA 9.12.1
See Notes
Principle 6 (Customer's interests) requires a firm to pay due
regard to the interests of its customers and treat them fairly. The purpose
of COB 5.6 is to ensure that the charges a firm makes to its
private customers are not excessive. The obligations to disclose to a private
customer the charges a firm intends to make are set out in COB
4.3 and COB 5.7.
- 09/09/2005
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 decide whether a
charge is excessive:
•how your charges
for products or services compare to similar ones in the market;•to what extent
the charges made are an abuse of the trust that your customer has placed in
your firm; and•the nature and
extent of the disclosure of the charges to your private customers.
- 09/09/2005
Where is the relevant section in the Handbook?
SIFA 9.12.3
See Notes
The following sections of the Handbook
are relevant:
•
COB 5.6 sets out the general requirements;•there is a special
provision for charges in respect of designated investments that are not readily
realisable (COB
5.6.5 R);•
COB
4.3 (Disclosing information about services, fees and commission - packaged
products); and•
COB 5.7 (Disclosure of charges, remuneration and commission).
| The following sections are also relevant: | |
| • | 'Inducements' - Chapter 9.4 |
| • | 'Depolarisation' - Chapter 9.7 |
| • | 'Disclosing charges, remuneration and commission' - Chapter 9.13 |
| • | PRIN 2.1 in the Handbook |
| If you do mortgage and general insurance business you should also refer to MOGI 2.10 and GIGI 3. | |
- 09/09/2005
SIFA 9.13
Disclosing charges, remuneration & commission
- 01/12/2004
SIFA 9.13.1
See Notes
Before
you conduct business with or for private or retail customers, you must communicate
in writing (COB 5.7.3 R (1)):
'Associate' has a wide meaning and you should refer to the definition in the Handbook glossary.
•the basis or
amount of charges you will charge them for conducting the business; and•the nature or
amount of any other income you or your associate will receive.
'Associate' has a wide meaning and you should refer to the definition in the Handbook glossary.
- 09/09/2005
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 or retail
customer aware of the direct or indirect costs he 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).
- 09/09/2005
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.
- 09/09/2005
How do you disclose this information?
SIFA 9.13.4
See Notes
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 include 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 in line with COB 6.2 and COB 6.4.
- 09/09/2005
SIFA 9.13.5
See Notes
If you are providing
advice in connection with packaged products, you should - in line with COB 4.3.3 R - have given your customer a menu setting out
the maximum rates of any fees or commissions which the firm may earn or 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
line with COB 4.3.6 R, it has confirmed
the exact amount or rate that it will charge.
- 09/09/2005
SIFA 9.13.6
See Notes
In addition a private
customer should be informed as soon as practicable of the exact rate or the
exact amount in cash terms of any commission or equivalent which the firm
will receive for a specific transaction. COB
5.7.5 R (2) sets
out the circumstances when a firm is to be regarded as receiving commission
equivalent.
- 09/09/2005
Where are the relevant sections in the Handbook?
SIFA 9.13.7
See Notes
The following sections of the Handbook
are relevant:
•the requirements
in COB 5.7;•key features
requirements set out in COB 6.2 and COB 6.4, including disclosure of product charges; and•disclosure of
commission (or equivalent) for packaged products: COB
5.7.5 R.
- 09/09/2005
Other considerations
SIFA 9.13.8
See Notes
If you conduct business on an execution-only
basis for a packaged product, there are certain exceptions to the rules. Full
details are can be found at COB 5.7.3 R (2). Any income receivable by an associate also needs to be disclosed.
- 09/09/2005
SIFA 9.13.9
See Notes
COB 6.7 on
Cancellation and Withdrawal applies to product providers and does not concern
small advisory firms directly. The COB 6.7 rules
vary depending on the product sold and hence advisers may find it useful to
be aware of these rules in relation to the rights of their customers.
| The following sections are also relevant: | |
| • | 'Clear, fair and not misleading' - Chapter 9.2 |
| • | 'Inducements' - Chapter 9.4 |
| • | 'Terms of business' - Chapter 9.6 |
| • | 'Depolarisation' - Chapter 9.7 |
| • | 'Excessive charges' - Chapter 9.12 |
| • | 'Key features' - Chapter 9.15 |
| • | PRIN 2.1 in the Handbook |
| If you do mortgage or general insurance business you should also refer to MOGI 2 and GIGI 3. | |
- 09/09/2005
SIFA 9.14
Projections
- 01/12/2004
SIFA 9.14.1
See Notes
- 09/09/2005
Why do you need to follow these rules?
SIFA 9.14.2
See Notes
To avoid committing an offence under section 397 of FSMA (Misleading
statements and practices) you should ensure that all forecasts of future values
of investments are not misleading, false or deceptive. For 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
about the potential value of future benefits from an investment.
- 09/09/2005
How do you disclose this information?
SIFA 9.14.3
See Notes
A firm must
ensure that the projection it gives a customer is relevant to that customer's
circumstances (COB
6.6.7 R).
- 09/09/2005
SIFA 9.14.4
See Notes
A firm 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.
- 09/09/2005
SIFA 9.14.5
See Notes
COB 6.6 sets out circumstances in connection with potential sales when
projections must be given.
- 09/09/2005
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 R.
- 09/09/2005
SIFA 9.14.7
See Notes
We
keep the projection rates on investment products under review. In July 2004
we issued DP04/1 Projections Review - the case for change. We will update
the FSA Library on our website with any further publications on this subject.
| If you do mortgage or general insurance business you should also refer to MOGI 2 and GIGI 3. |
- 09/09/2005
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.
- 09/09/2005
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. A direct offer financial promotion for
a packaged product must also contain key features information (COB 3.9.10 R). 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.
- 09/09/2005
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 R and COB 6.5.31 R). 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 R).
Your firm may provide these illustrations in a document separate from the
main text of the KFD but you should present the documents at the same time.
- 09/09/2005
SIFA 9.15.4
See Notes
When the business
with the customer is carried out at a distance, and falls under the definition
of a distance contract, as well as the KFD you must also send the customer
the terms and conditions of the contract and all the information set out in COB
Appendix 1. You do not need to put all this information
in one document, as long as you give it all to the customer in a durable medium
at the same time as you provide the KFD (COB
6.5.2 R (6)).
- 09/09/2005
SIFA 9.15.5
See Notes
If a consumer
has responded to a direct offer financial promotion, the information package
you send 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 G).
- 09/09/2005
SIFA 9.15.6
See Notes
When you carry out
business with the customer on the telephone, you must give them certain information
about your firm and why you are calling (COB 6.4.27 R).
Instead of providing the customer with the KFD before they are bound by the
contract, which is the rule set out in COB
6.5.2 R (6), you can give the customer some of this information on the telephone
and send the KFD afterwards. But the customer must agree to this.
- 09/09/2005
SIFA 9.15.7
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 R to COB 6.2.19 R.
- 09/09/2005
SIFA 9.15.8
See Notes
COB 6.2.12 R 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.
- 09/09/2005
Simplified prospectus Rules
SIFA 9.15.9
See Notes
In PS05/4 we set out final rules and guidance (COB 6.6) for implementing European requirements on product disclosure information
for consumers in relation to collective investment schemes such as unit trusts
and OEICS that hold a UCITS certificate enabling them to be marketed in other
EEA countries.
- 09/09/2005
SIFA 9.15.10
See Notes
The product information will be contained in a new document known
as the Simplified Prospectus. EU rules require this document to be offered
to anyone who wants to invest in a collective investment scheme that holds
a UCITS certificate.
- 09/09/2005
SIFA 9.15.11
See Notes
Our
approach builds on the existing Key Features document by adding new information
requirements only where it is necessary to meet EU standards. The new rules
and guidance came into effect on 1 May 2005. However, transitional relief
is granted until 30 September 2005 where the existing Key Features regime
is still to be followed.
- 09/09/2005
Financial Promotion Rules
SIFA 9.15.12
See Notes
You are reminded that key features are a form of financial promotion
and are subject to the rules contained in COB 3.
Also see section 9.3 of the Guide.
- 09/09/2005
Record Keeping Requirements
SIFA 9.15.13
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 of the Guide. These are minimum requirements and you
may decide to keep material for longer.
| The following sections are also relevant: | |
| • | 'Financial promotions' - Chapter 9.3 |
| • | 'Suitability' - Chapter 9.9 |
| • | 'Assessing your customer's understanding of risk' - Chapter 9.10 |
| If you do mortgage and general insurance business you should also refer to MOGI 2 and GIGI 3. | |
- 09/09/2005
SIFA 9.16
Custody and client money
- 01/12/2004
SIFA 9.16.1
See Notes
You will find
the rules at CASS 2.1 for custody and CASS 4 for client money. Safeguarding and administering
client assets is a separate regulated activity and permission must be obtained
to carry it out. Many small firms are not allowed to hold client money and
custody assets, and hence the Guide does not include a discussion of these
rules.
- 09/09/2005
How can you avoid inadvertently holding client money and custody assets?
SIFA 9.16.2
See Notes
Some firms can
get an exemption from the custody rules by following CASS 2.1.9 R (3). The rule 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.
- 09/09/2005
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 it to the client with a request for an amended cheque.
- 09/09/2005
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.
Firms operating fee agreements where commission is rebated to the client,
either directly or by holding excess amounts against future fees, will continue
to be able to construct their fee agreements in such a way that the client
money rules are not engaged.
- 09/09/2005
Mandates
SIFA 9.16.5
See Notes
You will find
the rules on mandates at CASS 4.5.
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 (CASS
4.5.4 G).
- 09/09/2005
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.
| If you do mortgage or insurance business you should also refer to MOGI 2 and GIGI 2. |
- 09/09/2005
SIFA 9.17
Providing basic advice on stakeholder products (basic advice)
- 09/09/2005
SIFA 9.17.1
See Notes
Basic advice is intended to be a simpler,
quicker and cheaper form of advice to consumers interested in buying a stakeholder
product. It covers advice in the form of a recommendation given to a retail
customer. The recommendation must relate to a stakeholder product and certain
other conditions must be met. These conditions are based on the need for the
adviser to make an assessment of the consumer's needs based on the answers
that the consumer provides to a series of pre-scripted questions. Firms intending
to provide basic advice must ensure that their permission covers the activity.
- 09/09/2005
SIFA 9.17.2
See Notes
The stakeholder products on which basic
advice may be given are:
These products are the only products that can be sold with basic advice and they must meet certain criteria to be stakeholder products. For example, the charges are capped. Currently, medium-term investment products cannot include a smoothed fund because our research found a risk that consumers who received basic advice may not understand the concept of smoothing.
•cash deposits;•medium term
investment products i.e. life assurance contracts or collective investments;•stakeholder
pensions; and•Child Trust
Funds
These products are the only products that can be sold with basic advice and they must meet certain criteria to be stakeholder products. For example, the charges are capped. Currently, medium-term investment products cannot include a smoothed fund because our research found a risk that consumers who received basic advice may not understand the concept of smoothing.
- 09/09/2005
SIFA 9.17.3
See Notes
A new Chapter 5A has been included in
COB that sets out what firms must do when providing basic advice on a stakeholder
product. You must provide an IDD on first making contact with the customer. COB
5A.3.1 R includes rules on the scope and range of advice
on stakeholder products. The scope of basic advice may be based on a limited
number of providers of stakeholder products or a single provider. The range
of stakeholder products provided must include no more than one of each type
of product (except for cash deposits). A firm may have several different ranges
but only one can be disclosed to the customer.
- 09/09/2005
SIFA 9.17.4
See Notes
Firms must provide basic advice through
a sales process that incorporates pre-scripted questions put to the customer.
There is no FSA-mandated script. Instead the firm's sales process must ensure
that the firm only recommends that a customer acquire a stakeholder product
if it is suitable. The suitability of stakeholder products is covered at COB
5A.4.2 R. COB
5A Annex 1 contains
guidance on the steps a firm could take to ensure it complies with the requirements
in COB
5A.4.2R (1). A customer must be sent or given a copy
of the completed scripted questions and answers.
- 09/09/2005
SIFA 9.17.5
See Notes
Where the sales process results in a
firm making a recommendation to a customer to acquire a stakeholder product
it must meet the requirements of COB
5A.4.6 R to COB
5A.4.9 R. The firm must provide the customer with a
summary sheet that sets out for each product recommended the amounts the customer
wishes to invest and the reasons for the recommendation. It also explains
that in determining any subsequent complaint the Financial Ombudsman Service
may take into account that the recommendation was based on limited information
only. Where a firm gives basic advice on stakeholder products that offer a
choice of funds, it must not give advice on, or recommend, a particular fund
for the customer.
- 09/09/2005
SIFA 9.17.6
See Notes
The basic advice regime aims to deliver
an assessment whether a stakeholder product is suitable without a detailed
assessment of the customer's needs. Hence, it differs from full advice on
investments. As a result, some other sections of COB do not apply to a firm
when providing basic advice on a stakeholder product:
Individuals who give basic advice do not need to be approved persons. They must be competent but there is no specified examination requirement.
•
COB 5.1 Advising on packaged products;•
COB 5.2 Know your customer;•
COB 5.3 Suitability; and•
COB 5.4 Customer's understanding of risk.
Individuals who give basic advice do not need to be approved persons. They must be competent but there is no specified examination requirement.
- 09/09/2005
SIFA 9.17.7
See Notes
COB Sch 1 summarises
record-keeping requirements concerning the firm's scope and range of stakeholder
products. In addition, COB
5A.4.10 R requires
a firm to keep a record of each recommendation to acquire a stakeholder product
and the customer's summary sheet for at least six years from the date of the
recommendation. This is the minimum requirement and you may decide to keep
material for longer.
- 09/09/2005
SIFA 9.17.8
See Notes
Firms that have permission to undertake
'advising on investments' as at 6 April 2005 must notify us in writing of
their intention to provide basic advice. The permission will be granted as
at the date of our acknowledgement. Firms may notify us using Firms Online
or by email or letter.
- 09/09/2005
SIFA 9.17.9
See Notes
Firms that do not have permission to
undertake 'advising on investments' are required to apply for a variation
of permission (VOP) - see Chapter 15.1 of the Guide.
- 09/09/2005