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 or place business in any way likely to conflict with any duty owed to customers

Indirect benefits: The FCA has many rules to prevent intermediaries being swayed in their recommendations by incentives. These rules aim to ban many indirect benefits and services and cover selling, gifts/extras, communications and training. To satisfy the “...

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Capability: limited financial literacy, poor English or digital skills, or restricted access to support

The FCA has embedded the consideration of vulnerable circumstances across the Consumer Duty rules. Firms are expected to factor vulnerability into the design of products, services, and communication strategies to support positive customer outcomes.

In addition to vulnerability, advisers must also be mindful of clients’ personal values and preferences. Many clients may have strong views rooted in religion, ethics, or sustainability that influence their financial decisions.

Religious beliefs: For example, Muslim clients may avoid earning or paying interest, affecting how they engage with certain financial products.

Ethical values: Clients may choose to avoid industries like tobacco, gambling, or weapons manufacturing due to personal convictions.

Sustainability concerns: Increasingly, clients wish to invest in ways that align with environmental and social responsibility, avoiding companies involved in practices like fossil fuel extraction or heavy carbon emissions.

These preferences can have a significant impact on financial planning and product selection. Advisers must actively consider them in order to provide suitable and respectful advice.

Introduction

Firms must also ensure that their communications with retail customers achieve the relevant outcomes of the Consumer Duty.

The Regulator’s advertising 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 products for a specific client

Communications to one recipient only

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 dialogue

Non-real time financial promotions

There are some important requirements for all non-real time financial promotions.

Approval

As ...

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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 (and if different, the full name and address of the firm communicating or approving the promotion)

If the promoter cannot hold client money, the name of the person to whom payment should be made

Details of charges and expenses

Details of any remuneration payable by the firm to another person

A general description of the nature and risks of the investment so the recipient can make an informed decision as to whether the investment is suitable for them

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 tax levels and reliefs depend on individual circumstances and can change

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 offer financial promotions

Life offices sel...

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The firm’s name and address, contact details and method of communication

A summary of the firm’s conflicts of interest policy

Where a fee is to be charged, the client’s agreement to this must be obtained before the firm starts to act. For pre-2013 legacy investment business under a fee-only arrangement, and trail commission received by the firm should generally be passed to the client, either by reducing fees increasing the investment, or paying it directly, unless the firm and client agree in writing that the firm may keep it (if the amount is small and repaying it would be disproportionate).

Explain the purpose of the Client Agreement.

Answer : Purchase course for answer

Advice

A transaction is classed as execution-only where it is processed by an authorised firm on the client’s specific instructions, but crucially 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 their knowledge and experience of the particular inv...

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Some private clients may not want to provide all this information and this should be recorded on the fact find and any suitability report that is subsequently produced. If this means that the authorised firm cannot assess suitability in any way, it must not make a personal recommendation.

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 their personal and financial circumstances, objectives, knowledge and experience, and capacity for loss.

A tied firm must not make a recommendation unless it has a suitable product in its range. If none is suitable, no recommendation should be made. A multi-tied firm must ensure it can access a suitable product from its tied providers before making any recommendation.

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 should be considered having been arrived at conscientiously and purely in the client’s...

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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

Different documents are required depending on the type of product: for Packaged Retail and Insurance-Based Investment Products (PRIIPs), a Key Information Document (KID) is mandatory. For non-PRIIP packaged products, a Key Features Document (KFD) is required; and for collective investment schemes, a Key Investor Information Document (KIID) must be provided. 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...

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These are regulated under the Insurance: Conduct of Business Sourcebook (ICOBS)

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 customer by post or electronically. The product provider must u...

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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 (and will not be liable for any shortfall).

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:

Inducements and indirect benefits

Firms must take reasonable steps to avoid offering, accepting, or requesting inducements that might materially conflict with their duty to clients. Providers may offer goods and services to intermediaries under certain conditions—for example, product ...

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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

Many intermediaries lack client money permissions and must therefore ensure payments for investments go directly to the provider. In such cases, client money accounts are not required.

Firms with client money permissions have additional obligations under the Senior Managers and Certification Regime. A suitably qualified senior manager must be given formal responsibility for safeguarding client money and assets.

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 (in some instances MiFID firms ar...

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Complaints closed

Complaints upheld

Complaints opened during the reporting period

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

An intermediary must supply the client details of the services offered and the authorisation status. An intermediary must have a list of insurers with which it deals available for clients.

Suitability

Recommendations must be suita...

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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 ...

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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). 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.