Learning Material Sample

UK Financial Services, regulations and ethics

11. FCA Conduct of Business Rules

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: Fir...

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...rwise 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.

Firms must provide their retail and professional clients with a client agreement (often referred to as a Terms of Business Agreement ). The purpose of the document is to ensure that the client is fully aware of whom 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 busi...

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...de the client with the following information:

The firm’s regulatory status

The firm’s adviser status - restricted or independent

The services to be provided

Details of how the firm is paid

Details of loans and ownership

How to complain

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 .

Explain the purpose of the Client Agreement.

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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.


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 clien...

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... 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.

When carrying out client reviews, the original factfind should always be updated with any changes to circumstances.  Records of factfinds must be kept for the standard periods, except where this was in connection to 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.

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 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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...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.

The product disclosure rules exist to regulate the information that is provided to clients to enable them to be aware of all the details of the investment they are purchasing.

Key features documents

All product providers must produce a ‘ key features document ’ 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 applic...

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...ans that it mainly applies to term assurance and income protection policies.

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.

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 ti...

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...y 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 the 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 affect all firms. In particular:

Churning and switching

Firms must only recommend deals or switches if they...

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...o 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.

The Regulator’s Insurance Conduct of Business Rules, commonly known as ICOB, regulates sales and advice in this area. These rules have been incorporated into the FCA’s Handbook. In this section we will look briefly at the content of the ICOB rules.


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 Docu...

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...f 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.

In this section we will look briefly at the content of the ICOB rules which have also been incorporated into the FCA Handbook.

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 purpos...

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...onsumer’s ability to pay

Banning self-certified mortgages

Banning the sale of products with characteristics that put borrowers at risk

Banning arrears charges to ensure firms do not profit from those in arrears

Requiring all mortgage advisers to be personally accountable to the FCA

A request for the FCA’s scope to extend to cover buy to let and all lending secured on a home.

The EU Mortgage Credit Directive deals with credit agreements relating to residential property. It has been formally adopted and published and it is proposed that member states will have until March 2016 to implement the requirements into national law.

Following the Sandler Review which recommended a range of simple, low-cost and risk controlled products, the new ‘stakeholder’ products and associated sales process was introduced on 6 April 2005.The range includes:

A cash deposit account

A medium term investment pr...

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...dvice had to be kept for 6 years. Providers of the medium term investment and pension products could charge up to 1.5% of the plan value for up to ten years, then decreasing to 1%.

The take up of these products has been smaller than anticipated and their availability has declined.

In August 2015, the Financial Advice Market Review (FAMR) was launched to explore ways in which the Government, industry and regulators could create a market which delivered affordable and accessible financial advice and guidance to everyone.

A report was published by HM Treasury and the FCA in March 2016 and built on the improvements made from the RDR aiming to:

provide affordable advice to consumers

increase access to advice

address industry concerns about future liabilities and redress without affecting levels of consumer pr...

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...nd has taken forward three recommendations assigned to it.  In April 2017 it published a foreword and three reports:

Financial well-being in the workplace: A way forward (recommendation 12)

Consumer explanations of ‘advice’ and ‘guidance’ (recommendation 17)

Fact find process (recommendation 10)

Employer and trustee factsheet (recommendation 11).

The FCA will be consulting on specific aspects of the regulation which will result from the FAMR and will conduct a full review of the outcomes in 2019.

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