COBS 2
Conduct of business obligations
COBS 2.1
Acting honestly, fairly and professionally
- 01/11/2007
The client's best interests rule
COBS 2.1.1
See Notes
- (1) A firm must act honestly, fairly and professionally in accordance with the best interests of its client (the client's best interests rule).
- (2) This rule applies in relation to designated investment business carried on:
- (a) for a retail client; and
- (b) in relation to MiFID or equivalent third country business, for any other client.
- (3) For a management company, this rule applies in relation to any UCITS scheme or EEA UCITS scheme the firm manages.
[Note: article 19(1) of MiFID]and article 14(1)(a) and (b) of the UCITS Directive]
- 01/07/2011
Exclusion of liability
COBS 2.1.2
See Notes
A firm must not, in any communication relating to designated investment business seek to:
- (1) exclude or restrict; or
- (2) rely on any exclusion or restriction of;
any duty or liability it may have to a client under the regulatory system.
- 01/11/2007
COBS 2.1.3
See Notes
- (1) In order to comply with the client's best interests rule, a firm should not, in any communication to a retail client relating to designated investment business:
- (a) seek to exclude or restrict; or
- (b) rely on any exclusion or restriction of;
- any duty or liability it may have to a client other than under the regulatory system, unless it is honest, fair and professional for it to do so.
- (2) The general law, including the Unfair Terms Regulations, also limits the scope for a firm to exclude or restrict any duty or liability to a consumer.
- 01/11/2007
COBS 2.2
Information disclosure before providing services
- 01/11/2007
Application
COBS 2.2.-1
See Notes
- (1) This section applies in relation to MiFID or equivalent third country business.
- (2) This section applies in relation to other designated investment business carried on for a retail client:
- (a) in relation to a derivative, a warrant or stock lending activity, but as regards the matters in COBS 2.2.1R (1)(b) only; and
- (b) in relation to a retail investment product, but as regards the matters in COBS 2.2.1R (1)(a) and (d) only.
[Note: article 19(3) of MiFID]
- 31/12/2012
Information disclosure before providing services
COBS 2.2.1
See Notes
- (1) A firm must provide appropriate information in a comprehensible form to a client about:
- (a) the firm and its services;
- (b) designated investments and proposed investment strategies; including appropriate guidance on and warnings of the risks associated with investments in those designated investments or in respect of particular investment strategies;
- (c) execution venues; and
- (d) costs and associated charges;
- so that the client is reasonably able to understand the nature and risks of the service and of the specific type of designated investment that is being offered and, consequently, to take investment decisions on an informed basis.
- (2) That information may be provided in a standardised format.
- (3) [deleted]
- (4) [deleted]
[Note: article 19(3) of MiFID]
- 06/08/2008
COBS 2.2.2
See Notes
A firm to which the rule on providing appropriate information (COBS 2.2.1 R) applies should also consider the rules on disclosing information about a firm, its services, costs and associated charges and designated investments in COBS 6.1 and COBS 14.
- 01/11/2007
Disclosure of commitment to the Financial Reporting Council's Stewardship Code
COBS 2.2.3
See Notes
A firm, other than a venture capital firm, which is managing investments for a professional client that is not a natural person must disclose clearly on its website, or if it does not have a website in another accessible form:
- (1) the nature of its commitment to the Financial Reporting Council's Stewardship Code; or
- (2) where it does not commit to the Code, its alternative investment strategy.
- 06/12/2010
COBS 2.3
Inducements
- 01/11/2007
Interpretation
COBS 2.3.-1
See Notes
In this section 'giving advice, or providing services, to an employer in connection with a group personal pension scheme or group stakeholder pension scheme' includes:
- (1) giving advice or assistance to an employer on the operation of such a scheme;
- (2) taking, or helping the employer to take, the steps that must be taken to enable an employee to become a member of such a scheme; and
- (3) giving advice to an employee, pursuant to an agreement between the employer and the adviser, about the benefits that are, or might be, available to the employee as an actual or potential member of such a scheme.
- 31/12/2012
Rule on inducements
COBS 2.3.1
See Notes
A firm must not pay or accept any fee or commission, or provide or receive any non-monetary benefit, in relation to designated investment business or, in the case of its MiFID or equivalent third country business, another ancillary service, carried on for a client other than:
- (1) a fee, commission or non-monetary benefit paid or provided to or by the client or a person on behalf of the client; or
- (2) a fee, commission or non-monetary benefit paid or provided to or by a third party or a person acting on behalf of a third party, if:
- (a) the payment of the fee or commission, or the provision of the non-monetary benefit does not impair compliance with the firm's duty to act in the best interests of the client; and
- (b) the existence, nature and amount of the fee, commission or benefit, or, where the amount cannot be ascertained, the method of calculating that amount, is clearly disclosed to the client, in a manner that is comprehensive, accurate and understandable, before the provision of the service;
- (i) this requirement only applies to business other than MiFID or equivalent third country business if it includes giving a personal recommendation in relation to a retail investment product , or giving advice, or providing services, to an employer in connection with a group personal pension scheme or group stakeholder pension scheme;
- (ii) where this requirement applies to business other than MiFID or equivalent third country business, a firm is not required to make a disclosure to the client in relation to a non-monetary benefit permitted under (a) and which falls within the table of reasonable non-monetary benefits in COBS 2.3.15 G as though that table were part of this rule for this purpose only;
- (iii) this requirement does not apply to a firm giving basic advice; and
- (c) in relation to MiFID or equivalent third country business or when carrying on a regulated activity in relation to a retail investment product, the payment of the fee or commission, or the provision of the non-monetary benefit is designed to enhance the quality of the service to the client; or
- (3) proper fees which enable or are necessary for the provision of designated investment business or ancillary services, such as custody costs, settlement and exchange fees, regulatory levies or legal fees, and which, by their nature, cannot give rise to conflicts with the firm's duties to act honestly, fairly and professionally in accordance with the best interests of its clients.
[Note: article 26 of the MiFID implementing Directive and articles 29(1) and 29(2) of the UCITS implementing Directive]
[Note: The Committee of European Securities Regulators (CESR) has issued recommendations on inducements under MiFID]
- 31/12/2012
COBS 2.3.1A
See Notes
COBS 2.3.1 R applies to a UK UCITS management company and EEA UCITS management company when providing collective portfolio management services, as if:
- (1) references to a client, were references to any UCITS it manages; and
- (2) in (2)(b) and (c) and (3) of that rule, references to MiFID or equivalent third country business were also references to the collective portfolio management activities of investment management and administration for the scheme.
[Note: article 29(1) of the UCITS implementing Directive]
- 01/07/2011
COBS 2.3.2
See Notes
A firm will satisfy the disclosure obligation under this section if it:
- (1) discloses the essential arrangements relating to the fee, commission or non-monetary benefit in summary form;
- (2) undertakes to the client that further details will be disclosed on request; and
- (3) honours the undertaking in (2).
[Note: article 26 of the MiFID implementing Directive and article 29(2) of the UCITS implementing Directive]
- 01/07/2011
COBS 2.3.2A
See Notes
COBS 2.3.2 R applies to a UK UCITS management company and EEA UCITS management company when providing collective portfolio management services, as if references to a client were references to a unitholder of the scheme.
[Note: article 29(2) of the UCITS implementing Directive]
- 01/07/2011
Guidance on inducements
COBS 2.3.3
See Notes
The obligation of a firm to act honestly, fairly and professionally in accordance with the best interests of its clients includes both the client's best interests rule and the duties under Principles 1 (integrity), 2 (skill, care and diligence) and 6 (customers' interests).
- 01/11/2007
COBS 2.3.4
See Notes
COBS 11.6 (Use of dealing commission) deals with the acceptance of certain inducements by investment managers and builds upon the requirements in this section. Investment managers should ensure they comply with this section and COBS 11.6.
- 01/11/2007
COBS 2.3.5
See Notes
For the purposes of this section, a non-monetary benefit would include the direction or referral by a firm of an actual or potential item of designated investment business to another person, whether on its own initiative or on the instructions of an associate.
- 01/11/2007
COBS 2.3.6
See Notes
For the purposes of this section, the receipt by an investment firm of a commission in connection with a personal recommendation or a general recommendation, in circumstances where the advice or recommendation is not biased as a result of the receipt of commission, should be considered as designed to enhance the quality of the recommendation to the client.
[Note: recital 39 of MiFID implementing Directive]
- 01/11/2007
COBS 2.3.6A
See Notes
COBS 6.1A (Adviser charging and remuneration), COBS 6.1B (Retail investment product provider requirements relating to adviser charging and remuneration), COBS 6.1C (Consultancy charging and remuneration) and COBS 6.1D (Product provider requirements relating to consultancy charging and remuneration) set out specific requirements as to when it is acceptable for a firm to pay or receive commissions, fees or other benefits:
- (1) relating to the provision of a personal recommendation on retail investment products; or
- (2) for giving advice, or providing services, to an employer in connection with a group personal pension scheme or group stakeholder pension scheme.
- 31/12/2012
COBS 2.3.7
See Notes
The fact that a fee, commission or non-monetary benefit is paid or provided to or by an appointed representative or, where applicable, by a tied agent, does not prevent the application of the rule on inducements.
- 01/11/2007
COBS 2.3.8
See Notes
The rule on inducements is applicable to a firm and those acting on behalf of a firm in relation to the provision of an investment service or ancillary service to a client. Small gifts and minor hospitality received by an individual in their personal capacity below a level specified in the firm's conflict's of interest policy, will not be relevant for the purpose of the rule on inducements.
- 01/11/2007
Paying commission on non-advised sales of packaged products
COBS 2.3.9
See Notes
The following guidance and evidential provisions provide examples of arrangements the
FSA
believes will breach the client's best interests rule if a firm sells or arranges the sale of a packaged product for a retail client.
- 31/12/2012
COBS 2.3.10
See Notes
- (1) If a firm is required to disclose commission (see COBS 6.4) to a client in relation to the sale of a packaged product (other than in relation to arrangements between firms that are in the same immediate group) the firm should not enter into any of the following:
- (a) volume overrides, if commission paid in respect of several transactions is more than a simple multiple of the commission payable in respect of one transaction of the same kind; and
- (b) an agreement to indemnify the payment of commission on terms that would or might confer an additional financial benefit on the recipient in the event of the commission becoming repayable.
- (2) Contravention of (1) may be relied upon as tending to establish contravention of the rule on inducements (COBS 2.3.1 R).
- 01/11/2007
COBS 2.3.11
See Notes
- (1) If a firm enters into an arrangement with another firm under which it makes or receives a payment of commission in relation to the sale of a packaged product that is increased in excess of the amount disclosed to the client, the firm is likely to have breached the rules on disclosure of charges, remuneration and commission (see COBS 6.4) and, where applicable, the rule on inducements in COBS 2.3.1R (2)(b), unless the increase is attributable to an increase in the premiums or contributions payable by that client.
- 01/11/2007
Providing credit and other benefits to firms that advise on retail investment products
COBS 2.3.11A
See Notes
The following guidance and evidential provisions provide examples of arrangements the
FSA
believes will breach the client's best interests rule in relation to a personal recommendation of a retail investment product to a retail client.
- 31/12/2012
COBS 2.3.12
See Notes
- (1) This evidential provision applies in relation to a holding in, or the provision of credit to, a firm which holds itself out as making personal recommendations to retail clients on retail investment products, except where the relevant transaction is between persons who are in the same immediate group.
- (2) A retail investment product provider should not take any step which would result in it:
- (a) having a direct or indirect holding of the capital or voting power of a firm in (1); or
- (b) providing credit to a firm in (1) (other than continuing to facilitate the payment of an adviser charge or consultancy charge where it is no longer payable by the retail client, as described in COBS 6.1A.5 G or COBS 6.1C.6 G);
- unless all the conditions in (4) are satisfied. A retail investment product provider should also take reasonable steps to ensure that its associates do not take any step which would result in it having a holding as in (a) or providing credit as in (b).
- (3) A firm in (1) should not take any step which would result in a retail investment product provider having a holding as in (2)(a) or providing credit as in (2)(b), unless all the conditions in (4) are satisfied.
- (4) The conditions referred to in (2) and (3) are that:
- (a) the holding is acquired, or credit is provided, on commercial terms, that is terms objectively comparable to those on which an independent person unconnected to a retail investment product provider would, taking into account all relevant circumstances, be willing to acquire the holding or provide credit;
- (b) the firm (or, if applicable, each of the firms) taking the step has reliable written evidence that (a) is satisfied;
- (c) there are no arrangements, in connection with the holding or credit, relating to the channelling of business from the firm in (1) to the retail investment product provider; and
- (d) the retail investment product provider is not able, and none of its associates is able, because of the holding or credit, to exercise any influence over the personal recommendations made in relation to retail investment products given by the firm or the advice given, or services provided to, an employer in connection with a group personal pension scheme or group stakeholder pension scheme.
- (5) In this evidential provision, in applying (2) and (3) any holding of, or credit provided by, a retail investment product provider's associate is to be regarded as held by, or provided by, that retail investment product provider.
- (6) [deleted]
- (7) Contravention of (2) or (3) may be relied upon as tending to establish contravention of the rule on inducements (COBS 2.3.1 R).
- 31/12/2012
COBS 2.3.12A
See Notes
Where a retail investment product provider, or its associate, provides credit to a retail client of a firm making personal recommendations in relation to retail investment products or giving advice, or providing services, to an employer in connection with a group personal pension scheme or group stakeholder pension scheme, this may create an indirect benefit for the firm and, to the extent that this is relevant, the provider of retail investment products may need to consider the examples in COBS 2.3.12E as if it had provided the credit to the firm.
- 31/12/2012
COBS 2.3.13
See Notes
In considering the compliance of arrangements between members of the same immediate group with the rule on inducements (COBS 2.3.1 R), firms may wish to consider the evidential provisions in COBS 2.3.10 E and COBS 2.3.12 E, to the extent that these are relevant.
- 01/11/2007
Reasonable non-monetary benefits
COBS 2.3.14
See Notes
- (1) In relation to the sale of retail investment products , the table on reasonable non-monetary benefits (COBS 2.3.15 G) indicates the kind of benefits which are capable of enhancing the quality of the service provided to a client and, depending on the circumstances, are capable of being paid or received without breaching the client's best interests rule. However, in each case, it will be a question of fact whether these conditions are satisfied.
- (2) The guidance in the table on reasonable non-monetary benefits is not relevant to non-monetary benefits which may be given by a retail investment product provider or its associate to its own representatives. The guidance in this provision does not apply directly to non-monetary benefits provided by a firm to another firm that is in the same immediate group. In this situation, the rules on commission equivalent (COBS 6.4.3 R), the requirements on a retail investment product provider making a personal recommendation in respect of its own retail investment products (COBS 6.1A.9 R) or the requirements on a firm giving advice, or providing services, to an employer in connection with a group personal pension scheme or group stakeholder pension scheme produced by the firm (COBS 6.1C.8 R) will apply.
- 31/12/2012
Reasonable non-monetary benefits
COBS 2.3.15
See Notes
This table belongs to COBS 2.3.14 G.
| Reasonable non-monetary benefits | |||
| Gifts, Hospitality and Promotional Competition Prizes | |||
| 1 | A retail investment product provider giving and a firm receiving gifts, hospitality and promotional competition prizes of a reasonable value. | ||
| Promotion | |||
| 2 | A retail investment product provider assisting another firm to promote its retail investment products so that the quality of its service to clients is enhanced. Such assistance should not be of a kind or value that is likely to impair the recipient firm's ability to pay due regard to the interests of its clients, and to give advice on, and recommend, retail investment products available from the recipient firm's whole range or ranges. | ||
| Joint marketing exercises | |||
| 3 | A retail investment product provider providing generic product literature (that is, letter heading, leaflets, forms and envelopes) that is suitable for use and distribution by or on behalf of another firm if: | ||
| (a) | the literature enhances the quality of the service to the client and is not primarily of promotional benefit to the retail investment product provider; and | ||
| (b) | the total costs (for example, packaging, posting, mailing lists) of distributing such literature to its client are borne by the recipient firm. | ||
| 4 | A retail investment product provider supplying another firm with 'freepost' envelopes, for forwarding such items as completed applications, medical reports or copy client agreements. | ||
| 5 | A retail investment product provider supplying product specific literature (for example, key features documents, minimum information) to another firm if: | ||
| (a) | the literature does not contain the name of any other firm; or | ||
| (b) | if the name of the recipient firm is included, the literature enhances the quality of the service to the client and is not primarily of promotional benefit to the recipient firm. | ||
| 6 | A retail investment product provider supplying draft articles, news items and financial promotions for publication in another firm's magazine, only if in each case any costs paid by the product provider for placing the articles and financial promotions are not more than market rate, and exclude distribution costs. | ||
| Seminars and conferences | |||
| 7 | A retail investment product provider taking part in a seminar organised by another firm or a third party and paying toward the cost of the seminar, if: | ||
| (a) | its participation is for a genuine business purpose; and | ||
| (b) | the contribution is reasonable and proportionate to its participation and by reference to the time and sessions at the seminar when its staff play an active role. | ||
| Technical services and information technology | |||
| 8 | A retail investment product provider supplying a 'freephone' link to which it is connected. | ||
| 9 | A retail investment product provider supplying another firm with any of the following: | ||
| (a) | quotations and projections relating to its retail investment products and, in relation to specific investment transactions (or for the purpose of any scheme for review of past business), advice on the completion of forms or other documents; | ||
| (b) | access to data processing facilities, or access to data, that is related to the retail investment product provider's business; | ||
| (c) | access to third party electronic dealing or quotation systems that are related to the retail investment product provider's business; and | ||
| (d) | software that gives information about the retail investment product provider's retail investment products or which is appropriate to its business (for example, for use in a scheme for review of past business or for producing projections or technical product information). | ||
| 10 | A retail investment product provider paying cash amounts or giving other assistance to a firm not in the same immediate group for the development of software or other computer facilities necessary to operate software supplied by the retail investment product provider, but only to the extent that by doing so it will generate equivalent cost savings to itself or clients. | ||
| 11 | A retail investment product provider supplying another firm with information about sources of mortgage finance. | ||
| 12 | A retail investment product provider supplying another firm with generic technical information in writing, not necessarily related to the product provider's business, when this information states clearly and prominently that it is produced by the product provider or (if different) supplying firm. | ||
| Training | |||
| 13 | A retail investment product provider providing another firm with training facilities of any kind (for example, lectures, venue, written material and software). | ||
| Travel and accommodation expenses | |||
| 14 | A retail investment product provider reimbursing another firm's reasonable travel and accommodation expenses when the other firm: | ||
| (a) | participates in market research conducted by or for the retail investment product provider; | ||
| (b) | attends an annual national event of a United Kingdom trade association, hosted or co-hosted by the retail investment product provider; | ||
| (c) | participates in the retail investment product provider's training facilities (see 13); | ||
| (d) | visits the retail investment product provider's United Kingdom office in order to: | ||
| (i) | receive information about the retail investment product provider's administrative systems; or | ||
| (ii) | attend a meeting with the retail investment product provider and an existing or prospective client of the receiving firm. | ||
- 31/12/2012
COBS 2.3.16
See Notes
In interpreting the table of reasonable non-monetary benefits,
retail investment product providers should be aware that where a benefit is made available to one firm and not another, this is more likely to impair compliance with the client's best interests rule and that, where any benefits of substantial size or value (such as adviser training programmes or significant software) are made available to firms that are subject to the rules on adviser charging and remuneration (COBS 6.1A) or consultancy charging and remuneration (COBS 6.1C), these benefits should be made available equally across those firms if they are provided at all.
- 31/12/2012
COBS 2.3.16A
See Notes
In interpreting the table of reasonable non-monetary benefits, a firm that provides a personal recommendation in relation to a retail investment product to a retail client or gives advice, or provides a service, to an employer in connection with a group personal pension scheme or a group stakeholder pension scheme should be aware that acceptance of benefits on which the firm will have to rely for a period of time is more likely to impair compliance with the client's best interests rule. For example, accepting services which provide access to another firm's systems or software on which the firm will need to rely to gain access to the firm's client data in the future, would be likely to conflict with the rule on inducements (COBS 2.3.1R).
- 31/12/2012
Record keeping: inducements
COBS 2.3.17
See Notes
- (1) A firm must make a record of the information disclosed to the client in accordance with COBS 2.3.1R (2)(b) and must keep that record for at least five years from the date on which it was given.
- (2) A firm must also make a record of each benefit given to another firm which does not have to be disclosed to the client in accordance with COBS 2.3.1R (2)(b)(ii), and must keep that record for at least five years from the date on which it was given.
[Note: see article 51(3) of the MiFID implementing Directive]
- 06/11/2008
COBS 2.4
Agent as client and reliance on others
- 01/11/2007
COBS 2.4.1
See Notes
This section applies to a firm that is conducting designated investment business or ancillary activities or, in the case of MiFID or equivalent third country business, other ancillary services.
- 01/11/2007
COBS 2.4.2
See Notes
- 06/02/2008
Agent as client
COBS 2.4.3
See Notes
- (1) If a firm (F) is aware that a person (C1) with or for whom it is providing services is acting as agent for another person (C2) in relation to those services, C1, and not C2, is the client of F in respect of that business.
- (2) Paragraph (1) does not apply if:
- (a) F has agreed with C1 in writing to treat C2 as its client; or
- (b) C1 is neither a firm nor an overseas financial services institution and the main purpose of the arrangements between the parties is the avoidance of duties that F would otherwise owe to C2.
- If this is the case, C2 is the client of F in respect of that business and C1 is not.
- (3) If there is an agreement under (2)(a) in relation to more than one C2 represented by C1, F may discharge any requirement to notify, obtain consent from, or enter into an agreement with each C2 by sending to, or receiving from, C1 a single communication expressed to cover each C2, except that the following will be required for each C2:
- (a) separate risk warnings required under this sourcebook;
- (b) separate confirmations under the requirements on occasional reporting (COBS 16.3); and
- (c) separate periodic statements.
- 01/11/2007
Reliance on other investment firms: MiFID and equivalent business
COBS 2.4.4
See Notes
- (1) This rule applies if a firm (F1), in the course of performing MiFID or equivalent third country business, receives an instruction to perform an investment or ancillary service on behalf of a client (C) through another firm (F2), if F2 is:
- (a) a MiFID investment firm or a third country investment firm; or
- (b) an investment firm that is:
- (2) F1 may rely upon:
- (a) any information about C transmitted to it by F2; and
- (b) any recommendations in respect of the service or transaction that have been provided to C by F2.
- (3) F2 will remain responsible for:
- (a) the completeness and accuracy of any information about C transmitted by it to F1; and
- (b) the appropriateness for C of any advice or recommendations provided to C.
- (4) F1 will remain responsible for concluding the services or transaction based on any such information or recommendations in accordance with the applicable requirements under the regulatory system.
[Note: article 20 of MiFID]
- 01/11/2007
COBS 2.4.5
See Notes
- (1) If F1 is required to perform a suitability assessment or an appropriateness assessment under COBS 9 or COBS 10, it may rely upon a suitability assessment performed by F2, if F2 was subject to the requirements for assessing suitability in COBS 9 (excluding the basic advice rules) or equivalent requirements in another EEA State in performing that assessment.
- (2) If F1 is required to perform an appropriateness assessment under COBS 10, it may rely upon an appropriateness assessment performed by F2, if F2 was subject to the requirements for assessing appropriateness in COBS 10.2 or equivalent requirements in another EEA State in performing that assessment.
- 01/11/2007
Reliance on others: other situations
COBS 2.4.6
See Notes
- (1) This rule applies if the rule on reliance on other investment firms (COBS 2.4.4 R) does not apply.
- (2) A firm will be taken to be in compliance with any rule in this sourcebook that requires it to obtain information to the extent it can show it was reasonable for it to rely on information provided to it in writing by another person.
- 01/11/2007
COBS 2.4.7
See Notes
- (1) In relying on COBS 2.4.6 R, a firm should take reasonable steps to establish that the other person providing written information is not connected with the firm and is competent to provide the information.
- (2) Compliance with (1) may be relied upon as tending to establish compliance with COBS 2.4.6 R.
- (3) Contravention of (1) may be relied upon as tending to establish contravention of COBS 2.4.6 R.
- 01/11/2007
COBS 2.4.8
See Notes
It will generally be reasonable (in accordance with COBS 2.4.6R (2)) for a firm to rely on information provided to it in writing by an unconnected authorised person or a professional firm, unless it is aware or ought reasonably to be aware of any fact that would give reasonable grounds to question the accuracy of that information.
- 01/11/2007
COBS 2.4.9
See Notes
- 01/11/2007
COBS 2.4.10
See Notes
- 01/11/2007