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R Rules

G Guidance

E Evidential Provisions

Legal Instruments

Deleted

COB 5.1 Advising on packaged products2

Application

COB 5.1.1 R 01/12/2004

This section applies to a firm which gives advice on investments to a private customer on packaged products.2

Purpose

COB 5.1.2 G 01/12/2004

This section gives support to Principle 6 (Customers' interests) and Principle 7 (Communications with clients) which require firms to have due regard to the information needs of their customers and treat them fairly. The purpose of this section is to ensure that private customers are adequately informed about the nature of the advice on investments which they may receive from a firm in relation to packaged products. In particular firms need to be clear to private customers about the scope and range of the products and product providers on which their advice on investments is based.2

COB 5.1.3 G 01/12/2004

2[deleted]

COB 5.1.4 G 01/12/2004

[deleted]

1 2

COB 5.1.5 G 01/12/2004

2[deleted]

COB 5.1.6 G 01/12/2004

2[deleted]

Scope and range of advice on packaged products: general2

COB 5.1.6A R 01/12/2004

(1)
2A firm which gives advice on investments to private customers about packaged products must, subject to (2), take reasonable steps to ensure that the scope of the advice on investments given to a private customer is based upon a selection from one of the following:
1. (a)
  the whole market (or the whole of a named sector of the market); or
2. (b)
  a limited number of product providers; or
3. (c)
  a single company or single group of companies.
(2)
A firm may change the scope of the advice on investments it gives to a particular private customer by widening the scope from that in (1)(c) through to that in (b) or (a) or from (b) to (a), but it must take reasonable steps to ensure that before doing so the customer is made aware of the proposed change by a communication in a durable medium.
(3)
If a firm:
1. (a)
  extends the scope of the advice on investments it will give a private customer; or
2. (b)
  extends the range of packaged products on which its advice on investments will be based;
and as a consequence the firm's arrangements for its remuneration are materially altered, the firm must provide the customer with a new and appropriate fees and commission statement.

COB 5.1.6B G 01/12/2004

(1)
2COB 5.1.6A R requires a firm when giving advice on investments to a private customer to do so on the basis that the scope of its advice on investments will involve a selection from the whole market (or from the whole of a sector of the market), or from a limited number of product provider or from a single provider and to adhere to such a scope during the advisory process unless the firm decides, and if necessary secures the customer's agreement, to widen the scope for the customer and, if necessary, any changes in the arrangements by which the firm will be remunerated (see COB 4.3.7 R). A firm can choose to offer both whole of market and more limited advice on investments. The scope of the advice which the customer subsequently receives should always however be made clear and explained in a way which is likely to be understood.
(2)
The scope of advice on investments prescribed in each of COB 5.1.6AR (1)(a) will require different competencies on the part of a firm's representatives to enable the firm to discharge its advisory functions.
(3)
A firm selecting packaged products from a limited number of product providers or from a single provider may do so on the basis of a range of packaged products which comprises a selection of products available from those providers and accordingly a firm may have one or more such ranges. COB 4.3.3 R requires a firm to give each customer some initial disclosure information - an initial disclosure document - which must indicate the scope of the advice on investments which the customer can expect to receive. This initial information must also invite the customer to ask for a copy of the range of packaged productsfrom which the firm will make a selection. A firm which has several ranges of packaged products will need to ensure that each customer who asks for it is given information about the range which is appropriate for that customer.
(4)
If a firm holds itself out as giving advice on investments to private customers on packaged products from the whole market (or the whole of any sector of that market; see (5)), the firm's selection for this purpose will need to be sufficiently large to enable the firm to satisfy the suitability requirement in COB 5.3.9 R (Requirement for suitability: whole-of-market advisers). One way in which such firm may wish to satisfy this requirement is by using "panels" of product providers which are sufficient for the purpose of giving advice from the whole market and which are reviewed on a regular basis. A firm which provides advice on investments from the whole market (or from the whole of a sector of the market) should ensure that its analysis of the market and the available packaged products is kept adequately up to date.
(5)
References to a firm advising on packaged products from the whole of a sector of the market are to a firm which, though holding itself out as giving advice on investments from the whole market, advise on investments in practice only on a relatively limited selection of packaged products which are available to meet the needs of a specialist sector or niche market (for example pension annuities). In such circumstances the quality of the firm's analysis of the sector or niche market should be commensurate with that which a firm would apply for the purposes of selecting products from the market as a whole.
(6)
IPRU(INS) 1.3 (Restriction of business to insurance) in practice restricts the range of packaged products that a long-term insurer may have and CIS 16.5.1 R (Managers of UCITS schemes) restricts the range of packaged products that a manager of a UCITS scheme may have.
(7)
If a firm gives advice on investments to a private customer on a packaged product produced by another person, the key features must be "appropriate" (see COB 6.2.7 (Provision of key features: life policies) COB 6.2.22R (1) (Provision of key features: schemes) and COB 6.4.15 (Stakeholder pension schemes)). Therefore, if the terms of the packaged product are different from the terms of the product for which the key features was originally prepared by the product provider, for example there are additional charges, then the key features will need to be amended.
(8)
There are restrictions on communicating and approving a financial promotion relating to a life policy produced by an unauthorised person (see COB 3.13.1 R (Additional requirements for financial promotions for an overseas long-term insurer)).
(9)
When a firm gives advice on investments relating to a packaged product which is not produced by the firm, it is responsible for the advice on investments given. The product provider is responsible for the relevant terms and conditions of the packaged product.
(10)
The rules in COB 5.1 are mainly concerned to ensure that firms can offer a wide range of advisory services in relation to packaged products. In the course of giving such advice a firm's representative may also need to consider the merits of whether a customer should give up, surrender or cease contributing to an existing packaged product and the rules in this section do not place a restriction on this (subject always to such advice on investments being suitable having regard to the customer's circumstances).

Range of packaged products: appointed representatives2

COB 5.1.6C R 01/12/2004

(1)
2A firm must maintain in writing and keep up to date a statement of:
1. (a)
  the scope of advice on investments (within the meaning of COB 5.1.6AR (1)) which each of its appointed representatives is, through its contract with the firm, permitted to give; and including
2. (b)
  the range (or ranges) of packaged products on which each appointed representative advises.
(2)
In applying the rules in COB to a firm in respect of its appointed representatives, references to a firm's scope or range of packaged products are to be taken as references to the scope (or scopes) and to the range (or ranges) of its appointed representatives.

COB 5.1.6D G 01/12/2004

2An appointed representative's range of packaged products may be defined by a particular category of packaged product or by individual product, as long as it is clear (for example, "all pension products of ABC Co Limited"). It may be set out in a document separate from the appointed representative's contract of appointment and should, in any event, be separate from the main body of the contract for clarity.

Range of packaged products: records2

COB 5.1.6E R 01/12/2004

(1)
2A firm must make, and keep up to date, a record of the scope (or scopes) of the advice (within the meaning of COB 5.1.6AR (1)) which it provides, its range (or ranges) of packaged products and the associate or ranges of each of its appointed representatives (if different from the firm's).
(2)
The record in (1) must be retained for six years from the date on which it was superseded by a more up-to-date record.
(3)
The record for distribution to a customer must be the particular range of packaged products which is appropriate for the services provided to that customer and include details of:
1. (a)
  the identity of the product providers within the range whose packaged products the firm may sell; and
2. (b)
  a list of the categories of their products the firm may sell.
(4)
In the case of a firm whose scope of advice on investments is the selection of packaged products from the whole of the market (or from the whole of a sector of the market) and which provides no other scope of advice on investments, it will be sufficient if the firm's record is restricted to confirming that the advice on investments it provides is given on this basis (and in the case of a firm which provides advice on investments on the whole of a sector of the market, confirms the nature and parameters of that sector).
(5)
For the purposes of the record in (1), (3) and (6), in relation to the packaged products within a particular category available from a product provider:
1. (a)
  where a firm provides services to a particular customer in relation to all of the products within that category the record may refer simply to that category and the product provider and not each particular product within the category; and
2. (b)
  notwithstanding (3)(b), where a firm does not provide services to a particular customer in relation to all of the products within that category the record must give details of each of the products in the category on which it does provide services.
(6)
A firm must maintain a record of the particular range of packaged products on which its advice on investments to each private customer is based and such a record must be kept for six years from the date on which the advice on investments is given.

Branding packaged products2

COB 5.1.6F R 01/12/2004

2If a firm gives advice on investments to a private customer on a packaged product produced by another person, it must not:

(1)
hold itself out as the packaged product's producer; or
(2)
do or say anything which might reasonably lead a private customer to be mistaken as to the identity of the product's producer.

COB 5.1.6G R 01/12/2004

2A firm must display the brand of the product provider at least as prominently as any other brand in the documentation that it makes available to its customer's in relation to a packaged product.

Staying within the range of advice of packaged products 2

COB 5.1.7 R 01/12/2004

(1)
A firm must, subject to (2), take reasonable steps to ensure that neither it nor any of its representatives gives advice on investments to a private customer about the purchase of a packaged product unless the product is:2
1. (a)
  within the firm's range (or ranges) of packaged products; and2
2. (b)
  is within the particular range of packaged products on which advice on investments is given to that customer.2
(2)
The restriction in (1) does not apply where COB 5.3.8A R (Suitability of packaged products: out-of-range recommendations) applies.2

COB 5.1.8 R 01/12/2004

2[deleted]

COB 5.1.9 G 01/12/2004

COB 5.1.7 R (1) does not inhibit the sale by a firm:2

(1)
where the sale does not involve the provision of advice on investments to a private customer; a firm may act as an intermediary for a transaction in a packaged product where that transaction is an execution-only transaction (long-term insurers are reminded of IPRU(INS) 1.3 (Restriction of business to insurance) and managers of UCITS schemes are reminded of CIS 16.5.1 R (Managers of UCITS schemes); or2
(2)
when the firm acts a discretionary investment manager.2

COB 5.1.10 G 01/12/2001

COB 5.1.7 R (1) applies to advice on investments given to private customers about the components of an ISA which are packaged products.

COB 5.1.11 R 01/12/2004

2[deleted]

2Restriction on holding out

COB 5.1.11A R 01/12/2004

(1)
2A firm that, in relation to packaged products, provides advice on investments to a private customer, must not hold itself out as acting independently unless it intends to:
1. (a)
  provide advice on investments to that customer that is on packaged products from the whole market (or the whole of a sector of the market); and
2. (b)
  offers the customer the opportunity of paying fee for the provision of such advice.
(2)
A firm which in accordance with (1) holds itself out as independent must ensure that the advice on investments subsequently given to the private customer concerned is on packaged products from the whole market (or the whole of a sector of the market).
(3)
A firm will not contravene (2) and does not need to offer the option of fee based advice on investments in accordance with (1), if it acts in accordance with COB 4.3.27 R.

COB 5.1.11B G 01/12/2004

(1)
2COB 5.1.11A R stipulates what a firm must do if it is to hold itself out to any particular client that it will act independently. Firms which wish to hold themselves out generally as acting independently should ensure that doing so (for example through a trading name or advertising) is consistent with the kind of service which private customers receive in relation to packaged products.
(2)
A firm that carries on business both in relation to packaged products and regulated mortgage contracts can do so in relation to the whole market and therefore be "independent" for one but offer only a limited service for the other. If this is the case the firm should explain the different nature of the services in a way which meets the requirement for clear, fair and not misleading communications in COB 2.1.3 R (Clear, fair and not misleading communications).
(3)
COB 5.1.11AR (1)(b) means that a firm wishing to hold itself out as independent will need to give customers a purely fee based option for paying for its services. Such a fee may be offered on a contingent basis so that it does not become payable if the customer does not acquire a product. A firm offering a fee-based service may, in addition, provide the customer with other payment options, such as by commission.

2Representatives to have access to whole range

COB 5.1.12 R 01/12/2004

(1)
A firm must, subject to (2), take reasonable steps to ensure that those of its representatives who give advice on investments on packaged products are able to sell with advice on investments each packaged product within the particular range of packaged products from which products are selected for a customer.2 1
(2)
A firm may restrict the packaged products it authorises a particular representative to sell, if:2
1. (a)
  that representative is not sufficiently competent to sell certain types of product; and
2. (b)
  it requires that representative to identify instances when another packaged product within the relevant range packaged products ought to be recommended; the representative must then be required to refer the private customer to another representative of the firm who is authorised and competent to sell that product.2

2Remuneration structure and referrals

COB 5.1.13 R 01/12/2004

2A firm must take reasonable steps to ensure that none of its representatives:2

(1)
is likely to be influenced by the structure of his or her remuneration to give unsuitable advice on investments to a private customer; and2
(2)
refers private customers to another firm in circumstances which would amount to the provision of an inducement under COB 2.2.3 R (Prohibition of inducements).2

2Excess charges on price-capped products

COB 5.1.14 R 01/12/2004

A firm must, if it gives advice on investments to a private customer on a stakeholder pensions scheme or other price capped product for which the firm is not the product provider, ensure that it does so only in accordance with arrangements under which the firm discloses any charges imposed by the firm in excess of those charged by the producer of the packaged product.2

COB 5.1.14A G 01/12/2004

2Products subject to price caps within COB 5.1.14 R would include ISAs marketed as "CAT standard".

COB 5.1.15 R 01/12/2004

2[deleted]

COB 5.1.16 R 01/12/2004

2[deleted]

COB 5.1.17 R 01/12/2004

2[deleted]

COB 5.1.18 R 01/12/2004

2[deleted]

COB 5.1.19 R 01/12/2004

2[deleted]

COB 5.1.20 R 01/12/2004

2[deleted]

COB 5.1.21 G 01/12/2004

2[deleted]

COB 5.1.22 G 01/12/2004

2[deleted]

COB 5.1.23 G 01/12/2004

2[deleted]

COB 5.2 Know your customer

Application

COB 5.2.1 R 01/12/2001

This section applies to a firm that:

(1)
gives a personal recommendation concerning a designated investment to a private customer; or
(2)
acts as an investment manager for a private customer; or
(3)
arranges a pension opt-out or pension transfer from an occupational pension scheme for a private customer; or3
(4)
is not an insurer and makes a personal recommendation to take out a life policy to an intermediate customer or a market counterparty; or3
(5)
is not an insurer and is arranging (but not merely by introducing) a life policy;3
(6)
is not an insurer and arranges (but not merely by introducing) a life policy for an intermediate customer or a market counterparty 3.

COB 5.2.2 G 01/12/2001

A firm that arranges an execution-only transaction for a private customer is not generally required to obtain any personal or financial information about that customer, except when the Money Laundering sourcebook applies. However, the Insurance Mediation Directive requires that a statement of the demands and needs of a client is provided to the client, whether advice is given or not. This is required whatever the status of the client. Accordingly the demands and needs provisions in COB 5.2.12 R to COB 5.2.17 G apply to all circumstances relating to life policies.3

COB 5.2.3 G 01/12/2001

When a firm provides limited adviceon investments to a private customer, the firm should not treat any resulting transaction as an execution-only one.

Purpose

COB 5.2.4 G 01/12/2001

Principle 9 (Customers: relationships of trust) requires a firm to take reasonable care to ensure the suitability of its advice and discretionary decisions. To comply with this, a firm should obtain sufficient information about its private customer to enable it to meet its responsibility to give suitable advice. A firm acting as a discretionary investment manager for a private customer should also ensure that before acting in the exercise of discretion it has sufficient information about its private customer to enable it to act in a way which is suitable for that private customer.

Requirement to know your customer

COB 5.2.5 R 01/12/2001

Before a firm gives a personal recommendation concerning a designated investment to a private customer, or acts as an investment manager for a private customer, it must take reasonable steps to ensure that it is in possession of sufficient personal and financial information about that customer relevant to the services that the firm has agreed to provide.

COB 5.2.6 G 01/12/2001

A firm that advises a private customer, or exercises discretion for a private customer, on a continuing basis should keep its information about that customer under regular review. A firm that acts for a private customer on an occasional basis should undertake such a review whenever that customer seeks advice.

COB 5.2.7 G 01/12/2001

If a private customer declines to provide relevant personal and financial information, a firm should not proceed to provide the services described in COB 5.2.5 R without promptly advising that customer that the lack of such information may affect adversely the quality of the services which it can provide. The firm should consider sending written confirmation of that advice.

COB 5.2.8 G 01/12/2001

The information to be obtained and enquiries made to satisfy COB 5.2.5 R may vary significantly depending on the type of customer concerned. COB 5.2.11 G provides some guidance on the process of collecting personal and financial information.

Record keeping: personal and financial circumstances

COB 5.2.9 R 01/09/2002

(1)
Unless (2) applies, a firm must make and retain a record of a private customer's personal and financial circumstances that it has obtained in satisfying COB 5.2.5 R. The firm must retain the record for a minimum period after the information is obtained, as follows:5
5
1. (a)
  indefinitely for a record relating to a pension transfer, pension opt-out or free-standing additional voluntary contribution (FSAVC);5
2. (b)
  six years for a record relating to a life policy, pension contract or stakeholder pension scheme;5 or
3. (c)
  three years in any other case.5
(2)
A firm need not retain the record where following a personal recommendation to a private customer in connection with a designated investment, the private customer does not proceed with the recommendation or any part of it.1 5
5
(3) 5

Record keeping: execution-only pension opt-outs and pension transfers

COB 5.2.10 R 01/01/2003

When a firm arranges a pension opt-out or pension transfer from an OPS for a private customer as an execution-only transaction, the firm must make and retain indefinitely a clear record to evidence that no advice on investments was supplied to the private customer.2

COB 5.2.11 G 01/12/2004

Guidance on the collection of information about a private customer.

This table belongs to COB 5.2.8 G.

Guidance on the collection of personal and financial information about a private customer
1	COB 5.2.5 R does not prescribe the method of obtaining sufficient personal and financial information about a private customer. A firm may design and use a process suitable for the market in which it transacts business. This process is often described as "fact-finding" and the document which records the information is often known as the "fact-find".
	(a)	Information collected from a private customer should, at a minimum provide an analysis of a customer's personal and financial circumstances leading to a clear identification of his needs and priorities so that, combined with attitude to risk, a suitable investment can be recommended.
	(b)	A customer information record can be electronic or paper based and it should be readily available and accessible at all times.
	(c)	There is no requirement under the regulatory system to obtain the private customer's consent in writing to a customer information record. When a customer is to give consent in writing to an information record, the request for consent should include a prominent warning advising the customer to read the information record in full before giving consent.
	(d)	Firms may send a customer a copy of the information record as proof of compliance with COB 5.3.14 R (Suitability letter). Further guidance on the contents of suitability letters is contained in COB 5.3.29 G.
Affordability
2	In assessing whether a private customer can afford an investment, due regard should be given to that customer's current level of income and expenditure, and any likely future changes to his income and expenditure.
Friendly society life policies
3	When recommending a friendly society life policy, the premium of which does not exceed £50 a year or, if the premiums are payable weekly, £1 a week, the firm should:
	(a)	obtain details of the private customer's (and his dependants') net income and expenditure; and
	(b)	keep a record of the reasons why the recommended transaction is considered to be suitable for that individual customer.

COB 5.2.18 G 01/12/2004

3 Firms are reminded of the record keeping obligations under SYSC 3.2.20 R

COB 5.3 Suitability

Application

COB 5.3.1 R 01/12/2001

This section applies to a firm when it:

(1)
makes a personal recommendation concerning a designated investment to a private customer; or
(2)
acts as an investment manager for a private customer; or
(3)
manages the assets of an occupational pension scheme (OPS) or astakeholder pension scheme; or
(4)
promotes a personal pension scheme by means of a direct offer financial promotion to a group of employees; or9
(5)
if the firm is not an insurer, makes a personal recommendation to an intermediate customer or a market counterparty to take out a life policy 9.

COB 5.3.2 G 01/12/2001

This section does not apply to a firm in respect of a direct offer financial promotion, except in respect of a promotion of a personal pension scheme under COB 5.3.28 R.

COB 5.3.3 G 09/10/2004

Firms are reminded of the requirements of COB 3.9.6 R (Direct offer financial promotions: general requirements). A direct offer financial promotion must make it clear that, if a private customer is in any doubt about the suitability of the agreement which is the subject of the promotion, he should contact the firm, or another appropriate firm if the firm does not offer advice.9 7

Purpose

COB 5.3.4 G 01/12/2001

Principle 9 (Customers: relationships of trust) requires a firm to take reasonable care to ensure the suitability of its advice and discretionary decisions. The purpose of this section is to amplify this requirement. The nature of the steps firms need to take will vary greatly, depending on the needs and priorities of the private customer, the type of investment or service being offered, and the nature of the relationship between the firm and the private customer and, in particular, whether the firm is giving a personal recommendation or acting as a discretionary investment manager.

Requirement for suitability generally

COB 5.3.5 R 01/12/2001

(1)
A firm must take reasonable steps to ensure that, if in the course of designated investment business:9
1. (a)
  it makes any personal recommendation to a private customer to:9
  1. (i)
    buy, sell, subscribe for or underwrite a designated investment (or to exercise any right conferred by such an investment to do so); or9
  2. (ii)
    elect to make income withdrawals; or9
  3. (iii)
    enter into a pension transfer or pension opt-out from an occupational pension scheme; or9
2. (b)
  it effects a discretionary transaction for a private customer (except as in (5)); or9
3. (c)
  it makes a personal recommendation to an intermediate customer or a market counterparty to take out a life policy;9
the advice on investments or transaction is suitable for the client.9
(2)
If the recommendation or transaction in (1) relates to a packaged product:9
1. (a)
  it must, subject to COB 5.3.8 G - COB 5.3.10 R, be the most suitable from the range of packaged products, on which advice on investments is given to the client as determined by COB 5.1.7 R; and9
2. (b)
  if there is no packaged product in the firm's relevant range of packaged products which is suitable for the client, no recommendation must be made.9
(3)
In making the recommendation or effecting the transaction in (1), the firm must have regard to:9
1. (a)
  the facts disclosed by the client; and9
2. (b)
  other relevant facts about the client of which the firm is, or reasonably should be, aware.9
(4)
A firm which acts as an investment manager for a private customer must take reasonable steps to ensure that the private customer's portfolio or account remains suitable, having regard to the facts disclosed by the private customer and other relevant facts about the private customer of which the firm is or reasonably should be aware.9
(5)
Where, with the agreement of the private customer, a firm has pooled his funds with those of others with a view to taking common discretionary management decisions, the firm must take reasonable steps to ensure that a discretionary transaction is suitable for the fund, having regard to the stated investment objectives of the fund.9

COB 5.3.5A G 01/12/2004

(1)
9If circumstances arise in which a firm reasonably concludes that there are several packaged products in the relevant range which would satisfy the test in COB 5.3.5 R (2), it will act in conformity with that rule if it recommends only one of those products.
(2)
If a client does not wish to proceed in accordance with a recommendation, a firm may nonetheless make further recommendations providing any such recommendation is suitable for the client in accordance with the obligation in COB 5.3.5 R.

COB 5.3.6 R 01/12/2001

9[deleted]

COB 5.3.7 R 01/12/2001

9[deleted]

COB 5.3.8 G 01/12/2001

9[deleted]

9Suitability of packaged products: out-of-range recommendations

COB 5.3.8A R 01/12/2004

(1)
9A firm when not selecting packaged products from the whole market (and notwithstanding COB 5.3.5 R (2)) may recommend a packaged product outside the range of packaged products on which it provides advice to a particular client if the recommended packaged product is suitable for the client and had it been included would have been at least as suitable as the most suitable packaged product in that range.
(2)
A firm must take reasonable steps to ensure that an appointed representative of a firm only acts as in (1) with its explicit written permission, either generally or in relation to the specific recommendation.

COB 5.3.8B G 01/12/2004

9 COB 5.3.8A R enables a firm to advise on packaged products from outside a particular range ofpackaged product. This will enable such advising on investments to be given on a one-off basis by firms which have only one range of packaged products and by other firms which may have more than one but without the firm needing to change the scope or range of the advice on investments which the client is expecting to receive.

COB 5.3.9 R 01/12/2001

[deleted]

1 9

COB 5.3.10 R 01/12/2004

[deleted]

1 9

9Requirement for suitability: whole-of-market advisers

COB 5.3.10A R 01/12/2004

(1)
9A firm which holds itself out as giving personal recommendations to private customers on packaged products from the whole market (or the whole of a sector of that market) must not give any such personal recommendation unless it:
1. (a)
  has carried out a reasonable analysis of a sufficiently large number of packaged products which are generally available from the market (or sector of the market); and
2. (b)
  conducts the analysis in (a) on the basis of criteria which reflect adequate knowledge of the packaged products generally available from the market as a whole (or from a relevant sector).
(2)
A firm in (1) must satisfy the obligation in COB 5.3.5 R (2) by taking reasonable steps to ensure that a personal recommendation given to a private customer is:
1. (a)
  in accordance with its analysis carried out under (1); and
2. (b)
  is the packaged product which on the basis of that analysis is the most suitable to meet the customer's needs.

COB 5.3.10B R 01/12/2004

(1)
9A firm which holds itself out as giving personal recommendations to intermediate customers or market counterparties on life policies from the whole market (or from a relevant sector) must not give any such personal recommendation unless it:
1. (a)
  has carried out an analysis of a sufficiently large number of life policies which are generally available from the market (or sector of the market); and
2. (b)
  conducts the analysis in (a) on the basis of criteria which reflect adequate knowledge of the life policies generally available from the market as a whole (or from a relevant sector).
(2)
A firm in (1) must satisfy the obligation in COB 5.3.5 R (2) by taking reasonable steps to ensure that a personal recommendation given to a client is:
1. (a)
  in accordance with its analysis carried out under (1); and
2. (b)
  for a life policy which on the basis of that analysis is suitable to meet the client's needs.

COB 5.3.11 G 01/12/2004

[deleted]

1 9

Requirement for suitability: manager of OPS and stakeholder pension scheme

COB 5.3.12 R 01/12/2004

A firm that manages the assets of an occupational pension scheme or stakeholder pension scheme must take reasonable steps to ensure the suitability of specific transactions and of the investment portfolio under management with regard to the investment objectives specified in the portfolio mandate.8

Requirements for suitability: other specific requirements

COB 5.3.13 G 01/12/2001

(1)
COB 5.3.20 R contains specific rules applicable to the suitability of broker funds.
(2)
COB 5.3.21 R - COB 5.3.27 R contain specific rules applicable to the suitability of pension transfers and pension opt-outs.
(3)
COB 5.3.28 R contains specific rules applicable to the promotion of personal pension schemes, including group personal pension schemes by means of direct offer financial promotions.
(4)
COB 5.3.29 G contains guidance which is relevant for assessing the suitability of:
1. (a)
  pension transfers and pension opt-outs;
2. (b)
  personal pension schemes and free-standing additional voluntary contributions (FSAVCs) compared to stakeholder pension schemes;
3. (c)
  hybrid products;
4. (d)
  industrial assurance policies;
5. (e)
  income withdrawals;
6. (f)
  ISA, PEP or CTF transfers; and6
7. (g)
  contracting out of SERPS; and6
8. (h)
  borrowing to invest.6 8

Requirement for a suitability letter: other specific requirements9

COB 5.3.14 R 01/12/2004

(1)
A firm that gives a personal recommendation, in relation to a life policy, to a person who is a policyholder or a prospective policyholder of a life policy, must provide the person with a suitability letter prior to the conclusion of the contract, unless one of the exceptions in COB 5.3.19 R applies.3 9
(2)
If, following a personal recommendation by a firm that does not fall within (1), a private customer:9
1. (a)
  buys, sells, surrenders, converts, cancels, or suspends premiums for or contributions to, a pension contract or a stakeholder pension scheme; or9
2. (b)
  elects to make income withdrawals; or 9
3. (c)
  acquires a holding in, or sells all or part of a holding in, a scheme; or9
4. (d)
  enters into a pension transfer or pension opt-out from an OPS;9
the firm must provide the customer with a suitability letter, within the time period stipulated by COB 5.3.18 R, unless one of the exceptions in COB 5.3.19 R applies.

COB 5.3.15 G 01/12/2001

A suitability letter is not required in respect of a personal recommendation made by a firm to buy or sell shares or units in a regulated collective investment scheme when the firm is acting as an investment manager for a private customer (see COB 5.3.19 R (1)).

COB 5.3.16 R 01/12/2004

The suitability letter in COB 5.3.14 R must:

(1)
explain why the firm has concluded that the transaction is suitable for the customer, having regard to his personal and financial circumstances;
(2)
contain a summary of the main consequences and any possible disadvantages of the transaction;
(3)
1. (a)
  in the case of a personal pension scheme which is not a stakeholder pension scheme, explain the reasons why the firm considers the personal pension scheme to be at least as suitable as a stakeholder pension scheme;
2. (b)
  in the case of an FSAVC:
  1. (i)
    if the customer has the alternative of a stakeholder pension scheme, explain the reasons why the firm considers the recommended contract to be at least as suitable as a stakeholder pension scheme or as any additional voluntary contribution (AVC) or the facility to make additional contributions to the occupational pension scheme which may be available; or
  2. (ii)
    if the customer does not have the alternative of a stakeholder pension scheme, explain the reasons why the firm considers the recommended contract to be at least as suitable as any AVC or the facility to make additional contributions to the occupational pension scheme which may be available;9
(4)
identify the individual who is authorised by the firm to advise on the type of product that has been recommended;9
(5)
if the recommended product is from a product provider (or if relevant, an undertaking in the immediate group of that provider) which is identified in section 6 of the firm's initial disclosure document given in accordance with COB 4.3.3R (1), include the information given in section 6 or in section 6 of the firm's combined initial disclosure document; and9
(6)
in the case of a recommendation by a firm under COB 5.3.8A R (Suitability of packaged products: out-of-range recommendations) explain why it has recommended a packaged product outside the firm's range of packaged products, including why it is suitable for the customer.9

COB 5.3.17 G 01/12/2001

COB 5.3.30 G provides guidance on the contents of suitability letters.

COB 5.3.18 R 09/10/2004

The firm must provide the letter required by COB 5.3.14 R (2) to the customer:9

(1)
in the case of a pension contract or stakeholder pension scheme, where the cancellation rules require notification of the right to cancel, no later than the fourteenth day after the contract is concluded; or 3 5 9
(2)
in any other case, when or as soon as possible after the transaction is effected.

Exceptions from requirement to provide a suitability letter

COB 5.3.19 R 01/12/2004

COB 5.3.14 R does not apply:

(1)
if the firm is acting as an investment manager for a private customer and makes a personal recommendation relating to a regulated collective investment scheme;
(2)
if the firm is not acting as an outgoing ECA provider, and the customer is habitually resident in another EEA State at the time of acknowledging consent to the proposal form to which the personal recommendation relates;
(3)
if the customer is habitually resident outside the EEA and the customer is not present in the United Kingdom (or EEA in the case of a firm acting as an outgoing ECA provider) at the time of acknowledging consent to the proposal form to which the personal recommendation relates;
(4)
to any personal recommendation by a friendly society for a life policy sold by it with a premium not exceeding £50 a year or, if payable weekly, £1 a week;9
(5)
to any personal recommendation to increase a regular premium to an existing contract; and
(6)
to any personal recommendation to invest additional single premiums or single contributions to an existing packaged product to which a single premium or single contribution has previously been paid.2

Record keeping requirements

COB 5.3.19A R 01/01/2003

3A firm must make and retain a record of a private customer's suitability letter that it has provided in satisfying COB 5.3.14 R. The record must be retained for a minimum period after the letter is provided, as follows:

(1)
for a record relating to a pension transfer, pension opt-out or free-standing additional voluntary contribution (FSAVC), indefinitely;
(2)
for a record relating to a life policy, pension contract or stakeholder pension scheme, six years;
(3)
in any other case, three years.

Suitability of broker funds

COB 5.3.20 R 01/12/2001

A firm acting as a broker fund adviser for a private customer must:

(1)
take account of the characteristics of the broker fund, including the charging arrangements, in total, when assessing the suitability of the arrangements;
(2)
review on a regular basis the customer's current investment objectives and strategies relative to those at the time of any previous periodic report to the customer in accordance with COB 8.2.4 R (Requirement for a periodic statement);
(3)
follow up the review with a recommendation in writing to the customer, to be provided at least annually, either to continue with the investment or to withdraw, and in either case to supply reasons for the recommendation;
(4)
provide the customer with an alternative recommendation if the broker fund arrangement is no longer suitable; and
(5)
ensure that any significant change in the investment strategy of the fund, where known to the firm, is notified to the customer in advance together with confirmation why the fund continues to be suitable for the customer's circumstances or an alternative recommendation.

Suitability of pension transfers and opt-outs

COB 5.3.21 R 01/12/2001

If a personal recommendation about a pension transfer or pension opt-out is to be made on a firm's behalf by an individual who is not one of its pension transfer specialists, the firm must have established procedures for checking:

(1)
the individual's compliance with the firm's procedures;
(2)
the correctness of the application of the transfer value analysis system, where applicable; and
(3)
the merits of the proposed transaction and the suitability of the recommendation;

and any such recommendation must be assessed by one of the firm's designated pension transfer specialists to ensure the procedures have been followed.

COB 5.3.22 R 01/12/2001

(1)
A firm must ensure that a transfer value analysis is carried out in accordance with COB 6.6.87 R - COB 6.6.93 R (Projections) before it makes any recommendation to a customer to transfer out of a defined benefits pension scheme.
(2)
A copy of the analysis must be delivered with the key features document or otherwise provided to the customer before he gives consent to the application to transfer.
(3)
The firm must take reasonable steps to ensure the customer understands the analysis, drawing attention to factors which do and do not support the recommendation to transfer.

COB 5.3.23 R 01/12/2001

A firm must provide a projection of the possible future benefits of the proposed individual pension contract before it makes any personal recommendation to a customer to opt out of, or transfer from, an occupational pension scheme.

(1)
The format and nature of the benefits given in the projection must, so far as possible, be the same as those which apply under the occupational pension scheme of which the customer is, or is eligible to become, a member.
(2)
If it is not possible for the benefits shown in the projection to replicate those of the occupational pension scheme, an explanation must be given.
(3)
If the customer has expressed an interest in changing the structure of his eventual benefits, an additional projection may also be prepared on that basis.

COB 5.3.24 R 01/12/2001

A suitability letter relating to a personal recommendation to opt out of or transfer from an occupational pension scheme must include:

(1)
a summary of the disadvantages as well as the advantages of opting out or transferring; and
(2)
in the case of a pension opt out, a financial analysis explaining the decision to opt-out.

COB 5.3.25 R 01/12/2001

If, contrary to the advice of the firm, a private customer instructs the firm to arrange a pension opt-out or pension transfer, the firm must:

(1)
make and retain a clear record of the firm'sadvice that the private customer should not proceed with the pension opt-out or pension transfer and the private customer's instructions to proceed with the transaction; and
(2)
provide a further confirmation and explanation, in writing, to the private customer that the firm'sadvice is that the private customer should not proceed with the pension opt-out or pension transfer.

COB 5.3.26 R 01/05/2003

[deleted]11

(1)
11Every six months, a firm must notify the FSA, in writing, of the number of pension opt-out and the number of pension transfer transactions which it has arranged during the previous six months. A firm need not make a notification if it has not arranged any such transactions.
(1A)
A firm must also notify the FSA, in writing, at quarterly intervals, of the following details in respect of the preceding quarter:
1. (a)
  the number of execution-only:
  1. (i)
    pension opt-outs arranged if they exceed 1% of all the firm's pension opt-outs arranged during the quarter; and
  2. (ii)
    pension transfers arranged if they exceed 1% of all the firm's pension transfers arranged during the quarter;
2. (b)
  thenumber of:
  1. (i)
    pension opt-outs arranged against the firm's advice if they exceed 1% of all the firm's pension opt-outs arranged by the firm during the quarter; and
  2. (ii)
    pension transfers arranged against the firm's advice if they exceed 1% of all the firm's pension transfers arranged by the firm during the quarter; and
3. (c)
  the number of pension opt outs and the number of pension transfers arranged on a correspondence-only basis by the firm during that quarter.
(1B)
A firm must provide the information required by (1) and (1A) as soon as reasonably practicable after the end of the period.
(2)
A firm must make records of the notifications required by (1) and (1A) and retain them indefinitely.4

COB 5.3.27 R 01/12/2001

A firm must keep separate records for each private customer of every pension transfer, pension opt-out or free-standing additional voluntary contribution (FSAVC) which it has arranged, whether advised or not, and retain these records indefinitely.

Suitability of personal pension schemes: promotions to employees

COB 5.3.28 R 01/01/2003

When a firm promotes a personal pension scheme including a group personal pension scheme, by means of a direct offer financial promotion to a group of employees, the firm must;

(1)
be satisfied on reasonable grounds that the pension scheme is likely to be at least as suitable for the majority of the employees as a stakeholder pension scheme;
(2)
record why it thinks the promotion is justified; and
(3)
retain the record for a minimum period of six years after the financial promotion is last communicated.3

COB 5.3.29 G 01/12/2004

Guidance on matters which should be taken into account when assessing the suitability of various personal recommendations. This table belongs to COB 5.3.13 G (4).

9 9 9 9 8 8 8 9 6 6 6 6 6

Suitability of guidance
A	Pension Transfers and Pension Opt-outs
1	When advising a customer who is, or is eligible to be, an active member of a defined benefits occupational pension scheme whether he should opt out or transfer, a firm should:
	(a)	start by assuming it will not be suitable; and
	(b)	only then consider it to be suitable if it can clearly demonstrate on the evidence available at the time that it is in the customer's best interests.
2	When the firm is recommending a customer to transfer or opt out of any other type of occupational pension scheme, the suitability letter should include:
	(a)	a clear explanation why transferring or opting out is more suitable than remaining in the occupational pension scheme;
	(b)	a request for the customer to contact the firm immediately should clarification or further information be needed or if the letter does not match the customer's understanding of why the transfer or opt-out has been recommended;
	(c)	a statement to the effect that the firm has relied on information supplied by the customer and the occupational pension scheme;
	(d)	particularly with pension opt-outs, an arithmetical analysis setting out the financial implications of leaving the scheme;
	Pension Opt-outs only
3.	When advising on a pension opt-out from an occupational pension scheme, a firm should:
	(a)	identify all the rights and benefits available to the customer under the occupational pension scheme and carefully consider the effect of replacing them with the very different benefits of a personal pension; the following factors should be taken into account relating to the occupational pension scheme:
		(i)	spouse's, dependants' and children's pensions;
		(ii)	early retirement provision, including retirement in ill-health;
		(iii)	revaluation rates both in deferment and payment, and whether they are guaranteed or discretionary (and if discretionary, whether likely to continue);
		(iv)	ancillary benefits (for example, tax-free cash or lump-sum death benefits);
		(v)	transfer club arrangements, where applicable;
		(vi)	the customer's contribution and the employer's contribution;
		(vii)	benefits on leaving service;
		(viii)	whether or not eligibility for other benefits, such as permanent health insurance, is dependent on being a member of the occupational pension scheme;
		(ix)	the financial security of the occupational pension scheme, by reference (for example) to the last actuarial statement or the most recent trustee's report and accounts; and
	(b)	take into account the following additional factors:
		(i)	whether or not the employer would contribute to the personal pension scheme;
		(ii)	the charging structure of the personal pension and its impact on transfer values in the early years;
		(iii)	subjective factors relating to the customer's personal circumstances such as;
			-	future career plans and earning prospects (including any reasonable likelihood of career progression making better occupational terms available) and intended retirement date;
			-	attitude towards earnings-related compared with money-purchase benefits;
			-	attitude to financial risk and security;
			-	a possible wish to make pension arrangements separate from employment (for example, because the customer is on a short-term non-renewable employment contract or does not expect to stay in his current employment for more than a short period);
			-	any value the customer attaches to personal control;
			-	the customer's cash needs;
	(c)	if the customer is about to change, or has just changed, employment, consider the issues in (ii) and (iii) in relation to any scheme of the new employer for which the customer is eligible now, or will become eligible in the near future;
	(d)	if the customer is an active or prospective member of a money-purchase occupational scheme, follow 1- 3 to the extent that the factors listed are relevant to such schemes taking particular account of differences in costs and charges.
	Pension Transfers only
4.	(a)	Advising a customer on the suitability of transferring deferred benefits from a defined benefits occupational pension scheme requires detailed consideration of the ceding scheme compared to the individual pension contract to which the transfer would take place. A process will be needed which should include procedures:
		(i)	for gathering ceding scheme information as detailed in (b);
		(ii)	to assess the customer's attitude to risk and security; this is relevant not merely to the choice of contract or fund, but also (and more fundamentally) to the initial choice between an occupational pension scheme and an individual pension contract;
		(iii)	to ascertain the customer's career aspirations and desired retirement age and to consider what a realistic retirement age would be, having regard to the size of the transfer value and the extent to which it can be converted into a stream of income before State pension age;
		(iv)	to ascertain whether the customer's new employer (if any) has arrangements to accept transferred benefits, as if so a further analysis may be necessary;
		(v)	enabling the representative to look at other pension options, if available;9
		(vi)	for carrying out a transfer value analysis;
		(vii)	for enabling the customer to receive sufficient, clear information to make an informed investment decision (see (iii)).
	(b)	The following information as a minimum will be needed from the ceding scheme in respect of the customer:
		(i)	spouse's, dependants' and children's pensions;
		(ii)	early retirement provision, including retirement in ill-health;
		(iii)	transfer value quotation detailing:
			-	guarantee period;
			-	pre- and post- April 1988 Guaranteed Minimum Pension and Excesses;
			-	revaluation rates in deferment and payment and whether they are guaranteed or discretionary and if discretionary whether they are likely to continue and how far they are reflected in the transfer value;
			-	tax-free cash arrangements;
		(iv)	lump-sum death benefits;
		(v)	transfer club arrangements, if applicable;
		(vi)	relevant earnings;
		(vii)	period of service;
		(viii)	scheme details (for example benefits, bridging pensions, guarantee periods, position pre- and postnormal retirement date, history of discretionary increases);
		(ix)	whether members' benefits have been equalised for service from 17 May 1990;
		(x)	ill-health benefits;
		(xi)	a consideration of the scheme's financial position and whether the transfer value has been reduced because the scheme is underfunded.
	(c)	Relevant items of information about the customer include:
		(i)	the different risks of personal pension schemes and defined benefit pension schemes;
		(ii)	the impact of fluctuations in annuity rates on the size of the eventual pension;
		(iii)	the impact of protected rights on the planned retirement date;
		(iv)	any changes to the tax-free lump-sum;
		(v)	any reduction in immediate death benefits;
		(vi)	the transfer value analysis including an indication of the rate of growth needed to ensure the investor is no worse off as a result of any transfer;
		(vii)	the position and interests of the customer's spouse and dependants.
	(d)	(a) - (c) also apply to prospective money-purchase benefits transfers where appropriate; and additional information concerning the customer should be considered, including:
		(i)	the possibility of incurring early transfer penalties and new front-end charges;
		(ii)	how the transfer affects the investment risk;
		(iii)	how the effects of charges and expenses differ between the schemes;
		(iv)	changes to the tax-free cash;
		(v)	any reduction in immediate death benefits.
B.	Personal Pension Schemes and FSAVCs compared to Stakeholder Pension Schemes
1.	A particular feature of the personal pension scheme market is that a potential investor in a personal pension scheme will always have the option of a stakeholder pension scheme and may find that equally suitable for his or her needs.
2.	Representatives will need to undertake the comparison between personal pension schemes and stakeholder pension schemes and, as required by COB 5.3.16 R (3), explain in the suitability letter why, if they have recommended a personal pension scheme, it is considered to be at least as suitable.9
3.	There are some circumstances where a potential investor in an FSAVC will have the option of a stakeholder pension scheme, in addition to the option of an in-house AVC.
4.	Representatives will need to undertake a comparison between the three options and explain in the suitability letter why, if they have recommended an FSAVC, it is considered to be at least as suitable as a stakeholder pension scheme or the in-house AVC.9
5.	If a representative without access to a stakeholder pension scheme makes a comparison with a stakeholder pension scheme, the comparison may be with a stakeholder pension scheme on the minimum product standards unless the representative is or ought to be aware that the customer has access to a stakeholder pension scheme on more advantageous terms.
6.	The guidance in this section of the table applies equally to recommendations for individual and group personal pensions, even though the latter may, in accordance with Regulation 22 of the Stakeholder Pension Scheme Regulations 2000 (SI 2000/1403), exempt an employer from having to designate a stakeholder pension scheme for his employees.
7.	Firms are reminded that key features documents for personal pension schemes should signpost the availability of stakeholder pension schemes, as set out in COB 6.5.21 (5).
8.	Firms promoting a personal pension scheme (including a group personal pension scheme) to the employees of a particular employer through direct offer financial promotion are reminded of the provisions of COB 5.3.28 R. Accordingly, firms should take reasonable care to ensure that the personal pension scheme is likely to be at least as suitable as a stakeholder pension scheme for the majority of employees to whom the personal pension scheme is being promoted, and that this is adequately evidenced.
C.	Hybrid Products
1.	A 'hybrid product' is a product which results from combining a package of products to create one recommended solution. An example is a 'back to back' contract which takes a lump sum investment and splits it into two amounts; one part is used to provide income through the purchase of a temporary annuity and the other part is invested in a unit trust or life insurance bond so that by the end of the annuity term the growth may produce the return of the original lump sum invested.
2.	The requirements for suitability and best investment advice apply to all elements of a hybrid product:
	(a)	if appropriate, representatives need to scrutinise ready-made packages from a single product provider to make sure that each element is competitive and that a better solution is not available by combining elements from different providers;9
	(b)	simplicity or administrative convenience is not sufficient reason for using one provider for all elements.
D.	Industrial Assurance Policies
	If an industrial assurance policy is recommended to a customer and a comparable policy (which is not an industrial assurance policy) is available which is at least as suitable, the suitability letter should explain clearly the reasons why the industrial assurance policy is being recommended.
E.	Income Withdrawals
	When a firm is advising a customer about personal pension fund withdrawals:
	(a)	the customer's personal and financial circumstances should be considered carefully, in particular:
		(i)	the customer's investment objectives, need for tax-free cash and state of health;
		(ii)	current and future income requirements, existing pension assets and the relative importance of the plan, given the customer's financial circumstances;
		(iii)	the customer's attitude to risk, ensuring that any discrepancy between his attitude to risk relating to pension fund withdrawals and that in relation to other investments is clearly explained;
	(b)	the suitability letter should explain:
		(i)	the purpose of the contract for the customer;
		(ii)	the relative importance of the contract, given the customer's financial circumstances;
		(iii)	the customer's attitude to risk; and
		(iv)	the risk factors involved in entering into a pension fund withdrawal, which are:
			-	taking withdrawals may erode the capital value of the fund, especially if investment returns are poor and a high level of income is taken; this could result in a lower income when the annuity is eventually purchased;
			-	the investment returns may be less than those shown in the illustrations;
			-	annuity rates may be at a worse level when annuity purchase takes place;
			-	when maximum withdrawals are to be taken, high income withdrawals may not be sustainable during the deferral period.
F.	ISA, PEP or CTF transfers8
	When a firm is advising a customer on whether to transfer existing ISA, PEP or CTF holdings, COB 5.2 (Know your customer) and COB 5.3 (Suitability) apply. All the advantages and disadvantages of transferring should be considered. In particular the following information (which is not exhaustive) should be considered and provided to the customer, usually as part of the suitability letter, before the transfer takes place:8
	(a)	exit charges and any other costs associated with the transfer;
	(b)	initial start-up charges;
	(c)	transaction details (that is, whether holdings are liquidated or transferred intact, as permitted by the terms and conditions);
	(d)	possibility (and likely effects) of shortfall, following cancellation;
	(e)	potential for loss of income or growth, following a rise in markets, while the ISA transfer, PEP transfer or CTF transfer remains pending.8
G.	Contracting out of SERPS
	When a firm is advising a customer on whether to contract out of SERPS in favour of an appropriate personal pension or contracted-out money-purchase scheme ('COMP'):
	(a)	representative should give careful consideration to:9
		(i)	the range of pivotal ages outside which it will generally be in the best interests of customers to remain in SERPS;
		(ii)	the level of earnings below which it may not be in a new customer's interests to contract out;
		(iii)	the minimum length of time for which a customer may benefit from being contracted out;
	(b)	factors to be taken into account when making this assessment include:
		(i)	customer's age and sex;
		(ii)	State pension age for females (where different from males);
		(iii)	customer's level and stability of earnings and tax position;
		(iv)	customer's career prospects (including the likely period for remaining contracted-out);
		(v)	customer's existing pension provision or opportunity to participate in an occupational pension scheme;
		(vi)	potential loss of rights compared to SERPS benefits;
		(vii)	terms of the personal pension scheme or contracted-out money-purchase scheme with particular reference to the level of charges;
		(viii)	customer's attitude to risk.
	(c)	The suitability letter should clearly explain any risks in contracting out.
H.6	Borrowing to invest
	When considering the suitability of a particular investment product which is linked directly or indirectly to any form of loan or mortgage, a firm 6
	(a)6	should take account of the source of the funds being invested and the suitability of the overall transaction; and6
	(b)6	must follow any relevant suitability and other rules in COB and MCOB.6
	For example, the circumstances in which a recommendation to enter intoa regulated lifetime mortgage contract and invest the funds into a long-term care insurance contract might be appropriate are limited, and both COB 5.3 and MCOB 8.5 apply.6

COB 5.3.30 G 01/12/2004

Guidance on the contents of suitability letters.

This table belongs to COB 5.3.17 G.

9 9 9

Guidance on the contents of suitability letters
	Introduction
1.	COB 5.3.14 R requires a written explanation of a recommendation relating to a product to be provided to a private customer. This is commonly referred to as 'the suitability letter' although it does not need to take the form of a letter, for example it might form part of:
	(a)	a financial report to the customer (provided that it is prominent); or
	(b)	a fact find document (a copy of the whole fact find or just the recommendation section could be given to the customer); if a copy of the fact find or the recommendation section is sent, the copy should be of sufficient quality to be clearly legible.
2.	A suitability letter, to be successful, should explain simply and clearly why the recommendation is viewed as suitable having regard to the customer's:
	(a)	personal and financial circumstances;
	(b)	needs and priorities identified through the fact finding process;
	(c)	attitude to risk in the area of need to which the recommendation relates.
	When a suitability letter is needed
3.	COB 5.3.14 R sets out the occasions when a suitability letter is required. COB 5.3.19 R sets out the exceptions to this rule. A letter is required in all cases where pension transfers or pension opt-outs are recommended.
	Style and presentation
4.	The style and presentation of a suitability letter is left for firms to decide so that they can design a document which works best for the market in which they transact business. A suitability letter is more likely to be effective if it demonstrates these features:
	(a)	personalisation - the more personalised the suitability letter, the more effective it is likely to be;
	(b)	simplicity and plain English - when technical terms need to be incorporated, they should be explained if the customer is unlikely to understand their meaning;
	(c)	concise and clear messages - lengthy explanations in extensive letters are likely to reduce the effectiveness of the letter with the customer disinclined to read it properly.
5.	Ideally each suitability letter will be different, reflecting the approach of the representative, the customer's profile, subjects discussed and the considerations on which the advice was based. Some firm may wish to introduce a degree of standardisation to suitability letter production to aid quality control. When using a standardised approach the firms should take the following into account:9
	(a)	standard paragraphs are best limited to the description of the most common needs and the products which will satisfy those needs;
	(b)	the firm should clearly link the customer's own needs, priorities and attitude to risk to the product recommended rather than just setting out stock motives that may apply to all customers;
	(c)	tick box, pre-printed forms should rarely be used, and when they are it should only be in the simplest and most straightforward advice situations.
	Content
6.	A firm should take the following into account when constructing a suitability letter:
	(a)	the letter should explain why the customer's needs, priorities, attitude to risk and financial situation all combine to make the recommended product suitable for the customer. It should not merely state what product is being recommended with no link to the customer's personal circumstances;
	(b)	other needs discussed during the factfind process which the customer does not wish to consider do not need to be included in the suitability letter (although they should be recorded in the factfind); they should be included if they assist in demonstrating why the product recommended is considered suitable;
	(c)	alternative products which were recommended but rejected by the customer should be mentioned;
	(d)	only the available options under a contract which have been recommended, whether accepted or rejected, need be mentioned in the letter;
	(e)	where the range of packaged products from which advice on investments has been given contains the products of more than one product provider in respect of the same type of packaged product, the letter should include (the list is not exhaustive) why a particular product provider has been recommended; reasons may include product features not available elsewhere, price, service levels, performance track record, investment prospects, medical evidence terms, reputation and financial strength.9
	Signing
7.	Each suitability letter should be signed by a person authorised by the firm to advise on the type of product which is being recommended. Ideally this will be the representative who gave the particular advice but, if not, both the signatory and the representative should accept responsibility for the letter and the recommendation.9
	Timing of suitability letters
8.	Suitability letters should be issued to customers at the time that the recommendation is made or as soon as possible afterwards, to allow as much time as possible for the customer to consider the recommendation before any cancellation period ends. In any event the letter should be issued no later than the issue of the cancellation notice or, in situations where no cancellation notice will be issued, for example in the case of personal pension income withdrawals, before the transaction is put into effect.

COB 5.4 Customers' understanding of risk

Application

COB 5.4.1 R 01/12/2001

This section applies to a firm that conducts designated investment business with or for a private customer

Purpose

COB 5.4.2 G 01/12/2001

Principle 7 (Communications with clients) requires a firm to pay due regard to the information needs of its clients and communicate information to them in a way that is clear, fair and not misleading. Principle 9 (Customers: relationships of trust) requires a firm to take reasonable care to ensure the suitability of its advice and discretionary decisions. The purpose of this section is to ensure that a firm takes reasonable steps to ensure that a private customer understands the nature of the risks inherent in certain transactions.

Requirement for risk warnings

COB 5.4.3 R 15/11/2001

A firm must not:

(1)
make a personal recommendation of a transaction; or
(2)
act as a discretionary investment manager; or
(3)
arrange (bring about) or execute a deal in a warrant or derivative; or
(4)
engage in stock lending activity;

with, to or for a private customer unless it has taken reasonable steps to ensure that the private customer understands the nature of the risks involved.1

COB 5.4.3A G 01/08/2002

A securitised derivative (as defined in the Glossary) is a derivative, and COB rules relevant to derivatives therefore apply. Firms should note that the Glossary definition of securitised derivative is slightly different from the definition in chapter 24 of the listing rules.7 An instrument listed under that chapter, which is not an option or contract for differences,7 is not a securitised derivative for the purposes of COB.2

COB 5.4.4 E 01/01/2004

The reasonable steps in COB 5.4.3 R should include the steps set out in COB 5.4.6 E to COB 5.4.12 E as appropriate, in relation to transactions in the following types of investment or activity:4

(1)
warrants and derivatives (see COB 5.4.6 E, COB 5.4.6A E or COB 5.4.6C E as appropriate);
(2)
non-readily realisable investments (see COB 5.4.7 E);
(3)
penny shares (see COB 5.4.8 E);
(4)
securities subject to stabilisation (see COB 5.4.9 E);
(5)
stock lending activity (see COB 5.4.10 E);5
(6)
a security or an investment trust savings scheme which satisfies the conditions specified in COB 3.8.9 G (6) (see COB 5.4.11 E);4
(7)
structured capital-at-risk products (see COB 5.4.12 E).2

COB 5.4.5 E 01/12/2001

Contravention of COB 5.4.4 E may be relied on as tending to establish contravention of COB 5.4.3 R.

Risk warnings in respect of warrants and derivatives (other than retail securitised derivatives and certain EEA listed derivatives)

COB 5.4.6 E 01/08/2002

(1)
In relation to a transaction in a warrant or derivative (other than a retailsecuritised derivative or an option or contract for differences to which COB 5.4.6C E applies), the firm should:
1. (a)
  provide the private customer with the notice in COB 5 Annex 1 E (Warrants and derivatives risk warning notice); and
2. (b)
  require the private customer to acknowledge receipt of the notice and confirm acceptance of its contents, in writing.
(2)
A firm need not undertake steps COB 5.4.6 E (1) (a) and (b) in respect of a private customer who is ordinarily resident outside the United Kingdom, if it has taken reasonable steps to determine that the private customer does not wish to receive the notice.
(3)
The notice in COB 5 Annex 1 E (Warrants and derivatives risk warning notice) need not be sent in relation to the realisation of a warrant that is already held by the private customer, or of a warrant attached to another designated investment.
(4)
For a firm acting as an outgoing ECA provider, the exemption contained in COB 5.4.6 E (2) applies only if the private customer is ordinarily resident outside the EEA and if the outgoing ECA provider has taken reasonable steps to ensure that the private customer does not want to receive the notice.2 3

Risk warnings in respect of retail securitised derivatives

COB 5.4.6A E 01/08/2002

(1)
2In relation to a transaction in a retail securitised derivative, the firm should provide the private customer with:
1. (a)
  the notice in COB 5 Annex 1 E (Warrants and derivatives risk warning notice); or
2. (b)
  a copy of the listing particulars prepared for the securitised derivative in accordance with chapter 24 of the listing rules, in a manner calculated to bring to the attention of the private customer the description of risk factors required by paragraphs 24.36 and 24.37 of the listing rules (Disclosure about risk factors); or
3. (c)
  a notice containing a clear, fair and adequate description of the securitised derivative which is to be the subject of the transaction, in a manner calculated to bring to the attention of the private customer the risks involved, and in particular (and if applicable):
  1. (i)
    that the securitised derivative gives rise to risks similar to those arising when an investor buys or sells an option;
  2. (ii)
    that the securitised derivative is 'geared' or 'leveraged', which means that a relatively small movement in the price of the underlying instrument, whether favourable or adverse, could result in a larger movement in the price of the securitised derivative;
  3. (iii)
    that the price of the securitised derivative may therefore be volatile;
  4. (iv)
    that the securitised derivative has a limited life, and may expire worthless if the underlying instrument (such as a share or index) does not perform as expected;
  5. (v)
    that, consequently, the private customer should not enter into the transaction unless he is prepared to lose all of the money he has invested, plus any commission or other charges;
  6. (vi)
    that the private customer should satisfy himself that the securitised derivative is suitable for him, in the light of his circumstances and financial position, and if the private customer is in any doubt he should seek professional advice; and
  7. (vii)
    a clear, fair and adequate description of any other relevant risks affecting the value, trading price, and realisation of the value of the securitised derivative.
(2)
A firm should either:
1. (a)
  require the private customer to acknowledge receipt of the documentprovided in accordance with (1)(a), (b) or (c) and confirm acceptance of its contents, in writing; or
2. (b)
  be otherwise able to demonstrate that the private customer has received the documentand had a proper opportunity to consider its terms.
(3)
A firm need not undertake steps (1) and (2) in respect of a private customer who is ordinarily resident outside the United Kingdom, if it has taken reasonable steps to determine that the private customer does not wish to receive the notice.

COB 5.4.6B G 01/08/2002

(1)
2It is appropriate for a notice provided to a private customer in accordance with COB 5.4.6A E (1)(c) to explain, where applicable, the existence and extent of any factors that reduce the risks to which the private customer is exposed (for example, the fact that the securitised derivative is listed, or subject to some form of guarantee), but the firm should ensure that any such statement does not, obscure or diminish the significance of the notice taken as a whole.
(2)
The document provided to a private customer in accordance with COB 5.4.6A E (1) (b) or (c) may use another term (such as "covered warrant") to describe a securitised derivative, if it is generally accepted market practice to do so.
(3)
In relation to (1) and (2), firms are also reminded of the requirements of COB 2.1 (Clear, fair and not misleading communication).

Risk warnings in respect of certain derivatives listed in other EEA States

COB 5.4.6C E 01/08/2002

2In relation to an option or contract for differences which is included on the official list of an EEA State other than the United Kingdom, a firm should comply with COB 5.4.6A E if:

(1)
the investment is not a contingent liability investment; and
(2)
(if it provides a right of exercise) the investment would comply with paragraph 24.7 of the listing rules (Method of exercising retail securitised derivatives), if it were listed on the UK official list.

Risk warnings in respect of non readily realisable investments

COB 5.4.7 E 01/12/2001

In relation to a transaction in a designated investment that is not a readily realisable investment, a firm should:

(1)
warn the private customer that there is a restricted market for such designated investments, and that it may therefore be difficult to deal in the designated investment or to obtain reliable information about its value; and
(2)
disclose any position knowingly held by the firm or any of its associates in the designated investment or in a related designated investment.

Risk warnings in respect of penny shares

COB 5.4.8 E 01/12/2001

In respect of penny shares, a firm should provide the risk warnings required by COB 3.9.17 G (12) (Investments that can fluctuate in value).

Risk warnings in respect of securities that may be subject to stabilisation

COB 5.4.9 E 01/12/2004

In respect of securities that may be subject to stabilisation, a firm should send to the private customer the notice in COB 5 Annex 2 E (Dealing in securities which may be subject to stabilisation) unless it has taken reasonable steps to establish that the customer requires an oral explanation only.

Stock lending activity

COB 5.4.10 E 01/12/2001

A firm should not engage in stock lending activity with or for a private customer unless it has notified him:

(1)
that this may affect his tax position and that he should consult a tax adviser before proceeding; and
(2)
of the consequences of the stock lending activity, including what impact it may have on the rights of the holder of the designated investments concerned.

4Risk warnings in respect of listed securities where gearing is involved

COB 5.4.11 E 01/01/2004

4In relation to a transaction in a security or an investment trust savings scheme for dealing in securities which satisfies the conditions specified in COB 3.8.9 G (6) a firm should provide to the private customer a notice to warn the private customer that the strategy which the issuer of securities uses or proposes to use may result in:

(1)
movements in the price of the securities being more volatile than the movements in the price of underlying investments;
(2)
the investment being subject to sudden and large falls in value; and
(3)
the private customer getting back nothing at all if there is a sufficiently large fall in value in the investment.

COB 5.4.12 E 15/07/2004

(1)
5Unless (2) applies, in relation to a transaction in a structured capital-at-risk product, the firm should provide the private customer with a notice containing a clear, fair and adequate description of the structured capital-at-risk product which is to be the subject of the transaction, in a manner calculated to bring to the attention of the private customer the risks involved, in particular (and if applicable):
1. (a)
  that the return of initial capital invested at the end of the investment period is not guaranteed and therefore the private customer may get back less then what was originally invested;
2. (b)
  that the amount of initial capital repaid may be geared, which means that a small percentage fall in the related index may result in a larger reduction in the amount paid out to the private customer;
3. (c)
  that any maximum benefit advertised to the private customer is only available after a set period, indicating how long that period is;
4. (d)
  that redeeming a product early may result in redemption penalties and a poor return;
5. (e)
  that the initial capital invested may be placed into high risk investments, such as non-investment grade bonds;
6. (f)
  that the rate of income or growth advertised to private customers may depend on specified conditions being met, indicating what these conditions are;
7. (g)
  that the private customer should not enter into the transaction unless he is prepared to lose some or all of the money he has invested;
8. (h)
  that the private customer should satisfy himself that the structured capital-at-risk product is suitable for him, in the light of his circumstances and financial position, and if the private customer is in any doubt he should seek professional advice; and
9. (i)
  a clear, fair and adequate description of any other relevant risks affecting the value, trading price, and realisation of the value of the structured capital-at-risk product.
(2)
If the firm is acting as an investment manager, it should provide the notice referred to in (1) as part of its terms of business, but need not provide a notice before each transaction in a structured capital-at-risk product, provided that the structured capital-at-risk product is within the range of structured capital-at-risk products described in the terms of business.

COB 5.4.13 G 15/07/2004

In relation to a transaction in a structured capital-at-risk product, if it is relevant, firms should comply with COB 5.4.7 E.5

COB 5.5 Information about the firm

Application

COB 5.5.1 R 01/12/2001

(1)
This section applies to a firm that conducts designated investment business with or for a private customer.
(2)
This section does not apply when a firm communicates or approves a financial promotion.

Purpose

COB 5.5.2 G 01/12/2001

Information required to be disclosed

COB 5.5.3 R 01/12/2004

When it conducts designated investment business, a firm must take reasonable steps to ensure that a private customer is given adequate information about:

(1)
the identity and business address of the firm and any relevant agent of the firm;
(2)
the identity and status, or relationship with the firm, of employees and other agents with whom the customer may have contact; and
(3)
the firm's statutory status (in accordance with GEN 4 Annex 1 (Statutory status disclosure));1

unless the private customer has been given the information on a previous occasion and that information is still up to date.

COB 5.5.4 E 01/12/2001

(1)
For the purposes of COB 5.5.3 R, the reasonable steps should include the relevant measures detailed in COB 5.5.5 E.
(2)
Compliance with (1) may be relied as tending to establish compliance with COB 5.5.3 R.
(3)
Contravention of (1) may be relied as tending to establish contravention of COB 5.5.3 R.

COB 5.5.5 E 01/12/2004

Table of information to be disclosed in written communications.

This table belongs to COB 5.5.4 E

3 3 3 3 1

Written communications
1.	Any written communication, including stationery, business cards or other business documentation published by the firm, or used by its employees, agents, representatives or introducers, should include:3
	(a)	the name, business address and telephone number of the firm or of the branch or office of the firm from which the communication originates;
	(b)	[deleted]3
	(c)	the name and status or relationship with the firm, of the individual from whom the communication originates;
	(d)	a statement of the firm's statutory status (in accordance with GEN 4 Annex 1 (Statutory status disclosure));
	(e)	[deleted]3
	(f)	if the communication is by or relates to an introducer, a statement of the introducer's capacity
2.	[deleted]3

COB 5.5.5A G 01/03/2003

Firms are reminded of GEN 4.3 (Letter disclosure), which requires a disclosure in letters to private customers.1

COB 5.5.6 G 01/12/2004

3[deleted]

Overseas business for UK private customers

COB 5.5.7 R 01/12/2001

(1)
A firm must not conduct designated investment business:
1. (a)
  from an office of its own (or of any appointed representative) outside the United Kingdom;
2. (b)
  with or for a private customer who is in the United Kingdom;
unless it has, where relevant, made a disclosure in accordance with (2) to the private customer.
(2)
The required disclosure in (1) means a written statement making it clear that in some or all respects the regulatory system applying, including any compensation arrangements, will be different from that of the United Kingdom. The statement may also indicate the protections or compensation available under another system of regulation.
(3)
A firm must not make an introduction or make arrangements or give advice on investments with a view to another person conducting designated investment business;
1. (a)
  from an office outside the United Kingdom;
2. (b)
  with or for a private customer (or a person who, if a client, would be a private customer), who is in the United Kingdom;
unless the firm has, where relevant, made a disclosure in accordance with (2) and there are no reasonable grounds for the firm to doubt that the private customer will be dealt with in an honest and reliable way.1

Business conducted from non-UK offices

COB 5.5.8 G 01/03/2003

GEN 4.4 (Business for private customers from non-UK offices), requires a firm to give information, similar to that in COB 5.5.7 R, in certain circumstances in connection with business conducted from an office outside the United Kingdom with both UK and non-UK private customers.1

ISD investment firms: compensation information

COB 5.5.9 R 09/10/2004

1An ISD investment firm providing or offering to provide a core investment service or custody must make available to every client, who has used or intends to use those services, information on whether or not compensation may be available from the compensation scheme or a compensation scheme established in another EEA State in accordance with the Investor Compensation Directive should the firm be unable to meet its liabilities, and the extent and level of cover and how further information can be obtained.2

COB 5.5.10 G 01/03/2003

1The obligation in COB 5.5.9 R is to "make information available". This does not require the firm to inform every client. A firm may make the information available in a number of ways, for example, by including it in explanatory literature or on the firm's website.

Example of compensation information for a UK domestic investment firm operating from the United Kingdom

COB 5.5.11 G 01/03/2003

1This is an example of how a UK domestic firm, carrying on a regulated activity from a UK establishment, could present the information required by COB 5.5.9 R:COMPENSATIONWe are covered by the Financial Services Compensation Scheme. You may be entitled to compensation from the scheme if we cannot meet our obligations. This depends on the type of business and the circumstances of the claim. Most types of investment business are covered for 100% of the first £30,000 and 90% of the next £20,000, so the maximum compensation is £48,000. Further information about compensation arrangements is available from the Financial Services Compensation Scheme

ISD investment firms: language of compensation information

COB 5.5.12 R 01/03/2003

1Information about compensation arrangements made available by an ISD investment firm under COB 5.5.9 Rmust:

(1)
(if it relates to the activities of an establishment in the United Kingdom) be in English; or
(2)
(if it relates to the activities of a branch in another EEA State) be in an official language of that EEA State.

COB 5.6 Excessive charges

Application

COB 5.6.1 R 01/12/2001

This section applies to a firm that makes a charge to a private customer in the course of, or in connection with its designated investment business.

Purpose

COB 5.6.2 G 01/12/2004

Principle 6 (Customers' interests) requires a firm to pay due regard to the interests of its customers and treat them fairly. The purpose of this section is to ensure that the charges a firm makes to its private customer are not excessive. The obligation to disclose to a private customer the charges that a firm intends to make are set out in COB 4.3 (Disclosing information about services, fees and commission - packaged products) and COB 5.7 (Disclosure of charges, remuneration and commission).1

Charges to a private customer

COB 5.6.3 R 01/12/2001

A firm must ensure that its charges to a private customer made in connection with the conduct of designated investment business are not excessive.

COB 5.6.4 G 01/12/2001

When determining whether a charge is excessive, a firm should consider:

(1)
the amount of its charges for the services or product in question compared with charges for similar services or products in the market;
(2)
the degree to which the charges are an abuse of the trust that the customer has placed in the firm; and
(3)
the nature and extent of the disclosure of the charges to the private customer.

Charges in respect of designated investments that are not readily realisable

COB 5.6.5 R 01/12/2001

When a firm's charges for advising on or managing a private customer's assets are dependent on the value of designated investments that are not readily realisable investments, the valuation of those designated investments must be based upon the price likely to be agreed between a willing buyer and a willing seller dealing at arm's length who are both in possession of all freely available information concerning those investments.

COB 5.6.6 G 01/12/2001

In appropriate cases it may be necessary for the basis of a valuation referred to in COB 5.6.5 R to be confirmed or approved by an independent expert.

COB 5.7 Disclosure of charges, remuneration and commission

Application

COB 5.7.1 R 01/12/2001

This section applies to a firm that conducts designated investment business with or for a private customer.

Purpose

COB 5.7.2 G 01/12/2001

Principle 7 (Communications with clients) requires a firm to pay due regard to the needs of its clients and communicate information to them in a way that is clear, fair and not misleading. The purpose of this section is to ensure that a private customer is made aware of the costs to him, directly or indirectly, of financial services, so that he is better able to make informed choices.

Disclosure of charges

COB 5.7.3 R 01/09/2002

(1)
Before a firm conducts designated investment business with or for a private customer, the firm must disclose in writing to that private customer the basis or amount of its charges for conducting that business and the nature or amount of any other income receivable by it or, to its knowledge, by its associate and attributable to that business.
(2)
If the designated investment business in (1) is in respect of an execution-only transaction:
1. (a)
  which does not relate to a packaged product; and
2. (b)
  where prior written disclosure would delay the transaction;
the firm may instead:
1. (c)
  make the disclosure required by (1) orally before the transaction is executed; and
2. (d)
  provide written confirmation of the matters disclosed to the private customer within five business days of the execution.2

COB 5.7.4 G 01/12/2004

(1)
A firm may make the disclosures required by COB 5.7.3 R in its terms of business, in a client agreement, or in a separate written statement. Disclosure should indicate any product-related charges that are deducted from the private customer's investment. If the product is a packaged product, product-related charges and expenses will be disclosed in the key features document or in the minimum information that the firm is required to provide to the private customer in accordance with COB 6.2 (Provision of key features) and COB 6.4 (Product disclosure: special situations). When a firm is a broker fund adviser, disclosure should include any fees payable to the firm or its associate in connection with that activity by a provider firm. In the case of advice provided in connection with packaged products a firm should, in accordance with COB 4.3.3 R, have provided its customer with a fees and commission statement setting out the maximum rates of any fees which the customer will pay and/or with an indication of the maximum rates of commission (or equivalent) which it, or its representatives, may retain in connection with the sale of packaged products. COB 5.7.3 R does not require any further disclosure of a firm's fees if, in accordance with COB 4.3.5 R it has confirmed the exact amount or rate that it will charge.4
(2)
In addition it is necessary that a private customer should, as soon as is practicable, be informed of the exact rate or the exact amount in cash terms of any commission (or equivalent) which the firm or its representatives will receive in respect of a specific transaction.4
(3)
In the case of a packaged product, product related charges and expenses will be disclosed in the key features document or in the minimum information that the firm is required to provide to private customers in accordance with COB 6.2 (Provision of key features) and COB 6.4 (Product disclosure: special situations). When a firm is a broker fund adviser, disclosure should include any fees payable to the firm or its associate in connection with that activity by a product provider.4

4Disclosure of commission (or equivalent) for packaged products

COB 5.7.5 R 01/12/2004

(1)
4When a firm sells, personally recommends or arranges the sale of a packaged product to a private customer, and subsequently on the request of a private customer, the firm must disclose to the private customer, in cash terms:
1. (a)
  any commission equivalent payable by it to a representative or appointed representative; and
2. (b)
  any commission or commission equivalent receivable by it, or by any of its associates in connection with the transaction
unless COB 5.7.9 R or COB 5.7.10 R applies.
(2)
In (1)(b) a firm is, in respect of any transaction, to be regarded as receiving commission equivalent if:
1. (a)
  it is received from a product provider ("P"), or an associate of P; and
2. (b)
  either P or its associate is in the same immediate group as the firm; and
3. (c)
  the value of the commission equivalent (as assessed in accordance with these rules) is greater than the amount of commission in cash terms.
(3)
In (1) and (2) "cash terms" in relation to commission does not include the value of any indirect benefits which the firm may receive in accordance with COB 2.2.1

COB 5.7.6 R 01/12/2004

In determining the amount to be disclosed as commission equivalent in accordance with COB 5.7.5 R, a firm must put a proper value on the cash payments, benefits and services provided to its representatives in connection with the transaction.4

COB 5.7.7 G 01/12/2004

4[deleted]

COB 5.7.8 E 01/12/2004

(1)
When determining the value of cash payments, benefits and services under COB 5.7.6 R, a firm should follow the provisions of COB 5.7.16 E.4
(2)
Compliance with COB 5.7.8 E (1) may be relied on as tending to establish compliance with COB 5.7.6 R.
(3)
Contravention of COB 5.7.8 E (1) may be relied on as tending to establish contravention of COB 5.7.6 R.

Exceptions to the disclosure for packaged products

COB 5.7.9 R 21/08/2002

COB 5.7.5 R does not apply if:

(1)
the firm is acting as an investment manager; or
(2)
the firm is not acting as an outgoing ECA provider and the transaction is effected for a private customer who is habitually resident overseas; or
(3)
the firm is not acting as an outgoing ECA provider and the packaged product is a life policy and the private customer is not present in the United Kingdom at the time the application is made; or
(4)
the firm is acting as an outgoing ECA provider and the transaction is effected for a private customer who is habitually resident outside the EEA; or
(5)
the firm is acting as an outgoing ECA provider, the packaged product is a life policy and the private customer is not present in the EEA at the time the application is made.3

COB 5.7.10 R 01/12/2004

The requirement in COB 5.7.5 R to disclose to a private customer the amount or value, in cash terms, of commission or equivalent does not apply if the firm provides the private customer with example key features, in accordance with COB 6.2.7 R (Life policies) andCOB 6.2.22 R (Schemes), provided that the firm discloses to the private customer the actual amount or value of commission or equivalent within five business days of effecting the transaction.4

Guidance on disclosure requirements for packaged products

COB 5.7.11 G 01/12/2001

The disclosures required by COB 5.7.5 R should be made in a manner that is clear, fair and not misleading, as required by COB 2.1.3 R (Clear, fair and not misleading communication), and that indicates the timing of any payment. For example, when a firm exchanges its right to future commission payments for a lump sum, whether by way of a loan or other commercial arrangement, it should disclose the amount of commission receivable by it that has been exchanged for the lump sum.

COB 5.7.12 G 01/12/2004

If the precise rate or value of commission or equivalent is not known in advance, the firm should estimate the rate likely to apply to the representative in respect of the transaction.4

COB 5.7.13 G 01/12/2004

The disclosures required by COB 5.7.5 R should normally be made in writing. For example, if a specific key features document or projection is provided to a private customer, the required disclosures should either be contained in the projection or the key features document, or be given to the private customer in a separate written statement at the time these documents are given to the private customer. When a private customer does not make a written application to enter into a transaction contemplated by COB 5.7.5 R, for example, when the transaction is a telephone deal for units in a regulated collective investment scheme, the firm may disclose the amount or value of commission or equivalent orally. In these circumstances, the firm should give written confirmation as soon as possible after the date of the transaction, and in any event within five business days. In preparing its written disclosure statement, a firm may wish to follow the guidance on content and wording set out in COB 5.7.17 G.4

COB 5.7.14 G 01/12/2001

The collection of premiums payable under a life policy by introducers acting as the appointed collecting agents of a product provider will not be treated by the FSA as a transaction for the purposes of COB 5.7.5 R.

COB 5.7.15 R 01/12/2004

If the terms of a packaged product are varied in circumstances that require the issue of a cancellation notice, a firm must disclose to a private customer in writing any consequent increase in commission or equivalent receivable by it in relation to that transaction.4

COB 5.7.16 E 01/12/2004

Calculating commission equivalent4

This table forms part of COB 5.7.8 E.

4 4 4 4 4

Calculating commission equivalent 4
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's appointed 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 share option (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's packaged 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 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's immediate 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's immediate 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

COB 5.7.17 G 01/12/2004

Remuneration and commission disclosure statements: content and wording.

This table forms part of COB 5.7.13 G.

Remuneration and commission disclosure statements: content and wording
A firm may wish to follow the guidance on content and wording in this table when drawing up its written statement of remuneration or commission under COB 5.7.5 R.
	Degree of accuracy
1.	To help the customer understand, the firm may round large amounts of commission or remuneration to three significant figures (that is, where the leading three figures are sufficient to convey the magnitude of the result, for example £122 instead of £122.35).
	Sample wordings
2.	Examples of appropriate remuneration or commission disclosure wordings, for:
	(a)	independent intermediaries and other intermediaries (in a direct offer financial promotion or post-sale information): "For arranging this policy/contract XYZ Ltd will pay commission to IFA Ltd £..."
	(b)	representatives employed by an appointed representative: "For arranging this policy/contract XYZ Ltd will pay remuneration and provide services to AR Ltd worth £..."
	(c)	representatives employed by an appointed representative (at the point of sale or in a direct offer financial promotion): "For arranging this policy/contract AR Ltd expects to receive remuneration and services from XYZ Ltd worth £..."
	(d)	representatives employed directly by the firm (including self-employed sole trader appointed representatives):
		(i)	"for arranging this policy/contract I expect to receive remuneration and services from XYZ Ltd worth £..."; or
		(ii)	"for arranging this policy XYZ Ltd expect to incur sales costs of £..."; or
		(iii)	an acceptable post sale alternative might be: "for arranging this policy XYZ Ltd has provided remuneration and services to your adviser worth £..."; 1
		this type of approach would be suitable either to a salaried or commissioned representative.
3.	The description of the monetary amount (just shown as '£...') in the examples in paragraph 2 will vary according to the incidence and basis of remuneration or commission. Examples of some common cases are:
	(a)	indemnified payments (on a monthly payment contract): "£X immediately and £Y each month from the Nth month to the end of the term"
	(b)	level basis (on an annual payment whole life contract): "£X each year"; but in the case of a sale by any representative, the provision of benefits and services would probably require instead a statement in the form: "£X immediately and £Y each year thereafter".
	(c)	fund related basis:
		(i)	using the same rate of growth and the same periods as those in the key features document or the simplified prospectus, the example will normally show the commission or remuneration in the first year in which it is paid and the tenth year; or
		(ii)	for an investment of £P, "For arranging this policy, XYZ Ltd will pay commission to IFA Ltd of £X, and half a percent of the fund value each year. For example, if your fund was worth £P, we would pay £X per year: if it was worth £2xP, we would pay £Z per year. Commission is paid every six months".
	(d)	increasing payment basis: "£X immediately and a variable amount in each year thereafter, being, for example, £Y in the second year and increasing to £Z by the final year".

COB 5.8 Customers introduced to clearing firms by introducing brokers and overseas introducing brokers

Application

COB 5.8.1 G 01/12/2001

This section should be considered by a firm that, in the course of carrying on designated investment business, acts as a clearing firm to which an introducing broker or an overseas introducing broker introduces a transaction for its customer.

Purpose

COB 5.8.2 G 01/12/2001

Principle 1 (Integrity) requires a firm to conduct its business with integrity and Principle 6 (Customers' interests) requires a firm to pay due regard to the interests of its customers and treat them fairly. This section supports and clarifies these requirements in respect of the relationship that exists between a clearing firm and a customer for whom the clearing firm executes and clears business, when the business has been introduced by a third party.

Clearing firms and introducing brokers and overseas introducing brokers

COB 5.8.3 G 01/12/2001

A clearing firm to which an overseas introducing broker has introduced a transaction on behalf of its customer should ensure that the customer is aware of the nature of the services that the clearing firm will be providing to that customer and that only these services, but not those of the overseas introducing broker, will be regulated under the Act.

COB 5.8.4 G 01/12/2001

As a matter of good practice, and preferably before accepting orders, a clearing firm should enter into a written contract with the introducing broker or overseas introducing broker specifying that the clearing firm will be responsible for all dealing and settlement obligations to the customer. The contract should also specify that the introducing broker or overseas introducing broker will act as agent for the customer in introducing transactions and will be responsible for advising the customer or managing his assets (or both).

COB 5.8.5 G 01/12/2001

A clearing firm should, by appropriate disclosures, ensure that the customer is aware of the nature of the services to be provided to him by the clearing firm.

COB 5.8.6 G 01/12/2001

When a clearing firm knows or suspects that the activities of an introducing broker or an overseas introducing broker are or may be damaging to its customers, it should take reasonable steps to address the situation and, as far as possible, to protect its customers' interests.

COB 5.8.7 G 01/12/2001

When a clearing firm operates an omnibus account for an overseas introducing broker (that is, an account operated in the name of the overseas introducing broker for more than one underlying client) a clearing firm should:

(1)
establish that the overseas introducing broker is authorised in his own country;
(2)
where there is no formal regulatory regime in the overseas introducing broker's own country, take reasonable steps to establish that the overseas introducing broker is legally empowered to undertake the proposed business to be transacted; and
(3)
have regard to the requirements of UK law on money laundering and financial crime.

COB 5.9 Information about stakeholder pension schemes

Application

COB 5.9.1 R 01/12/2001

This section applies to a firm that provides information about stakeholderpension schemes at a meeting arranged for a group of employees.

Requirement

COB 5.9.2 R 01/12/2001

When a firm provides information about stakeholderpension schemes to a group of five or more employees at a meeting which has been sponsored by one or more employers, that information must be given by an adviser appointed by the firm to give advice to private customers on packaged products.

Exception

COB 5.9.3 R 01/12/2001

COB 5.9.2 R does not apply to a firm that provides information about stakeholderpension schemes to a group of four or less employees at a meeting.

COB 5.10 Corporate finance business issues

Application

COB 5.10.1 R 01/05/2004

1This section applies to a firm that conducts corporate finance business.

Purpose

COB 5.10.2 G 01/05/2004

The purpose of this section is to provide guidance on the management of conflicts of interest in particular situations arising in the context of corporate finance business. The FSA expects that in most corporate finance business Principle 1 (Integrity), Principle 2 (Due skill, care and diligence), Principle 5 (High standards of market conduct), Principle 6 (Customers' interests) and Principle 8 (Conflicts of interest), will be particularly relevant. The guidance in this section is not intended to be exhaustive, and is in addition to other provisions which apply to the firm (see COB 1.6 which specifies these). It also supplements other provisions in the Handbook (see, in particular, COB 2.2 (Inducements and soft commission), COB 7.1 (Conflict of interest and material interest) and COB 7.16 (Investment research)).1 2

Securities offerings

COB 5.10.3 G 01/05/2004

The Principles referred to in COB 5.10.2 G are highly relevant to the management of an offering of a security by a firm. They require a firm to manage conflicts of interest which may arise in a way which ensures that all its clients are treated fairly and which ensures that the firm is conducting its business with integrity and according to proper standards of business.1

COB 5.10.4 G 01/05/2004

1The overriding responsibility of the firm is to have in place systems, controls and procedures to ensure that the duties which the firm owes to its clients are identified effectively and discharged appropriately. In particular, the firm's processes and procedures will need to take account of the following:

(1)
when carrying out a mandate to manage an offering of securities, the firm's duty for that business is to its corporate finance client (in many cases, the corporate issuer or seller of the relevant securities);
(2)
a firm's responsibilities to provide services to the firm's investment clients (that is, those on the investment client side of the Chinese wall (see COB 5.10.5 G)) are unchanged, even if they have an interest in acquiring securities in the offering. The firm will need to ensure that it complies with the relevant regulatory obligations to its investment clients, such as COB 5.3 (Suitability).

COB 5.10.5 G 01/05/2004

1 Firms will need to have in place systems, controls and procedures, appropriate to its structure and business, and to the sorts of offerings in which they are involved, for identifying and managing conflicts of interest (and see SYSC 3 (Systems and controls)). Examples which the FSA considers that a firm should consider (not every example will be relevant or appropriate to every situation or firm) include:

(1)
at an early stage, for example before it accepts a mandate to manage the offering, discussing or agreeing with its corporate finance client relevant aspects of the offering process, such as:
1. (a)
  the process the firm proposes to follow in order to determine what recommendations it will make about allocations for the offering;
2. (b)
  details of how the target investor group, to whom it is planned to offer the securities, will be identified;
3. (c)
  the process through which recommendations on allocation and pricing are prepared, and by whom; and
4. (d)
  (if relevant) that it may recommend placing securities with an investment client of the firm for whom the firm provides other services, with the firm's own proprietary book, or with an associate, and that this represents a potential conflict of interest;
(2)
having internal arrangements designed to ensure that the firm will give unbiased and full advice to the corporate finance client about the valuation and pricing for an offering (the FSA accepts that valuation is a complex process and great precision may not always be possible in a security offering);
(3)
having internal arrangements under which individuals or business units in the firm, whose responsibilities are ordinarily to provide services to the firm's investment clients (that is, those on the investment client side of the Chinese wall), are not involved directly in decisions about recommendations to a corporate finance client on pricing (although they might, for example, be permitted to provide information about likely investor interest to those advising the corporate finance client);
(4)
ensuring that its systems, controls and procedures to identify and manage conflicts of interest also cover the allocation process for an offering of securities; for example:
1. (a)
  having internal arrangements under which the allocation process and the development of recommendations on allocation (names and amounts proposed to be allocated) are made to the corporate finance client only by staff who do not have any responsibilities for servicing investment clients;
2. (b)
  inviting the corporate finance client to participate actively in the allocation process so that its proper interests can be taken into account effectively, including making available to the corporate finance client appropriate information to support the proposed recommendations on allocation;
3. (c)
  basing recommendations about allocation and pricing on objectives agreed with the corporate finance client;
4. (d)
  making the initial recommendation for allocation to private customers of the firm as a single block and not on a named basis;
5. (e)
  having internal arrangements under which senior personnel in the department (or equivalent business unit), who are responsible for providing services to private customers, make the individual allocation recommendations for allocation to private customers of the firm; and
6. (f)
  disclosing to the issuer, after completion of the transaction, details of the allocations which were actually made; and
(5)
having internal arrangements under which allocation recommendations are not determined by the level of business which a firm does or hopes to do with any other client (see also COB 2.2 (Inducements and soft commission)); for example:
1. (a)
  any allocation to a private customer of the firm should be justifiable in terms of the process for developing allocation recommendations which was disclosed to the corporate finance client at the outset (as well as in terms of any other obligations which the firm may have - for example under COB 5.3 (Suitability) or COB 7.7 (Aggregation and allocation)); and
2. (b)
  any recommendation for allocation to the proprietary trading desk of the firm or to an associate or affiliate of the firm should be justifiable in terms of the objectives of the allocation policy and should be consistent with the process for developing allocation recommendations disclosed by the firm at the outset.

COB 5.10.6 G 01/05/2004

1One control which a firm might use is a review by the compliance function after the event of how well the firm's conflicts of interest management processes worked in relation to an issue. This might be of particular use if there are significant differences between the recommendation on price and subsequent market behaviour. The review might examine how the recommendations of the firm on pricing were reflected in market dealings after the issue. If significant differences are observed, it may be appropriate to identify why, and what that discloses about the way in which the firm's systems and controls operated in relation to that offering. The frequency of any review is a matter for the firm, in the light of its business and structure.

Securities offerings: behaviour in breach of the Principles

COB 5.10.7 G 01/05/2004

(1)
1For the avoidance of doubt, the FSA considers that the following would each be a breach of the Principles referred to in COB 5.10.2 G, and a breach of COB 2.2.3 R:
1. (a)
  an allocation made as an inducement for the payment of excessive compensation in respect of unrelated services provided by the firm; for example, very high rates of commissions paid to the firm by an investment client, or an investment client providing very high volumes of business at normal levels of commission (which may also be a breach of COB 7.2 (Churning and switching));
2. (b)
  an allocation made to a senior executive or a corporate officer of an existing or potential corporate finance client, or of a listed company, in consideration for the future or past award of corporate finance business; and
3. (c)
  an allocation which is expressly or implicitly conditional upon the receipt of orders or the purchase of any other service from the firm by the investor, or any body corporate of which the investor is a corporate officer.
(2)
A firm's systems, controls and procedures should, therefore, be designed to prevent these sorts of behaviour.

COB 5 Annex 1 Warrants and derivatives risk warning notice (E)

E 01/08/2002

This notice is provided to you, as a private customer, in compliance with the rules of the Financial Services Authority (FSA). Private customers are afforded greater protections under these rules than other customers are and you should ensure that your firm tells you what this will mean to you. This notice cannot disclose all the risks and other significant aspects of warrants* and/or derivative* products such as futures*, options*, and contracts for differences* (* delete as appropriate). You should not deal in these products unless you understand their nature and the extent of your exposure to risk. You should also be satisfied that the product is suitable for you in the light of your circumstances and financial position. Certain strategies, such as a 'spread' position or a 'straddle', may be as risky as a simple 'long' or 'short' position.

Although warrants and/or derivative instruments can be utilised for the management of investment risk, some of these products are unsuitable for many investors. Different instruments involve different levels of exposure to risk and in deciding whether to trade in such instruments you should be aware of the following points. (Include or delete as appropriate).

1. Warrants

A warrant is a time-limited right to subscribe for shares, debentures, loan stock or government securities and is exercisable against the original issuer of the underlying securities. A relatively small movement in the price of the underlying security results in a disproportionately large movement, unfavourable or favourable, in the price of the warrant. The prices of warrants can therefore be volatile.

It is essential for anyone who is considering purchasing warrants to understand that the right to subscribe which a warrant confers is invariably limited in time with the consequence that if the investor fails to exercise this right within the predetermined time-scale then the investment becomes worthless.

You should not buy a warrant unless you are prepared to sustain a total loss of the money you have invested plus any commission or other transaction charges.

2. Off-exchange warrant transactions

Transactions in off-exchange warrants may involve greater risk than dealing in exchange traded warrants because there is no exchange market through which to liquidate your position, or to assess the value of the warrant or the exposure to risk. Bid and offer prices need not be quoted, and even where they are, they will be established by dealers in these instruments and consequently it may be difficult to establish what is a fair price.

Your firm must make it clear to you if you are entering into an off-exchange transaction and advise you of any risks involved.

3. Securitised derivatives

These instruments may give you [a time-limited right (Note 1)] [an absolute right (Note 2)] to acquire or sell one or more types of investment which is normally exercisable against someone other than the issuer of that investment. Or they may give you rights under a contract for differences which allow for speculation on fluctuations in the value of the property of any description or an index, such as the FTSE 100 index. In both cases, the investment or property may be referred to as the "underlying instrument".

These instruments often involve a high degree of gearing or leverage, so that a relatively small movement in the price of the underlying investment results in a much larger movement, unfavourable or favourable, in the price of the instrument. The price of these instruments can therefore be volatile.

These instruments have a limited life, and may (unless there is some form of guaranteed return to the amount you are investing in the product) expire worthless if the underlying instrument does not perform as expected.

You should only buy this product if you are prepared to sustain a [total loss (Note 3)] [substantial loss (Note 4)] [loss (Note 5)] of the money you have invested plus any commission or other transaction charges.

You should consider carefully whether or not this product is suitable for you in light of your circumstances and financial position, and if in any doubt please seek professional advice.

Notes (these notes are not part of the notice):

1 Use for instruments such as covered warrants where there is some form of exercise required by the investor.

2 Use for instruments such as linked notes, or some certificates where there is no form of exercise required by the investor.

3 Use for instruments such as covered warrants where the return payable to the investor is totally dependant upon the performance of the underlying instrument/s to which the product is linked and there is not another form of payment due to the investor (for example the repayment of capital).

4 Use for instruments such as linked notes where there is a form of return paid to the investor irrespective of the performance of the underlying instrument/s to which the product is linked, but the return is low.

5 Use for instruments such as linked notes where there is a form of return paid to the investor irrespective of the performance of the underlying instrument/s to which the product is linked, but the return is high but less than 100% of the amount paid for the product.

4. Futures

Transactions in futures involve the obligation to make, or to take, delivery of the underlying asset of the contract at a future date, or in some cases to settle the position with cash. They carry a high degree of risk. The 'gearing' or 'leverage' often obtainable in futures trading means that a small deposit or down payment can lead to large losses as well as gains. It also means that a relatively small movement can lead to a proportionately much larger movement in the value of your investment, and this can work against you as well as for you. Futures transactions have a contingent liability, and you should be aware of the implications of this, in particular the margining requirements, which are set out in paragraph 9.

5. Options

There are many different types of options with different characteristics subject to the following conditions.

Buying options:

Buying options involves less risk than selling options because, if the price of the underlying asset moves against you, you can simply allow the option to lapse. The maximum loss is limited to the premium, plus any commission or other transaction charges. However, if you buy a call option on a futures contract and you later exercise the option, you will acquire the future. This will expose you to the risks described under 'futures' and 'contingent liability investment transactions'.

Writing options:

If you write an option, the risk involved is considerably greater than buying options. You may be liable for margin to maintain your position and a loss may be sustained well in excess of the premium received. By writing an option, you accept a legal obligation to purchase or sell the underlying asset if the option is exercised against you, however far the market price has moved away from the exercise price. If you already own the underlying asset which you have contracted to sell (when the options will be known as 'covered call options') the risk is reduced. If you do not own the underlying asset ('uncovered call options') the risk can be unlimited. Only experienced persons should contemplate writing uncovered options, and then only after securing full details of the applicable conditions and potential risk exposure.

Traditional options:

Certain London Stock Exchange member firms under special exchange rules write a particular type of option called a 'traditional option'. These may involve greater risk than other options. Two-way prices are not usually quoted and there is no exchange market on which to close out an open position or to effect an equal and opposite transaction to reverse an open position. It may be difficult to assess its value or for the seller of such an option to manage his exposure to risk.

Certain options markets operate on a margined basis, under which buyers do not pay the full premium on their option at the time they purchase it. In this situation you may subsequently be called upon to pay margin on the option up to the level of your premium. If you fail to do so as required, your position may be closed or liquidated in the same way as a futures position.

6. Contracts for differences

Futures and options contracts can also be referred to as contracts for differences. These can be options and futures on the FTSE 100 index or any other index, as well as currency and interest rate swaps. However, unlike other futures and options, these contracts can only be settled in cash. Investing in a contract for differences carries the same risks as investing in a future or an option and you should be aware of these as set out in paragraphs 4 and 5 respectively. Transactions in contracts for differences may also have a contingent liability and you should be aware of the implications of this as set out in paragraph 9.

7. Off-exchange transactions in derivatives

It may not always be apparent whether or not a particular derivative is arranged on exchange or in an off-exchange derivative transaction. Your firm must make it clear to you if you are entering into an off-exchange derivative transaction.

While some off-exchange markets are highly liquid, transactions in off-exchange or 'non transferable' derivatives may involve greater risk than investing in on-exchange derivatives because there is no exchange market on which to close out an open position. It may be impossible to liquidate an existing position, to assess the value of the position arising from an off-exchange transaction or to assess the exposure to risk. Bid prices and offer prices need not be quoted, and, even where they are, they will be established by dealers in these instruments and consequently it may be difficult to establish what is a fair price.

8. Foreign markets

Foreign markets will involve different risks from the UK markets. In some cases the risks will be greater. On request, your firm must provide an explanation of the relevant risks and protections (if any) which will operate in any foreign markets, including the extent to which it will accept liability for any default of a foreign firm through whom it deals. The potential for profit or loss from transactions on foreign markets or in foreign denominated contracts will be affected by fluctuations in foreign exchange rates.

9. Contingent liability investment transactions

Contingent liability investment transactions, which are margined, require you to make a series of payments against the purchase price, instead of paying the whole purchase price immediately.

If you trade in futures contracts for differences or sell options, you may sustain a total loss of the margin you deposit with your firm to establish or maintain a position. If the market moves against you, you may be called upon to pay substantial additional margin at short notice to maintain the position. If you fail to do so within the time required, your position may be liquidated at a loss and you will be responsible for the resulting deficit.

Even if a transaction is not margined, it may still carry an obligation to make further payments in certain circumstances over and above any amount paid when you entered the contract.

Save as specifically provided by the FSA, your firm may only carry out margined or contingent liability transactions with or for you if they are traded on or under the rules of a recognised or designated investment exchange. Contingent liability investment transactions which are not so traded may expose you to substantially greater risks.

10. Limited liability transactions

Before entering into a limited liability transaction, you should obtain from your firm or the firm with whom you are dealing a formal written statement confirming that the extent of your loss liability on each transaction will be limited to an amount agreed by you before you enter into the transaction.

The amount you can lose in limited liability transactions will be less than in other margined transactions, which have no predetermined loss limit. Nevertheless, even though the extent of loss will be subject to the agreed limit, you may sustain the loss in a relatively short time. Your loss may be limited, but the risk of sustaining a total loss to the amount agreed is substantial.

11. Collateral

If you deposit collateral as security with your firm, the way in which it will be treated will vary according to the type of transaction and where it is traded. There could be significant differences in the treatment of your collateral depending on whether you are trading on a recognised or designated investment exchange, with the rules of that exchange (and the associated clearing house) applying, or trading off-exchange. Deposited collateral may lose its identity as your property once dealings on your behalf are undertaken. Even if your dealings should ultimately prove profitable, you may not get back the same assets which you deposited, and may have to accept payment in cash. You should ascertain from your firm how your collateral will be dealt with.

12. Commissions

Before you begin to trade, you should obtain details of all commissions and other charges for which you will be liable. If any charges are not expressed in money terms (but, for example, as a percentage of contract value), you should obtain a clear and written explanation, including appropriate examples, to establish what such charges are likely to mean in specific money terms. In the case of futures, when commission is charged as a percentage, it will normally be as a percentage of the total contract value, and not simply as a percentage of your initial payment.

13. Suspensions of trading

Under certain trading conditions it may be difficult or impossible to liquidate a position. This may occur, for example, at times of rapid price movement if the price rises or falls in one trading session to such an extent that under the rules of the relevant exchange trading is suspended or restricted. Placing a stop-loss order will not necessarily limit your losses to the intended amounts, because market conditions may make it impossible to execute such an order at the stipulated price.

14. Clearing house protections

On many exchanges, the performance of a transaction by your firm (or third party with whom he is dealing on your behalf) is 'guaranteed' by the exchange or clearing house. However, this guarantee is unlikely in most circumstances to cover you, the customer, and may not protect you if your firm or another party defaults on its obligations to you. On request, your firm must explain any protection provided to you under the clearing guarantee applicable to any on-exchange derivatives in which you are dealing. There is no clearing house for traditional options, nor normally for off-exchange instruments which are not traded under the rules of a recognised or designated investment exchange.

15. Insolvency

Your firm's insolvency or default, or that of any other brokers involved with your transaction, may lead to positions being liquidated or closed out without your consent. In certain circumstances, you may not get back the actual assets which you lodged as collateral and you may have to accept any available payments in cash. On request, your firm must provide an explanation of the extent to which it will accept liability for any insolvency of, or default by, other firms involved with your transactions.

[name of firm]

[on duplicate for signature by private customer]

I/We have read and understood the risk warning set out above.

Date

[Signature of the customer]

[Signature of joint account holder]

Note to firms

Paragraphs 1-15 may be deleted when they relate to particular kinds of business which will not be carried out with or for the customer.

This notice may be incorporated as part of a two-way customer agreement, but the customer must sign separately that he has read and understood the risk warnings.1

COB 5 Annex 2 Dealing in securities which may be subject to stabilisation (E)

E 01/12/2004

This statement complies with the rules of the Financial Services Authority (FSA)

[Name of Firm] or its representatives may, from time to time, recommend transactions in securities to you, or carry out such transactions on your behalf, where the price may have been influenced by measures taken to stabilise it.

You should read the explanation below carefully. This is designed to help you judge whether you wish your funds to be invested at all in such securities and, if you do, whether you wish:

(1) to be consulted before [Name of Firm] carries out any such transaction on your behalf; or

(2) to authorise [Name of Firm] to carry out any such transaction on your behalf without first having to consult you.

What is stabilisation?

Stabilisation enables the market price of a security to be maintained artificially during the period when a new issue of securities is sold to the public. Stabilisation may affect not only the price of the new issue but also the price of other securities relating to it.

The FSA allows stabilisation in order to help counter the fact that, when a new issue comes onto the market for the first time, the price can sometimes drop for a time before buyers are found.

Stabilisation is being carried out by a 'stabilisation manager' (normally the firm chiefly responsible for bringing a new issue to market). As long as the stabilising manager follows a strict set of rules, he is entitled to buy back securities that were previously sold to investors or allotted to institutions which have decided not to keep them. The effect of this may be to keep the price at a higher level than it would otherwise be during the period of stabilisation.

The Stabilisation Rules:

(1) limit the period when a stabilising manager may stabilise a new issue;

(2) fix the price at which he may stabilise (in the case of shares and warrants but not bonds); and

(3) require him to disclose that he may be stabilising but not that he is actually doing so.

The fact that a new issue or a related security is being stabilised should not be taken as any indication of the level of interest from investors, nor of the price at which they are prepared to buy the securities.

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