Conduct of business obligations

Part

COBS Conduct of Business Sourcebook

Chapter

Conduct of business obligations

Printed on: 06/11/2024

Rulebook at: 05/02/2008

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

(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.

[Note: article 19(1) of MiFID]

01/11/2007

Exclusion of liability

COBS 2.1.2

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

(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

COBS 2.2.1

(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) This rule applies in relation to MiFID or equivalent third country business.
(4) The requirement to provide information about designated investments and proposed investment strategies also applies to a firm in relation to designated investment business other than MiFID or equivalent third country business carried on for a retail client in relation to a derivative, a warrant or stock lending activity.

[Note: article 19(3) of MiFID]

01/11/2007

COBS 2.2.2

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

COBS 2.3

Inducements

01/11/2007

Rule on inducements

COBS 2.3.1

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 packaged product;
(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,

(c) in relation to MiFID or equivalent third country business, 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.

(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]

[Note: The Committee of European Securities Regulators (CESR) has issued recommendations on inducements under MiFID]

01/11/2007

COBS 2.3.2

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]

01/11/2007

Guidance on inducements

COBS 2.3.3

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

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

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

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 2.3.7

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

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

Packaged products evidential provisions and guidance on inducements

COBS 2.3.9

The following guidance and evidential provisions provide examples of arrangements the FSA believes will breach the client's best interests rule if it sells, personally recommends or arranges the sale of a packaged product for a retail client.

01/11/2007

COBS 2.3.10

(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

(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

COBS 2.3.12

(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 packaged products, except where the relevant transaction is between persons who are in the same immediate group.
(2) A 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 commission due from the firm to the product provider in accordance with an indemnity commission clawback arrangement);

unless all the conditions in (4) are satisfied. A 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 product provider having a holding as in (2)(a) or providing credit as in paragraph (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 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 product provider; and
(d) the 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 packaged products given by the firm.

(5) In this evidential provision, in applying (2) and (3) any holding of, or credit provided by, a product provider's associate is to be regarded as held by, or provided by, that product provider.
(6) In this evidential provision, in applying (3) references to a "product provider" are to be taken as including an unauthorised equivalent of a product provider; that is, an unauthorised insurance undertaking or an unauthorised operator of a regulated collective investment scheme or of an investment trust savings scheme;
(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).

01/11/2007

COBS 2.3.13

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

(1) In relation to the sale of packaged 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 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) will apply.

01/11/2007

Reasonable non-monetary benefits

COBS 2.3.15

This table belongs to COBS 2.3.14 G.

Reasonable non-monetary benefits

Gifts, Hospitality and Promotional Competition Prizes

A product provider giving and a firm receiving gifts, hospitality and promotional competition prizes of a reasonable value.

Promotion

A product provider assisting another firm to promote its packaged 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, packaged products available from the recipient firm's whole range or ranges.

Joint marketing exercises

A 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 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.

A product provider supplying another firm with 'freepost' envelopes, for forwarding such items as completed applications, medical reports or copy client agreements.

A 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.

A 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

A 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

A product provider supplying a 'freephone' link to which it is connected.

A product provider supplying another firm with any of the following:

(a)

quotations and projections relating to its packaged 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 product provider's business;

(c)

access to third party electronic dealing or quotation systems that are related to the product provider's business; and

(d)

software that gives information about the product provider's packaged 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).

A 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 product provider , but only to the extent that by doing so it will generate equivalent cost savings to itself or clients.

A product provider supplying another firm with information about sources of mortgage finance.

A 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

A product provider providing another firm with training facilities of any kind (for example, lectures, venue, written material and software).

Travel and accommodation expenses

A 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 product provider;

(b)

attends an annual national event of a United Kingdom trade association, hosted or co-hosted by the product provider;

(c)

participates in the product provider's training facilities (see 13);

(d)

visits the product provider's United Kingdom office in order to:

(i)

receive information about the product provider's administrative systems; or

(ii)

attend a meeting with the product provider and an existing or prospective client of the receiving firm.

01/11/2007

COBS 2.3.16

In interpreting the table of reasonable non-monetary benefits, 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.

01/11/2007

Record keeping: inducements

COBS 2.3.17

(1) In relation to its MiFID or equivalent third country business, a firm must make a record of each fee, commission or non-monetary benefit given to another firm that meets the criteria set out in 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.
(2) A firm must make a record of each benefit given to another firm in accordance with COBS 2.3.14 G, 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]

01/11/2007

COBS 2.4

Agent as client and reliance on others

01/11/2007

COBS 2.4.1

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

This section is not relevant to the question of who is the firm's counterparty for prudential purposes and it does affect any obligation a firm may owe to any other person under the general law.

01/11/2007

Agent as client

COBS 2.4.3

(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

(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:

(i) a firm or authorised in another EEA State; and
(ii) subject to equivalent relevant requirements.

(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

(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

(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

(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

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

Any information that a rule in COBS or CASS requires to be sent to a client may be sent to another person on the instruction of the client so long as the recipient is not connected to the firm.

01/11/2007

COBS 2.4.10

In the case of business that is not MiFID or equivalent third country business, if a rule in COBS or CASS requires information to be sent to a client, a firm need not send that information so long as it takes reasonable steps to establish that it has been or will be supplied by another person.

01/11/2007