UK Financial Services, regulations and ethics

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). These can be found in the third block of the FCA Handbook – business standards.

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 must take reasonable steps to ensure that they do not offer, give, solicit or accept an inducement...

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Vulnerable clients

Vulnerable clients, on account of their age, state of health or current circumstances, require an extra duty of care. Advisers need to ensure that the client fully understands the advice process and if not another closely related individual should be with them. Consideration of vulnerable clients is embedded in all of the new Consumer Duty rules.

Client classification records

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

The FCA’s advertising rules are based on its principle 7 for businesses: “Firms have a general requirement to pay due regard to the information needs of their customers and communicate information to customers in a way that is fair, clear and not misleading.”

The Regulator’s rules apply to all financial promotions apart from the following:

Deposits

General insurance

Home finance business

Pure protection life assurance

Reinsurance

The rules for financial promotions do not apply to:

Specific one-off product details for a specific recipient

Personal quotations or illustrations

Communications to one recipient only

Straightforward promotions that just contain the firm’s name, contact point, logo, brief factual descriptions of the firm’s activities, fees, products and services.

Types of promotion

The FCA’s Conduct of Business rules give separate requirements for two distinct types of promotion. These are:

Non-real time promotions that deal with FCA regulated advertising and promotions, such as press advertising, newsletters, leaflets and brochures. E-communications are also regarded as non-real time financial promotions, for example, websites and emails

Real time financial promotions deal with activities such as personal visits, telephone conversations and any other interactive dial...

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The promotion must detail that in the event that there is any doubt about the suitability of the investment, the firm should be contacted for advice (or an IFA should be contacted, if the firm does not offer advice)

Confirmation that the firm is authorised and /or regulated by the FCA

The promotion must include the full name and address of the person offering the investment and the firm

Details of charges, expenses and commissions payable to the firm must be provided

There must be a summary of the tax treatment and consequences for the average investor of making such an investment

There should be a warning that the relevant tax regime may change in the future

The promotion must not relate to unregulated collective investment schemes, derivatives or warrants, unless the firm can prove with evidence that the investment is suitable

E-commerce

If a firm advertises or conducts business online it is subject to the E-commerce Directive Rules. This means that:

Certain regulatory information (name and address of firm, email contact details, FCA status disclosure and Financial Services Register number) must be easily accessible

Clear information must be given on the services provided

Clear instructions must be given for placing orders

Ways of identifying and correcting inputting errors when making orders must be available

Orders must be acknowledged without delay

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 off...

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Details of the coverage provided by the Financial Services Compensation Scheme (FSCS)

Where a fee is to be charged, the client’s agreement to this must be obtained before the firm starts to act. The above information will be confirmed in writing in the Services and Costs Disclosure Document. The information does not have to be provided if it has already been given to the client and is still valid, the initial contact is by phone (the equivalent information must be provided on the phone and later confirmed in writing) or the transaction is an execution only transaction for a non-life packaged product.

Explain the purpose of the Client Agreement.

Answer : Purchase course for answer

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, the client answers an advertisement by purchasing directly off the page. Where an execution-only case arises and in some direct offer transactions, the firm must assess the appropriateness of the transaction for them.

To consider appropriateness, the firm must request that the client provides information regarding ...

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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.

When carrying out client reviews, the original fact find should always be updated with any changes to circumstances. Records of fact finds must be kept for the standard periods, except where this was in connection with a pension opt-out or transfer from an occupational pension scheme. In these instances, records must be kept indefinitely, even if no advice was provided.

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 FCA’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 FCA are:

Advice shoul...

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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.

Key information documents

All product providers must produce a ‘ key information document ’ (KID) for each of their packaged products. They can be either on paper (hard copy) or in electronic format, but must be to the same standard as the marketing material.

Generally, the document must be issued to all retail clients before they complete an application form, for all new sales. Where a variation is made to an existing policy, the customer must have sufficient information to understand the consequences of the alteration. Where a packaged product is sold without a written application, the key features m...

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With profits business

Where a life office deals in with profits arrangements, it must produce a Principles and Practices of Financial Management (PPFM) document, setting out the way in which the organisation manages its 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.

The product provider must issue cancellation notices directly to the cust...

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If a provider does not send a cancellation notice as required, the customer may cancel at any time and will receive a full refund.

The COBS rules affect investment transactions and how they are arranged. The rules apply primarily to market makers, but many of them affect all firms. In particular:

Churning and switching

Firms must only recommend deals or switches if they have taken reasonable steps to make sure that the deal or switch is in the customer&rsq...

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Interest on the account belongs to the client unless it is agreed otherwise. Client money reconciliations have to be carried out as often as necessary 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.

Records need to be kept:

Indefinitely for pension transfers, pension opt-outs and FSAVCs

Five years for life policies and pension contracts (promotions for these is six years)

Five years in most other cases (i...

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Complaints outstanding at the end of the reporting period

Complaints reporting is subject to strict time limits and where not met, firms will be charged an administration fee. Enforcement action may also be taken leading to the firms loss of their authorisation.

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 renewals as well as new business

Initial Disclosure Document

An intermediary must supply the client with an Initial Disclosure Document (IDD) – or Terms of Business - giving details of the services offered and the authorisation status. An intermediary must have a list of insurers with which it deal...

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Clients must be given guidance on claims procedures

The insurer must not unreasonably reject a claim

The insurer must not refuse a claim on grounds of non-disclosure 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.

Its Mortgage Conduct of Business Rules (MCOB) applies 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 passes on leads to an authorised person who pays the introducer for the lead, they will not require FCA authorisation as they are not in themselves providing advice to the client.

Regulated mortgage contracts are those where:

A lender provides credit (for private or commercial purposes) to an individual (or trustees) secured by a first legal mortgage on land in the UK at least 40% of which is to be used as a dwelling by the borrower (or a beneficiary of the trust) or a spouse, quasi spouse, parent, brother, sister, child, grandparent or grandchild of the borrower

It follows therefore that mortgages are not regulated where:

The borrower is a company

The loan is secured on a second or subsequent charge

The loan is for the purchase of commercial property

The Regulator has different regulatory requirements for information and advice.

Information is the provision of accurate and neutral facts about a mortgage loan witho...

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Need to provide a binding mortgage offer and seven day (minimum) reflection period

Need to give an adequate explanation of a product’s essential features

Are subject to new disclosure requirements

From 21 March 2019, firms have to issue a new mandatory disclosure document – a European Standardised Information Sheet (ESIS) - instead of a key facts illustration. Firms must provide adequate explanations of the proposed mortgage contract and any ancillary services, which includes pre-contract information, essential product features and the potential impact on the consumer (i.e. the consequences of default).

If firms are paid by commission they must inform consumers that they have the right to ask for information on that which is paid by different lenders and the Directive also introduces the requirement that remuneration of advisers cannot be contingent on sales targets.

The FCA rules do not require firms to widen their services to include second charge mortgages, but if they do they will need to take all these products into account.

The FCA requires mortgage sellers and advisers to obtain a relevant level 3 qualification. Those in these roles at 21 March 2016 had until 21 September 2018 to achieve the qualification.