1. (1)

   This section applies to a firm intending to conduct, or conducting designated investment business or ancillary business relating to designated investment business.

2. (2)

   For the purposes of COB only, the following provisions in COB 4.1 also apply to a firm intending to carry on, or carrying on, any other regulated activity:

   1. (a)

      COB 4.1.12 R and COB 4.1.13 G (Large intermediate customer classified as a market counterparty); and

   2. (b)

      COB 4.1.14 R (Client classified as a private customer).

1. (1)

   Before conducting designated investment business with or for any client, a firm must take reasonable steps to establish whether that client is a private customer, intermediate customer or market counterparty.

2. (2)

   A firm which takes reasonable steps to classify its clients, as required by the rules in this section, and treats a client in accordance with the classification it has established for that purpose, does not breach any other rule in COB to the extent that the breach arises only from inappropriate classification of that client.3

1. (1)

   If a firm ("F") is aware that a person ("C1") with or for whom it is conducting designated investment business, or related ancillary activities, is acting as agent for another person ("C2") in relation to that business, C1, and not C2, is the client of F in respect of that business, if:

   1. (a)

      C1 is another firm or an overseas financial services institution; or

   2. (b)

      C1 is any other person, provided that avoidance of duties which F would otherwise owe to C2 is not the main purpose of the arrangements between the parties.

2. (2)

   Paragraph (1) does not apply if F has agreed with C1 in writing to treat C2 as its client.

3. (3)

   If there is an agreement under (2) in relation to more than one client (C2) represented by C1, F may discharge any requirement to notify, obtain instructions or consent from, or enter into an agreement with each C2 by sending to, or receiving from, C1, a single communication which is expressed to cover each C2, except that:

   1. (a)

      separate risk warnings under COB 5.4 (Customers' understanding of risk);

   2. (b)

      confirmations under COB 8.1 (Confirmation of transactions); and

   3. (c)

      periodic statements under COB 8.2 (Periodic statements) are required for each C2

   are required for each C2.

4. (4)

   If paragraph (1) does not apply, because of the proviso in (1)(b) or an agreement under (2), C2, and not C1, is the client of F in respect of that business.2

1. (1)

   When a firm ("F") conducts designated investment business, or related ancillary activities, with or for:

   1. (a)

      another firm; or

   2. (b)

      an overseas financial services institution;3

   ("C1"), C1 is a market counterparty of F, unless (2), (3) or (4) applies.

2. (2)

   C1 is an intermediate customer of F when the activity carried on by F would be inter-professional business (if C1 were a market counterparty), and:

   1. (a)

      C1 is acting for an underlying customer ("C2"); and

   2. (b)

      [deleted]

   3. (c)

      F and C1 have agreed that F should classify C1 as an intermediate customer when C1 is acting for C2.3

3. (3)

   C1 is an intermediate customer of F when the activity carried on would not be inter-professional business (if C1 were a market counterparty) and:

   1. (a)

      C1 has not indicated that it is acting on its own behalf in relation to that activity; or

   2. (b)

      C1 is a long-term insurer acting on behalf of its life fund.

4. (4)

   If C1 is a collective investment scheme, C1 is an intermediate customer of F.4

5. (5)

   [deleted]4

3A firm must classify a client which is a recognised investment exchange, designated investment exchange, regulated market or clearing house as either a market counterparty or an intermediate customer.

1. (1)

   A firm may classify a client who would otherwise be a private customer as an intermediate customer if:

   1. (a)

      the firm has taken reasonable care to determine that the client has sufficient experience and understanding to be classified as an intermediate customer; and

   2. (b)

      the firm:

      1. (i)

         has given a written warning to the client of the protections under the regulatory system that he will lose;

      2. (ii)

         has given the client sufficient time to consider the implications of being classified as an intermediate customer; and

      3. (iii)

         has obtained the client's written consent, or is otherwise able to demonstrate that informed consent has been given.

2. (2)

   For the purposes of (1), a client's consent to being classified as an intermediate customer may be limited to one or more types of:

   1. (a)

      designated investment; or

   2. (b)

      designated investment business.

A firm may classify a client (other than another firm, regulated collective investment scheme, or an overseas financial services institution) who would otherwise be an intermediate customer as a market counterparty if:4

1. (1)

   the client at the time he is classified is one of the following:

   1. (a)

      a body corporate (including a limited liability partnership) which has (or any of whose holding companies or subsidiaries has) called up share capital of at least £10 million (or its equivalent in any other currency at the relevant time);

   2. (b)

      a body corporate that meets (or any of whose holding companies or subsidiaries meets) two of the following tests:

      1. (i)

         a balance sheet total of 12.5 million euros (or its equivalent in any other currency at the relevant time);

      2. (ii)

         a net turnover of 25 million euros (or its equivalent in any other currency at the relevant time);

      3. (iii)

         an average number of employees during the year of 250;

   3. (c)

      a local authority or public authority;

   4. (d)

      a partnership or unincorporated association which has net assets of at least £10 million (or its equivalent in any other currency at the relevant time) (and calculated, in the case of a limited partnership, without deducting loans owing to any of the partners);

   5. (e)

      a trustee of a trust (other than an occupational pension scheme, SSAS, personal pension scheme or stakeholder pension scheme) with assets of at least £10 million (or its equivalent in any other currency), calculated by aggregating the value of the cash and designated investments forming part of the trust's assets, but before deducting its liabilities;

   6. (f)

      a trustee of an occupational pension scheme, SSAS or stakeholder pension scheme where the trusthas (or has had at any time during the previous two years):

      1. (i)

         at least 50 members; and

      2. (ii)

         assets under management of not less than £10 million (or its equivalent in any other currency at the relevant time); and

2. (2)

   the firm has, before commencing business with the client on a market counterparty basis:

   1. (a)

      advised the client in writing that he is being classified as a market counterparty;

   2. (b)

      given a written warning to the client that he will lose protections under the regulatory system;

   3. (c)

      for a client falling under (1)(a) or (b):

      1. (i)

         taken reasonable steps to ensure that the written notices required by (2)(a) and (b) have been delivered to a person authorised to take such a decision for the client; and

      2. (ii)

         not been notified by the client that the client objects to being classified as a market counterparty;

   4. (d)

      for a client falling under (1)(c), (d), (e) or (f):

      1. (i)

         taken reasonable steps to ensure that the written notices required by 2(a) and (b) have been delivered to a person authorised to take such a decision for the client; and

      2. (ii)

         obtained the client's written consent or is otherwise able to demonstrate that consent has been given.

1. (1)

   A firm may classify as a private customer any client (other than a firm, unless it is an ICVC, or an overseas financial services institution) who would otherwise be a market counterparty or an intermediate customer, and must notify any such client accordingly.4

2. (2)

   A notice under (1) must advise the client that he may not necessarily have rights under the Financial Ombudsman Service or the compensation scheme as a result of such classification.

1. (1)

   If a firm classifies:

   1. (a)

      a client as an intermediate customer under COB 4.1.9 R (Expert privatecustomer classified as an intermediate customer); or

   2. (b)

      a client as a market counterparty under COB 4.1.12 R (Large intermediate customer classified as a market counterparty);

   it must review that classification at least annually to ensure that it remains appropriate to the designated investment business which the firm carries on with or for that client, unless (2) applies.

2. (2)

   If a firm has not conducted designated investment business with or for a client during the previous 12 month period, the firm may defer the review referred to in (1) until the firm next conducts designated investment business with or for the client.

1. (1)

   A firm must make a record of the classification established for each client under this section, including sufficient information to support that classification. 3

2. (2)

   A firm must retain the record referred to in (1) for a minimum period after the date on which the firm ceases to carry on business with or for that client, as follows:

   1. (a)

      indefinitely, if relevant to a pension transfer, pension opt-out or FSAVC;

   2. (b)

      for a period of at least six years, if relevant to a life policy or pension contract;

   3. (c)

      for a period of at least three years in any other case.

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

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

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

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.

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

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.

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.

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.

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 4.3 applies:

1. (1)

   to a firm when carrying on with or for private customers any of the following in relation to packaged products:

   1. (a)

      advising on investments; or

   2. (b)

      dealing as agent; or

   3. (c)

      arranging;

2. (2)

   to a firm, other than an insurer, that carries on in relation to a life policy any of the activities in (1) with or for an intermediate customer or a market counter-party.

1. (1)
   1. (a)

      A firm must take reasonable steps to ensure that its representatives on first making contact with a private customer with a view to:

      1. (i)

         advising on investments on packaged products; or

      2. (ii)

         dealing as agent in packaged products; or

      3. (iii)

         arranging (bringing about) deals in packaged product; or

      4. (iv)

         making arrangements with a view to transactions in life policies;

      provide the customer, in a durable medium, with information concerning:

   2. (b)
      1. (i)

         the firm and the scope of and nature of its services (an initial disclosure document); and

      2. (ii)

         where (a)(i) applies, the firm's arrangements for charging and receiving fees and commission (a fees and commission statement);

   in both cases being information which the firm reasonably considers will be, or is likely to be, appropriate for the customer having regard to the type of service which the firm may provide or business which the firm may conduct.

2. (2)

   A firm must also provide a private customer with an initial disclosure document if, in relation to the amendment of a life policy for that private customer, it:

   1. (a)

      advises on investments on packaged products; or

   2. (b)

      deals as agent in packaged products; or

   3. (c)

      arranges.

3. (3)
   1. (a)

      The requirements in (1) and (2) do not apply:

      1. (i)

         to the extent that the appropriate information has already been given to the customer on a previous occasion and that information is still likely to be accurate and appropriate for the customer; or

      2. (ii)

         if COB 4.3.16 G (initial contact by telephone) applies; or

      3. (iii)

         to a firm when it carries out an execution only transaction in non-life packaged products; or

      4. (iv)

         to an insurer for those customers in respect of which it is not advising on investments.

   2. (b)

      A firm that reasonably expects it will not be advising on investments in respect of products falling within any of the product groups set out in Note 14 to COB 4 Annex 6R does not have to comply with the requirements in (1)(b)(ii) but if it does advise on investments on these products the rules will apply to the firm in respect of the fees and commission statement as if it was required by (1)(b)(ii) to provide the statement.

4. (4)

   The requirements in (1) and (2) will apply to:

   1. (a)

      a firm that is acting as a discretionary investment manager for private customers; or

   2. (b)

      a firm which is effecting execution-only transactions in packaged products for private customers;

   only if the firm is carrying on an insurance mediation activity in relation to life policies for those private customers, in which case the requirements in (1) and (2) will only apply to the extent of requiring the firm to provide those private customers with an initial disclosure document.

5. (5)

   A firm which acts for a private customer under a non-discretionary management agreement need not comply with the requirements in (1) above to provide an initial disclosure document or a fees and commission statementif the following are satisfied:

   1. (a)

      the firm is remunerated by the customer by the payment of a fee; and

   2. (b)

      the agreement provides that the firm may recommend securities as well as packaged products for inclusion in the customer's portfolio and that in respect of packaged products the firm will make selections from the whole market;

   but such a firm must, if it is carrying on an insurance mediation activity for a private customer in relation to life policies, comply with the requirements in (1) as to the provision of an initial disclosure document to the private customer.

6. (6)

   A firm which is required in accordance with this rule to provide an initial disclosure document to a private customer may instead provide the customer with a combined initial disclosure document if it has reasonable grounds to be satisfied that the services which it is likely to provide to the customer will, in addition to packaged products, relate to one or more of the following:

   1. (a)

      regulated mortgage contracts;

   2. (b)

      regulated lifetime mortgage contracts;

   3. (c)

      non-investment insurance contracts.

7. (7)

   The information contained in the initial disclosure document may be provided orally if a firm has not made a personal recommendation to a private customer, and:

   1. (a)

      the customer requests it; or

   2. (b)

      immediate cover is necessary;

   but in both cases the firm must provide the initial disclosure document immediately after the conclusion of the contract, in a durable medium.

A firm must take reasonable steps to ensure that it provides a private customer with an appropriate fees and commission statement whenever requested to do so.

1. (1)

   A firm must before starting to act for a private customer on the basis of a fee charging arrangement:

   1. (a)

      secure the customer's agreement to the particular rate or amount which the firm will charge for its services; and

   2. (b)

      provide the customer with a record in a durable medium of the particular fee charging arrangement which will apply unless the firm starts to act for the private customer during a telephone call, in which case this record must be forwarded to the customer on conclusion of the call.

2. (2)

   A firm which charges a private customer a fee must do so on the basis that it will, in respect of any commission which it receives in respect of transactions in packaged products for that customer (and to which the particular fee charging arrangement relates), ensure the value of that commission is transferred to the customer by one or more of the following:

   1. (a)

      reducing the amount of its fee;

   2. (b)

      arranging for the amount invested by the customer to be increased; or

   3. (c)

      refunding the amount of the commission to the customer;

   except that this does not prohibit such a firm from agreeing with the customer (in writing) that it will retain an amount or rate of trail or renewal commission up to an amount each year specified in the agreement and so small, relative to the overall amount of fees paid by the customer, that it would be manifestly disproportionate for the firm to be required to account to the customer in one of the ways outlined in (a) to (c).

1. (1)

   A firm which has started to provide a private customer with services in relation to packaged products following the provision of a fees and commission statement must not (at least until the completion of those services):

   1. (a)

      increase the rate or amount of the fees it is charging the customer; or

   2. (b)

      subject to (4), arrange to retain any commission which exceeds the maximum amount or rate disclosed ;

   without first providing a further appropriate statement and obtaining the customer's prior consent to the proposed alteration in a durable medium.

2. (2)

   A firm which in accordance with (1) secures a private customer's agreement to retain an increased rate or amount of commission must ensure that, if it subsequently provides the customer with a suitability letter, it includes an explanation of why it was necessary for the principal to recommend a packaged product in respect of which the firm will retain such higher commission or fees.

3. (3)

   If a firm decides to provide a private customer with advice on investments on a type of packaged product (which falls within a product group specified in Note 14 to COB 4 Annex 6R) in relation to which the fees and commission statement previously given to the customer does not contain the information required in Note 14 to COB 4 Annex 6R, it must issue a new and appropriate statement to that customer.

4. (4)
   1. (a)

      Notwithstanding (1)(b) a firm is not required to provide a further fees and commission statement for the purposes of (1) if:

      1. (i)

         the maximum amounts or rates disclosed in the statement already provided to the customer only apply to policiesof the example term or age of policyholder given in the fees and commission statement, or to policieswith shorter terms; and

      2. (ii)

         the firm arranges a policyfor a term longer than the example term in the statement (or longer than the term deemed for the example age given) and the increase in the commission which the firm arranges to retain over the maximum disclosed in the statement is not more than an amount that is directly proportional to the increase in the duration of the term of the policy(or to the term deemed from the age of policyholder).

   2. (b)

      If requested by a customer, a firm must explain the basis of the higher maximum commission or fees charged in accordance with (4)(a)(ii).

1. (1)

   An initial disclosure document must contain the Key facts logo, headings and text in the order shown in COB 4 Annex 4R and in accordance with the Notes.

2. (2)

   A combined initial disclosure document must contain the Key facts logo, headings and text in the order shown in COB 4 Annex 5R and in accordance with the Notes.

3. (3)

   If a private customer so requests, a firm should be able to provide an explanation of the basis on which it has chosen to market the particular packaged products within the range from which advice on investments will be given to that customer including an explanation of why the firm has selected particular product providers.

4. (4)

   Information given in the initial disclosure information about compensation arrangements made by an investment firm must:

   1. (a)

      (if it relates to the activities of an establishment in the United Kingdom) be in English; or

   2. (b)

      (if it relates to the activities of a branch in another EEA State) be in an official language of that EEA State.

5. (5)

   Information given in the initial disclosure information about the insurance mediation activities of a firm must be in English, unless the customer requests it to be, and the firm agrees to it being, in another language.1

1. (1)

   A fees and commission statement must contain the Key facts logo, heading and text in the order shown in COB 4 Annex 6R and in accordance with the Notes.

2. (2)

   A firm must maintain as many versions of the fees and commission statement set out at COB 4 Annex 6R as are appropriate to the different bases on which it may conduct business with private customers:

   1. (a)

      fee only (version 1);

   2. (b)

      commission (or equivalent) only (version 2);

   3. (c)

      fee or commission (or equivalent) (version 3);

   4. (d)

      fee or commission (or equivalent); or combination of commission (or equivalent) and fee (version 4);

   5. (e)

      commission (or equivalent); or combination of commission (or equivalent) and fee(version 5);

   6. (f)

      fee; or combination of commission (or equivalent) and fee (version 6).

3. (3)

   A firm must keep its fees and commission statements up to date and keep a record of each fees and commission statement for a period of six years from the date on which it was updated or replaced.

4. (4)

   A firm must maintain a record of each particular fees and commission statement which it provides to a private customer (other than when given merely in response to a request).1

1A firm which operates with a range (or ranges) of packaged products must produce in a durable medium, and in a form which is appropriate for distribution to private customers, the record of its range (or ranges) of packaged products which it maintains for the purposes of COB 5.1.6ER (1).

1A firm must take reasonable steps to ensure that its representatives provide a copy of the appropriate range of packaged products on the request of a private customer having regard to the services it is providing or may provide to the customer.

1. (1)

   1A firm which complies with COB 4.3.3 R will, in respect of any requirement imposed by COB 4.2 as to the delivery or content of information to be included in its terms of business, be regarded as complying with any such analogous requirement.

2. (2)

   Any information required by COB 4.2 which is not covered by (1) may be satisfied by it being included at the end of an initial disclosure document which is given to a private customer in accordance with COB 4.3.3 R or, if provided at the same time, by way of separate items of information.

1. (1)

   Where a firm's initial contact with a private customer (for a purpose set out in COB 4.3.3R (1)) is by telephone then the following information must be provided and requirements satisfied before proceeding further:

   1. (a)

      the name of the firm and, if the call is initiated by or on behalf of a firm, the commercial purpose of the call;

   2. (b)

      whether the firm offers packaged product from the whole market or from a limited number of companies or from a single company or single group of companies;

   3. (c)

      whether the firm will provide the customer with advice on investments on packaged products;

   4. (d)

      if the firm does not offer products from the whole market, that the customer can request a copy of the appropriate range of packaged products;

   5. (e)

      whether the firm offers a fee based service, a commission based service, a service based on a combination of fee and commission, or a combination of these three types of services, and the consequences for the customer of proceeding with each type of service;

   6. (f)

      that the information given under (a) to (e) will subsequently be confirmed in writing.

2. (2)

   A firm which complies with (1) will, subject to (3), satisfy the condition set out in item (1) of COB 4 Annex 1.

3. (3)

   If during the course of a telephone call a firm is to conclude a contract (whether for the provision of a mediation services and/or for the purchase or sale of a packaged product), it must as well as complying with (1) and (2) above satisfy the requirement in COB 4.2.5 R and COB 4 Annex 1.

4. (4)

   If a firm's initial contact with a private customer by telephone is such that COB 4.3.3 R (other than COB 4.3.3R (3)(a)(ii)) applies then, subject to any relevant exclusions, it must send the customer an initial disclosure document and a fees and commission statement as soon as is reasonably practicable following the conclusion of the call.

Intermediate customers and market counterparties (and private customers who are introduced): disclosure before conclusion of the contract or immediately after conclusion of the contract 1

1A firm must take reasonable steps to ensure that its representatives on first making contact with an employee with a view to advising on his employer's group personal pension scheme or stakeholder pension scheme, inform the employee:

1. (1)

   that the firm will be providing advice on investments on group personal pension schemes and/or stakeholder pension schemes provided by the employer;

2. (2)

   whether the employee will be provided with advice on investments:

   1. (a)

      that is restricted to the group personal pension scheme or stakeholder pension scheme provided the employer; or

   2. (b)

      the matters in (a) and other products;

3. (3)

   the amount and nature (ie fees and/or commission (or equivalent) and/or a combination of fees and commission (or equivalent)) of any payments that the employee will have to pay for the advice on investments.

This annex consists only of one or more forms or templates. Forms and templates are to be found through the 'Forms' link under Useful Links section at www.fsahandbook.info or on the Handbook CD-ROM.

This annex consists only of one or more forms or templates. Forms and templates are to be found through the 'Forms' link under Useful Links section at www.fsahandbook.info or on the Handbook CD-ROM.