1 COB applies to every firm (except an ICVC) as specified in the remainder of this chapter.

The purpose of this chapter is to set out to whom, for what activities, and within what territorial limits the rules, evidential provisions and guidance in COB apply.

If a firm engages in insurance mediation activities for non-investment insurance contracts, ICOB applies and COB does not apply.6

7The effect of COB 1.2.1 R (4)(d) is that if the relevant designated professional body of an authorised professional firm does not make rules implementing articles 12 and 13 of the IMD applicable to authorised professional firms, those firms will need to comply with:

(a) the IMD minimum implementation provisions; and

(b) COB 4.3.19 R to COB 4.3.25 R as if they also applied to a firm carrying out the activities in COB 4.3.19R (1)(a) with or on behalf of private customers.

A UCITS qualifier should be aware of the requirements of CIS 17.4 (Facilities in the United Kingdom).

COB 6.7 (Cancellation and withdrawal) confers rights on customers to rescind agreements with, or withdraw offers from, firms within a specified period.

COB 3 (Financial promotion) is available for nationals of EEA States (other than the United Kingdom) wishing to take advantage of article 36 of the Financial Promotion Order.

Authorised professional firms should be aware of the following:

1. (1)

   PROF 5 (Non-mainstream regulated activities);5

2. (2)

   COB 3.1.5 R (Authorised professional firms) and the exemption in article 55 of the Financial Promotion Order (Communications by members of professions) which applies in relation to financial promotions of authorised professional firms under COB 3.5.5 R (2) (Exemptions);

   8
3. (3)

   COB 4.2.3 G which contains guidance for authorised professional firms on the provision of terms of business; and8

   8
4. (4)

   COB 7.17 which relates to disclosures required to be made in relation to investment research recommendations as a result of the Market Abuse Directive.8

1. (1)

   The approach in COB is to ensure that each rule, or, as appropriate, the rules in a section or part of a section, are applied to firms in respect of particular regulated activities or unregulated activities or, in the case of COB 3 (Financial promotion), in relation to particular kinds of promotion.

2. (2)

   Most of COB applies in relation to regulated activities, conducted by firms, which fall within the definition of designated investment business. In relation to deposits, COB has limited application, as described in COB 1.11 (Application of COB in relation to deposits).57

3. (3)

   The scope of the regulated activities to which COB applies is determined by the description of the activity as it is set out in the Regulated Activities Order. Accordingly, a firm will not generally be subject to COB in relation to any aspect of its business activities which fall within an exclusion found in the Regulated Activities Order. The definition of designated investment business includes, however, activities within the exclusion from dealing in investments as principal in article 15 of the Regulated Activities Order (Absence of holding out etc).

4. (4)

   COB has limited application to Lloyd's related activities as set out in Chapter XIII of Part II of the Regulated Activities Order. Firms are reminded of the provisions of COB 12 (Lloyd's).

5. (5)

   COB 3 (Financial promotion) applies to a firm which communicates or approves a financial promotion, but see (6);

6. (6)

   Firms are reminded that COB 3 (Financial promotion) has limited application to a firm carrying on a takeover or related operation. (See COB 3.2.3A R and COB 3.2.5 R)

7. (7)

   MCOB applies to a firm that carries on home finance activity10.3

   10
8. (8)

   ICOB applies to a firm in relation to insurance mediation activities in connection with non-investment insurance contracts.7

1. (1)

   The application of many provisions in COB depends on the classification of the client with whom a firm is conducting business. A client must fall within one of three classifications: private customer, intermediate customer or market counterparty. In COB, the term "customer" refers to private customers and intermediate customers, but not market counterparties. The term "client" covers customers and market counterparties. Where relevant, each of the provisions of COB makes clear whether it applies to activities carried on with or for private customers, intermediate customers or both.8

2. (2)

   4[deleted]

3. (3)

   Some rules in COB (mainly those relating to distance contracts) use the term "retail customer" rather than "customer", "private customer" or "intermediate customer". A retail customer is an individual who is acting for purposes which are outside his trade, business or profession.5

Firms are reminded that the definition of inter-professional business does not include:

1. (1)

   the approval of a financial promotion - COB 3 (Financial promotion) has a limited application in this context (see COB 3.2.3A R and COB 3.2.5 R);

2. (2)

   4[deleted]

3. (3)

   offering, giving, soliciting or accepting inducements for the purpose of or in connection with activities falling within the scope of COB 2.2 (Inducements) will apply in this context;85

   9
4. (4)

   corporate finance business;2568

5. (5)

   concluding a distance contract with a retail customer; or568

6. (6)

   regulated activities relating to life policies.568

The rules in COB 1.4 set out the maximum territorial scope of this sourcebook. Particular rules may have express territorial limitations.345

COB 1.9 contains guidance on how this sourcebook is modified by ECO.5

1. (1)

   10The IMD minimum implementation provisions are the minimum provisions required for the implementation of articles 12 and 13 of the IMD.

2. (2)

   The effect of COB 1.4.12 R is to apply these minimum provisions to firms in respect of their insurance mediation activities passported under the IMD if other EEA States have not implemented articles 12 and 13 of the IMD for those activities.

3. (3)

   Firms are reminded that insurers have passporting rights under the Consolidated Life Directive but not under the IMD.

8 COB 6.7 (Cancellation and withdrawal) has limited application for corporate finance business. Distance contracts concluded with retail customers in the course of corporate finance business are exempt from COB 6.7 if the price of the financial service is dependent on fluctuations in the financial market outside the firm's control (COB 6.7.17, row 2, case 15(a)).

2 Article 16 of the Regulated Activities Order (Dealing in contractually based investments) sets out an exclusion for unauthorised persons who deal in investments as principal in contractually based investments. The exclusion relates to dealings:

1. (1)

   with or through an authorised person or, in certain cases, an exempt person; or

2. (2)

   in certain cases, through an office outside the United Kingdom maintained by a party to the transaction.

2 Article 22 of the Regulated Activities Order (Deals with or through authorised persons) sets out an exclusion for unauthorised persons who deal in investments as agent. The exclusion relates to dealings with or through an authorised person if:

1. (1)

   the transaction is entered into on advice given to the client by an authorised person; or

2. (2)

   it is clear, in all the circumstances, that the client, in his capacity as an investor, is not seeking and has not sought advice from the agent as to the merits of the client's entering into the transaction (or the agent has declined to give such advice but has recommended the client seek such advice from an authorised person); and in either case, the agent does not receive from any person other than the client any pecuniary reward or advantage for which he does not account to the client.

1. (1)

   Although COB does not apply directly to a firm's appointed representatives, a firm will always be responsible for the acts and omissions of its appointed representatives in carrying on business for which the firm has accepted responsibility (section 39(3) of the Act). In determining whether a firm has complied with any provision of COB, anything done or omitted by a firm's appointed representative (when acting as such) will be treated as having been done or omitted by the firm (section 39(4) of the Act).

2. (2)

   Firms should also refer to SUP 12 (Appointed representatives), which sets out requirements which apply to firms using appointed representatives.

GEN 2.2.14 R (References to writing) has the effect that electronic media may be used to make communications that are required by the Handbook to be 'in writing' unless a contrary intention appears.

For any electronic communication with a customer, a firm should:

1. (1)

   have in place appropriate arrangements, including contingency plans, to ensure the secure transmission and receipt of the communication; it should also be able to verify the authenticity and integrity of the communication; the arrangements should be proportionate and take into account the different levels of risk in a firm's business;

2. (2)

   be able to demonstrate that the customer wishes to communicate using this form of media; and

3. (3)

   if entering into an agreement, make it clear to the customer that a contractual relationship is created that has legal consequences.

Firms should note that GEN 2.2.14 R does not affect any other legal requirement that may apply in relation to the form or manner of executing a document or agreement.

1. (1)

   1COB 1.9.1 G and COB 1.9.2 G apply to a firm:2

   1. (a)

      which is an electronic commerce activity provider, that is, any firm which carries on an electronic commerce activity; and2

   2. (b)

      in relation to a financial promotion which is an electronic commerce communication.2

2. (2)

   Paragraph (1) means that firms need to be aware of this section whenever they are providing a service which:

   1. (a)

      is normally provided for remuneration;

   2. (b)

      is provided at a distance;

   3. (c)

      is so provided by means of electronic equipment for the processing (including digital compression) and storage of data; and

   4. (d)

      is so provided at the individual request of a recipient of the service.

3. (3)

   The purpose of this section is to indicate, for the benefit of such firms, the extent to which and the general manner in which the normal provisions of COB are modified by ECO.

The modifications made to COB resulting from the introduction of the E-Commerce Directive are of three kinds:

1. (1)

   ECO 1.1.6 R modifies COB so that a firm providing an electronic commerce activity from an establishment elsewhere in the EEA to a recipient who is in the United Kingdom (an incoming ECA provider) is not required to comply with any provision of COB except to the extent required by ECO 1. These exceptions relate to the 'consumer contract derogation' (see ECO 1.2) and to the 'insurance derogation' (see ECO 1.3);

2. (2)

   ECO 2:

   1. (a)

      modifies COB so that, in relation to a financial promotion which is an outgoing electronic commerce communication, COB 3 has an extended application to cover the whole of the EEA;2

   2. (b)

      obliges such a firm, in providing an electronic commerce activity within the EEA, to comply with the minimum information and other requirements in the E-Commerce Directive; and

   3. (c)

      relieves such a firm of the obligations covered by the derogations in ECO 1.

   otherwise COB applies in the usual way to such a firm.

3. (3)

   ECO 3 applies to a firm providing an electronic commerce activity from an establishment in the United Kingdom to a recipient who is in the United Kingdom or in a non-EEA State (a domestic ECA provider). Such a firm has to comply with COB in the usual way and so the requirements in ECO 3 are in addition to COB. ECO 3 sets out the minimum information and other requirements in the E-Commerce Directive.

3The Distance Marketing Directive is also relevant for electronic commerce activities and communications. The E-Commerce Directive applies in relation to any commercial transaction entered into over the Internet; the Distance Marketing Directive applies only in relation to contracts for financial services concluded exclusively by any means of distance communication such as telephone, fax or mail as well as electronic communications. COB 1.10.3G (2)(b) (Application of the Distance Marketing Directive and the Distance Marketing Regulations) provides guidance on the Distance Marketing Directive.

This section provides guidance on certain expressions used in COB that are derived from the Distance Marketing Directive and on the application of the Distance Marketing Regulations.

1This sourcebook adopts the concepts of "initial service agreement" and "successive operations" from the DMD.

1. (1)

   A firm's contract with a customer may take the form of an initial service agreement under which successive operations or a series of separate operations of the same nature are performed over time. Where this is the case, the DMD disclosure and cancellation requirements apply in relation to the initial service agreement only and not to the successive or separate operations. However, if new elements are added to the initial service agreement, the addition of those new elements is treated as a new contract to which the DMD disclosure and cancellation requirements apply. In accordance with recital 17 of the Distance Marketing Directive, examples are:

   1. (a)

      the opening of a bank account, which would be an initial service agreement, and the deposit or withdrawal of funds from that account which would be a successive or series of separate operations under that initial agreement; however, adding a debit card to the account would be the addition of a new element involving a separate contract; and

   2. (b)

      concluding an investment management agreement would be an initial service agreement, and carrying on discretionary or advisory transactions under that agreement would be a successive or a series of separate operations under it.

   Other examples are, in the FSA's view:

   1. (c)

      opening a brokerage account for the purposes of trading securities, and transactions under that account;

   2. (d)

      establishing a facility to enable a customer to subscribe to an ISA for the present and future tax years, and successive subscriptions under that agreement;

   3. (e)

      subscribing to an investment trust savings scheme, and successive purchases or sales of shares under that scheme; and

   4. (f)

      concluding a life policy, personal pension scheme4 or stakeholder pension scheme that includes a pre-selected option providing for future increases or decreases in regular premiums or payments, and subsequent index-linked changes to those premiums or increases or decreases to pension contributions following fluctuations in salary.

      4
2. (2)

   Even if a firm has not entered into an initial service agreement with a retail customer, but simply performs successive operations or a series of separate operations of the same nature for a retail customer over time, the DMD disclosure requirements will not apply to the successive or separate operations, provided there has been an operation of the same nature within the past year. But if it has been longer than a year, the next operation will be treated as the first in a new series of operations and the DMD disclosure requirements will apply. In accordance with recital 17 of the Distance Marketing Directive, an example of "successive operations" is the subscription to units of the same collective investment scheme.

1. (1)

   1The Distance Marketing Directive provides protections for 'any natural person who, in distance contracts... is acting for purposes which are outside his trade, business or profession', for which the FSA uses the term 'retail customer'. In practice, private individuals may act in a number of capacities. In the FSA's view retail customer does not include an individual acting, for example:

   1. (a)

      as trustee of a trust such as a housing or NHS trust; or

   2. (b)

      as member of the governing body of a club or other unincorporated association such as a trade body or a student union; or

   3. (c)

      as a pension trustee (but see COB 6.4.19 and COB 6.7.8 regarding the information and cancellation rights of such trustees).

2. (2)

   Examples of retail customers are:

   1. (a)

      personal representatives, including executors, unless they are acting in a professional capacity, for example, a solicitor acting as executor; or

   2. (b)

      private individuals acting in personal or other family circumstances for example, as trustee of a family trust.

1. (1)

   2To be a distance contract, a contract must be concluded under an 'organised distance sales or service-provision scheme' run by the contractual provider of the service who, for the purpose of the contract, makes exclusive use (directly or through an intermediary) of one or more means of distance communication up to and including the time at which the contract is concluded. The expression 'organised distance sales or service-provision scheme' is not defined in the DMD, but:

   1. (a)

      recital 15 of the DMD states that contracts negotiated at a distance involve the use of means of distance communication which are used as part of such a scheme not involving the simultaneous physical presence of the supplier and the consumer; and

   2. (b)

      recital 18 of the DMD states that the expression is intended to exclude services provided on a strictly occasional basis and outside a commercial structure dedicated to the conclusion of distance contracts.

2. (2)

   So, in the FSA's view, this means that:

   1. (a)

      the firm must have put in place facilities designed to enable a retail customer to deal with it exclusively at a distance, such as facilities for a retail customer to deal with it purely by post, telephone, fax or the Internet. If a firm normally operates face-to-face and has no facilities in place enabling a retail customer to deal with it customarily by distance means, the DMD will not apply. A one-off transaction effected exclusively by distance means to meet a particular contingency or emergency will not be a distance contract; and

   2. (b)

      there must have been no simultaneous physical presence of the firm and the other party to the contract throughout the offer, negotiation and conclusion of the contract. So, for example, contracts offered, negotiated and concluded over the Internet, through a telemarketing operation or by post will normally be distance contracts. A retail customer may visit the local office of the firm in the course of the offer, negotiation or conclusion of the contract with that firm. Wherever, in the literal sense, there has been "simultaneous physical presence" of the firm and the retail customer at the time of such a visit, any ensuing contract will not be a distance contract.

1The mere fact that an intermediary (acting for the supplier or for the retail customer) is involved, does not make the sale of a financial product or service a distance contract. The same principles apply as in the case of contact between the supplier and a retail customer. For example, if the intermediary and retail customer are simultaneously physically present at some stage in the course of the offer, negotiation and conclusion of a contract, the contract will not be a distance contract.3

1Some of the services which some intermediaries provide will themselves fall within the scope of the DMD. The FSA expects this to apply in only a small minority of cases, for example where the intermediary agrees to provide continuing advisory, broking or portfolio management services for a retail customer. The DMD is only relevant if:

1. (1)

   there is a contract between the intermediary and the retail customer in respect of the intermediary's mediation services; an intermediary may in its terms of business make clear that it does not, in providing its mediation services, act contractually on behalf of, or for, its retail customer and then proceed on the basis that no contract for its mediation services will arise;

2. (2)

   the contract is a distance contract; and

3. (3)

   the contract is concluded other than merely as a stage in the provision of another service by the intermediary or another person (see COB 4 Annex 1.1 R(13) and COB 6.7.17, Row 1, case D(a)).

COB implements most of the Distance Marketing Directive for distance contracts concluded by firms, the making or performance of which constitutes, or is part of, designated investment business or accepting deposits. However, certain aspects of the Distance Marketing Directive are implemented by provisions of the Distance Marketing Regulations, which apply in addition to COB, in particular:

1. (1)

   regulation 12 (Automatic cancellation of an attached distance contract) on which there is guidance in COB 6.7.51A G; and2

2. (2)

   regulation 14 (Payment by card). 21