COB 5A Annex 1 Sales processes for stakeholder products

This Annex forms part of COB 5A.4.3 G and gives guidance on the standards and requirements to which a firm may have regard in designing a sales process for stakeholder products which meets the requirements of COB 5A.4.2 R.

General Standards - all sales

1.

A sales process for stakeholder products may allow the representative administering it to depart from scripted questions where this is desirable to enable the customer to better understand the points that need to be made provided this is compatible with the representative's competence and the degree of support offered by the firm's software and other systems. A software based system is more likely to provide an adaptable means of providing prompts and support for representatives which may accordingly support a more flexible sales process.

2.

Questions, statements and warnings provided to a customer should be short, simple and couched in plain language that customers will understand. Questions should address one issue at a time.

3.

The sales process should enable the customer to exit freely and without pressure at any stage and should make provision for the representative to terminate the process if at any stage it appears that there is no likelihood of any product being suitable for the customer (whether by reason of the affordability of products for the customer, the need to address other financial priorities (see below), the mis-match of risk or otherwise).

4.

Where necessary the sales process should incorporate procedures to allow uncertainties in the customer's answers to be addressed before proceeding further and should generally reflect caution about proceeding further if clarification or further information cannot be obtained during the process (this would be likely to be the case for example if a customer were unable to confirm whether he or she was eligible for membership of an occupational pension scheme).

Preliminary - all sales

5.

The following preliminary information and explanation should be given to the customer:

(a)

only basic advice will be given about stakeholder products;

(b)

stakeholder products are intended to provide a relatively simple and low-cost way of investing and saving;

(c)

the range of products on which the representative will give advice to that customer;

(d)

the customer will be asked a series of questions about his or her circumstances and needs and at the end of the procedure he or she may be recommended to acquire a stakeholder product;

(e)

that the assessment of whether a stakeholder product is suitable will be made without a detailed assessment of the customer's needs but will be based only upon the information disclosed during the questioning process; and

(f)

the customer's answers will be noted and that at the end of the process, if a recommendation to acquire a stakeholder product is made, the customer will be provided with a copy of the completed questionnaire.

6.

Following 5, the customer should be asked if he or she wishes to proceed and, if not, the sales process should cease.

Affordability - all sales

7.

If it appears that the customer will be likely to be unable to afford a stakeholder product, the sale should be terminated at that stage and the customer given an explanation together with a copy of the questions and answers completed to that point.

Financial Priorities and Debt - all sales

8.

A customer should be assessed to ascertain other possible financial priorities such as the need for insurance protection for self or dependents, the need for access to liquid cash to meet an emergency, or, a need to reduce a level of existing debt and, if appropriate, the customer should be given an unambiguous warning about the desirability of meeting those other priorities before making payments to a stakeholder product.

9.

A stronger warning about the desirability of addressing debt as a priority should be given if it appears that the customer is significantly indebted, and particularly where there is a strong indication that such debt commitments may render any new commitment unaffordable in the short-term. For this purpose a firm should consider using a threshold or indicator to decide whether a customer should be excluded on the basis of affordability. Examples may include where the customer has (a) annual unsecured debt repayments in excess of 20% of gross annual income or (b) four or more active forms of unsecured credit or (c) has consistently reached his overdraft limit. A firm should review its chosen indicator or threshold regularly to ensure that it reflects prevailing economic conditions and takes account of industry best practice.

10.

A firm should clearly explain the information it is seeking in respect of a customer's 'debt' and consider the use of a range of alternative words, such as 'loans', 'repayable student loans' 'borrowing' or 'other forms of credit', to ensure all relevant information is obtained. A firm may use a simple reckoner to assess customer debt but should be conscious of the nature of, and not give impression that they are providing anything more than, basic advice.

11.

After a firm has given either or both of the warnings mentioned in 8 and 9 above, the customer should be invited to consider whether the sales process should be terminated at that stage.

Saving and investment objectives - all sales (except establishing a stakeholder CTF)

12.

A customer's savings and investment objectives, including the period over which the customer wishes to save or invest, should be ascertained including whether:

(a)

early access to some or all of the amount saved or invested could be important;

(b)

the customer wishes to save or invest for retirement; or whether

(c)

the customer wants to accumulate a specific sum by a specific date.

13.

If the information obtained under 12 above indicates that the customer's objective:

(a)

is as described in 12 (c) then normally no CIS, linked life stakeholder product or topping up of a stakeholder CTF should be recommended; or

(b)

is to save or invest for the short term only or that early access to the whole accumulated sum may be important, then no CIS, linked life stakeholder product, stakeholder pension or topping up of a stakeholder CTF should normally be recommended.

Tolerance of risk - all sales

14.

If a customer is not, in any circumstances, willing to accept any risk of the capital value of an investment being reduced then normally no CIS, linked life stakeholder product, or stakeholder CTF should be recommended. However a firm may, if it is appropriate, explain the effect of inflation on long-term savings especially in relation to pensions and invite the customer to consider his attitude to risk in the light of that explanation.

15.

If a customer is willing to accept the risk of capital reduction in some circumstances but not others then, before any recommendation to acquire a CIS or linked life stakeholder product is made, the customer should be reminded of the other circumstances in which he or she is unwilling to accept risk to capital.

Stakeholder pensions

16.

A stakeholder pension should not be recommended and instead the customer should be advised to seek alternative or further advice if it appears that the customer:

(a)

has or will have access to an occupational pension scheme; or

(b)

is likely to view income in retirement from state benefits as sufficient; or

(c)

already has a pension to which he or she could make further contributions; or

(d)

wishes to retire within five years.

17.

In addition to providing the advice in 16, a firm may also want to advise the customer that there may be more beneficial courses of action than buying a stakeholder pension (for example joining an occupational pension scheme).

18.

A firm designing a sales process for use in the workplace may take account of the benefits offered by the employer. If a firm recommends a stakeholder pension on the basis of benefits provided by an employer then it should explain the basis of the recommendation to the customer and suggest that the customer seek advice if he or she has any concerns.

19.

A firm should design its processes with a view to addressing the risk that customers will fail to appreciate the significance of questions about their pension provision and should accordingly incorporate a range of questions and information designed to foster the customer's understanding of the issues and to elicit appropriate information.

20.

Customers should be told that a stakeholder pension is life-styled and what this means.

21.

A firm may provide a copy of the pension table specified in COB 6 Annex 1 R for the customer's reference but in doing so should also provide and explain the caveats and assumptions behind the table. A firm should make it clear that the decision on how much to invest is the customer's responsibility and that he should get further advice if has any concerns.

Child Trust Funds

22.

A firm is reminded of its obligation to provide a customer with the information relating to stakeholder CTFs that is specified in COB 6.5.40 (7)(a), COB 6.5.40 (7)(b), COB 6.5.40 (7)(d) and COB 6.5.40 (7)(e).

ISAs

23.

It should be ascertained whether the customer has already opened an ISA (whether a "maxi" or "mini" version) and if so whether it would be appropriate for the customer to open a non-ISA version of the same product.