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  3. Point in time
    2007-03-06

COB 4.2 Terms of business and client agreements with customers

Application

COB 4.2.1R

This section applies to a firm intending to conduct or conducting designated investment business with or for a specific customer.4

4Meaning of 'private customer'

COB 4.2.2R

In this section, COB 4.2, references to a 'private customer' include, in relation to the conclusion of a distance contract, a retail customer, and references to 'customer' are to be interpreted accordingly. 4

4Authorised professional firms

COB 4.2.3G

If an authorised professional firm conducts non-mainstream regulated activity for a customer (whether with or without any other regulated activity for the customer) then, subject to COB 4.2.8 G, the effect of COB 1.2.1 R (4) and PROF 5.4 is that:4

  1. (1)

    terms of business must be provided in accordance with COB 4.2.5 R;4

  2. (2)

    with respect to the non-mainstream regulated activity, the terms of business should satisfy COB 4.2 as to content if it contains the disclosure in COB 4 Ann 2E(25); and4

  3. (3)

    the Distance Marketing Regulations may apply and require the provision of pre-contractual information in certain circumstances (see PROF 5.4).45

Purpose

COB 4.2.4G

COB 4.2 amplifies Principle 6 (Customers' interests) and Principle 7 (Communications with clients). These require a firm to pay due regard to the interests of its customers and to their information needs, to treat them fairly and to communicate information to them which is clear, fair and not misleading. A customer needs to know on what basis a firm intends to do business with him. Terms of business or a client agreement set this out. 4

Requirement to provide terms of business to a customer

COB 4.2.5R

Unless any of the exemptions in COB 4 Annex 1 applies, a customer must, in good time before designated investment business is conducted, be provided with a firm'sterms of business, setting out the basis on which the designated investment business is to be conducted with or for the customer.4

COB 4.2.6G

4[deleted]

COB 4.2.6AG
  1. (1)

    Terms of business will be provided in 'good time' for the purposes of COB 4.2.5 R if provided in sufficient time to enable the customer to consider properly the service or investment on offer before he is bound.4

  2. (2)

    COB 4.2.5 R does not require the same information to be provided again if the customer already has it (for example through a direct offer financial promotion).4

Requirement to enter into a client agreement with a private customer

COB 4.2.7R
  1. (1)

    If a firm intends to conduct any of the following designated investment business with or for a private customer:

    1. (a)

      managing investments on a discretionary basis;

    2. (b)

      designated investment business relating to a contingent liability investment;

    3. (c)

      stock lending activity; or

    4. (d)

      designated investment business involving underwriting (except in respect of a life policy);

    its terms of business for the customer must, unless (2) applies, take the form of a client agreement, and the firm must not enter into this client agreement unless it has taken reasonable care to ensure that the private customer has had a proper opportunity to consider the terms.

  2. (2)

    A firm need not enter into a client agreement with a private customer if the private customer is habitually resident outside the United Kingdom and the firm has taken reasonable steps to establish that the private customer does not wish to enter into a client agreement.

COB 4.2.8G

Firms are reminded that, as well as complying with the requirements of COB 4.2.5 R and COB 4.2.7 R, they may also need to comply with the additional requirements relating to disclosure and client agreements set out in CASS (Client assets).

COB 4.2.9R

4[deleted]

Content of terms of business4

COB 4.2.10R

A firm must ensure that its terms of business (including a client agreement with a customer) provided in accordance with this section, COB 4.2:4

  1. (1)

    set out in adequate detail the basis on which it will conduct designated investment business with the customer; and4

  2. (2)

    (in respect of distance contracts with retail customers) include all contractual terms and conditions and the information set out in COB App 1.4

COB 4.2.11E
  1. (1)

    A firm should, in order to provide adequate detail, include in its terms of business provided to a customer:

    1. (a)

      a provision about each item set out in COB 4 Ann 2E and COB 4 Ann 3E; and24

    2. (b)

      any further or alternative provisions that the customer has asked for and on his own initiative agreed with the firm;

    to the extent that each such provision is relevant in the circumstances and that it is practicable to provide it.

  2. (1A)

    [deleted]6

    6
  3. (2)

    Compliance with (1) may be relied on as tending to establish compliance with COB 4.2.10 R (1).4

  4. (3)

    Contravention of (1) may be relied on as tending to establish contravention of COB 4.2.10 R (1).4

4Information not available at time of issue of terms of business

COB 4.2.11AR

4A firm is not required to provide information under COB 4.2.10 R that, by its nature, is unavailable at the time the terms of business are issued. In such circumstances, the firm must notify the customer of any relevant information as soon as practicable after it becomes available and, in the case of a distance contract with a retail customer, in good time before the contract is concluded.

COB 4.2.11BG

4COB 4.2.11A R will apply, for example, where a firm does not know a private customer's investment objectives before providing terms of business, as it cannot determine the private customer's requirements without undertaking know-your-customer checks, as required by COB 5.2.

4Terms of business provided in more than one document

COB 4.2.12R

A firm'sterms of business provided to a customer may comprise more than one document, provided that it is clear that collectively they constitute the terms of business, and provided the use of several documents does not materially diminish the significance of any information the firm is required to give the customer, or the ease with which this can be understood.

4Contents of terms of business: non-mainstream regulated activities of an authorised professional firm

COB 4.2.12AE
  1. (1)

    4An authorised professional firm should include, in its terms of business, the information in COB 4 Annex 2.

  2. (2)

    For an authorised professional firm, with respect to its non-mainstream regulated activities and as to the content only of its terms of business:

    1. (a)

      compliance with (1) may be relied on as tending to establish compliance with COB 4.2.5 R; and

    2. (b)

      contravention of (1) may be relied on as tending to establish contravention with COB 4.2.5 R.

Amendment of terms of business

COB 4.2.13R

If the terms of business provided to a customer allow a firm to amend its terms without the customer's consent, the firm must give at least ten business days' notice to a customer before conducting designated investment business with or for that customer on any amended terms, unless it is impracticable in the circumstances to do so.

4Records

COB 4.2.14R
  1. (1)

    A firm must make a record of each terms of business it provides to a customer, and any amendment to them, as soon as the terms of business come into force.

  2. (2)

    A firm must retain each record referred to in (1):

    1. (a)

      indefinitely, where the terms of business relate to a pension transfer, pension opt-out or FSAVC;

    2. (b)

      for six years, where the terms of business relate to a life policy, pension contract or stakeholder pension scheme; and

    3. (c)

      for three years in any other case.

  3. (3)

    For the purposes of (2), the appropriate time period runs in each case from the date on which the customer ceases to be a customer of the firm.

COB 4.2.15E

[deleted]134

COB 4.2.16E

4[deleted]3

COB 4.2.17E

Content of terms of business provided to a customer: Operating an ATS

2

Operating an ATS

Additional contents in respect of operating an ATS

An ATS operator should also ensure that the terms of business provided to a customer contain information about the following:

(1)

how the ATS operates, including any order handling and order execution processes;

(2)

the status of other users of the ATS, for example whether market counterparties, intermediate customers or private customers and whether based within or outside the United Kingdom;

(3)

arrangements for the clearing and settlement of transactions, including the respective obligations and responsibilities (if any) of the ATS operator and the customer in relation to clearing and settlement;

(4)

if investments that are not listed are traded on the ATS:

(a)

that unlisted investments are traded on the ATS; and

(b)

that the ATS operator will advise the customer on request where publicly available information about such investments can be obtained;

(5)

whether transactions executed using the ATS are reportable transactions;

(6)

trading procedures (if any) that may be adopted in the event of system malfunction;

(7)

the circumstances in which the ATS operator can terminate the customer's access to the ATS;

(8)

procedures (if any) to be adopted in the case of trading errors or disputes; and

(9)

whether investmentstraded on the ATS are qualifying investments for the purposes of the market abuse regime.