The FCA's Conduct of Business and Client Assets Sourcebook Flashcards
37/75 Qs
Conduct of Business Sourcebook (COBS)
- COBS = contained in the business standards block of the FCA handbook
- Aim = move regulatory apporach towards an outcomes focus rather than compliance witha detailed set of rules.
- Implemented MiFID conduct of business rules - high level guidance.
- Contains provisions for investment firms that are out of scope for MiFID.
Firms subject to COBS
- General application rule - based on geographical location and brings firms that are maintained/have appointed representatives in the UK.
- Typically applies to firms conducting business with UK clients (even if they are established overseas) as well.
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COBS - BLOT
- COBS applies to firms conducting MiFID business for UK clients within the UK
- Post Brexit - COBS doesn’t apply to MiFID business of a UK MiFID firm carried on from an EEA establishment
- COBS rules derived from MiFID apply to Non-UK MiIFD investment firms (eg third country firm operating via a UK branch).
- Post brexit, EEA firms operating from a UK branch will be classified as third country firms
- Exception for investment research and personal account dealing where COBS applies to home state firms only - COBS applies to UK firms regardless of where they conduct business.
Activities subject to cobs
- Designated investment business
- Long term insurance business in relation to life policies etc
- Accepting deposits - fin. promotion rules and rules on preparing and providing product information.
Eligible counterparty business - the COBS rules that become out of scope for EPs
- Large part of COBS 2 - general conduct of business oblgations
- Much of COBS 4 - communicating with clients
- COBS 6.1 - provision of information about the firm, it’s services and renumeration.
- COBS 8 - client agreements
- COBS 10 - appropriateness requirements
- Bits of COBS 11 - best execution and client order handling
- bits of COBS 12 - labeling of non independatn research
- COBS 14.3 - info. for designated investments
- COBS 16 - reporting of info. to clients
Members/participants of a regulated market do not have to comply with COBS 11.4 (client limit orders) when dealing with each other but must comply when executing orders on a client’ behalf.
Appointed representatives
- COBS rules apply to firms in relation to relevant activities carried out for them by their appointed representatives.
- The appointed reps themselves are exempt as they can carry out activities in the name of the firm
- Appointed reps must comply with COBs when communicating financial promotions. This is the case as technically fin. promotions made by appointed reps. are exempt.
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Electronic media
As communications move online, COBS rules have been adapted to accept communication on a Durable medium.
* Paper
* instruments allowing the recipient to store the information so they can access it for future reference in an unchanged format. This can be on a PC storage but not on a website unless it meets certain conditions
Storing information on websites - FCA conditions
- Info sent on a website must be appropriate based on teh firm/client’s business. There then must be evidence the client has access to the internet.
- Client must consent to having info provided in that format.
- Client must be notified of the web address and where the info is stored.
- info must be up to date
- must be accessible continuously for a period of time so teh client can inspect it accordingly.
Application of client categorisation rules
- Firms required to categorise clients carrying out designated investment business
- FCA adopted MiFID client classification with a few differences in the criteria that need to be met.
- When a mix of MiFID and non-MiFID services are being offered, the client should be categorised
Client definition
Someone to who a firm provides a service (or has/will provide service to) and in the case of MiFID or equivalent third country business - any ancillary service.
Under fin. promotion rules - it includes persons with whom the firm communicates whether or not they are clients themselves.
Clients of a firm’s appointed rep or tied agent are also regarded as clients of the firm.
Client categories
- retail client
- professional client
- Eligible counterparty
Classification determines the degree of protection given to the client with retail clients recieiving the most.
- Retail client - not a professional or eligible client
- Professional client - can be per se professional or elective professional client.
- Per se professional client - meet certain criteria and are not considered eligible counterparties/categorised differently.
Per se professional criteria
- An entity required to be authorised or regulated to operate in the financial markets: credit instit., inv. firm, insurance company, CIS, pension fund, etc
- Large undertakings - firms who’s balance sheet (EUR 20 mil), turnover (EUR 40 mil) and own funds (EUR 2 mil) meet any 2 of the previous requirements.
- Non MiFID businesses: firms who’s share capital/net assets are/have been £5 mil in the past year.
- companies with EUR 12.5 mil balance sheet, 25 mil turnover or 250 employees.
- Partnership with net assets of £5 mil in the last 2 years
- trustee with £10 mil net assets in past 2 years
- Trustee of a pension scheme with 50 members and £10 mil AUM in past 2 years.
Also includes
* national or regional goverrnments, central banks, supranationals etc
* institutional investors whose main business is investemnt
per se Eligble counterparty criteria
- Eligible firms are the same as per se professionals however, there is no large untakings section.
- Can only be catagorised as an ECP if the entity:
1. Executes orders
2. dealing on their own account
3. receiving/transmitting orders.
so if the entity wants to do other business (inv. mgmt) then it must be classified as a per se professional
ECPs are not in scope for COBS rules as COBS protections will not benefit them. Some firms request to be categorised as PsPs to gain more protection
Agents
if a firm knows that it is providing services to a person (A) that is acting as the agent (PAOB) of another person (B) A should be regarded as the client.
* This can be overturned if A signs an agreement with the firm to treat B as teh client.
* Another exemption - if A is employed simply to reduce the protection afforded to B then B should be considered the client (i.e. A is a PsP and B is retail)
Recategorising clients to provide lower levels of protection - elective professionals
Retail clients can be considered elective proffessionals if:
* The firm assesses the client’s expertise and experience to prove they can make their own decisions/understand the risks of MiiFID business. qualitative test
* Quantitative test - any 2 of the folllowing:
1. Client carried out 10 or more significant transactions in the past 12 months.
2. client portfolio value of over EUR 500,000
3. client has worked as a fin. svs. professional for 1 or more years in a role requiring knowledge of the markets/products they are trading in.
If a client chooses to reclassify, clear written consent must be sent to the firm and the firm must respond with a warning that they will lose investor protections
Clients must notify the firm if their situation changes and the firm may need to reclassify them.
Elective eligible counterparties
- Clients can be treated as elective ECPs if:
- they are a pers e professional
- The request to be treated as an ECP
Local authorities/municipalities which are by default classified as retail clients can request to be reclassified as ECPs if they meet the following:
1. Qualitative test - {COBS 3.5.3(1)}
2. Quantitative test [COBS 3.5.3(2)] - financial protfolio (cash, fin. instruments, etc) of £10 mil + and
And one of the following
1. 10 significant transactions per quarter for the past 4 quarters.
2. the person executing transactions has relevenat fin. svs. experince of 1 or more years in a relevant role.
3. authority is an administering authority of the local govt. pension scheme and acts in that capactiy.
Recategorising clients and providing higher levels of protection
Some clients choose to be recalssified as retail clients to gain extra protection and firms can also choose to classify them as retail at their discretion (trating PsPs and ECPs as retail).
Clients can also be reclassified generally or for specific transactions - specific transactions can create complex legal arrangements between client/firm.
Protections lost by recategorising are on P193
Client agreements
Designated inv. businesses must enter into client agreements for retail, MiFID and ancillary services - doesn’t apply to insurance firms offering life policies.
- Firms must provide the client with terms of the agreement and information about the products/services being offered and the agreement in good time before it is signed - MiFID ToBS.
- First must notify the client if terms of agreement change in good time before the cnage is made.
Client agreement time requirements for maintenace
Whichever is longer:
* 5 years
* duration of the client relationship
* for pension transfers, pension opt outs or fresstanding additional contributions.
Firms should also consider COBS rules when issuing client agreements e.g. being fair and not misleading.
Information requirements re nature and risk of investments
- High level disclosure reqs in COBS 2.2 and 2.2A
- firms must provide current and potential professional and retail clients with info about
1. The firm + it’s servies
2. designated investments, proposed stratergies, warning on the risk of investments
3. exectution venues
4. costs/charges
Gives the client information to understand the risk of the services they are using and make informed decisions as a result (applicable to non-MiFID commods, warrants and stock lending).
The high level rules are explained further n COBS 6.1, 14.2 - non-mifid business requires disclousres to be sent to al retail clients and for Mifid business it must be sent to professional clients as well.
Information about the firm
Firms must provide retail, professional and retail clients (including potential clients) with the following info on the firm:
* Name and address of the firm + contact info
* languages in which the client can communicate with the firm (mIFID business)
* methods of communication to be used between cleints/thefirm
* confirmation the firm is authorised andby which authority
* statement if the firm is using an appointed agent.
* nature, frequency and timing of reports detailing the performance of products the client is using
* conflict of interest policy
Information requirements around managing investment
Firms managing client’s invesments must establish and use a point of comparison (benchmark) based on the client’s objectives to help the client assess the firm’s performance.
When managing a retail client’s inv. - firms must provide:
* method + frequency of portfolio valuation.
* delegation of discretionary management of all/part of the investments/funds in the portfolio.
* what will be used as a benchmark
* types of investments and transactions that can be used.
* objectives, risk levels and inv. manager’s level of discretion.
Info on safe guarding investments/money
Firms holding retail, professional and ECP investments/money (inclduing potential clients) are subject to UK MiFID custody/clientmoney rules where applicable and must provide the following.
* that the inv./money may be held by a third party.
* firm’s responsibility for any acts/ommissions by the third party’
* consequences of third party insolvency
* if the investments cannot be sepreately designated in the country where teh third party is based.
* if the investments are subject to laws of a country outside the UK
* details on how the firm has protected the clients money and any releveant investor compensations schemes.
* if the inv./money are subject to any security interest, lein etc.
* full and clear information in a durable medium presented in good time before the commencement of business
Disclosures of costs
Retail clients must be provided with info on costs/charges of investments/services.
* total prices to be paid - fees, costs, taxes etc
* if this cannot be provided- the method of calculating the cost must be provided to the client so tehy can verify the costs.
* costs charged by the firm.
* if paid in a foreign currency - conversion rates, currencies involved etc
* note that further costs may be added (taxes etc)
* how the above will be paid/levied
* information about compensation schemes
ECPs/professional clients can request this information but firms do not have to provide it to them post 2021.
Timing and medium of disclosures.
Provided in good time before the provision of a firm’s services.
Can be provided immediately after provision of services if:
* At the request of the client, the agreement was executed using a means of distance communication which prevented the firm from providing the information before svs provision.
* firm complies with the rules in relation to telephone communication.
The disclosures must be in a durable medium/on the website if it complies with regulation.
Client disclosure info
- client’s must be notified/kept up to date in good time of any changes ti a service they are using in a durable medium
- Firms don’t have to renew disclosures for every transaction for exisiting clients, only when there are changes to the product/servuce
- Make clients aware of the compensation schemes, the amount of cover offered, the conditions and formalities required to get compensation (upon request).
Adviser charging - incomplete,page199
- Covered by COBS 6.2A and B - firms must not describe themselves as independant unless they only offer recommendations to retail clients that based cmprehensive, unbiased and unrestricted.
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Reliance on others
If a fim offering UK MiFID products recieves instruction toprovide investment or ancilliary services to a client via anotehr UK Mifid firm - it can rely on:
* information provided by the 3rd party about the client
* recommendations that teh 3rd party provide
- 3rd party remains responsible for the accuracy of client info and appropriateness of reccomendations. reliance on anotehr firm must be confirmed in writing
- Non Mifid inv. firms can rely on info from an unconnected authorised person/professional firm unless it is aware the info is wrong.
Communicating with clients - application of rules on communicating with clients
Firms must follow either principle 12 or FTOC when communiciating with clients.
Financial promotions - communications with clients
- Only authorised persons/firms can be communicate a financial promotion with clients / or the fin. promotion is through an approved source. otehrwise it’s illegal
Designated investment businesses have some exemptions:
* qualifying credit, home purchase plan or home reversion plan.
* promotion for a non-inv. insurance contract
* cannot promote unregulated CISs
* relates to a credit agreement, cosnumer hire agreeement or credit regulated activity.
This also applies to communications to authorised professional firms.
Applies to a firm carrying out business/communciates a fin promotion to a client in the UK (including when this is done from an overseas branch offering svs in the UK).
Mostly don’t apply to ECPs
Purpose of financial promotion rules
- Ensure fin. promotions are fair, clear and not misleading.
- Consistent with principles 6 & 7 (unless the firm is in scope for consumer duty - then principle 12 takes over)
- FCA has the power to remove promotions from the mkt or prevent it from being issued in the first place. The FCA will notify the firm that they need to remove the promotion, the firm can contest it and the FCA will then issue a final decision
Fair, clear and not misleading fin. promotions
- Fin. promotions must be fair, clear and not misleading as well as appropriate and proportionate based on the type of communication and target market.
Firms must ensure fin promotions communications are:
* Clearly call out when customer’s capital is at risk
* Give clear impression of short/medium/long term yeild if a yeild is quoted.
* Clear and appropriate info. on service charges/fees if they are complex
* If areas of the business are mot FCA regulated, that this is called out.
* Clear information about the manager/producer of the product if the firm didn’t create it internally.
FCA advises firms to review the ‘code of conduct for the advertising of interest bearing accounts’ when creating fin. propmotions for deposit accs.
Fin. promotions must be clearly identifiable for the customer.
FCA policy statement, final rules on sustainability disclosure requirements, investment labelling and anti-greenwashing.
- Post FCA consultation in 2022, they published a policy statement in 2023 with their final rules.
- Anti greenwashing rules come in from 31st May 2024 for all regulated firms when marketing a product’s sustainability features to a client.
- Ensures sustainability claims are consistent with the product and are fair, clear and not misleading.
Exceptions to the financial promotion rules
Exempt excluded communications:
* High net worth individuals (FPO artcile 48) and sophisticated investors (FPO art. 50 and 50a).
* Exempt under the financial promotion order (FPO) - makes some promotions exempt if communicated by an unauthorised person, originates from outside UK or doesn’t affect the UK.
* Originates from outside the UK if the office sending the promotion is a seperate unauthorised person
* Subject to/exempted from the takeover code
* one-off promotions that are not cold calls.
Treasury rework of the fin. promotion exemptions for HNWIs and sophisticated inv.
- Passed in 2023
Changes - Increased fin thresholds to be a HNWI - annual income of £170K (up from 100K) and net assets of $430K (up from £250K).
- Amend the criteria to self certify as a sophisticated investor - removed criteria of making an investment in a private company in the past 2 years and increased company turnover threshold to £1.6mil for the company director exemption.
- Business must provide their details in communications under exemption
- removed ‘certified’ from HNWI exemption
- updated the HNWI and soph. inv. statements.
- applied changes to promotion of CISs.
Passed through parliament on 6/11/23 and implemented on 31/1/24
4 types of communication
- Real time - e.g. face to face, phone, presentations, etc.
- Unsolicited real time - cold calls
- non-real time communications - emails, letters, websites, typically where a record of communication is made
- direct offer financial promotions - make an offer to any person to enter into an agreement and include a form of response/method of responding
Prospectus advertising rules
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COBS 3.3 applies to prospectusses NOT COBS 4
COBS 3.3 applies when: - Prospectus is required under FSMA section 85 or
- election to produce a prospectus is made unde FSMA section 87
Prospectus promotion is any communication specifically promoting subscritpion to/acquisition of securities and cannot be issued unless.
* The communication states a prospectus has/will be issued
* clearly an advertisment
* the information is accurate/not misleading.
* consistent with the info in the prospectus
Must also include a bold and prominent statement to the effect that the advertisment is not a prospectus and is only an advert. Investors should only subscribe to securities after reviewing the propectus.
New UK prospectus regime
- NOV 2023 - treasury published a statutory instrument - the publlic offers and admissions to trading regulations 2023 to take a step towards replacing the old EU derived prospectus rules.
- will be implemented in 2 stages - FCA granted new powers to make rules, provide guidance and issue policy and a formal consultation process of the rules the FCA creates.
Communicating with retail clients - promotions rules
COBS rules required the following when sending fin promotions to retail clients:
* Firm;s name is on the promotion
* accurate information which gives fair explaination of both risk and potential rewards
* information is presented so the average joe can read/understand it
* information does not obscure important information
* If comparisons to other products are made they must be fair and balanced (data sources + any assumptions must be stated for MiFID business)
* If tax treatement is mentioned - statement saying it depends on each customer’s personal circumstance + is subject to change is required
- Rules aren’t applicable to 3rd party prospectuses and image advertising
- Excluded communications are exempt for MiFID business also
FCA illiquid securities promotion rules
- 2020 - FCA implemented temporary rules re promtoing illiquid investments to retail clients.
- Implemented to protect retail clients form investing in high risk instruments that they don’t understand.
- Banned promotion of mini-bonds and preference shares to retail investors.
- increased transparency disclosure requirements on risks
FCA rules for risk warnings for fin. promotions of high risk investments
- Active from 01/12/2022
- banned promo. of non mass market inv. instruments to retail inv.
- restricted mass mkt inv. are not permitted to non-readily realisable securities and peer-peer agreements.
- Enhanced risk warnings
- banned incentives to invest - referral schemes, chasback etc
- cooling off periods
- personalised risk warnings - e.g. first time investors with a firm
- client categorisation - retail investors must confirm they meet the cirteria to recieve HR inv. promotions
- more robust appropriate test and preventing firms from coaching clients to pass it.
- record keepign requirements are enhanced
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Feb 2023 FCA handbook guidance for fin. promotiions
- Enhanced requiremetns for firms apprvoing and communicating financial promotions
- display the name of the approver of the fin. promotion and the date approved. Firms can use FRN and approvers must be competent and take active steps to ensure compliance.
- Enhanced conflict of interest requirements
- approverrs must undertake suitability assessments before NMMI are promoted to retail investors.
Fin. promotion of cryptoassets
- Sep 2023 final rules published
- Focusses on clear, fair and not misleading promotion of cryptoassets
Background of Cryptoassets being in scope of fin promotion rules
- In-scope cryptoassets covered in 26F, schedule 1 of the FPO and is a digital representation of value that is transferable and fungible but excludes crypto assets that are electronic money/already regulated.
- dealing in/arrangign deals of, managing/advising and agreeing to carrry out certain kinds of activity for cryptoassets are now in scope for regulation.
- Unauthorised firms selling cryptoassets can communicate their promotions under a specific exemption by the FPO called the MLRs.
4 routes for legally promoting cryptoassets
- Promotion communicated by an authorised person
- promo made by an unauthorised person but approved by an authorised person
- Promo is communicated by a cryptto business registered with the FCA under teh MLRs in reliance with the FPO exemption.
- promotion is communicated under an FPO exemption
FCA is making crypto a restricted mass market investment that can be mass marketed under the following restrictions:
* clear risk warnings - general and personalised
* banning incentives to invest
* positive frictions (cooling off periods, client categorisiation etc)
* Appropriateness assessments
past performance
Firms must provide information on past performance in a way that is:
* Not the most prominent feature of a communication.
* show the most immediate 5 years past performance at least
* reference periods + relevant sources are given
* clear warning the past performance may not be repeated in the future
* If the currency is not sterling - warning on currency risk
* if gross performance is cited - clear disclosures on otehr fees, tax etc are required.
Simulated past performance
When firms give data that is simulated past performance as the product does not have a track record, they must:
* Relate to an investment/fin. index
* based on/relate to an index/instrument similar to the one beign simualted
* meet teh past performance rules
* clear and prominent warning the data is simulated
Future performance
Information referring to possible future performance must:
* not be based on/refer to past performance
* based on reasonable assumptions and supported by data
* disclosures on tax, fees etc if quoted gross
* contains a prominent warning the figures a projected and not reliable.
Direct offers/iinvitations
Direct offer promos making a direct offer/invitation must follow the below rules (examples are in newspapers/direct mail)
* Prescribed info on the firm + services it offers
* info on the mgmt of client’s investements if relevant
* info on safekeeping of client assets
* info on costs/charges
* info on risks and taxes etc.
* statement confirming a prospectus has been published
* if 2 or more inv. are combined, a breakdown of the risks of each instrument is required
* if a third party guarantee is in place, info must be presented
* advise the recipient to get advice if they are unsure on the inv. suitablity
not required if the offer directs a client to anothe doc detialing the above info
Unwritten promotions
Firms cannot initiate unwritten promotions to clients outside of their premises unless:
* it is at an appropriate time of day
* identifies themselves and their firm and makes the reason for contact clear
* clarify whether the client wants to continue with promos or cancel them
* gives teh client a point of contact if an appointment is arranged
Unsolicited real time communications (cold calling)
When an authorised person or exempt person contacts people without a prior appointment with teh view to communicate a fin. promo.
Firms must not cold call unless:
* the recipient has an exisiting relationship with the firm
* call relates to a generally marketable product and not high risk prods/life policies
* it relates to controlled activity relating to a limited range of investments inclluding deposits and readily realisable investments (not warrants or fruity geared products)
Overseas persons
Firms only allowed to approve/communicated fin. promos. for overseas firms if the promo sets out which firm has approved/communicated the promo and explains teh following where applicable.
* the rules for inv. protection don’t apply
* the extent that UK compensation schemes will be available if at all
* at the communicator’s discretion - any overseas comp. schemes
Firms cannot approve/communicate a promo unless it is fully confident the firm will deal honestly/reliably with UK retail clients
Approving fin promotions
- Approving fin. promos is a formal process set out in COBS 4.10 and FSMA - complimens SYSC 3 and 4 - require communication in related to designated inv. business and the firm to have policies to comply with fin. promo rules.
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FCA Fin promo gateway
- ‘Gateway’ policy introduced Sep 2023
- means all firms must apply for permission to approve fin promos for third parties with the FCA.
FCA final rules/requirements for firms applicable to ‘gateway’
* how they assess applicants
* the basis for the FCA approving/rejecting applications
* bi-annual reporting for approved firms.
* Firms must notify the FCA of action on fin promos within 7 days of approving/rejecting a 3rd party’s promo
* not extending teh compulsory jurisidication of the fin. ombudsman service
* further changes to the FCA, non handbook guidance on fin. promos
Approving a fin promo - process
- Firms must check the promo complies with the rules and withdraw it if it no longer applies ater approval.
- Rules apply to the third party approver as if they were the firm doing it themselves
- Firms may not approve real time fin promos
- Cannot approve promos fro restricted instruments unless under an exemption - ie unauthorised CISs
- When approving promos under exemptions - the exemption must be stated in the promo.
