COB 5.7 Disclosure of charges, remuneration and commission

This table sets out the basis on which the firm should determine the value of cash payments, benefits and services to be disclosed as commission equivalent under COB 5.7.5 R. Benefits and services, as set out in parts B and C below, need be included only where their value is such that they could not be provided to a firm as an indirect benefit under COB 2.2.6 G (Packaged products - guidance on indirect benefits) and COB 2.2.7 G (Reasonable indirect benefits).4The result of the calculation should be that the amounts disclosed as commission equivalent are, as far as possible, the same as the amounts and value of commission which would be paid in a corresponding sale.4

Part A: Cash payments

1.

These cover all payments by a firm to a representative, appointed representative or a firm in the same immediate group in relation to a transaction in a packaged product, including:4

(a)

payments to any representative of the firm in respect of the transaction (for example, a manager's override), including any payments from the firm to introducers;4

(b)

bonus payments made for the achievement of certain sales targets;

(c)

that element of any payment made in relation to other business which may be considered to result directly or indirectly from the transaction; for example, any extra element of commission equivalent payable on the sale of a mortgage which is to be repaid through an investment in a packaged product;4

(d)

payments resulting directly from business written in previous years (for example, renewal commission equivalent), which are conditional on the completion of minimum amounts of new business;4

(e)

payments made by an associate of the firm to an associate of the representative;

(f)

salaries and other payments which do not relate directly to any one transaction, provided they are treated similarly to 'benefits' and 'services' (see paragraph 14).4

2.

In determining the amounts to be included in the calculation, a firm should have regard to the following:

(a)

When the precise rate of commission equivalent is not known in advance (for example, if retrospective volume overrides apply), the firm should estimate the rate likely to apply to the representative in question. This could, for example, be based on an average rate applicable to particular groupings of representatives or on a best estimate for each representative. It should never be below any minimum rate applicable to that representative or sale.4

(b)

When payments are credited to an 'account' from which periodic withdrawals may be made, the amount included should be that credited to the account whether or not the recipient intends to withdraw it immediately. If a representative is able to 'overdraw' an account, all amounts to be credited in respect of a transaction, up to any 'borrowing limit', should be included as if they were credited at the time the transaction was effected.

(c)

When a payment is made before the firm receives the premium or the investment monies to which it relates (for example, indemnity commission equivalent), it should be included as being received at the time of payment. If the representative or the provider firm wishes to explain this arrangement to the customer, he is free to do so, provided this does not detract from the required disclosure.4

(d)

When the firm arranges for a lump sum to be paid to a representative through a third party, in exchange for the income stream to which the representative is entitled (for example, a factoring arrangement), the lump sum should be included as if it were a payment from the firm.

(e)

When a firm provides, or arranges for a third party to provide, a loan to a representative, on the security of, or in the expectation of, future payments from the firm, the amounts to be included are the payments to the representative on which the provision of the loan is based, as if they were received at the time the transaction was effected, irrespective of their actual timing.

(f)

When an agent is employed and remunerated by the firm'sappointed representative , the payments to be included should be those made by the firm to the appointed representative , not those made by the appointed representative to its own employee.

Part B: Benefits

3.

These include the cost to the firm of all non-monetary benefits provided by it to a representative. These benefits include any item that could be considered as a benefit or expense under the Income and Corporation Taxes Act 1988 (ICTA). A benefit should be included whether or not the representative is liable to income tax on it and whether it is chargeable to tax.

4.

The type of benefits covered by paragraph 3 include the use of a car, attendance at conferences, subsidised loans, contributions to pension schemes, national insurance contributions, the value of any voucher outside the ICTA definition of benefit or expense, and the value of shareoption (taking into account any discount on issue and assuming that the shares in question grow at a reasonable rate in line with other investments).

Part C: Services

5.

These include benefits which could not be provided to a firm, A, as an indirect benefit (under COB 2.2.3 R (Prohibition of inducements) and COB 2.2.6 G (Packaged products - guidance on indirect benefits)), and which A would therefore have to fund out of its disclosable commission. For those services which can be provided as an indirect benefit, it is not necessary for the firm providing the benefit, B, actually to provide services to another firm, A, for B to be able to apply this criterion in relation to its employees, representatives or agents.4

6.

The following services should be included:

(a)

office accommodation and equipment, including telephone, photocopying and fax;

(b)

loans where a commercial rate of interest is not charged, including commission equivalent advances overdue for repayment;4

(c)

general stationery and mailing or distribution costs;

(d)

computer hardware and software (except software which specifically relates to the firm'spackaged product, such as software used in supporting the pensions review process or for producing illustrations, projection and product information);

(e)

clerical and administrative support (except support given in relation to the pensions review process);

(f)

business insurance cover, including professional indemnity and fidelity guarantee;

(g)

recruitment;

(h)

compliance monitoring;

(i)

customer services;

(j)

business planning services;

(k)

line management.

7.

To put a value on these services, the following costs should be included:

(a)

all overheads attributable to a particular cost item (for example, the cost of a compliance official);

(b)

salary costs pro rata where individuals are only engaged part-time on relevant business;

(c)

rent and associated premises costs at an appropriately reduced rate where the premises are also used for other business activities;

(d)

only that proportion of the cost of lead generation promotions attributable to the generation of relevant business (but including the placing of any financial promotion, and its mailing or provision of access to third party customers);

(e)

only the marginal additional compliance costs of ensuring that representatives and their support and training material comply with relevant rules;

(f)

the commercial value of a service which is the use of an asset owned by the firm (for example in the case of a property, its full market rent);

(g)

in respect of appointed representative, the costs of any promotion in a newspaper or elsewhere and the provision of representative-specific literature in connection with a direct offer financial promotion;

(h)

in respect of a firm in the same immediate group and connected appointed representatives, where the name of the company is included in the direct offer financial promotion, the costs of any promotion in a newspaper or elsewhere and the provision of literature specific to the representative in connection with a direct offer financial promotion.4

8.

The following costs should be excluded:

(a)

any contributions made by a representative out of his own resources;

(b)

the cost of corporate awareness advertising;

(c)

training costs;

(d)

underwriting, policy administration and claims handling costs;

(e)

costs of developing and maintaining computer systems for the provision of projections of benefits, customer-specific key features documents, simplified prospectuses5 or other product information;

(f)

costs of compensating customers;

(g)

the costs of head office and branch level management and support, other than payments to managers falling under Part 1, for representatives, where these services could also be provided to a firm not in the same immediate group, for example, broker consultants and 'inspectors';4

(h)

'collecting remuneration' payable in respect of industrial assurance policies or by friendly societies, provided that the amounts excluded do not exceed the genuine costs of premium collection; comparison with the remuneration payable to collectors who are not representatives or with the renewal remuneration payable on ordinary branch business may provide a guide.

Part D: Calculation methodology4

9.

Estimating commission equivalent4

The cost of benefits and services should normally be based on the most recent relevant experience of the firm, except where one of the following applies:4

(a)4

the firm has reasonable grounds to believe that the commission equivalent for the period concerned will be higher than that implied by the experience; or4

(b)4

the firm has strong grounds to believe that the commission equivalent for the period concerned will be lower than that implied by the experience; or4

(c)4

no such experience is available.4

If any of (a) to (c) applies, the estimate should be based on and evidenced by business plans which the firm is satisfied on reasonable grounds are achievable.4

10.

Firms that receive or expect to receive:4

(a)4

commission in respect of packaged products which are not its own products or the products of a product provider who is in the same immediate group; and4

(b)4

commission equivalent in respect of its own products4

must ensure that the costs and benefits attributed to these products do not exceed the amounts that can be financed from that commission.4

Construction of commission equivalent scales4

11.

The total costs of cash payments, benefits and services should be assessed and the normal approach is to split them into new business costs and after sale servicing costs. The costs of each of these functions should be assessed directly in relation to the work carried out by the representatives.4

12.

(a)

The commission equivalent costs identified in 11 should be spread across the business using a new business commission equivalent scale and a servicing commission equivalent scale respectively. The new business commission equivalent scales when applied to the total value/volumes of business should reproduce the total new business commission equivalent costs, and similarly for the servicing scales.4

(b)

The commission equivalent scales should distinguish between products for which the commission equivalent to representatives is likely to be different.4

13.4

Where the representative's commission equivalent includes a cash payment related to volume and/or value of the transactions sold, the following method would be appropriate:4

(a)4

The basic payment scale should comprise a new business payment scale and a servicing payment scale. The cost of benefits and services should be expressed in the form of a new business uplift factor and a servicing uplift factor. So the "new business uplift factor" would be the cost of new benefits and services divided by the new business payments. The "servicing uplift factor" would be the cost of servicing benefits and services divided by servicing payments.4

(b)4

The payment scales should be grossed up by new business uplift factors or servicing uplift factors as appropriate to reflect the cost of benefits and services. The grossed up scales represent the new business and servicing commission equivalent scales, and are applied to each contract to derive the commission equivalent to be disclosed.4

(c)4

Where the level of payment in the first year of a policy equals the level of payment in subsequent years then "new business payments" refers to payments in the first year of a contract and "servicing payment" refers to the level of payment in subsequent years.4

(d)4

If servicing costs are expected to be incurred in any year in which no servicing payments are to be made on a contract, disclosure should still be made, for example by using a technique similar to that described in 14.4

14.4

(a)4

When a representative receives a salary, or other payment unrelated to volume or sales:4

(i)4

this should be amalgamated with the cost of benefits and services; and4

(ii)4

the total costs should be apportioned over individual transactions in a way that reflects the value of a contract to a firm or thefirm'simmediate group.4

(b)4

Where a firm is a distributor for a product provider within the same immediate group, the firm must apportion total costs over individual transactions in a way that reflects the value of the contract to the firm'simmediate group.4

15.4

Where other methods of commission equivalent are employed, for example, part salary and part related to the volume/value of the sale, the salary element should be added to the cost of benefits and services and the method in 13 should be used.4

16.4

Where a representative agrees to forgo part of his or her normal payment to improve the terms of the contract, the same uplift factor (in line with 13(a)) may be applied to the reduced payment, or the same monetary cost of benefits and services may be used, subject to the following constraints:4

(a)4

the same uplift factor approach should only be adopted if the customer will also receive the full benefit of the lower of:4

(i)4

the reduction in the amount of disclosed commission equivalent for non-financial benefits and services; and4

(ii)4

an equivalent proportion of the policy loadings intended to cover non-financial benefits and services.4

(b)4

Where the 'same uplift factor' approach is adopted, the proportion of payments forgone must be allowed for in calculating the uplift factor.4

(c)4

Where an average scale of commission equivalent is used, the percentage reduction in payment in respect of the individual representative may be applied to the average payment in order to calculate the reduced payment.4

17.4

The firm should review the commission equivalent scales if at any time it becomes aware that the commission equivalent figures have become misleading. A review should take place at least annually.4

18.4

When an identical commission equivalent scale applies to all representatives (although they might earn differing percentages of it), the same average amount of commission equivalent (and the value of other benefits and services) in respect of identical transactions may be disclosed, regardless of the percentage of the scale paid to each individual representative. Averaging may be used for representatives on the same scale and employees of firms in the same immediate group, but not appointed representatives.4

Payments to associates4

19.4

Where a firm pays commission equivalent to a another firm in the same immediate group, or an appointed representative which is an associate of the firm, it should ensure that the calculation of the sum to be disclosed is the higher of:4

(a)4

all payments, benefits and services provided to the firm or appointed representative, from whatever source, plus an additional allowance for profit of 15% - unless the firm can demonstrate that another figure (higher or lower) is more appropriate; and4

(b)4

the cash payments actually paid by the firm, plus the value of services provided.4