Our Conduct of Business sourcebook (COB) provides the rules that you must comply with in the conduct of your investment business. If you undertake mortgage and/or general insurance intermediation you will also need to be familiar with the conduct of business source books for mortgages (MCOB) and insurance (ICOB). You may find it helpful to refer to the special guides (MIGI, MOGI, and GIGI).

This part of the Guide covers the conduct of business rules that small personal investment firms will encounter most frequently. These are:

• clear, fair and not misleading communication
• financial promotions
• inducements
• client classification
• terms of business
• depolarisation
• know your customer
• suitability
• assessing your customer's understanding of risk
• information about the firm
• excessive charges
• disclosing charges, remuneration and commission
• projections
• key features
• custody and client money
• basic advice on stakeholder products

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

Under COB 2.5 you must not seek to exclude or restrict any duty or liability you may have to a customer under the regulatory system. This applies whenever you make any written or oral communication to a customer in the course of, or in connection with, designated investment business. COB 2.5 also required you not to exclude or restrict any other duty or liability when you are communicating with a private customer unless it is reasonable to do so. You also need to bear in mind your obligations under the Unfair Terms in Consumer Contracts Regulations 1999.

Principle 2 requires you to conduct your business with due skill, care and diligence. COB 2.3 indicates the extent to which you can meet this requirement by relying on others. You may generally rely on another competent person not connected with your firm to provide you with information in writing to meet your own obligations to obtain information, and vice versa. This is providing that you can show that it was reasonable to do so (COB 2.3.5 G provides guidance on when it will be reasonable). You may also send information to a third party (unconnected with the firm) on the instructions of the customer.

'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). This is a requirement in COB, MCOB and ICOB. However MCOB and ICOB are more prescriptive about the terms that must or must not be used.

You will want to communicate clearly so that your customers understand the scope of advice, the range of products on which you will advise and the payment options. For example, a firm holding itself out as independent must provide whole-of-market advice and offer customers the option to pay by fee for that advice.

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

Where your communications have been clear, fair and not misleading you face a reduced risk of complaints as your customers should be fully aware of the advantages and risks of the products you have recommended.

COB 2.1 sets out the basic requirements for all types of communication to be clear, fair and not misleading.

COB 2.1 embraces all communications with customers. Communication with customers is not a one-off process. It begins with the initial disclosure document and fees and commission statement (also known as the menu) and continues through the advice and selling process ending with the production of the suitability letter and key features. The detailed requirements for these communications are found in COB 4, COB 5 and COB 6.

This is not to suggest that communications do not need to be clear, fair and not misleading once the suitability letter has been provided. The requirement to be clear, fair and not misleading continues throughout the customer relationship, for example, when dealing with a complaint or providing a report. It also applies to intermediate customers who do not receive initial disclosure documents and menus.

A financial promotion is an invitation or inducement to engage in investment activity and so is far wider than just investment advertisements. Section 21(1) of FSMA 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 can be either solicited or unsolicited and may be communicated through any form of media - such as phone conversations, newspaper advertisements, websites, group presentations and mail shots. 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 through correspondence, email, website material, and radio and television.

The general rules on the content and form of both real and non-real time promotions are given in COB 3.8. There are major differences between the financial promotion requirements for investment business and mortgage or general insurance business. Firms that undertake mortgage or general insurance intermediation should consult MCOB 3 and ICOB 3 and the relevant guides for small firms.

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 (see COB 3.8.22 R).

Your firm must not make an unsolicited real time financial promotion (see COB 3.10.3 R) unless:

• the recipient has an established customer relationship with you and expects to receive such promotions; or
• the financial promotion relates to a generally marketable packaged product which does not involve higher volatility funds; or
• the financial promotion relates to a controlled activity carried out by an authorised person involving readily realisable securities and generally marketable non-geared packaged products only.

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

Firms may communicate non-real time financial promotions produced by other firms (e.g. product providers) in the circumstances set out in COB 3.6.5 R. However you should remember that if you pass on to your client someone else's promotional material such as product provider literature, you are responsible for taking reasonable care to ensure that the product provider has confirmed compliance and that the literature has not ceased to be clear, fair and not misleading.

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 and 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.

You should bear in mind that an unsolicited letter to clients which contains direct offer marketing material will (in the absence of an exemption) be a financial promotion if any reference is made to the benefits or risks of the products. So these will need to be approved before issue.

The information that a direct offer financial promotion should contain is set out in COB 3.9.6 R. Among other things, a direct offer financial promotion must contain the information set out in COB Appendix 1.

Following implementation of the Distance Marketing Directive in October 2004, all direct offers must be in a durable medium. This can be paper, or another medium that enables the person receiving the information to store it so that it can be accessed in the future and remains unchanged (COB 3.9.6 R (1)). Retail customers must also be provided with all contractual terms on which your service will be provided in a durable medium before the customer is bound by the offer, unless an exemption applies.

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

A summary of record-keeping requirements is set out in schedule 1 to each sourcebook (COB, MCOB and ICOB). The summaries are intended as guides and are not a complete statement of our requirements - you will also need to refer to the rules in the body of the sourcebook. These are minimum requirements and you may decide to keep material for longer. Remember that other organisations you deal with e.g. PII insurers and auditors may have different record-keeping requirements.

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 2.2.3 R). This includes any inducement being given or received by an unregulated associate. There are similar requirements in COB, ICOB and MCOB but the nature of business covered results in specific requirements for each. COB 5.7 covers disclosure of charges, remuneration and commission. In relation to business involving packaged products, remuneration and commission information is included in the menu (COB 4.3).

Principles 1 (Integrity) and 6 (Customers' interests) apply to the issue of inducements.

The following sections are relevant.

• Section 2.2 of COB and 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. This rule is relevant to firms who may consider making or receiving payments to secure their distribution arrangements following depolarisation.
• Selling packaged products is on the basis of disclosable commission or fees. Restrictions on the arrangements under which commission may be paid to a firm in relation to the sale of a packaged product are set out in COB 2.2.5 E. Financial assistance from product providers is covered by COB 2.2.5A E.
• 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. Reasonable indirect benefits now include assistance for the development of software or other computer facilities but only to the extent that the indirect benefits will generate equivalent cost savings to the provider (who must not be part of your immediate group) or to consumers.
• Record-keeping requirements: COB 2.2.20 R.

For any firms that deal in investments, COB 2.2.8 R to COB 2.2.19 R is relevant, as it discusses soft commission. We issued CP05/5 'Bundled brokerage and soft commission arrangements' in March 2005 which includes proposed rule changes. Hence you should check your understanding of these rules remains current.

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. Provisions in MCOB relate to customers and in ICOB relate to retail customers and commercial customers, so firms must be guided by the specific provisions for advising and selling in each sourcebook.

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.

If you propose classifying an individual as an intermediate customer, COB 4.1.9 R requires you to give them a written warning to say that they would lose some protections under the regulatory system. You should keep a copy of this warning letter. You must also give your client sufficient time to consider the implications of being classified as an intermediate customer and obtain their written consent. The contents of the warning are set out at COB 4.1.11 E. This should include advising the client that they will lose the protection afforded by the rules in COB 5.1: Advising on packaged products.

There are two relevant sections:

• the rules and guidance in section 4.1 of COB; and
• classifying clients under a different category and when to review the classifications in COB 4.1.9 R to 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 conducting business with them; and to set out particular issues such as the complaints procedure and payment for services. The requirements for terms of business are included in COB 4.2. If your firm carries on business in relation to packaged products it must also comply with COB 4.3 which covers the contents of the initial disclosure document (IDD) and fees and commission statement (menu). The terms of business do not need to duplicate information in the IDD and menu.

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 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 investment business customer. This must be provided to the customer 'in good time' before the business is conducted (COB 4.2.5 R). This means that the customer must have enough time to fully consider all the information before they are bound by the contract (COB 4.2.6A G).

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:

• your customers are aware that any separate terms of business documents you give to them collectively amount to being the terms of business; and
• 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 and in particular the table at COB 4 Annex 2E.

Information is available as follows:

• requirements for terms of business and client agreements: COB 4.2; and
• a list of the general requirements for the content of terms of business: COB 4 Annex 2E.

There are the following other considerations:

• There are times when you need to issue a client agreement (which the client has to sign before it comes into force) instead of a terms of business: COB 4.2.7 R
• There are occasions when you are not required to provide terms of business: COB 4.2.5 R and COB 4 Annex 1R.
• If the terms of business provided to a customer allow you to amend the terms of business without your customer's consent you must give the customer at least 10 business days' notice before conducting business on the amended terms (COB 4.2.13 R)
• A firm can continue to rely on terms of business issued to an existing client under the rules of its previous regulator. However it must also inform such clients in writing of the matters set out at COB 4 Annex 2E Notes 2, 20 and 21 which deal with FSA regulation and the protections available from the Financial Ombudsman Service (FOS) and the Financial Services Compensation Scheme (FSCS). If you need to make any amendments to the terms of business, or there is a new client, you must issue new terms.

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 required firms that advise on packaged products to be either independent financial advisers (IFAs) who sell products from the whole market place and charge fees; or representatives selling on behalf of a single company (or group). These rules changed on 1 December 2004 when the depolarisation rules came into effect. Under these rules firms may offer advice with the following scope (COB 5.1.6A R):

• from the whole of the market, or
• from a limited number of providers, or
• from a single provider.

There is guidance on the scope and range of advice on packaged products at COB 5.1.6B G. You can expand the scope of advice beyond the scope previously arranged with the customer provided you make the customer aware of the proposed change in advance in a durable medium.

The Insurance Mediation Directive requires enhanced disclosure when business relates to life policies - see COB 4.3.19 R to COB 4.3.26 R. Firms can comply using the IDD. Firms will also need to provide a 'statement of demands and needs' (unless these points are covered in the suitability letter before conclusion of the contract) - see COB 5.2.12 R to COB 5.2.17 G.

A firm must not hold itself out as independent unless:

• it provides advice from the whole market (or the whole of a sector of the market), and
• it offers the customer the opportunity of paying fees for the provision of such advice (COB 5.1.11A R).

This means that a firm cannot use the word independent in its name unless it offers customers the opportunity of paying by fee.

The IDD may be found at COB 4 Annex 4 R. On first making contact with a private customer with a view to advising etc on packaged products you should provide an IDD. The activities that require this disclosure are set out at COB 4.3.3 R (1)(a). Any loans to the firm as well as share ownership of 10% or more must be disclosed in the IDD. Where the IDD is provided by an appointed representative, it must cover loans made to or by that appointed representative or holdings in or held by that appointed representative.

Downloadable templates of the document are on our website at: http://www.fsa.gov.uk/Pages/Doing/Info/disclosure/index.shtml. Any terms of business not covered by the IDD may be attached to the IDD or provided to the client as a separate document.

The menu may be found at COB 4 Annex 6 R. You should give out a menu on first making contact with a private customer with a view to providing advice on packaged products (COB 4.3.3 R), or on request (COB 4.3.5 R).

If you allow payment by commission you will need to disclose the higher of commission or commission equivalent if you are in the same immediate group as a product provider (i.e. you are more than 50% owned by a provider or otherwise controlled by a provider) (COB 5.7.5 R). A firm can have more than one menu as it may offer a different charging structure to different groups of clients. The menu disclosures are in addition to the existing disclosure of actual commission in cash terms.

To help firms to complete their menus, we have developed a calculator using Excel software. This will help you to identify your firm's own maximum commission levels by comparing different commission shapes and giving you the corresponding market average. The calculator is available on our website.

A small investment business firm can be the appointed representative of a network or another firm (the principal). In this case, the network, or principal, is responsible for the training and competence of the appointed representative and for ensuring compliance with the FSA rules, including the depolarisation rules. Appointed representatives will need to agree the scope and range of advice they give with their principal.

Offering independent, whole-of-market advice does not mean that you must search the entire market of packaged products for each and every customer. You may maintain a panel of 'preferred' packaged products selected from those generally available in the market. As long as the panel is made up of products from a sufficiently large number of providers, is selected following a reasonable analysis against definite criteria reflecting adequate knowledge of the products available on the market which are applied equally, and is reviewed regularly (and whenever significant market changes require it) we consider the practice acceptable (see further COB 5.1.6B G (4)). We would always expect a firm using such a panel to have written instructions describing the criteria to be applied in selecting or reviewing products and to maintain a full written record of its initial selection and subsequent reviews.

Both the IDD and menu must carry the Key facts logo. The logo may not be used on any document where its use is not mandated by FSA rules (GEN 5.1).

Firms need to secure customer agreement to fee charging arrangements before starting to act for a private client (COB 4.3.6 R (1)). If charging solely by fee you may only retain trail commission where it would be manifestly disproportionate for your firm to be required to account to the customer and you have agreed a maximum amount to be retained each year with your customer (COB 4.3.6 R (2)). Paragraphs 2.119-2.122 of PS04/27 set out what we mean by a fee.

If the firm receives a complaint that is the responsibility of another party to the transaction you must have procedures in place to refer it to the appropriate party (DISP 1.2.1 R and DISP 1.4.18 R). The records you keep should also include the documentation relating to the referral of a complaint under DISP 1.4.18 R (DISP 1.5.2 G).

The scope of advice of the firm (whole-of-market, multi-tied, single-tied) will require different competences on the part of the firm's advisers to enable it to discharge its advisory functions.

Before you give personal recommendations regarding investment or mortgage 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). For general insurance the required information is ascertained in the preparation of the statement of demands and needs. When arranging a life policy for any client, you may be required to give them a statement of their demands and needs (COB 5.2.12 R to COB 5.2.17 G).

Principle 9 (Customers: relationships of trust) requires you to take reasonable care to ensure the suitability of your advice and discretionary decisions for any customers who are entitled to rely on this. You will not be able to comply with Principle 9 unless you have first obtained enough information about your private customers to enable you to assess correctly 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 the Guide).

You will need to obtain personal and financial information to be able to recommend a suitable product. The process is often described as fact-finding and the document that records the information is generally referred to as a fact-find. The factors that you will need to assess include:

• the financial needs and objectives of a private customer;
• the customer's current income and expenditure and any likely changes to income and expenditure - to assess the affordability of any investment or mortgage product that you recommend to a private (or retail) customer;
• their attitude to risk; and
• 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. You may design and use a process that is suitable for the market you transact business in (COB 5.2.11 G).

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

If a private customer declines to provide relevant personal and financial information, you should not proceed without promptly advising them that this may adversely affect the quality of the services you can provide (COB 5.2.7 G). You should consider sending written confirmation of that advice. Note that provision of certain information e.g. income / expenditure is not optional when dealing with mortgage products where it is a requirement to ensure responsible lending. Fact-finds for these products are specific and vary according to the nature of the loan e.g. property purchase, equity release or lifetime mortgages.

The following parts of the Handbook are relevant:

• know your customer requirements: COB Section 5.2;
• guidance on how to collect information: table at COB 5.2.11 G;
• statement of demands and needs: COB 5.2.12 R to COB 5.2.17 G; and
• in MCOB and ICOB - advising and selling standards.

If you arrange an execution-only transaction (a transaction where no advice is sought or given) you will not normally need to obtain personal or financial information. However, you may still need to do money-laundering checks and provide a demands and needs statement in relation to any life policy business (COB 5.2.2 G).

If you arrange a pension transfer or opt-out from an occupational pension scheme for a private customer on an execution-only basis, you will need to make and retain a clear record to confirm that no advice was supplied to the customer (COB 5.2.10 R).

The purpose of the Suitability section (COB 5.3) is that advisers take reasonable steps to ensure that any investment product they recommend is suitable for the customer's requirements. A firm must take reasonable steps to ensure that the advice on investments is suitable for the client. Any recommendation it makes must have regard to the facts the client disclosed and any other relevant facts about the client of which the firm is - or reasonably should be - aware (COB 5.3.5 R). The section applies to all investments, but only in relation to advice given to private customers. It does not generally apply to firms' direct offer financial promotions and does not apply to providing basic advice on a stakeholder product.

However you are reminded of the requirement in COB 3.9.6 R (Direct offer financial promotions: general requirements). Under this, if you issue a direct offer promotion, you must make it clear that if a private customer is in any doubt about the suitability of the agreement which is the subject of the promotion, they should seek advice.

If the recommendation relates to a packaged product, it must be the most suitable from the range of packaged products on which you give investment advice to the client. If there is no packaged product in the firm's relevant range of packaged products which is suitable for the client, you must not make a recommendation (COB 5.3.5 R (2)). However please see paragraph 9.9.4 below.

Following depolarisation firms have the opportunity to make out-of-range recommendations. COB 5.3.8A R sets out the procedure that must be followed when a firm wishes to go out of range. Before doing so a firm will want to consider whether its systems and controls and training and competence arrangements are adequate to enable it to go out of range and still comply with its regulatory obligations. COB 5.3.10A R sets out the requirements which whole-of-market advisers must follow if their recommendations are to be suitable.

COB 5.3.13 G lists where you can find the specific rules and guidance for firms in assessing the suitability of personal pensions and FSAVCs (relative 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 the State Second Pension (formerly SERPS).

When a private customer decides to act on the investment advice given, your firm is required to provide them 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. 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 should also contain a summary of the main consequences and any possible disadvantages of the transaction. 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 and there is additional information on our website.

The requirement for providing a suitability letter is listed at COB 5.3.14 R. The timing of when you must provide a suitability letter is at COB 5.3.18 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).

Assessing attitude to risk is a fundamental part of the 'know your customer' process and of suitability. You will want to recommend products or services that are suitable for your client's risk profile. This is so that they are happy with the service you have provided.

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 them and advise them 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 customers' understanding of risk and providing risk warnings are set out in COB 5.4.

COB 5.4 refers to the requirement for an adviser to assess a private customer's understanding of risk for any personal recommendation (COB 5.4.3 R). Special risk warnings apply in addition for:

• warrants and derivatives (COB 5.4.6 E);
• retail securitised derivatives (COB 5.4.6A E);
• non-readily realisable investments (COB 5.4.7 E);
• penny shares (COB 5.4.8 E);
• securities subject to stabilisation (COB 5.4.9 E); and
• stock-lending activity (COB 5.4.10 E).

A firm has a general duty to ensure that it has taken reasonable steps to ensure that its private customers understand the risks involved with any investment product that the firm recommends to them (COB 5.4.3 R) and, similarly, with the risks involved in mortgage and/or general insurance products.

Your client may have different attitudes to risk for different products. You should not assume they would have the same attitude to risk for all their financial planning needs.

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

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

• your firm publishes; or
• your employees, agents, representatives, financial advisers and introducers use

such as stationery, business cards, or other business documents.

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:

• the identity and business address of the firm;
• the identity and status or relationship that employees - or other agents of the firm the customer may have contact with - have with the firm; and
• the fact that the firm is authorised and regulated by the FSA (or is an appointed representative of such a firm).

This is 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). For business involving packaged products this information is included in the IDD which is given to the private customer on first contact.

Principle 6 (Customer's interests) requires a firm to pay due regard to the interests of its customers and treat them fairly. The purpose of COB 5.6 is to ensure that the charges a firm makes to its private customers are not excessive. The obligations to disclose to a private customer the charges a firm intends to make are set out in COB 4.3 and COB 5.7.

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

• how your charges for products or services compare to similar ones in the market;
• to what extent the charges made are an abuse of the trust that your customer has placed in your firm; and
• the nature and extent of the disclosure of the charges to your private customers.

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

• the basis or amount of charges you will charge them for conducting the business; and
• the nature or amount of any other income you or your associate will receive.

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

The purpose of this requirement is to ensure that you make each private or retail customer aware of the direct or indirect costs he 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.

A firm may make the disclosures required by COB 5.7.3 R in its terms of business, in a client agreement, or in a separate written statement. Disclosure should include any product-related charges that are deducted from the private customer's investment. If the product is a packaged product, product-related charges and expenses will be disclosed in the key features document in line with COB 6.2 and COB 6.4.

If you are providing advice in connection with packaged products, you should - in line with COB 4.3.3 R - have given your customer a menu setting out the maximum rates of any fees or commissions which the firm may earn or retain in connection with the sale of packaged products. COB 5.7.3 R does not require any further disclosure of a firm's fees if, in line with COB 4.3.6 R, it has confirmed the exact amount or rate that it will charge.

In addition a private customer should be informed as soon as practicable of the exact rate or the exact amount in cash terms of any commission or equivalent which the firm will receive for a specific transaction. COB 5.7.5 R (2) sets out the circumstances when a firm is to be regarded as receiving commission equivalent.

If you conduct business on an execution-only basis for a packaged product, there are certain exceptions to the rules. Full details are 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 FSMA (Misleading statements and practices) you should ensure that all forecasts of future values of investments are not misleading, false or deceptive. For 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 about the potential value of future benefits from an investment.

A firm must ensure that the projection it gives a customer is relevant to that customer's circumstances (COB 6.6.7 R).

A firm 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 6.6 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 R.

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. A direct offer financial promotion for a packaged product must also contain key features information (COB 3.9.10 R). 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 R and COB 6.5.31 R). 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 R). Your firm may provide these illustrations in a document separate from the main text of the KFD but you should present the documents at the same time.

When the business with the customer is carried out at a distance, and falls under the definition of a distance contract, as well as the KFD you must also send the customer the terms and conditions of the contract and all the information set out in COB Appendix 1. You do not need to put all this information in one document, as long as you give it all to the customer in a durable medium at the same time as you provide the KFD (COB 6.5.2 R (6)).

If a consumer has responded to a direct offer financial promotion, the information package you send 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 G).

When you carry out business with the customer on the telephone, you must give them certain information about your firm and why you are calling (COB 6.4.27 R). Instead of providing the customer with the KFD before they are bound by the contract, which is the rule set out in COB 6.5.2 R (6), you can give the customer some of this information on the telephone and send the KFD afterwards. But the customer must agree to this.

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

COB 6.2.12 R 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.

In PS05/4 we set out final rules and guidance (COB 6.6) for implementing European requirements on product disclosure information for consumers in relation to collective investment schemes such as unit trusts and OEICS that hold a UCITS certificate enabling them to be marketed in other EEA countries.

The product information will be contained in a new document known as the Simplified Prospectus. EU rules require this document to be offered to anyone who wants to invest in a collective investment scheme that holds a UCITS certificate.

Our approach builds on the existing Key Features document by adding new information requirements only where it is necessary to meet EU standards. The new rules and guidance came into effect on 1 May 2005. However, transitional relief is granted until 30 September 2005 where the existing Key Features regime is still to be followed.

You are reminded that key features are a form of financial promotion and are subject to the rules contained in COB 3. Also see section 9.3 of the Guide.

You will find the rules at CASS 2.1 for custody and CASS 4 for client money. Safeguarding and administering client assets is a separate regulated activity and permission must be obtained to carry it out. Many small firms are not allowed to hold client money and custody assets, and hence the Guide does not include a discussion of these rules.

Some firms can get an exemption from the custody rules by following CASS 2.1.9 R (3). The rule 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 it 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. Firms operating fee agreements where commission is rebated to the client, either directly or by holding excess amounts against future fees, will continue to be able to construct their fee agreements in such a way that the client money rules are not engaged.

You will find the rules on mandates at CASS 4.5. 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 (CASS 4.5.4 G).

Basic advice is intended to be a simpler, quicker and cheaper form of advice to consumers interested in buying a stakeholder product. It covers advice in the form of a recommendation given to a retail customer. The recommendation must relate to a stakeholder product and certain other conditions must be met. These conditions are based on the need for the adviser to make an assessment of the consumer's needs based on the answers that the consumer provides to a series of pre-scripted questions. Firms intending to provide basic advice must ensure that their permission covers the activity.

The stakeholder products on which basic advice may be given are:

• cash deposits;
• medium term investment products i.e. life assurance contracts or collective investments;
• stakeholder pensions; and
• Child Trust Funds

These products are the only products that can be sold with basic advice and they must meet certain criteria to be stakeholder products. For example, the charges are capped. Currently, medium-term investment products cannot include a smoothed fund because our research found a risk that consumers who received basic advice may not understand the concept of smoothing.

A new Chapter 5A has been included in COB that sets out what firms must do when providing basic advice on a stakeholder product. You must provide an IDD on first making contact with the customer. COB 5A.3.1 R includes rules on the scope and range of advice on stakeholder products. The scope of basic advice may be based on a limited number of providers of stakeholder products or a single provider. The range of stakeholder products provided must include no more than one of each type of product (except for cash deposits). A firm may have several different ranges but only one can be disclosed to the customer.

Firms must provide basic advice through a sales process that incorporates pre-scripted questions put to the customer. There is no FSA-mandated script. Instead the firm's sales process must ensure that the firm only recommends that a customer acquire a stakeholder product if it is suitable. The suitability of stakeholder products is covered at COB 5A.4.2 R. COB 5A Annex 1 contains guidance on the steps a firm could take to ensure it complies with the requirements in COB 5A.4.2R (1). A customer must be sent or given a copy of the completed scripted questions and answers.

Where the sales process results in a firm making a recommendation to a customer to acquire a stakeholder product it must meet the requirements of COB 5A.4.6 R to COB 5A.4.9 R. The firm must provide the customer with a summary sheet that sets out for each product recommended the amounts the customer wishes to invest and the reasons for the recommendation. It also explains that in determining any subsequent complaint the Financial Ombudsman Service may take into account that the recommendation was based on limited information only. Where a firm gives basic advice on stakeholder products that offer a choice of funds, it must not give advice on, or recommend, a particular fund for the customer.

The basic advice regime aims to deliver an assessment whether a stakeholder product is suitable without a detailed assessment of the customer's needs. Hence, it differs from full advice on investments. As a result, some other sections of COB do not apply to a firm when providing basic advice on a stakeholder product:

• COB 5.1 Advising on packaged products;
• COB 5.2 Know your customer;
• COB 5.3 Suitability; and
• COB 5.4 Customer's understanding of risk.

Individuals who give basic advice do not need to be approved persons. They must be competent but there is no specified examination requirement.

COB Sch 1 summarises record-keeping requirements concerning the firm's scope and range of stakeholder products. In addition, COB 5A.4.10 R requires a firm to keep a record of each recommendation to acquire a stakeholder product and the customer's summary sheet for at least six years from the date of the recommendation. This is the minimum requirement and you may decide to keep material for longer.

Firms that have permission to undertake 'advising on investments' as at 6 April 2005 must notify us in writing of their intention to provide basic advice. The permission will be granted as at the date of our acknowledgement. Firms may notify us using Firms Online or by email or letter.

Firms that do not have permission to undertake 'advising on investments' are required to apply for a variation of permission (VOP) - see Chapter 15.1 of the Guide.