Our Conduct of Business sourcebook (COB) provides the rules that authorised firms must comply with in the conduct of their business.

This part of the Overview covers the rules that IFA firms carrying on typical financial advisory business will encounter most frequently.

COB 8.1 requires firms to send written confirmation to clients promptly after each transaction. This requirement will not usually apply to IFAs in view of the exceptions at COB 8.1.6 R.

COB 2.5 applies to a firm that makes any written or oral communication to a customer in the course of, or in connection with, its designated investment business. It covers how firms should handle the duties and liabilities that they have to their customers.

COB 2.5.3 R states that a firm must not, in any written or oral communication, seek to exclude or restrict, or to rely on any exclusion or restriction of, any duty or liability it may have to a customer under the regulatory system.

COB 2.5.4 R states that a firm must not in any written or oral communication to a private customer seek to exclude or restrict, or to rely on any exclusion or restriction of, any duty or liability not referred to in COB 2.5.3 R unless it is reasonable for it to do so.

Principle 2 requires a firm to conduct its business with due skill, care and diligence. COB 2.3 indicates the extent to which firms can meet this requirement by relying on others.

A firm will be taken to be in compliance with any rule in COB that requires a firm to obtain information to the extent that the firm can show that it was reasonable for the firm to rely on information provided to it in writing by another person ( COB 2.3.3 R).

You may generally rely on another authorised person not connected with your firm to provide you with information in writing to meet your own obligations to obtain information, and vice versa (COB 2.3.5 G). 'In writing includes the use of electronic media to make communications (GEN 2.2.14 R). Additional guidance on electronic communication is given at COB 1.8.2 G.

When you communicate information to a customer, you must take reasonable steps to communicate in a way that is clear, fair and not misleading (COB 2.1.3 R).

You will want to communicate clearly so that your customers understand your advice and the products and services that you advise them on.

You will also want to ensure that they understand why you are recommending certain products or services and therefore suitability letters should be clear, fair and not misleading.

Section 2.1 of the Conduct of Business (COB) sourcebook sets out how you should communicate investment-related issues with a customer.

You should consider your customer's knowledge of the particular investment business that the communication relates to and make reasonable steps to ensure that the communication is clear, fair and not misleading (COB 2.1.4 G).

All types of communication are covered by this requirement (COB 2.1.5 G), for example:

1. (1)

   telephone calls;

2. (2)

   financial reports;

3. (3)

   any communication that is not a financial promotion; and

4. (4)

   client agreements.

COB Section 2.1 does not apply to a firm when it communicates a financial promotion, when COB Chapter 3 will apply instead (COB 2.1.1 R). In other words, you have broadly similar obligations whether the communication is a financial promotion or not.

A financial promotion may be described as an invitation or inducement to engage in investment activity. Section 21(1) of the Act prohibits financial promotions unless communicated by an authorised person, or an authorised person has approved the content of the promotion, or an exemption applies.

A primary intention of the rules and guidance relating to financial promotions is to ensure firms pay due regard to the interests of their customers and communicate information in a manner which is clear, fair and not misleading (see COB 3.8.4 R).

Financial promotions are far wider than just investment advertisements. They can be either solicited or unsolicited and may be through any form of media, such as phone conversations, newspaper advertisements, group presentations and mailshots. For the purposes of COB 3, financial promotions are classed as either real time or non-real time promotions. Real time promotions are those that are communicated in the course of a meeting, telephone conversation, or other interactive dialogue. Non-real time promotions include those made via correspondence, email, website material, and radio and television.

By their very nature it is not possible for a firm to approve real time financial promotions, and our rules do not allow this (see COB 3.12.2 R). Instead, the rules and guidance require that firms make clear their identity and the purpose of the promotion and do not communicate at an unsociable hour (unless previously agreed with the customer). Above all, promotions should be clear, fair and not misleading.

Your firm must not make an unsolicited real time financial promotion unless the recipient has an established customer relationship with you and expects to receive such promotions (see COB 3.10.3 R).

Before you communicate to a customer or approve a non-real time financial promotion you must arrange for confirmation by an individual in your firm with appropriate expertise that the financial promotion complies with the rules in COB Chapter 3 (see COB 3.6). Firms are also expected to ensure routinely that their financial promotions continue to comply with the rules.

COB 3.8 contains detailed rules and guidance concerning the form and content of financial promotions. For example, all non-real time financial promotions should contain the name and address (or contact point) of the firm or its appointed representative. Any comparisons should be objective, balanced and clear. If a particular investment or service is promoted then a fair and adequate description of the nature of the investment, the commitment required, and the risks involved must be given. As with real time promotions, however, the overriding principle is that promotions be clear, fair and not misleading.

A direct offer financial promotion is a non-real time financial promotion that contains an offer for the consumer to enter into an investment agreement or, specifies the manner of response or includes a response form (such as a tear-off slip). The rules require such a promotion to contain enough information to enable the customer to make an informed assessment of the investment or service to which it relates.

1. (1)

   The Table in COB 3.9.3 G is intended to help firms locate the sections of COB 3.9 that are applicable to them when they communicate or approve a direct offer financial promotion.

2. (2)

   The Table in COB 3.9.7A R lists the information that a direct offer financial promotion should contain.

Direct offer financial promotions for packaged products must contain the information required by COB 6.5 (Content of key features).

Direct offers for investments whose value (or income) may fluctuate must make this clear in terms that are likely to be understood by the kind of customer to whom the promotion is communicated (COB 3.9.15 R).

A firm must make an adequate record of each non-real time financial promotion that it has confirmed as complying with the rules of COB 3. In addition to a copy of the actual promotional material, firms should record the name of the individual who approved the promotion, the date of approval and medium it was authorised for. (See COB 3.7.2 G and COB 3.7.3 G for further guidance).

The following information may be helpful:

1. (1)

   Guidance on the restrictions on making financial promotions under Section 21 of the Act is given in AUTH App 1 (Financial promotion and related activities). This also explains the main exemptions.

2. (2)

   The Table at COB 3.2.5 R lists the exemptions to the financial promotion rules in the Handbook. Additionally, some of the main exemptions contained in the Financial Promotion Order are summarised in COB 3 Annex 1.

You must ensure that your firm, or anyone acting on behalf of it, does not conduct business under arrangements that are likely to result in a material conflict with your duty to your customers ( COB 2.3.3 R). This includes any inducement being given or received by an unregulated associate.

Principles 1 (Integrity) and 6 (Consumer's interest) apply to the issue of inducements.

The following sections are relevant:

1. (1)

   Section 2.2 of COB in particular COB 2.2.3 R requires a firm to be satisfied that it or anyone acting on its behalf does not conduct business under arrangements that are likely to result in a material conflict with its duty to its customers.

2. (2)

   Selling packaged products is on the basis of disclosable commission or fees. Restrictions on the arrangements under which commission may be paid to an IFA in relation to the sale of a packaged product are set out in COB 2.2.5 E.

3. (3)

   In addition some indirect benefits are permitted. These are set out in COB 2.2.6 G and the table under COB 2.2.7 G.

4. (4)

   Record keeping requirements: COB 2.2.20 R.

For any firms that manage investments, COB 2.2.8 R?COB 2.2.19 R is relevant as it covers soft commission.

You need to take reasonable steps to establish the classification of each client that you intend to conduct investment business with or for, and classify them appropriately.

Classifying your clients is part of the 'know your customer process'. It helps you to recommend suitable products to your clients while ensuring that they are covered by the appropriate protections.

We want to ensure that your clients receive an appropriate level of protection. Private customers are entitled to receive the most protection under the regulatory system.

Very occasionally, customers who would normally be classed as one type of customer can be classed differently. To do this, you are required to obtain written consent from your customer. For example, an expert private customer could be classed as an intermediate customer but only if you have taken reasonable care to determine that they are experienced and have an in-depth knowledge of products and services (i.e. at a similar level to a financial adviser). COB 4.1.9 R requires you to give such an individual who it is proposed should be classified as an intermediate customer, a written warning (you should keep a copy) to say that they would lose some protections under the regulatory system. You must also give your client sufficient time to consider the implications of being classified as an intermediate customer and obtain his written consent.

The following sections are relevant:

1. (1)

   The rules and guidance are in Section 4.1 of COB.

2. (2)

   Transitional rules for firms that were 'grandfathered' across to the FSA from the PIA on 1 December 2001 (date also known as N2): COB Table TR3 'Client Classification Provisions' sets out our view on client classifications that were made by firms before N2. The table can be found under COB section TP 1: 'COB TR 1 Transitional Rules for pre-N2 and ex-Section 43 firms'.

3. (3)

   Classifying clients under a different category and when to review the classifications: COB 4.1.9 R?COB 4.1.15 R.

You are required to provide written terms of business to your customers to explain the terms and conditions on which you intend to conduct business with them; and to set out particular issues such as the complaints procedure and payment for services.

When you provide terms of business to a client it is a useful record for both your client and your firm. It offers protection to clients if they think that a firm did not provide the services that they agreed to, and it offers the firm protection if a client incorrectly queries the services that it has provided to them.

The requirement to provide terms of business is in line with Principle 7 (Communications with clients).

You need to give a terms of business document to each customer and you should provide one before conducting any designated investment business with a private customer. However, the length of time you have to provide one depends on both the category of customer and the type of product that forms part of the transaction ( COB 4.2.5 R). Please see the summary below:

Please note that conducting designated investment business includes advising on investments as well as arranging and entering into transactions (for a complete definition see the Handbook glossary).

You must ensure that your terms of business sets out the basis on which you will conduct business with your customer in adequate detail (COB 4.2.10 R and COB 4.2.11 E).

The terms of business information does not have to be contained in only one document because you might not know a private customer's investment objectives before you provide him with your terms of business (see COB 4.2.12 R). However, you should ensure that:

1. (1)

   your customers are aware that any separate terms of business documents you give to them are collectively the terms of business; and

2. (2)

   the content is still easy to understand.

We will not approve the content or layout of your terms of business. You should follow the rules and guidance in COB 4.2 (Terms of business and client agreements with customers) when designing the content. In particular, see the Table at COB 4.2.15 E.

Information is available as follows:

1. (1)

   Our requirements for terms of business and client agreements: COB Chapter 4.2.

2. (2)

   A list of the general requirements for the content of terms of business is given in the Table under COB 4.2.15 E. The following sections will be particularly relevant to a small personal investment firm: sections 1-7, 9-11, 13, 14, 15-17, 21-25.

You must make a record of each terms of business you provide as soon as it comes into force ( COB 4.2.14 R).

Polarisation only applies to advice relating to packaged products, which are life policies, personal pensions, collective investment schemes, stakeholder pensions and investment trust savings schemes.

Polarisation requires firms that advise on packaged products to be either:

1. (1)

   independent intermediaries (IFAs) who sell products from the whole market place; or

2. (2)

   representatives selling on behalf of a single company (or group).

If your firm holds itself out as an independent intermediary then it must offer advice across the whole market of packaged product providers. IFAs need not necessarily provide advice on all product types, but instead may specialise in certain areas (e.g. annuities and pensions). COB 5.1.16 R (1) states that an independent intermediary must at all times act in the best interests of its private customers when advising on packaged products. It must not enter into any commercial arrangement that may adversely affect its ability to provide independent advice ( COB 5.1.16 R (2)).

An IFA can be the appointed representative of an IFA network or another IFA. In this case, the network, or principal, is responsible for the training and competence of the IFA and for ensuring compliance with the FSA rules.

Offering independent, whole-of-market advice does not mean that for each and every customer the firm must search the entire market of packaged products. IFA firms may maintain a panel of preferred packaged products selected from those generally available in the market, based on the criteria of quality of product and general suitability for customers. So long as the panel is made up of products from a sufficiently large number of providers, is selected against definite criteria which are applied equally, and is reviewed regularly (and whenever significant market changes require it) we consider the practice acceptable. We would always expect an IFA using such a panel to have written instructions describing the criteria to be applied in selection or review of products and to maintain a full written record of its initial selection and subsequent reviews.

The polarisation rules apply only to packaged products. They do not apply to mortgages or pure protection products for example. So, an IFA may be restricted to one or more companies for the purpose of advising on non-packaged products, and still act 'independently' in relation to packaged products.

Monitoring of business placement: your firm is required to inform us when it places 20% or more of its business with a particular provider together with its reasons for doing so. This is a question in the Annual questionnaire at SUP 16 Ann 7 .

The detailed rules and guidance relating to Polarisation can be found in COB 5.1.

In CP121 and CP166 we have outlined plans to abolish the polarisation regime. To continue to have 'independent' status firms that advise on packaged products from the whole of the market will have to offer customers the opportunity to pay by fee.

We do not propose to remove the polarisation rules until a further Consultation Paper (covering the so-called 'menu' and transitional rules) is published and the necessary changes have been made to the Handbook. If your firm then wishes to take advantage of the removal of the polarisation restriction, it may do so, providing that it is at the same time in a position to comply with the new obligations that go with it. Following a transitional period all firms will be required to comply with the new rules.

For more information on the upcoming changes to the polarisation regime please see CP166, 'Reforming Polarisation: Removing the Barriers to Choice'.

Before you give personal recommendations regarding investment business to private customers, you must take reasonable steps to ensure that you have enough personal and financial information about them. The information you gather should be relevant to the services that you agree to provide (COB 5.2.5 R).

Principle 9 (Customers: relationships of trust) requires you to take reasonable care to ensure the suitability of your advice and discretionary decisions. You will not be able to comply with Principle 9 unless you have first obtained enough information about your private customers to enable you correctly to assess their individual requirements. This will help you to meet your responsibility to give suitable advice.

Another key reason for obtaining information about your customers is to prevent money laundering (see Chapter 14 of this Overview).

You will need to obtain personal and financial information to be able to recommend a suitable product. The factors that you will need to assess include:

1. (1)

   the financial needs and objectives of a private customer;

2. (2)

   the affordability of any investment that you recommend to a private customer;

3. (3)

   their attitude to risk; and

4. (4)

   any foreseeable future events for your client.

There is guidance in the Table at COB 5.2.11 G.

We do not prescribe the method of completing a fact-find and of obtaining personal and financial information about a private customer. Instead, you may design and use a process that is suitable for the market in which you transact business ( COB 5.2.11 G).

Where you advise a customer on a continuing basis, you should regularly review the information you keep about him ( COB 5.2.6 G).

If a private customer declines to provide information, you should advise him that this may adversely affect the quality of the services you can provide ( COB 5.2.7 G).

The following parts of the Handbook are relevant:

1. (1)

   Know your customer requirements: COB Section 5.2

2. (2)

   Guidance on how to collect information: Table 5.2.11G of COB.

If you arrange an execution-only transaction you will not normally need to obtain personal or financial information. However, you will still need to do money-laundering checks ( COB 5.2.2 G).

You must keep a record of a private customer's personal and financial circumstances. The table below shows details of how long you must keep the records to meet our requirements. Each period of retention starts from the date when the information was obtained ( COB 5.2.9 R).

The purpose of the Suitability section (COB 5.3) is that advisers take reasonable steps to ensure that any investment they recommend is suitable for the customer's requirements. The adviser must base his recommendation on information disclosed by the customer and on other relevant facts about the customer of which the adviser is, or reasonably should be, aware. It applies to all investments, but only in relation to advice given to private customers - not intermediate customers or market counterparties (see COB 5.3.5 R). You should refer to COB 5.3.1 R to check where section 5.3 applies.

An adviser may not recommend a packaged product if they are aware of another more suitable product that is generally available (see COB 5.3.9 R(1)). Nor may an adviser recommend the packaged product of a connected product provider unless that product is better than every other available packaged product (the 'Better than Best' rule see (COB 5.3.9 R(2)). To comply with these rules, an adviser is expected to have adequate knowledge of the products available from the market as a whole.

COB 5.3.29 G contains guidance for firms in assessing the suitability of personal pensions and FSAVCs (compared to stakeholder pensions and AVCs), broker funds, pension transfers and opt-outs, hybrid products, industrial assurance policies, income withdrawals, ISA or PEP transfers and contracting out of SERPS.

When a private customer decides to act on the investment advice given, your firm is required to provide the customer with a written explanation of why it has concluded that the transaction is suitable. This is commonly referred to as a 'suitability letter', but need not necessarily take the form of a letter. However, whatever form it takes, it should explain simply and clearly why the recommendation is viewed as suitable having regard to the customer's personal and financial circumstances, needs and priorities, and attitude to risk. It is also essential that a member of staff who is authorised to advise on the type of product being recommended signs the 'suitability letter' and accepts responsibility for the advice. Detailed guidance on the contents of suitability letters can be found in COB 5.3.30 G.

The requirement for providing a suitability letter is explained in COB 5.3.14 R.

When you must provide a suitability letter is explained in COB 5.3.18 R.

Record keeping requirements for suitability letters are listed in COB 5.3.19A R.

When you conduct investment business for private customers, you must ensure that you take reasonable steps to ensure that they understand the nature of the risks involved with the transaction ( COB 5.4.3 R).

You will want to sell products or services that are suitable for your client's risk profile. This is so that they are happy with the service that you provide them but it is also a vital part of the 'know your customer process'.

Assessing your customers' understanding of risk will help ensure that you meet the requirements set out in the following Principles:

Principle 7 (Communications with clients) requires you to pay due regard to the information needs of your clients and to communicate information to them in a clear, fair and not misleading way.

Principle 9 (Customers: relationships of trust) requires you to take reasonable care to establish the suitability of advice that you give.

You must establish what each client considers an acceptable level of risk to be for him or her and advise him or her on that basis. When you have a clear understanding of your client's attitude to risk (i.e. whether they are risk averse or willing to take some degree of risk) you will be in a better position to recommend suitable products.

The requirements for assessing your customer's understanding of risk and providing risk warnings are set out in Section 5.4 of COB.

COB 5.4.3 R refers to the general requirement for an adviser to assess a private customer's understanding of risk for any personal recommendation. Special risk warnings apply in addition for:

1. (1)

   warrants and derivatives ( COB 5.4.6 E);

2. (2)

   retail securitised derivatives ( COB 5.4.6A E);

3. (3)

   non-readily realisable investments ( COB 5.4.7 E);

4. (4)

   penny shares ( COB 5.4.8 E);

5. (5)

   securities subject to stabilisation ( COB 5.4.9 E); and

6. (6)

   stock lending activity ( COB 5.4.10 E).

You need to disclose certain information about your firm when you conduct investment business with or for private customers so as to ensure that they have adequate information.

The disclosure of information is relevant to any written communications that:

1. (1)

   your firm publishes; or

2. (2)

   your employees, agents, representatives, financial advisers and introducers use such as stationery, business cards, or other business documentation.

Disclosing information about your firm ensures that your clients know who they are conducting business with, both the identity of the firm and the employee or representative of the firm. This is in line with Principle 7 (Communications with clients), which requires you to pay due regard to the information needs of your clients and communicate information to them in a way that is clear, fair and not misleading.

When you conduct investment business with private customers you should take reasonable steps to ensure that they have been given adequate information about:

1. (1)

   the identity of your firm and business address and telephone number;

2. (2)

   employees or other agents of the firm; and

3. (3)

   your firm's statutory status;

unless you have given the information to the client on a previous occasion and it is still up to date ( COB 5.5.3 R).

There are further considerations to take into account if you:

1. (1)

   conduct overseas business for UK private customers ( COB 5.5.7 R); or

2. (2)

   conduct business from an overseas place of business with overseas customers ( COB 5.5.8 G).

A firm must ensure that the charges it makes to a private customer, in the course of or in connection with designated investment business are not excessive. This is in line with Principle 6 (Customer's interests) which requires you to pay due regard to the interests of your customers and treat them fairly.

COB 5.6.4 G says that you should consider the following to determine whether a charge is excessive:

1. (1)

   how your charges for products or services compare to similar ones in the market;

2. (2)

   to what extent the charges made are an abuse of the trust that your customer has placed in your firm; and

3. (3)

   the nature and extent of the disclosure of the charges to your private customers.

Before you conduct business with or for private customers, you must communicate in writing ( COB 5.7.3 R(1)):

1. (1)

   the basis or amount of charges you will charge them for conducting the business; and

2. (2)

   the nature or amount of any other income you or your associate will receive.

'Associate' has a wide meaning and you should consider the definition in the Handbook glossary.

The purpose of this requirement is to ensure that you make each private customer aware of the direct or indirect costs he/she will have to pay for financial services. This is so that they are in a better position to make informed choices ( COB 5.7.2 G).

This is in line with Principle 7 (Communications with clients) which requires you to pay due regard to the information needs of your clients and communicate information to them in a clear, fair and not misleading way.

You can disclose the required information in a terms of business, in a client agreement, or in a separate written statement. When you advise private customers on packaged products, product-related charges and expenses are normally disclosed in a key features document ( COB 5.7.4 G).

The following sections of the Handbook are relevant:

1. (1)

   The requirements: COB 5.7

2. (2)

   Key features requirements are set out in COB 6.2 and COB 6.4 including disclosure of product charges.

3. (3)

   Disclosure of remuneration and commission for packaged products is covered by COB 5.7.5 R.

If you conduct business on an execution-only basis not for a packaged product, there are certain exceptions to the rules. Full details can be found at COB 5.7.3 R (2). Any income receivable by an associate also needs to be disclosed.

COB 6.6 applies to a firm in respect of projections for packaged products. A firm must not provide a projection for a packaged product unless the projection is calculated and presented in accordance with the rules in COB 6.6 . A firm should not provide its own unauthorised projections.

To avoid committing an offence under section 397 of the Act (Misleading statements and practices) you should ensure that all forecasts of future values of investments are not misleading, false or deceptive. In respect of packaged products COB 6.6 amplifies Principle 7 which 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. A projection needs to be carried out on a basis of consistent rates of investment return so that firms do not seek to compete on the basis of wholly speculative forecasts as to the potential value of future benefits from an investment.

An IFA firm must ensure that a projection given to a customer is relevant to that customer's circumstances (COB 6.6.7).

An IFA can hand over the projections prepared by a product provider. If you wish to make your own calculations then you must comply with the rules in COB 6.6 .

COB 6.5 sets out circumstances in connection with potential sales when projections must be given.

There is an exception to the rules in COB 6.6 for pension benefit projections that meet the requirements in COB 6.6.5 .

Consumers need key features so that they can understand the product and compare it with different packaged products. The COB 6 requirements expand on Principle 7 that requires a firm to pay due regard to the information needs of its customers.

At the core of the regime is the Key Features Document (KFD) that your firm must give to consumers before they complete an application for any packaged product or cash deposit ISA. Product providers must produce key features for every packaged product that they provide. Under the rules set out in COB 6.5, all KFDs should be split into a number of sections and the information disclosed will vary depending on the type of product. COB 6.4 explains the product disclosure required in some special situations.

KFDs must contain an illustration of the effect of charges over time on what the consumer might get back (COB 6.5.24 and COB 6.5.31 ). In many cases, mainly for life products, an additional illustration is required to show the investor what he might get back assuming set rates of return (COB 6.5.15 ). Your firm may provide these illustrations in a document separate from the main text of the KFD but presented with it.

In the case where a consumer has responded to a direct offer financial promotion, the information package that they receive should contain example-based key features documents. There is no need to provide a further set of key features for this transaction (COB 6.2.8 ).

A firm may delay the provision of a KFD when a customer is buying a life policy (which includes a pension policy) without making a written application. However, that firm must give an adequate oral explanation of the main features of the product, and must send the customer a KFD within five business days of the sale (COB 6.2.9 (2)).

For the rules relating to the provision of KFDs when there are variations to existing life policies please refer to COB 6.2.16 to COB 6.2.19 .

COB 6.2.12 deals with the provision of revised key features where the terms of a proposed life policy are subsequently altered before the private customer completes the application form.

You are reminded that key features are a form of financial promotion and are subject to the rules contained in COB 3 (see also section 9.3 of this Overview on financial promotions).

Your firm must keep records of its key features as governed by the rules applying to record keeping of non-real time financial promotions ( COB 3.7). Also see section 9.3 in this Overview.

We have set out in CP170 new proposals for product disclosure at the point of sale, which will see the Key Features Document and 'illustrations' replaced by a Key Facts Document and 'examples'. The main focus of our work has been to develop a Key Facts Document consumers will recognise, read, and understand.

The proposals make little change to the disclosure regime in terms of the products to which it relates. The requirement for full, clear, fair and not misleading product disclosure will remain the bedrock of the regime. The main costs of the change will be borne by life and non-life product providers who are responsible for producing the key facts information.

A policy statement, RM19, giving feedback to the responses we received to CP170 will be published in 2004. We expect to implement the revised rules in 2005. For detailed information on the new proposals see CP170, 'Informing Consumers: Product Disclosure at the Point of Sale' (February 2003).

You will find the rules at COB 9.1 for custody and COB 9.3 for client money. Many small firms are not allowed to hold client money and custody assets, and hence this Overview does not include a discussion of these rules.

COB 9.1.9 (3)COB 9.1.9(3) states that when a firm temporarily holds a designated investment belonging to a client (other than in bearer form) it is exempt from the custody rules if it takes certain steps as set out in the Rule. You should not rely on this rule as a matter of course, and should only retain a designated investment for as long as is strictly necessary.

There is no equivalent exemption for client money. An example of where a firm may need to act to avoid holding client money is where a customer sends a cheque intended for the purchase of a product made payable to the firm rather than the product provider. In this case you should not cash the cheque if you want to avoid holding client money instead you should return the cheque to the client with a request for an amended cheque.

A further potential client money issue is that of rebated commission. If a firm makes it clear in its agreement with the client that any commission remains the firm's until actually paid into the account of the client, then the client money rules should not apply. However, as soon as a firm agrees that a part of its commission will belong to the client, then on receipt it will be part client money and part firm money and the client money rules may need to be applied.

You will find the rules on mandates at COB 9.2. The rules apply to those firms that control rather than hold clients' assets, or are able to create liabilities in the name of the client (COB 9.2.4).

We are introducing a new sourcebook - the Client Assets sourcebook (CASS). This will bring together in one sourcebook the existing client assets rules from the Conduct of Business sourcebook (COB chapter 9), and the proposed client money rules from the Insurance and Mortgage Conduct of Business sourcebooks (ICOB and MCOB).

Details of the proposals are in CP199: Miscellaneous amendments (September 2003). We will publish comprehensive Destination and Derivation tables, and there will be automatic links on the electronic version of the Handbook from COB chapter 9 to the relevant sections of CASS. (The COB rules will not change, they will just be re-numbered).