COB TP 1 Transitional Rules for pre-N2 and ex-Section 43 firms at N216

1.0

Application

1.1

These transitional provisions apply to:

(a)

pre-N2 firms; and

(b)

ex-section 43 firms.

2.0

Purpose

2.1

G

The FSA is aware that the introduction of COB will impose an additional compliance burden on firms, even when there is an underlying continuity of policy. The FSA wishes to lighten that burden in a manner consistent with its regulatory objectives and the principles of good regulation under the Act. The following rules provide transitional relief which takes three distinct forms:

(a)

extra time provisions (ETPs) which, in practice, give firms additional time after commencement to complete their preparations for the impact of certain provisions in COB;

(b)

technical timing provisions (TTPs) which give relief from certain provisions in COB that require firms to fulfil obligations to customers at periodic intervals. TTPs postpone the impact of these provisions in COB in relation to periods that span N2; and

(c)

timeless (saving) provisions (TSPs) which give firms relief for an indefinite period after N2 from certain provisions in COB relating mainly to terms of business and client agreements COB 4.2 and from provisions in the Handbook generally (including COB) relating to client classification. TSPs allow firms to continue to use, or rely upon, documentation or compliance work that was undertaken in accordance with previous regulator rules in relation to existing clients at N2.

2.2

G

If a firm's permitted regulated activities are subject to one or more of the transitional provisions in COB , and were carried on before commencement, those regulated activities should be interpreted, where appropriate, as if they were authorised investment business before commencement.

2.3

G

GEN contains some technical transitional provisions that apply throughout the Handbook and which are designed to ensure a smooth transition at commencement. These include transitional provisions relevant to record keeping and notification rules.

2.4

G

For the avoidance of doubt, COB TP 1.2, COB TP 1.2 and COB TP 1.2 at COB TP 1.2 override paragraph 9 (Time starting before commencement) of the technical timing provisions in GEN.

2.5

G

SUP contains transitional provisions, which carry forward written concessions relating to pre-commencement provisions.

3.0

Continuity of contracts

3.1

G

The FSA is sometimes asked whether a firm should re-negotiate contracts to replace references to its authorisation status or regulatory provisions made under predecessor legislation with references to its status or regulatory provisions made under the Act . Clearly, whether a firm should renegotiate its contracts is a matter for the firm , which needs to be considered in the light of the effect of the contractual provision as a whole. As a general rule, unless the FSA has made particular requirements relating to such matters, the FSA would not expect to see this done for regulatory reasons. Firms may wish to consider whether they need appropriate professional advice.

3.2

G

Clearly, the interpretation of contractual provisions is a matter for the courts. However, where a firm continues, as a result of the grandfathering process, to enjoy permission which provides it with authority under the Act to carry on regulated activities substantially similar to the investment business it could carry on under its authorisation under predecessor legislation, the FSA would be surprised if a court were to conclude that updating a contractual provision was necessary to enable it to give effect to the intentions of the parties to the contract.

4.0

Definitions

4.1

R

In these transitional provisions the following words are to have the meaning given to them below:

"corresponding rule" means a rule of the previous regulator of a firm that is substantially similar in purpose and effect to the relevant provision in COB.

"section 43 business" means activities in respect of which the firm would have been an exempted person under section 43 of the Financial Services Act 1986.

"pre-N2firm" means:

(a)

a firm which immediately before commencement was authorised under the Financial Services Act 1986 to carry on investment business in the United Kingdom by virtue of its membership of:

(i)

IMRO;

(ii)

PIA; or

(iii)

SFA;

(b)

a firm which immediately before commencement held an authorisation granted directly by the FSA under the Financial Services Act 1986 to carry on investment business in the United Kingdom immediately before commencement; or

(c)

an employee of such a firm in (a) or (b), including any of its appointed representatives (as defined under section 44 of the Financial Services Act 1986);

but does not include:

(d)

an ex-RPB firm; or

(e)

a firm in relation to its section 43 business.

"transitional period" means the period starting on commencement and finishing on midnight on 30 June 2002, except where otherwise specified.

1.0

Extra time provisions

1.1

ETP1

R

Transitional relief

(1) commencement to 30 June 2002, except as specified in (2) and (3) below;

(2) for COB 9.3.105R, from commencement to 31 December 2002;

(3) for COB 3.9.10 R, COB 6.1 to COB 6.8, until a date yet to be specified.14

commencement5

(1)

A pre-N2 firm will not contravene any of the provisions labelled ETP1 in COB TP 1.3 to the extent that, on or after commencement, it is able to demonstrate that it has complied with the corresponding rule of its previous regulator or, where applicable, the relevant former statutory requirement, subject to any modification, wherever appropriate, to take account of the passing of the Act.14

(2)

Paragraph (1) does not apply to the following:

(a)

(from 1 September 2002) COB 6.1.1 (5) to COB 6.1.1 (6) (Application);

(b)

(from 1 September 2002) COB 6.5.50 to COB 6.5.52 (Life policies: requests for quotations for surrender values);

(c)

(from 1 September 2002) COB 6.5.53 to COB 6.5.56 (Open market option).

(d)

(from 1 August 2002) COB 6.5.40 (3)(k) (Further information for life policies, schemes, insurance or equity ISAs, PEPs and stakeholder pensions);

(e)

(from 1 August 2002) COB 6.5.8 to COB 6.5.9 (Stakeholder pension schemes: decision trees);7

(f)

(from 6 April 2003) COB 6.6.51 (b) (Rate of return assumptions), COB 6.6.83 (Assumptions for pension annuities), COB 6.6.84 (Assumptions for pension annuities), COB 6.6.90 (3) and COB 6.6.91 (Required assumptions);8

(g)

(from 1 November 2002) COB 6.5.40 (3)(m) (Further information for life policies, schemes, insurance or equity ISAs, PEPs and stakeholder pensions);119

(h)11

(from 1 April 2004) COB 6.1.1A (Application of COB 6.2.26);11

(i)11

(from 1 April 2004) COB 6.2.26 (Requirement to offer a simplified prospectus for section 264 schemes); and11

(j)11

(from 1 April 2004 for a mini cash ISA for the tax year 2004/2005 and later tax years) COB 6.5.42 (14) (Information requirements for cash deposit ISAs, friendly society tax-exempt policies, traded life policies and broker funds);1112

(k)12

(from 9 October 2004) any rule in COB inserted or amended by the Distance Marketing Directive Instrument 2004 and, in the case of an amendment, to the extent of such amendment;1213

(l)13

(from 31 October 2004) any rule in COB inserted or amended by the Long-Term Care Insurance Contracts Instrument 2004 and, in the case of an amendment, to the extent of such amendment.13

1.1A

ETP1 (for COB 6.1 - COB 6.8)

G

(1)

The FSA is extending transitional relief for COB 6.1 - COB 6.8 and various other rules in COB, pending the outcome of the review of product disclosure and polarisation. As each of those reviews are completed, the transitional provisions will be revoked or modified to provide an appropriate transition into the new regime. Firms will be given notice of any revocation or modification as part of consultation on the new regime.

commencement until a date yet to be specified.

875

(2)

Interim changes to these rules may not benefit from this transitional relief.

1.2

ETPs 1 to 9

TTPs 1 to 3

TSPs 1 to 7

G

It is for a pre-N2 firm to satisfy itself that it has complied with the corresponding rule of its previous regulator or, where applicable, the relevant former statutory requirement. In order to benefit from the relief, a firm must ensure that the rule of its previous regulator which it proposes to comply with is substantially similar to the provision in COB to which it relates.

for ETP 1 as for COB TP 1.1

for ETP 2 to 9 and TTP 1 to 3 commencement to 30 June 2002

commencement5

For the assistance of firms , the FSA has compiled tables of derivations indicating the rules of a firm's previous regulator that correspond to the provision in COB being transitioned. Firms may wish to refer to these tables but in doing so should understand that they are not intended to be exhaustive and are produced merely as a guide.

Firms are advised that should they wish to take advantage of the transitional provisions set out in this section, the onus is on the firm to be able to demonstrate that in any given case it has in fact complied with the corresponding rules of its previous regulator or, as the case may be, the former statutory requirement.

1.3

ETPs 1 to 9

TTPs 1 to 3

TSPs 1 to 7

G

Firms will have noted from the wording of COB TP 1.1 that they should treat the corresponding rules of their previous regulator as modified to the extent necessary to ensure that the provision can operate effectively notwithstanding the enactment of the Act. Firms will need to adopt a common sense approach in interpreting the corresponding rules of their previous regulator and modify them accordingly. For example, references in such rules to a firms previous regulator should be read as if they referred to the FSA. Other modifications may not be as straightforward, such as where the concept of an indirect customer is not carried forward under the new legislation. In cases of difficulty, firms are encouraged to approach the FSA for its views.

for ETP 1 as for COB TP 1.1

for ETP 2 to 9 and TTP 1 to 3 commencement to 30 June 2002

indefinitely for TSPs

commencement5

1.4

ETP2

[deleted]

1

1.5

ETP1

G

Expired16

1.6

ETP3

R

Expired16

1.7

ETP3

G

Expired16

1.8

ETP4

R

Expired

1.9

ETP4

G

Expired16

1.10

ETP5

R

Expired16

1.11

ETP6

R

Expired16

1.12

ETP7

R

Client Money

An ex-section 43 firm need not comply with the provisions labelled ETP7 in Table COB TP 1.3 in relation to its section 43 business until the expiry of a period of 12 months following commencement, provided it continues to comply with the requirements of the Grey Paper (version June 1999), as published by the FSA, relating to the segregation of money and other assets belonging to counterparties.

until a date yet to be specified

commencement54

1.13

ETP8

R

Expired16

1.14

ETP8

G

Expired16

1.15

ETP9

R

Group business disapplication for ex-IMRO firms and ex-SFA firms

Commencement until a date yet to be specified

commencement

(1)

This paragraph applies to a pre-N2 firm which immediately before commencement was a member of IMRO or SFA.

(2)

COB 1.3.1 R applies to an ex-IMRO firm in (1) as if it provided as follows:

"COB applies to firms with respect to the carrying on of:

(1)

all regulated activities except:

(a)

to the extent that a provision of COB provides for a narrower application; and

(b)

activities which fall within article 69 of the Regulated Activities Order (Groups and joint enterprises), notwithstanding, in respect of article 69, article 4(4) of that Order (Specified activities: general: investment firms); and

(2)

unregulated activities to the extent specified in any provision of COB.".

(3)

COB 1.3.1 R applies to an ex-SFA firm in (1) as if it provided as follows:

"COB applies to firm with respect to the carrying on of:

(1)

all regulated activities except:

(a)

to the extent that a provision of COB provides for a narrower application: and

(b)

in relation to all of COB other than COB 7.13 (Personal account dealing) and the rules in COB requiring records to be made and retained, activities which fall within article 69 of the Regulated Activities Order (Groups and joint enterprises), notwithstanding, in respect of article 69, article 4(4) of that Order (Specified activities: general: investment firms); and

(2)

unregulated activity to the extent specified in any provision of COB.".

542

1.16

ETP9

G

The purpose of ETP 9 is to carry forward for ex-IMRO firms and ex-SFA firms the former regulatory treatment of intra-group investment business, which is carried on in conjunction with investment business for third parties. The effect of that treatment was that under the IMRO rulebook the rules do not apply to the business done for group companies which fell within the group business exemption in paragraph 18 of Schedule 1 to the Financial Services Act 1986. The effect of that treatment under the SFA rulebook was that with the exception of the rules relating to compliance (of which the personal account dealing and record keeping rules are carried forward in COB) the conduct of business rules did not apply to the business done for group companies that fell within the group business exemption. Effectively it was only the non-group third party element of such firms' investment business that was subject to the relevant rules. COB would not have carried forward this group business disapplication for such firms, were it not for the introduction of ETP 9.

Note that during the transitional period the FSA will be consulting on its proposals how this issue should be treated in COB after 30 June 2002.

commencement until a date yet to be specified16

commencement42

2.0

Technical timing provisions

2.1

TTP1

R

Expired16

2.2

TTP2

R

Expired16

2.3

TTP3

R

Expired16

2.4

TTP1, 2 and 3

G

Expired16

3.0

Timeless (saving) provisions

3.1

TSP1

R

Confirmation of compliance and approval

A pre-N2 firm will not contravene any of the provisions labelled TSP1 in Table COB TP 1.3 to the extent that it is able to demonstrate that, on or after commencement, it has carried out the confirmation exercise referred to in COB 3.6.1 R (Confirmation of compliance), for an investment advertisement issued or approved before commencement, in accordance with the corresponding rule of its previous regulator.

indefinitely

commencement

3.2

TSP2

R

Terms of business and client agreements

(1)

Subject to (2) and (3), a pre-N2 firm will not contravene any of the provisions in Table COB TP 1.3 labelled TSP2 to the extent that, on or after commencement, it is able to demonstrate that it has continued to use, or rely upon, terms of business (including a client agreement), or a soft commission agreement , given to, or made with, a client before the end of the transitional period in accordance with the corresponding rule of its previous regulator.

indefinitely

commencement

(2)

If the basis on which a pre-N2 firm conducts, or proposes to conduct, its designated investment business for a client changes after commencement in a way not contemplated by the original terms of business and where the original terms of business allow the firm to amend its terms without the customer's consent, the firm must provide the client with amended terms of business in accordance with COB 4.2.13 R (Amendment of terms of business).

(3)

A pre-N2 firm must take reasonable steps to ensure that a private customer to whom it has provided terms of business (including a client agreement ) before commencement is notified in writing of the matters set out in COB 4.2.15E (2), (21) and (22) as soon as practicable after commencement.

1

3.3

TSP2

G

(1)

Firms should note that COB 4.2 also benefits from an ETP1 as set out in COB TP 1.1. The purpose of this is to allow firms additional time, after commencement , to amend their terms of business for new clients taken on after N2.

indefinitely

commencement

(2)

Where a pre-N2 firm has started, but has not concluded, negotiating terms of business with a client before commencement, it may rely on COB TP 1.1 even if the terms of business are not agreed until after commencement.

(3)

COB TP 1.3 does not require the firm to provide a client with amended terms of business where the change in the terms was contemplated in the original terms of business.

(4)

Further to Principle 7 (Communications with clients) of the FSA's Principles for Business, a firm should not refuse a customer's reasonable request for new terms of business to reflect the new regime applicable under the Act.

(5)

A pre-N2 firm will comply with COB TP 1.1 if the firm gives written notification to the private customer as part of the firm's next routine communication to the customer. In most circumstances, the FSA expects that a period of between three and six months from commencement should give sufficient time for a pre-N2 firm to notify a private customer under this rule. For example, a pre-N2-firm might notify under COB TP 1.1 much sooner than six months after commencement when it provides private customers with risk warnings in respect of warrants and derivatives or non-readily realisable investments (COB 5.4 Customers' understanding of risk).

(6)

A pre-N2 firm's only routine communication with a private customer might occur more that six months after commencement. For example, a long-term insurer providing customers with the annual statement might only communicate with some customers (particularly 'dormant' customers) annually or less frequently. In such limited circumstances, a period of up to six months might be too restrictive an interpretation of the requirement to take reasonable steps to notify private customers as soon as practicable after commencement. This is exceptional and a period of up to six months from commencement will be sufficient in most cases.

(7)

The FSA wishes to minimise any unnecessary repetition or duplication of notifications flowing from COB TP 1.1. A pre-N2 firm acting under COB TP 1.1 may reasonably fulfil its notification obligation to a private customer through the pre-N2 firm's agent or intermediary who services the private customer and is authorised by the FSA, or through the pre-N2 firm'sappointed representative who services the private customer and for whom the pre-N2 firm is responsible as principal under section 39 of the Act (Exemption). But a pre-N2 firm will retain responsibility for fulfilling the notification requirement in COB TP 1.1.

(8)

COB TP 1.1 requires notification in writing. This may be done by using electronic media, subject to COB 1.8 (Application to electronic media). The requirement will not be discharged, however, simply by publishing a notice in a national or local newspaper.

5

3.4

TSP3

R

Know your customer and suitability

indefinitely (as regards (1) and (2))

commencement

(1)

Subject to (2), a pre-N2 firm will not contravene any of the provisions labelled TSP3 in Table COB TP 1.3 to the extent that it is able to demonstrate that, on or after commencement, it has continued to use, or rely upon, a record of a private customer's personal and financial circumstances made in accordance with the corresponding rules of its previous regulator, and in doing so has had regard to the guidance set out in COB 5.2.6 G.

(2)

The relief in (1) will apply only so long as there is no relevant change in the customer's personal and financial circumstances.

(3)

Paragraph (2) applies only for relevant changes of which a firm ought reasonably to be aware assuming compliance with COB 5.2.5 R (Requirement to know your customer)

indefinitely from 1 January 2003 (as regards (3))10

3.5

TSP4

R

Suitability and customers' understanding of risk

A pre-N2 firm will not contravene any of the provisions labelled TSP4 in Table COB TP 1.3 to the extent that it is able to demonstrate that, on or after commencement, it uses, or relies upon, a suitability letter or, as the case may be, a risk warning or disclosure, given to a customer in accordance with the corresponding rule of its previous regulator, in relation to a transaction or series of transactionsexecuted or arranged before the expiry of the transitional period.

indefinitely

commencement

3.6

TSP4

G

Firms should note that the requirements in COB 5.2 and COB 5.3 relating to the production of suitability letters and risk warnings also benefit from an ETP1 provision.

indefinitely

commencement

3.7

TSP5

R

Scheme documents for an unregulated collective investment scheme

A pre-N2 firm that is an operator will not contravene any of the provisions labelled TSP5 in Table COB TP 1.3 to the extent that it is able to demonstrate that, on or after commencement, it has continued to use, or rely upon, a scheme document provided to a participant before the expiry of the transitional period, in accordance with the corresponding rule of its previous regulator.

indefinitely

commencement

3.8

TSP6

R

Notice and consents

(1)

A pre-N2 firm will not contravene any of the provisions labelled TSP6 in Table COB TP 1.3 to the extent that it is able to demonstrate that, on or after commencement, it has continued to use or rely upon a valid notice or consent which, before the expiry of the transitional period, was given to, given by or obtained from a client or counterparty in accordance with the corresponding rule of its previous regulator, or, where applicable, the relevant former statutory instrument.

indefinitely

commencement5

(2)

A pre-N2 firm will not contravene any of the provisions labelled TSP in the Table COB TP 1.3 to the extent that it is able to demonstrate that, on or after commencement, its auditors have provided its previous regulator with written confirmation of the type required by COB 9.3.42R (2)(a) in accordance with the corresponding rule of its previous regulator.

1

3.9

TSP7

R

Cancellation

The Financial Services (Cancellation) Rules 1994 and the Financial Services (Non-Life Cancellation) Rules 1997 continue to apply in respect of investment agreements, as defined in section 44(9) of the Financial Services Act 1986, entered into before commencement.

indefinitely

commencement

3.10

TSP7

G

COB 6.7 (Cancellation and withdrawal) applies in the case of an investment agreement entered into before commencement but which, on or after that date, is subsequently varied.

indefinitely

commencement