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 except, where the eligible counterparty business is in scope of the IDD, those provisions which implement the IDD continue to apply15.2

COBS provision

Description

COBS 2 (other than COBS 2.1.1AR, COBS 2.2A and12COBS 2.4)

Conduct of business obligations

COBS 4 (other than COBS 4.2,12COBS 4.4.1 R, COBS 4.5A.9EU12 and COBS 4.7.-1AEU12)

Communicating with clients including financial promotions

COBS 6.1

Information about the firm, its services and remuneration (non-MiFID and non insurance distribution15 provisions)12

12 COBS 6.1ZA.16R 13

12Information about costs and charges of different services or products (MiFID provisions)

12 COBS 6.1ZA.22R 13

12Compensation information (MiFID provisions)

COBS 8

Client agreements (non-MiFID provisions)12

12 COBS 8A (other than COBS 8A.1.5EU to COBS 8A.1.8G)

12Client agreements (MiFID provisions)

COBS 10

Appropriateness (for non-MiFID12 and non-insurance-based investment products15 non-advised services) (non-MiFID and non-insurance-based investment products provisions)15

12 COBS 10A

12Appropriateness (for non-advised services) (MiFID and insurance-based investment products15 provisions)

COBS 11.2A 12, COBS 11.2B and12COBS 11.3

Best execution, quality of execution and12 client order handling12

COBS 12.2.18EU 12

Labelling of non-independent research

COBS 14.3

Information about designated investments (non-MiFID provisions)12

COBS 16

Reporting information to clients (non-MiFID provisions)12

[Note: paragraphs 1 and 2 of article 30(1)12 of MiFID]

2.

Transactions between an MTF operator and its users

2.1

10

R

The COBS provisions (applicable to MiFID business) shown below12 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.

12 COBS provision

12 Description

12 COBS 2 (other than COBS 2.4)

12Conduct of business obligations

12 COBS 4 (other than COBS 4.4.1R)

12Communicating with clients, including financial promotions

12 COBS 6.1ZA

12Information about the firm and compensation information (MiFID provisions)

12 COBS 8A

12Client agreements (MiFID provisions)

12 COBS 10A

12Appropriateness (for non-advised services) (MiFID provisions)

12 COBS 11.2A , COBS 11.2B, COBS 11.3 and COBS 11.4

12Best execution, quality of execution, client order handling and client limit orders

12 COBS 14.3A

12Information about financial instruments (MiFID provisions)

12 COBS 16A

12Reporting information to clients (MiFID provisions)

[Note: article 19(4)12 of MiFID]

3.

Transactions concluded on an MTF

3.1

10

R

The COBS provisions in paragraph 2.1R12 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 19(4)12 of MiFID]

12 3A.

12 Operators of OTFs

123A.1

12G

12A firm which operates an organised trading facility should refer to MAR 5A.3.9R which specifies how the provisions in this sourcebook apply to that activity.

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 2.1R12. 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 53(4)12 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 EU5law12 related to credit institutions and consumer credits with respect to12 information requirements, that service is not subject to the rules in this sourcebook that implement articles 24(3), (4) and (5)12 of MiFID.

[Note: article 24(6)12 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.

12 5A.

Mortgages and mortgage bonds

125A.1

12R

12The rule in paragraph 5A.2R applies in relation to an MCD credit agreement with a consumer which is subject to the provisions concerning the creditworthiness assessment of consumers in Chapter 6 of the MCD (as transposed in MCOB 11 and MCOB 11A).

125A.2

12R

12If an agreement with a consumer within paragraph 5A.1R has as a pre-requisite the provision to that same consumer of an investment service in relation to mortgage bonds satisfying the conditions in paragraph 5A.3R in order for the loan to be payable, refinanced or redeemed, that investment service is not subject to the rules in this sourcebook which implement article 25 of MiFID.

125A.3

12R

12The conditions in paragraph 5A.2R are that the mortgage bonds:

12(1)

12are specifically issued to secure the financing of the MCD credit agreement in paragraph 5A.1R; and

12(2)

12have terms which are identical to the MCD credit agreement in paragraph 5A.1R.

[Note: article 25(7) of MiFID]

6. 10

Use of third party processors in life insurance distribution 15 activities

6.12

10

R

If a firm (or its appointed representative or, where applicable, its tied agent) outsources insurance distribution activities15 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 giving personal recommendations in relation to advising on investments (except P2P agreements)14.

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, modifications and restrictions to the general application

1.1

10

G

The general application of this sourcebook12 is modified in Parts 1 and 2 2of Annex 1 and in certain chapters of the Handbook. The modification may be an extension of the general application12. For example, COBS 4 (Communicating with clients, including financial promotions) has3 extended the general12 application12.

1.2

10

G

The provisions of the Single Market Directives and other directives also extensively modify the general application of this sourcebook12, particularly in relation to territorial scope.12

121.3

12G

12In particular, certain chapters of this sourcebook apply only to firms in relation to their MiFID, equivalent third country or optional exemption business and, in some of these chapters, specified insurance distribution activities (sometimes only in relation to insurance-based investment products)15 while others apply only to firms’ designated investment business which is not MiFID, equivalent third country or optional exemption business or, in some of these chapters, certain insurance distribution activities15.

121.4

12G

12 COBS 18 (Specialist regimes) contains specialist regimes which modify the application of the provisions in this sourcebook for particular types of firm and business. To the extent that they are in conflict, the rules in COBS 18 on the application of the provisions in this sourcebook should be understood as overriding any other provision (whether in COBS 1 or an individual chapter) on the application of COBS. For the avoidance of doubt, nothing in COBS 18 modifies the effect of the EEA territorial scope rule.

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 general application of this sourcebook12.

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 Delegated Directive12 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 34(1),12 35(1)12 and 35(8)12 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 35(1)12 and 35(8)12 of MiFID)

3.5

10

G

However, the rules on investment research and non-independent research ( COBS 12.2, except for COBS 12.2.18EU12) and the rules on personal transactions (COBS 11.7A12) 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.

123.6

12G

12 Firms to which MiFID applies or which are subject to requirements in MiFID (including MiFID optional exemption firms) should also have regard to the rules and guidance in COBS 1.2.

4.

Insurance Distribution Directive 15 : effect on territorial scope

4.1

10

G

The IDD’s15 scope covers most firms carrying on most types of insurance distribution in relation to risks and commitments located in an EEA State15.

154.1A

G

The rules in this sourcebook within the Directive’s scope are those relating to life policies that implement15 the minimum requirements in articles 1(4), 17, 18, 19, 20, 21, 23, 24(1) to (3) and (6), 29, and 3015 of the IDD are set out in:15

(1)

COBS 2.1.1R , COBS 2.2A and COBS 2.3A (Conduct of business obligations);15

(2)

COBS 4 (Communicating with clients, including financial promotions);15

(3)

COBS 6.1ZA (Information about the firm and compensation information (MiFID and insurance distribution provisions));15

(4)

COBS 7 (Insurance distribution);15

(5)

COBS 8 (Client agreements);15

(6)

COBS 9 (Suitability (including basic advice) (other than MiFID and insurance-based investment products provisions)) and COBS 9A (Suitability (MiFID and insurance-based investment products provisions));15

(7)

COBS 10A (Appropriateness (for non-advised services));15

(8)

COBS 14.2 (Providing product information to clients); and15

(9)

COBS 16A.2 (General client reporting and record keeping requirements).15

154.1B

G

A Member State is entitled to impose additional requirements within the IDD’s scope in the ‘general good’(see recital 52 to, and article 22 of, the IDD).

4.2

10

G

The IDD places responsibility for requirements in this sourcebook within the Directive’s scope (both minimum and additional requirements) on the Home State, except:15

(1)

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 recital 22 to, and article 7(2) of, the IDD). So firms operating under the freedom of establishment in the UK must adhere to the requirements in the UK, regardless of the habitual residence of the customer (other than in the situations described in (2)); and

(2)

where a Member State has:

(a)

introduced the stricter requirements in article 29(3) of the IDD; or

(b)

introduced requirements which have not made use of the derogation in article 30(3) of the IDD to allow firms not to carry out an appropriateness assessment in relation to a non-advised sale of an insurance-based investment product,

firms concluding contracts with customers having their habitual residence or establishment in that Member State must adhere to the more onerous requirements in (a) or (b) in force in that State.

154.3

G

Accordingly, the general rules on territorial scope are not modified by the IDD except15:

(1)

for an EEA firm providing passported activities under the Directive in the United Kingdom,15 the additional rules within the Directive’s scope have their unmodified territorial scope unless the Home State imposes measures of like effect.15

(2)

for insurance distribution business carried on by insurers:15

(a)

minimum and additional requirements apply to a UK firm unless responsibility for any matter it covers is reserved by the Solvency II Directive to the firm’sHost State regulator; and15

(b)

paragraphs (1), (3), (4) and 4.4G, below, apply in the same way unless the responsibility for any matter it covers is reserved by the Solvency II Directive to the firm’sHome State regulator.15

(3)

for a UK firm concluding contracts with customers having their habitual residence or establishment another Member State, it must comply with the requirements of that Member State falling within 4.2G(2);15

(4)

for an EEA firm providing passported activities in the United Kingdom under the IDD the rules in COBS which give effect to article 29(3) apply, where the client has their habitual residence or establishment in the UK, when it is operating under the freedom to provide services.15

154.4

G

An EEA firm acting as the principal of an appointed representative carrying on insurance distribution activities from an establishment in the UK is required to ensure that its appointed representative complies with this sourcebook.

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 Solvency II Directive’s15 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 Solvency II Directive15 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 Solvency II Directive15 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 Solvency II Directive15 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 and the IDD15; (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)

[deleted]15

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 the IDD15; 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 2IDD15, 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 11.2B 12 (Best execution for UCITS management companies12);

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 18.5B12 (UCITS management companies12).

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 18.5A12 (Full-scope UK12 AIFMs and incoming EEA AIFM branches12).

17 11.

SRD: effect on territorial scope

11.1

G

SRD includes a number of requirements on SRD asset managers. These requirements are implemented in COBS 2.2B.

11.2

G

SRD provides that the EEA State competent to regulate these requirements is the Home State as defined in the applicable sector-specific legislation. COBS 2.2B therefore applies where a UK firm carries on activities from an establishment in the United Kingdom or another EEA State, as set out in COBS 2.2B.4R.

[Note: article 1(2)(a) of SRD]