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COB 2.1 Clear, fair and not misleading communication

Application

COB 2.1.1 R
  1. (1)

    This section applies to a firm when it communicates information to a customer in the course of, or in connection with, its designated investment business.

  2. (2)

    This section does not apply to a firm when it communicates a financial promotion in circumstances in which COB 3 (Financial promotion) applies to the firm.

Purpose

COB 2.1.2 G

The purpose of this section is to restate, in slightly amended form, and as a separate rule, the part of Principle 7 (Communications with clients) that relates to communication of information. This enables a customer, who is a private person, to bring an action for damages under section 150 of the Act to recover loss resulting from a firm communicating information, in the course of designated investment business, in a way that is not clear or fair, or is misleading.

Clear, fair and not misleading communication

COB 2.1.3 R

When a firm communicates information to a customer, the firm must take reasonable steps to communicate in a way which is clear, fair and not misleading.

COB 2.1.4 G

When considering the requirements of COB 2.1.3 R, a firm should have regard to the customer's knowledge of the designated investment business to which the information relates.

COB 2.1.5 G

COB 2.1 embraces all communications with customers, for example: client agreements, periodic statements, financial reports, telephone calls and any correspondence which is not a financial promotion to which COB 3 (Financial promotion) applies. Firms should note the requirements of COB 3.8.4 R relating to non-real timefinancial promotions and COB 3.8.22 R relating to real timefinancial promotions.

COB 2.2 6Inducements6

Application

COB 2.2.1 R

This section applies to a firm that conducts designated investment business with or for a customer.

Purpose

COB 2.2.2 G

Principles 1 and 6 require a firm to conduct its business with integrity, to pay due regard to the interests of its customers and to treat them fairly. The purpose of this section is to ensure that a firm does not conduct business under arrangements that might give rise to a conflict with its duty to customers.

Prohibition of inducements

COB 2.2.3 R

A firm must take reasonable steps to ensure that it, and any person acting on its behalf, does not:

  1. (1)

    offer, give, solicit or accept an inducement; or

  2. (2)

    direct or refer any actual or potential item of designated investment business to another person on its own initiative or on the instructions of an associate;

if it is likely to conflict to a material extent with any duty that the firm owes to its customers in connection with designated investment business or any duty which such a recipient firm owes to its customers.

COB 2.2.4 G

The purpose of COB 2.2.3 R (2) is to prevent the requirement in COB 2.2.3 R (1) being circumvented by an inducement being given or received by an unregulated associate. A firm may be able to demonstrate that it could not reasonably have knowledge of an associate giving or receiving an inducement. It should not, however, direct business to another person on the instruction of an associate if this is likely to conflict with the interests of its customers.

Investment research

COB 2.2.4A G

3An offer or agreement to publish investment research which is, or to change a published recommendation so that it becomes, favourable to its subject (even if the subject is a customer of the firm), is an example of offering or accepting an inducement which is likely to conflict to a material extent with the firm's duties to its other customers. (See also COB 5.10 in relation to inducements related to corporate finance and COB 7.16 in relation to investment research.)4

Restriction in connection with packaged products

COB 2.2.5 E
  1. (1)

    A firm should not enter, and should take reasonable steps to ensure that no person acting on its behalf enters, into any of the following arrangements with another firm in relation to a packaged product if any commission is required to be disclosed to a customer:52

    1. (a)

      volume overrides, if commission paid in respect of several transactions is more than a simple multiple of the commission payable in respect of one transaction of the same kind;

    2. (b)

      an arrangement to pay commission that is increased in excess of the amount disclosed to the customer, unless the increase is attributable to an increase in the premiums or contributions payable by that customer;

    3. (c)

      an agreement to indemnify the payment of commission on terms that would or might confer an additional financial benefit on the recipient in the event of the commission becoming repayable;

    4. (d)

      an arrangement to pay commission other than to the firm responsible for a sale, unless:

      1. (i)

        the firm responsible for the sale has passed on its right to receive the commission to the recipient; or

      2. (ii)

        another firm has given advice on investments to the same customer after the sale; or

      3. (iii)

        the commission is paid following the sale of a packaged product by the firm in response to a direct offer financial promotion communicated by that firm to a customer of the recipient firm.5

  2. (1A)

    COB 2.2.5 E (1) does not apply to arrangements between firms that are in the same immediate group. In this situation COB 5.7.5 R will apply.

  3. (2)

    Contravention of (1) may be relied upon as tending to establish contravention of COB 2.2.3 R.

5Financial assistance and product providers

COB 2.2.5A E
  1. (1)

    5This evidential provision applies in relation to a holding in, or the provision of credit to, a firm which holds itself out as giving advice on investments to private customers on packaged products except where the relevant transaction is between persons who are in the same immediate group.

  2. (2)

    A product provider should not take any step which would result in it:

    1. (a)

      having a direct or indirect holding in a firm in (1) of its capital or voting power ; or

    2. (b)

      providing credit to a firm in (1) (other than commission due from the firm to the product provider in accordance with an indemnity commission clawback arrangement);5

    unless all the conditions in (4) are satisfied. A product provider should also take reasonable steps to ensure that its associates do not take any step which would result in it having a holding as in (a) or providing credit as in (b), having regard to (5).5

  3. (3)

    A firm in (1) should not take any step which would result in a product provider having a holding as in (2)(a) or providing credit as in (2)(b), unless all the conditions in (4) are satisfied.

  4. (4)

    The conditions referred to in (2) and 5(3) are that:

    1. (a)

      the holding is acquired, or credit is provided, on commercial terms; that is terms objectively comparable to those on which an independent person unconnected to a product provider would, taking into account all relevant circumstances, be willing to acquire the holding or provide credit;

    2. (b)

      the firm (or, if applicable, each of the firms) taking the step has reliable written evidence that (a) is satisfied;

    3. (c)

      there are no arrangements, in connection with the holding or credit , relating to the channelling of business from the firm in (1) to the product provider; and

    4. (d)

      the product provider is not able, and none of its associates is able, because of the holding or credit, to exercise any influence over the advice on investments in relation to packaged products given by the firm.

  5. (5)

    In this evidential provision , in applying (2) and (3) any holding of, or credit provided by, a product provider'sassociate is to be regarded as held by, or provided by, that product provider.

  6. (6)

    In this evidential provision , in applying (3) references to a " product provider " are to be taken as including an unauthorised equivalent of a product provider ; that is, an unauthorised insurance undertaking or an unauthorised operator of a regulated collective investment scheme or of an investment trust savings scheme.

  7. (7)

    Contravention of (2) or (3) may be relied upon as tending to establish contravention of COB 2.2.3 R.

Packaged products - guidance on indirect benefits

COB 2.2.6 G
  1. (-2)

    To comply with COB 2.2.3 R, neither a product provider nor any of its associates should give, and a firm should not receive from such persons , any indirect benefit, if the benefit is likely to conflict to a material extent with any duty owed by the receiving firm when giving advice on investments to private customers on packaged products. Such conflicts may arise, for example, where the gift might induce material bias as regards:5

    1. (a)

      the choice of product provider whose products are recommended; or5

    2. (b)

      the type of product which is recommended.5

  2. (-1)

    The guidance in COB 2.2.7 G is not relevant to indirect benefits which may be given by a product provider or its associate to its own representatives.5

  3. (1)

    The FSA will not regard a firm as being in contravention of COB 2.2.3 R if it gives or receives gifts, hospitality and promotional competition prizes of a reasonable value, providing they do not conflict with the duties that the recipient owes to its customers.5

  4. (2)

    A product provider may assist another firm to promote its packaged products so that the quality of its service to customers is enhanced. Such assistance should not be of a kind or value that is likely to impair the other firm's ability to pay due regard to the interests of its customers, and to give advice on, and recommend, packaged products available from the recipient firm's whole range or ranges of packaged products. The recipient firm should be mindful of the requirements of COB 5.3.5 R (Requirement for suitability generally).5

  5. (3)

    In relation to the sale of packaged products, COB 2.2.7 G indicates the kind of benefits which, in the FSA's view, a firm can give and receive without contravening COB 2.2.3 R.

  6. (4)

    COB 2.2.6 G does not apply to indirect benefits provided by a firm to another firm that is in the same immediate group. In this situation COB 5.7.5 R will apply.5

COB 2.2.7 G

Reasonable indirect benefits1

This Table belongs to COB 2.2.6 G.

 55

Reasonable indirect benefits

Joint marketing exercises

1

A product provider or its associate may provide generic product literature (that is, letterheading, leaflets, forms and envelopes) that is suitable for use and distribution by or on behalf of another firm if:5

(a)

the literature does not feature the recipient firm's name or features it less prominently than that of the product provider and is not used to promote the recipient firm'sbroker fund service; and5

(b)

the total costs (for example, packaging, posting, mailing lists) of distributing such literature to its customer are borne by the recipient firm.5

2

A product provider or its associate may supply another firm with 'freepost' envelopes, for forwarding such items as completed applications, medical reports or copy client agreements , when these are made generally available to all firms from which the provider obtains business.5

3

A product provider or its associate may supply product specific literature (for example, key features, minimum information, direct offer financial promotions) to another firm if:5

(a)

the literature is not designed to be used to promote the recipient firm's broker fund service; or5

(b)

the literature does not contain the name of any other firm; or5

(c)5

the name of the recipient firm (if it is included) appears only incidentally in the literature and the supplying firm's name appears with greater prominence.5

4

A product provider or its associate may supply draft articles, news items and financial promotion's for publication in another firm's magazine, only if in each case any costs paid by the product provider or its associate for placing the articles and financial promotions are not more than market rate, and exclude distribution costs.5

Seminars and conferences

5

A product provider or its associate may take part in a seminar organised by another firm or a third party and may pay toward the cost of the seminar, if:5

(a)

its participation is for a genuine business purpose;

(b)

the contribution is reasonable and proportionate to its participation and by reference to the time and sessions at the seminar when its staff play an active role; and5

(c)

in the case of a seminar organised by a third party, the seminar is open to participation by other firms generally.5

Technical services and information technology

6

A product provider or its associate may supply a 'freephone' link to which it is connected only if it is available to other firms generally.5

7

A product provider or its associate may supply another firm with any of the following:5

(a)

quotations and projections relating to its packaged products and, in relation to specific investment transactions (or for the purpose of any scheme for review of past business), advice on the completion of forms or other documents;

(b)

access to data processing facilities, or access to data, that is related to the product provider's business;5

(c)

access to third party electronic dealing or quotation systems that are related to the product provider's business; and5

(d)

software that gives information about the product provider'spackaged products or which is appropriate to its business (for example, for use in a scheme for review of past business or for producing projections or technical product information).5

7A5

A product provider may pay cash amounts or give other assistance to a firm not in the same immediate group for the development of software or other computer facilities necessary to operate software supplied by the product provider, but only to the extent that by doing so it will generate equivalent cost savings to itself or consumers.5

8

A product provider or its associate may supply a broker fund adviser (and its customer ) with a periodic statement relating to the relevant broker fund if the broker fund adviser is unable to supply the periodic statement.5

9

A product provider or its associate may supply another firm with information about sources of mortgage finance.5

10

A product provider or its associate may supply another firm with generic technical information in writing, not necessarily related to the product provider's business, when this information:5

(a)

is made available generally to other firms which give or might give advice on the product provider'spackaged products; or5

(b)

(i)

is of a specialist nature and is made available to a particular class of firm (that is, one that promotes itself as an expert in the same specialist area); and5

(ii)

states clearly and prominently that it is produced by the product provider or (if different) supplying firm.5

Training

11

A product provider or its associate may provide another firm with training facilities of any kind (for example, lectures, venue, written material and software) only if these are made available generally to all other firms which give or might give advice on the product provider'spackaged products.5

Travel and accommodation expenses

12

A product provider or its associate may reimburse another firm's reasonable travel and accommodation expenses when the other firm: 5

(a)

participates in market research conducted by or for the product provider; 5

(b)

attends an annual national event of a UK trade association, hosted or co-hosted by the product provider;5

(c)

participates in the product provider's training facilities (see 11);5

(d)

visits the product provider'sUK office in order to:5

(i)

receive information about the product provider's administrative systems; or5

(ii)

attend a meeting with the product provider and an existing or prospective customer of the receiving firm.5

Requirements when using a soft commission agreement

COB 2.2.8 R

[deleted]6

6
COB 2.2.9 G

[deleted]6

6
COB 2.2.10 G

[deleted]6

6
COB 2.2.11 G

[deleted]6

6

Allowable benefits provided under a soft commission agreement

COB 2.2.12 R

[deleted]6

6
COB 2.2.13 G

[deleted]6

6
COB 2.2.14 G

[deleted]6

6
COB 2.2.15 G

[deleted]6

6

Prior disclosure

COB 2.2.16 R

[deleted]6

1 6
COB 2.2.17 G

[deleted]6

6

Periodic disclosure

COB 2.2.18 R

[deleted]6

1 6

Exceptions

COB 2.2.19 R

[deleted]6

6

Record keeping

COB 2.2.20 R
  1. (1)

    [deleted]

    6
  2. (2)

    A firm must make a record of each payment of disclosable commission, and must retain that record for a period of at least six years from the date of payment.

  3. (3)

    A firm must make a record of each benefit given to another firm in accordance with COB 2.2.6 G, and must keep that record for at least six years from the date on which it was given.5

COB 2.3 Reliance on others

Application

COB 2.3.1 R

This section applies to a firm when it is conducting designated investment business or activities in connection with designated investment business.

Purpose

COB 2.3.2 G

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

Reliance on others

COB 2.3.3 R

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 2.3.4 E
  1. (1)

    In relying on COB 2.3.3 R, a firm should take reasonable steps to establish that the other person providing written information is:

    1. (a)

      not connected with the firm; and

    2. (b)

      competent to provide the information.

  2. (2)

    Compliance with (1) may be relied on as tending to establish compliance with COB 2.3.3 R.

  3. (3)

    Contravention of (1) may be relied on as tending to establish contravention of COB 2.3.3 R.

COB 2.3.5 G

A firm may generally rely on any information provided to the firm in writing by:

  1. (1)

    an unconnected authorised person; or

  2. (2)

    a professional firm;

unless the firm is aware, or ought reasonably to be aware, of any fact, or facts, that would give reasonable grounds to question the accuracy of any such information.

COB 2.3.6 R
  1. (1)

    Any information which a rule in COB or in CASS requires to be sent to a customer may be sent to another person on the instruction of the customer, so long as the recipient is not connected with the firm. 1

  2. (2)

    There is no need for a firm to send information to a customer where it has taken reasonable steps to establish that this has been or will be supplied by another person.

COB 2.4 Chinese walls

Application

COB 2.4.1 R

This section applies to a firm that conducts designated investment business.

COB 2.4.1A R

This section does not apply to a common platform firm if SYSC 10.2 (Chinese walls) applies to the firm.4

Purpose

COB 2.4.2 G

Principle 8 (Conflicts of interest) requires a firm to manage a conflict of interest fairly, both between itself and its customers and between a customer and another client. One of the methods by which a firm may manage conflicts of interest is to establish and maintain internal arrangements restricting the movement of information within the firm - Chinese walls. The purpose of this section is to set out the circumstances when the FSA would consider it appropriate for a firm to withhold or not to use information that it would otherwise have to disclose to, or use for the benefit of a client.

COB 2.4.3 G

The purpose of COB 2.4.4 R (1) is also to exercise the FSA's power under section 147 of the Act to make control of information rules (see COB 2.4.5 G for an explanation of the effect of this).

Control of information

COB 2.4.4 R
  1. (1)

    When a firm establishes and maintains a Chinese wall (that is, an arrangement that requires information held by a person in the course of carrying on one part of its business to be withheld from, or not to be used for, persons with or for whom it acts in the course of carrying on another part of its business), it may:1

    1. (a)

      withhold or not use the information held; and

    2. (b)

      for that purpose, permit persons employed in the first part of its business to withhold the information held from those employed in that other part of the business;

    but only to the extent that the business of one of those parts involves the carrying on of designated investment business or related ancillary activities.

  2. (2)

    Information may also be withheld or not used by a firm when this is required by an established arrangement maintained between different parts of the business (of any kind) in the same group. This provision does not affect any requirement to transmit or use information that may arise apart from the rules in COB.

  3. (3)

    For the purpose of this rule, 'maintains' includes taking reasonable steps to ensure that the arrangements remain effective and are adequately monitored, and must be interpreted accordingly.

  4. (4)

    For the purposes of section 118A(5)(a) 3of the Act, behaviour conforming with COB 2.2.4R(1) does not amount to market abuse.

Effect of acting in conformity with COB 2.4.4 R

COB 2.4.5 G

Section 147 of the Act enables the FSA to make rules ("control of information rules") about the disclosure and use of information held by a firm. COB 2.4.4 R (1) is the only control of information rule made by the FSA. This means that:

  1. (1)

    acting or engaging in conduct in conformity with COB 2.4.4 R (1) provides a defence against proceedings brought under section 397(2) or (3) of the Act (Misleading statements and practices) - see sections 397(4) and (5)(c);

  2. (2)

    behaviour conforming with COB 2.4.4 R (1) does not amount to market abuse - see COB 2.4.4 R (4); and

  3. (3)

    acting in conformity with COB 2.4.4 R (1) provides a defence for a firm against FSA enforcement action, or an action for damages under section 150 of the Act, based on a breach of a relevant requirement to disclose or use information (this is likely to be relevant only for requirements in PRIN, COB and MAR 3 (Inter-professional conduct)). Acting in conformity with COB 2.4.4 R (2) has a similar effect but only in relation to such a requirement in COB.

Attribution of knowledge

COB 2.4.6 R

When any of the COB rules or any of the CASS rules apply to a firm that acts with knowledge, the firm will not be taken to act with knowledge for the purposes of that rule if none of the relevant individuals involved on behalf of the firm acts with that knowledge as a result of arrangements established under COB 2.4.4 R.2

COB 2.4.7 G

When a firm manages a conflict of interest using the arrangements in COB 2.4.4 R which take the form of a Chinese wall, individuals on the "other side of the wall" will not be regarded as being in possession of knowledge denied to them as a result of the Chinese wall.

COB 2.5 Exclusion of liability

Application

COB 2.5.1 R
  1. (1)

    This section applies to a firm that conducts designated investment business.12

  2. (2)

    This section also applies to a firm which enters into a distance contracts to accept deposit with a retail customer.12

Purpose

COB 2.5.2 G

This section amplifies Principle 6 (Customers' interests) which requires a firm to pay due regard to the interests of its customers and treat them fairly.1

Limits on the exclusion of liability: designated investment business1

COB 2.5.3 R

A firm must not, in any written or oral communication in connection with designated investment business, seek to exclude or restrict, or to rely on any exclusion or restriction of, any duty or liability it may have to a customer (which for these purposes includes a retail customer) under the regulatory system.12

COB 2.5.4 R

A firm must not, in any written or oral communication to a private customer in connection with designated investment business, 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.2

1Limits on the exclusion of liability: distance contracts to accept deposits

COB 2.5.5 R

1A firm must not, in any written or oral communication to a retail customer in connection with a distance contract to accept deposits with a retail customer , seek to exclude or restrict, or to rely on any exclusion or restriction of, any duty or liability it may have to a retail customer under COB.2

COB 2.6 1General provisions related to distance marketing2

Application

COB 2.6.1 R

This section applies to a firm which:

  1. (1)

    conducts designated investment business with or for a retail customer;2

  2. (2)

    accepts a deposit from a retail customer.12

Pre-contract information about contractual obligations to be in conformity with contract

COB 2.6.2 R

A firm must ensure that information provided to a retail customer before the conclusion of a distance contract about his contractual obligations under that contract conforms with the contractual obligations that would be imposed on him under the law applying if the contract were concluded.1

Unsolicited services

COB 2.6.3 R
  1. (1)

    Subject to COB 2.6.3R (2), a firm must not:2

    1. (a)

      supply a service to a retail customer without a prior request on his part, when the supply of such service includes a request for immediate or deferred payment; or2

    2. (b)

      enforce any obligations against a retail customer in the event of unsolicited supplies of such services, the absence of reply not constituting consent.2

  2. (2)

    Paragraph (1) applies in relation to designated investment business, and accepting deposits, under an organised distance sales or service-provision scheme run by the firm or by an intermediary, who, for the purpose of that supply, makes exclusive use of one or more means of distance communication up to and including the time at which the services are supplied.12

COB 2.6.4 R

COB 2.6.3R (2) does not apply for a tacit renewal of a distance contract.1

Paper copy of contractual terms and conditions

COB 2.6.5 R

During the course of a distance contract with a firm , if a retail customer requests a paper copy of his contractual terms and conditions, the firm must provide it without additional charge and without delay.1

Change in means of distance communication

COB 2.6.6 R

During the course of a distance contract , a firm must comply with a retail customer's request to change the means of distance communication used, unless this is incompatible with the distance contract concluded or the service being provided by the firm.1