COBS 1 Annex 1 Application (see COBS 1.1.2R)

1.

Eligible counterparty business

1.1

10

R

The COBS provisions shown below do not apply to eligible counterparty business.2

COBS provision

Description

COBS 2 (other than COBS 2.4)

Conduct of business obligations

COBS 4 (other than COBS 4.4.1 R and COBS 4.4.2 G)1

Communicating with clients including financial promotions

COBS 6.1

Information about the firm, its services and remuneration

COBS 8

Client agreements

COBS 10

Appropriateness (for non-advised services)

COBS 11.2 , COBS 11.3 and COBS 11.6

Best execution, client order handling and use of dealing commission

COBS 12.3.1 R to COBS 12.3.3 R

Labelling of non-independent research

COBS 14.3

Information about designated investments

COBS 16

Reporting information to clients

[Note: article 24(1) of MiFID]

2.

Transactions between an MTF operator and its users

2.1

10

R

The COBS provisions in paragraph 1.1R and COBS 11.4 (Client limit orders) do not apply to a transaction between an operator of an MTF and a member or participant in relation to the use of the MTF.

[Note: article 14(3) of MiFID]

3.

Transactions concluded on an MTF

3.1

10

R

The COBS provisions in paragraph 1.1R and COBS 11.4 (client limit orders) do not apply to transactions concluded under the rules governing an MTF between members or participants of the MTF2. However, the member or participant must comply with those provisions in respect of its clients if, acting on its clients behalf, it is executing their orders on an MTF.

[Note: article 14(3) of MiFID]

4.

Transactions concluded on a regulated market

4.1

10

R

In relation to transactions concluded on a regulated market2, members and participants of the regulated market are not required to apply to each other the COBS provisions in paragraph 1.1R and COBS 11.4 (client limit orders). However, the member or participant must comply with those provisions in respect of its clients if, acting on its clients behalf, it is executing their orders on a regulated market.

[Note: article 42(4) of MiFID]

5.

Consumer credit products

5.1

10

R

If a firm, in relation to its MiFID business, offers an investment service as part of a financial product that is subject to other provisions of EU5 legislation or common European standards related to credit institutions and consumer credits with respect to risk assessments of clients and/or information requirements, that service is not subject to the rules in this sourcebook that implement Article 19 of MiFID.

[Note: article 19(9) of MiFID]

5.2

10

G

This exclusion for consumer credit products is intended to apply on a narrow basis in relation to cases in which the investment service is a part of another financial product. It does not apply where the investment service is the essential or leading part of the financial product. It also does not apply where the service provided is a combination of an investment service and an ancillary service (for example, granting a credit for the execution of an order where the credit is instrumental to the buying or the selling of a financial instrument.) The exclusion also does not apply in relation to the sale of a financial instrument for the purpose of enabling a client to invest money to repay his obligations under a loan, mortgage or home reversion1.

6. 10

Use of third party processors in life insurance mediation activities

6.12

10

R

If a firm (or its appointed representative or, where applicable, its tied agent) outsources insurance mediation activities to a third party processor:

2

(1)

the firm must accept responsibility for the acts and omissions of that third party processor conducting those outsourced activities; and

2

(2)

any COBSrule requiring the third party processor's identity to be disclosed to clients must be applied as a requirement to disclose the firm's identity;

2

unless the third party processor is advising on investments.

7. 10

Modified meaning of regulated activities for UK AIFMs and UK UCITS management companies 7

7.17

10

R

In determining whether a provision in COBS applies to a UK AIFM or a UK UCITS management company, an activity carried on by the firm which would be a regulated activity but for article 72AA (Managers of UCITS and AIFs) of the Regulated Activities Order, must be treated as a regulated activity carried on by the firm.7

11 8.

PRIIPs Regulation

118.1

R

The general application rule is modified so that a firm will not be subject to COBS to the extent that it would be contrary to the United Kingdom’s obligations in respect of the PRIIPs Regulation.

1.

EEA territorial scope rule: compatibility with European law

1.1

10

R

(1)

The territorial scope of this sourcebook is modified to the extent necessary to be compatible with European law (see Part 3 for guidance on this).

(2)

This rule overrides every other rule in this sourcebook.

1.2

10

R

In addition to the EEA territorial scope rule, the effect of the Electronic Commerce Directive on territorial scope is applied in the fields covered by the 'derogations' in the Annex to that Directive other than the 'insurance derogation' in the fourth indent (see paragraph 7.3 of Part 3 for guidance on this).

[Note: article 3(3) of, and Annex to, the Electronic Commerce Directive]

2.

Business with UK clients from overseas establishments

2.1

10

R

(1)

This sourcebook applies to a firm which carries on business with a client in the United Kingdom from an establishment overseas.

(2)

But the sourcebook does not apply to those activities if the office from which the activity is carried on were a separate person and the activity:

(a)

would fall within the overseas persons exclusions in article 72 of the Regulated Activities Order; or

(b)

would not be regarded as carried on in the United Kingdom.

2.2

10

G

One of the effects of the EEA territorial scope rule is to override the application of this sourcebook to the overseas establishments of EEA firms in a number of cases, including circumstances covered by MiFID, the Distance Marketing Directive or the Electronic Commerce Directive. See Part 3 for guidance on this.

1.

The main extensions and restrictions to the general application rule

1.1

10

G

The general application rule is modified in Parts 1 and 2 2of Annex 1 and in certain chapters of the Handbook. The modification may be an extension of this rule. For example, COBS 4 (Communicating with clients, including financial promotions) has3 extended the application of the rule.

1.2

10

G

The provisions of the Single Market Directives and other directives also extensively modify the general application rule, particularly in relation to territorial scope. However, for the majority of circumstances, the general application rule is likely to apply.

2.

The Single Market Directives and other directives

2.1

10

G

This guidance provides a general overview only and is not comprehensive.

2.2

10

G

When considering the impact of a directive on the territorial application of a rule, a firm will first need to consider whether the relevant situation involves a non-UK element. The EEA territorial scope rule is unlikely to apply if a UKfirm2 is doing business in a UKestablishment for a client located in the United Kingdom in relation to a United Kingdom product. However, if there is a non-UK element, the firm should consider whether:2

2

(1)

it is subject to the directive (in general, directives only apply to UK firms and EEA firms, but the implementing provisions may not treat non-EEA firms more favourably than EEA firms);

2

(2)

the business it is performing is subject to the directive; and

2

(3)

the particular rule is within the scope of the directive.

2

If the answer to all three questions is ‘yes’, the EEA territorial scope rule may change the effect of the general application rule.

2.3

10

G

When considering a particular situation, a firm should also consider whether two or more directives apply.

3.

MiFID: effect on territorial scope

3.1

10

G

PERG 13 contains general guidance on the persons and businesses to which MiFID applies.

3.2

10

G

This guidance concerns the rules within the scope of MiFID including those rules which are in the same subject area as the implementing rules. A rule is within the scope of MiFID if it is followed by a ‘Note:’ indicating the article of MiFID or the MiFID implementing Directive which it implements.

3.3

10

G

For a UK MiFID investment firm, rules in this sourcebook that are within the scope of MiFID generally apply to its MiFID business carried on from an establishment in the United Kingdom. They also generally apply to its MiFID business carried on from an establishment in another EEA State, but only where that business is not carried on within the territory of that State. (See articles 31(1) and 32(1) and (7) of MiFID)

3.4

10

G

For an EEA MiFID investment firm, rules in this sourcebook that are within the scope of MiFID generally apply only to its MiFID business if that business is carried on from an establishment in, and within the territory of, the United Kingdom. (See article 32(1) and (7) of MiFID)

3.5

10

G

However, the rules on investment research and non-independent research ( COBS 12.2 and 12.3) and the rules on personal transactions (COBS 11.7) apply on a "home state" basis. This means that they apply to the establishments of a UK MiFID investment firm in the United Kingdom and another EEA State and do not apply to an EEA MiFID investment firm.

4.

Insurance Mediation Directive : effect on territorial scope

4.1

10

G

The Insurance Mediation Directive's scope covers most firms carrying on most types of insurance mediation. The rules in this sourcebook within the Directive's scope are those relating to life policies that require the provision of pre-contract information or the provision of advice on the basis of a fair analysis. The rules implementing the minimum information and other requirements in articles 12 and 13 of the Directive are set out in COBS 7 (Insurance mediation) and COBS 9 (Suitability (including basic advice)).

4.2

10

G

In the FCA's view, the responsibility for these minimum requirements rests with the Home State, but a Host State is entitled to impose additional requirements within the Directive's scope 2in the 'general good'. Accordingly, the general rules on territorial scope are modified so that:

(1)

for a UK firm providing passported activities through a branch2in another EEA State under the Directive, 2the rules implementing the Directive's minimum requirements apply but the territorial scope of the 2additional rules within the Directive's scope is not modified;2

(2)

for an EEA firm providing passported activities under the Directive in the United Kingdom, the rules implementing the Directive's minimum requirements do not apply, but the additional rules within the Directive's scope have their unmodified territorial scope 2unless the Home State imposes measures of like effect. (See recital 19 and article 12(5) of the Insurance Mediation Directive)

5.

Solvency II Directive: effect on territorial scope 9

5.1

10

G

The Solvency II Directive's9 scope covers long-term insurers. The rules in this sourcebook within the Directive's scope are the cancellation rules3(COBS 15)1 and those rules requiring the provision of pre-contract information or information during the term of the contract concerning the insurer or the contract of insurance3. The Directive specifies minimum information and cancellation requirements and permits EEA States to adopt additional information requirements that are necessary for a proper understanding by the policyholder3of the essential elements of the commitment.

5.2

10

G

If the State of the commitment is an EEA State, the Directive provides that the applicable information rules and cancellation rules shall be laid down9 by that state. Accordingly, if the State of the commitment is the United Kingdom, the relevant rules in this sourcebook apply. Those rules do not apply if the State of the commitment is another EEA State. The territorial scope of other rules3, in particular the financial promotion rules, is not affected since the Directive explicitly permits EEA States to apply rules, including advertising rules, in the 'general good'. (See articles 156, 180, 185 and 186 of the Solvency II Directive)9

6.

Distance Marketing Directive: effect on territorial scope

6.1

10

G

In broad terms, a firm is within the Distance Marketing Directive's scope when conducting an activity relating to a distance contract with a consumer. The rules in this sourcebook within the Directive's scope are those requiring the provision of pre-contract information, the cancellation rules (COBS 15)1 and the other specific rules implementing the Directive contained in COBS 5 (Distance communications).

6.2

10

G

In the FCA's view, the Directive places responsibility for requirements within the Directive's scope on the Home State except in relation to business conducted through a branch, in which case the responsibility rests with the EEA State in which the branch is located (this is sometimes referred to as a 'country of origin' or ‘country of establishment’ basis). (See article 16 of the Distance Marketing Directive)

6.3

10

G

This means that relevant rules in this sourcebook will, in general, apply to a firm conducting business within the Directive's scope from an establishment in the United Kingdom (whether the firm is a national of the UK or of any other EEA or non-EEA state).

6.4

10

G

Conversely, the territorial scope of 2the relevant rules in this sourcebook 2is modified as necessary so that they do 2not apply to a firm conducting business within the Directive's scope from an establishment in another EEA state if the firm is a national of the United Kingdom or of any other EEA state.

6.5

10

G

In the FCA's view:

(1)

the 'country of origin' basis of the Directive is in line with that of the Electronic Commerce Directive; (See recital 6 of the Distance Marketing Directive)

(2)

for business within the scope of both the Distance Marketing Directive and the Solvency II Directive,9 the territorial application of the Distance Marketing Directive takes precedence; in other words, the rules requiring pre-contract information and cancellation rules (COBS 15)1 derived from the Solvency II Directive9 apply on a 'country of origin' basis rather than being based on the State of the commitment;9 (See articles 4(1) and 16 of the 2Distance Marketing Directive2 )

(3)

for business within the scope of both the Distance Marketing Directive and the Insurance Mediation Directive, the minimum information and other requirements in the Insurance Mediation Directive continue to be those applied by the 'Home State ', but the minimum requirements in the Distance Marketing Directive and any additional pre-contract information requirements are applied on a 'country of origin' basis. (The basis for this is that the Insurance Mediation Directive1 was adopted after the Distance Marketing Directive1 and is not expressed to be subject to it.)

7.

Electronic Commerce Directive: effect on territorial scope

7.1

10

G

The Electronic Commerce Directive's scope covers every firm carrying on an electronic commerce activity. Every rule in this sourcebook is within the Directive's scope.

7.2

10

G

A key element of the Directive is the ability of a person from one EEA state to carry on an electronic commerce activity freely into another EEA state. Accordingly, the territorial application of the rules in this sourcebook is modified so that they apply at least 2to a firm carrying on an electronic commerce activity from an establishment in the United Kingdom with or for a person in the United Kingdom or another EEA state. Conversely, a firm that is a national of the UK or another EEA State, 2carrying on an electronic commerce activity from an establishment in another EEA State with or for a person in the United Kingdom need not comply with the rules in this sourcebook. (See article 3(1) and (2) of the Electronic Commerce Directive)

7.3

10

G

The effect of the Directive on this sourcebook is subject to the 'insurance derogation', which is the only ‘derogation’ in the Directive that the FCA has adopted for this sourcebook. The derogation applies to an insurer that is authorised under and carrying on an electronic commerce activity within the scope of the Solvency II Directive9 and permits EEA States to continue to apply their advertising rules in the 'general good'. Where the derogation applies, the financial promotion rules continue to apply for incoming electronic commerce activities (unless the firm's 'country of origin' applies rules of like effect) but do not apply for outgoing electronic commerce activities. (See article 3(3) and Annex, fourth indent of the Electronic Commerce Directive; Annex to European Commission Discussion Paper MARKT/2541/03)

7.4

10

G

In the FCA's view, the Directive's effect on the territorial scope of this sourcebook (including the use of the 'insurance derogation'):

(1)

is in line with the Distance Marketing Directive; and

(2)

overrides that of any other Directive discussed in this Annex 2to the extent that it is incompatible.

7.5

10

G

The 'derogations' in the Directive may enable other EEA States to adopt a different approach to the United Kingdom in certain fields. (See recital 19 of the 2Insurance Mediation Directive2, recital 6 of the 2Distance Marketing Directive2, article 3 and Annex of the Electronic Commerce Directive)

8.

Investor Compensation Directive

8.1

10

G

(1)

The Investor Compensation Directive generally requires MiFID investment firms to belong to a compensation scheme established in accordance with the Directive. The rules in this sourcebook that implement the Directive are those (i) requiring MiFID investment firms, including their branches, to make available specified information about the compensation scheme to which they belong and specifying the language in which such information must be provided (COBS 6.1.16 R3) and (ii) restricting mention of the compensation scheme in advertising to factual references (COBS 4.2.5 G).

(2)

In the FCA's view, these matters are a Home State responsibility although a Host State may continue to apply its own rules in the 'general good'. Accordingly, these rules apply to the establishments of a UK MiFID investment firm in the United Kingdom and another EEA State but also apply in accordance with 2 their standard territorial scope 2 to an EEA MiFID investment firm providing services in the UK2 unless its Home State applies rules of like effect.

9.

UCITS Directive: effect on territorial scope

9.1

10

G

The UCITS Directive covers undertakings for collective investment in transferable securities (UCITS)6meeting the requirements of the Directive, and their management companies6 and depositaries.6The rules in this sourcebook within the Directive's scope (all of which will apply to a management company)6 are those in:6

6(1)

COBS 2.1 (Acting honestly, fairly and professionally);

6(2)

COBS 2.3 (Inducements);

6(3)

COBS 4.2.1 R (The fair, clear and not misleading rule);

6(4)

COBS 4.3.1 R (Financial promotions to be identifiable as such);

6(5)

COBS 4.13 (UCITS);

6(6)

COBS 11.2 (Best execution);

6(7)

COBS 11.3 (Client order handling);

6(8)

COBS 11.7 (Personal account dealing);

6(9)

COBS 14 (Providing product information to clients) relating to the provision of key investor information by the management company (in addition to applying to a management company, COBS 14.2 also applies to an ICVC that is a UCITS scheme); and

6(10)

COBS 16.2 (Occasional reporting).

69.1A

10

G

The majority of the COBSrules referred to in paragraph 9.1 are rules of conduct which each EEA State must draw up under article 14.1 of the UCITS Directive which management companies authorised in that State must observe at all times. The exceptions are COBS 4 and COBS 14 in so far as they relate to a UCITS scheme, which form part of the FCA'sfund application rules and which are the responsibility of the UCITS Home State (for a UCITS scheme, the FCA - see COLL 12.3.5 R (COLL fund rules under the management company passport: the fund application rules) and article 19 of the UCITS Directive).

69.1B

10

G

Where a management company is providing collective portfolio management services for a UCITS established in a different EEA State, responsibility for its compliance with the applicable rules of conduct drawn up under article 14 will generally be for the management company'sHome State, but when a branch is established it will be the responsibility of the Host Member State (UCITS Home State) (see articles 17(4) and 17(5) of the UCITS Directive).

69.1C

10

G

Under the UCITS Directive certain Host State marketing and MiFID-specific rules might also apply to a management company providing collective portfolio management services for a UCITS established in a different EEA State. Consequently, an EEA UCITS management company should note that, under COBS, certain of the FCA'srules apply to it, including the financial promotion rules. COBS 4.13 (UCITS) is concerned with marketing communications for UCITS schemes and EEA UCITS schemes.

69.1D

10

G

EEA UCITS management companies should be aware that there is a special narrower application of COBS for scheme management activity provided for by COBS 18.5 (Residual CIS operators, UCITS management companies and AIFMs8).

9.2

G

[deleted]6

9.3

10

G

The Directive does not affect the territorial scope of rules as they apply to an intermediary (that is not a management company)6 selling units of6 a UCITS.6

[Note: articles 12, 14, 17, 18, 19 and 94 of the UCITS Directive]6

7 10.

10

AIFMD: effect on territorial scope

710.1

G

PERG 16 contains general guidance on the businesses to which AIFMD applies. FUND 1 contains guidance on the types of AIFM.

710.2

G

The only rule in this sourcebook which implements AIFMD is COBS 2.1.4 R, which applies to:

7(1)

a full-scope UK AIFM operating from an establishment in the UK or a branch in another EEA State; and

7(2)

an Incoming EEA AIFM branch.

710.3

G

The other rules in COBS which apply to a full-scope UK AIFM or incoming EEA AIFM (including an AIFM qualifier) fall outside the scope of AIFMD and are, therefore, not affected by its territorial scope. 8

810.4

G

Incoming EEA AIFM branches should be aware that there is a special narrower application of COBS for AIFM investment management functions provided for by COBS 18.5 (Residual CIS operators, UCITS management companies and AIFMs).