UK Financial Services, regulations and ethics Demo

In this section we identify what the purpose of the Conduct of Business rules are and to whom they apply.

Regulatory rules for investment advice (COBS)

Most of the rules which affect the day-to-day operations are contained in the Conduct of Business Rules (COBS).

Purpose of the COBS rules (COBS 1)

The purpose is to provide detailed guidance on how staff and representatives of regulated businesses should deal with customers. It incorporates the MiFID requirements and introduces a principles-based regime for regulated firms.

The rules apply to all regulated life and pensions and investment businesses and deposit taking institutions, although many only apply to specific regulated activities.

COBS obligations (COBS 2)

Inducements: Firms...

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...therwise usually be retail clients. To be classed as a professional client, the firm should carry out a qualitative assessment of the client’s expertise, experience and knowledge to ensure that he/she is able to satisfactorily make his/her own investment decisions whilst understanding the risks involved.

A record of each client’s classification must be made at the time of their classification and be retained for the relevant period after the firm ceases to carry on business with or for the client. The relevant periods are:

Indefinitely in relation to a pension transfer, pension opt-out or FSAVC

At least five years in relation to a life policy or pension contract

Five years in relation to MiFID business and three years in any other case.

In this section we identify the content and make up of the main initial document that is presented to the client upon initial contact – the client agreement.

Firms must provide their retail and professional clients with a client agreement. <...

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...t that the customer wishes to specify or a statement that there are no such restrictions

Services provided

Payment for services

Provisions for terminating the agreement.

Records of terms of agreement must be retained for the standard periods.

Status disclosure

Firms must provide their retail and professional clients with a client agreement, which is sometimes referred to as a ‘Terms of Business’ document. The purpose of the document is to ensure that the client is fully aware of who they are dealing with, the service they will receive, the procedures involved in the process and the costs involved.

This agreement must be given to the client prior to conducting any investment business for retail clients or immediately after where the agreement was concluded at a distance (e.g. over the telephone).

Professional clients should receive a client agreement within a reasonable period of the start of conducting investment business.

Client agreements are not required for:

Direct offer financial promotions

Life offices selling life and pensions policies...

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... was prescribed by the FSA and had to include their Keyfacts logo. From 1 November 2007, firms are no longer required to issue these specific documents. From 6 August 2008, the IDD and Menu were replaced with one document, the Services and Costs Disclosure Document (SCDD). From 31 August 2009, firms must either use the SCDD or create their own format for presenting the information.

The information of the SCDD, or any equivalent, does not have to be given if:

It has already been given to the client and is still valid

Where the initial contact is by telephone – the information must be provided orally and later confirmed in writing

For ‘execution only' transactions in non-life packaged products.

Explain the purpose of the ‘Terms of Business’ document.

 

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In this section we describe the circumstances in which advice is likely to be given and the information required by an adviser in order to assess the client’s circumstances fully.

Advice

A transaction is classed as execution-only where it is not only processed by an authorised firm on the client’s specific instructions but also, the customer neither expects, nor receives advice about the merits of any facet of the investment.

With a direct offer transaction,...

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...If this means that the authorised firm cannot assess suitability in anyway, it must not make a personal recommendation.

The Regulator perceives that advisers could offer ‘restricted advice’ on a limited area of the customer’s circumstances. This has many risks in that just providing advice on one part of a customer’s circumstances may affect the suitability of holding other products being used to address separate needs within the customer’s portfolio.

In this section we identify the rules relating to the suitability of advice to clients.

Firms must take reasonable steps to ensure that any advice to a retail client is suitable for them taking account of the information that the firm has about the client or details of which it is reasonable that the firm should have been aware.

The FSA’s main concern is that proposals put forward by advisers are in the genuine interest of a client. The guidelines to be followed from the FSA are:

Advice should...

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...mium top ups.

For a personal pension or a free standing additional voluntary contribution (FSAVC) plan, the letter has to explain why the recommended product is at least as suitable as a stakeholder pension. In the case of an FSAVC, it should also explain why the product is at least as suitable as an in-house AVC.

Firms must not make recommendations about any transaction for a retail client unless it has taken reasonable steps to ensure that the customer fully understands the nature of the risks involved.

In this section we identify the disclosure of charges and commission that a firm must advise its clients before proceeding with any business.

Charges and commission

Before carrying out any business, an authorised firm must disclose in writing to the retail client the basis or amount of its charges.

Before effecting a life policy, firms must disclose the remuneration or commission they will receive. This has to be shown in cash terms.

A firm must take all reasonable steps to make sure that it does not offer, give, solicit or accept an inducement or place business in any way that is likely to conflict with...

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...le assumptions and supported by data that is objective. The projection has to include a risk warning to explain that the figures are purely examples and are not a reliable indicator of future performance.

Where a life office deals in with profits arrangements, it must produce a Principles and Practices of Financial Management document setting out the way in which the organisation manages with profits business. This document must be sent to all existing with profits policyholders with their annual statements. It must also be issued where existing policyholders make any change and at the point of sale for a new plan.

In this section we identify the rules that exist to enable a client to change their minds about a new contract and cancel it within a given period of...

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...ny payment to it. However, the provider can deduct form this any market loss produced as a result of a fall in unit prices since allocation of payment.

In this section we find out how the COBS rules affect transactions with customers and how certain types of business are to be dealt with caution or avoided altogether.

The COBS rules affect investment transactions and how they are arranged. The rules apply primarily to market makers, but many of them a...

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...days and the firm should correct discrepancies as soon as possible.

Most IFAs do not have the authority to handle client money and do not need client accounts. Therefore, they have to ensure that all cheques or other payments for investment that have been arranged are paid directly to the product provider.

The FSA has been the regulator of the selling and marketing of general insurance and pure protection life assurance since 14 January 2005. The FSA’s Insurance Conduct of Business Rules, commonly known as ICOB, regulate sales and advice in this area. In this section we will look briefly at the content of the ICOB rules.

Authorisation

Insurers and intermediaries must be authorised and an insurer must make sure that any intermediary it deals with is authorised.

The rules distinguish between retail customers and commercial customers (who receive less protection)

The rules also vary according to whether the sale is with, or without, advice

The rules apply to ...

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...sure of a material fact that a retail customer could not reasonably be expected to have disclosed

Claims cannot be rejected for misrepresentation unless the misrepresentation is at least negligent

Claims cannot be rejected for a breach of warranty unless the claim is causally connected with the breach.

Other rules

General insurance companies can act via appointed representatives (like life offices) but general insurance appointed representatives can act for more than one insurance company.

The complaints rules and FOS jurisdiction have been extended to general insurance intermediaries.

Records of general insurance business must be kept for at least three years.

The FSA took over the regulation of mortgage advice and transactions on 31 October 2004. In this section we will look briefly at the content of the ICOB rules.

Its Mortgage Conduct of Business Rules (MCOB) apply to mortgage lenders, administrators, arrangers and advisers.

Firms must be authorised, either directly or as an appointed representative of an authorised firm.

Where a firm simply pass...

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...erest (APRs)

Responsible lending – lenders must take account of a customer’s ability to repay before giving a loan

Charges

Arrears and repossessions.

Home reversion plans and Islamic mortgages came under the FSA’s regulatory regime on 6 April 2007. These arrangements are now subject to the Mortgage Conduct of Business rules with adaptations where appropriate to accommodate them.