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COB 3.9 Direct offer financial promotions

Application

COB 3.9.1R

This section applies to a firm which communicates or approves a direct offer financial promotion.

COB 3.9.2G
  1. (1)

    This section includes provisions which apply to all direct offer financial promotions and other provisions which apply only to certain kinds of direct offer financial promotions. COB 3.9.3 Gis intended to help firms locate the paragraphs which are relevant to them.

  2. (2)

    COB 3.8.2 R to COB 3.8.20 G also apply to direct offer financial promotions.

  3. (3)

    Material communicated as one package, such as by direct mail, may be regarded as one financial promotion for the purposes of this section.

COB 3.9.3G

Location of the provisions applicable to direct offer financial promotions

This table belongs to COB 3.9.2 G

87775

(1)

Exemptions for deposits, pure protection contracts which are long-term insurance contracts8 and reinsurance contracts

8

COB 3.9.4 G

(2)

Prohibited types of direct offer financial promotions

COB 3.9.5 R

(3)

Direct offer financial promotions: general requirements

COB 3.9.6 R7

(3A)7

Contractual terms and conditions for distance contracts7

COB 3.9.7A R7

(4)

Cash deposit ISAs

COB 3.9.8 R

(5)

Electronic media

COB 3.9.9 G

(6)

Packaged products

COB 3.9.10 R to COB 3.9.11 G

(7)

Execution-only dealing service

COB 3.9.12 R to COB 3.9.13 G

(8)

Potential problem areas

COB 3.9.14 G

(9)

Information to be contained in direct offer financial promotions14 regarding:

14

COB 3.9.14 G

(a)

investments which can fluctuate in value

COB 3.9.15 R

(b)

life policies

COB 3.9.18 R

(c)

taxation

COB 3.9.19 R to COB 3.9.20 R

(d)

EIS or non-packaged products, ISAs or PEPs with no right of withdrawal7

COB 3.9.21 R

(e)

charges for regulated collective investment schemes

COB 3.9.23 R

(f)

penny shares

COB 3.9.24 R

(g)

branded funds

COB 3.9.25 R

(h)

Enterprise Investment Schemes

COB 3.9.26 R to COB 3.9.28 R

(i)

income withdrawals or short-term annuities14

COB 3.9.29 R

(j)

structured capital-at-risk products

COB 3.9.31 R

(k)9

CTFs9

COB 3.9.8 R9

COB 3.9.30 R9

Exemptions

COB 3.9.4G

Firms are reminded that under COB 3.2.3 R:

  1. (1)

    COB 3.9 does not apply to a direct offer financial promotion relating to:

    1. (a)

      a deposit (except a cash deposit ISA or cash deposit CTF); or9

    2. (b)

      a pure protection contract which is a long-term care insurance contract8 or reinsurance contracts8; and

      8
  2. (2)

    a direct offer financial promotion relating to a cash deposit ISA must comply with COB 3.9.6 R (1) and COB 3.9.8 R.

Prohibited types of direct offer financial promotion

COB 3.9.5R
  1. (1)

    A direct offer financial promotion must not relate to a broker fund.

  2. (2)

    A direct offer financial promotion must not relate to:

    1. (a)

      a derivative; or

    2. (b)

      a warrant;

    unless the firm itself has adequate evidence to suggest that the investment may be suitable for the person to whom the promotion is communicated.1

Direct offer financial promotions: general requirements

COB 3.9.6R
  1. (1)

    A direct offer financial promotion must be in a durable medium and contain sufficient information to enable a person to make an informed assessment of the investment or service to which it relates.6

  2. (2)

    In particular, a direct offer financial promotion must contain:6

    1. (a)

      the information set out in COB App 1 (the information in and (4) must be provided in relation to the person offering the investment or service and, if different, the firm communicating or approving the financial promotion);6

    2. (b)

      where it is the case that no advice on investments has been given, a prominent statement that:10

      1. (i)

        no advice on investments has been given; and10

      2. (ii)

        if a person has any doubt about the suitability of the agreement which is the subject of the financial promotion he should contact the firm for advice on investments (or another appropriate firm if the firm does not offer advice on investments).106

    3. (c)

      if the financial promotion is communicated by a firm whose permission includes a requirement that it must not hold client money, the name of the person to whom payment (if any) should be made;6

    4. (d)

      details of the basis or amount of any commission or remuneration which might be payable by the person who is offering the investment or service to another person.6

COB 3.9.7R

[deleted]26

6Contractual terms and conditions for distance contracts

COB 3.9.7AR
  1. (1)

    6A firm must ensure that a retail customer is provided with all the contractual terms and conditions on which its service will be provided in a durable medium in good time before the retail customer is bound to the firm by a distance contract or offer resulting from a direct offer financial promotion, unless an exemption in (2), (3) or (4) applies:

  2. (2)

    Exemption: means of distance communication

    This exemption applies if the contract is concluded at the retail customer's request using a means of distance communication which does not enable provision of the contractual terms and conditions in a durable medium in accordance with (1). In that case, the firm must provide the retail customer with the information in a durable medium immediately after conclusion of the distance contract.

  3. (3)

    Exemption: successive or separate operations under an initial service agreement

    This exemption applies if the firm has an initial service agreement with the retail customer and the contract is in relation to a successive operation or separate operation of the same nature under that agreement (see COB 1.10.2 G (1)).

  4. (4)

    Exemption: other successive or separate operations

    This exemption applies if:

    1. (a)

      the firm has no initial service agreement with the retail customer;

    2. (b)

      the firm has performed an operation with the retail customer within the last year; and

    3. (c)

      the contract is in relation to a successive operation or separate operation of the same nature (see COB 1.10.2 G (2)).

Cash deposit ISAs and cash deposit CTFs9

COB 3.9.8R

A direct offer financial promotion relating to a cash deposit ISA or cash deposit CTF must contain the information required by whichever of COB 6.5.42 (1) to COB 6.5.42 (8) or COB 6.5.42A applies to it and COB App 1.1679

Electronic media

COB 3.9.9G

Guidance, including information on direct offer financial promotions on the internet and other electronic media, is provided in COB 3.14 (The internet and other electronic media).

Packaged products

COB 3.9.10R
12
  1. (1)

    A direct offer financial promotion relating to a packaged product other than a simplified prospectus scheme or a recognised scheme under section 264 of the Act (Schemes constituted in other EEA States)13 must contain the information required by COB 6.5.2 R (1), (3) and (5) as applicable (Contents of key features).12

  2. (2)

    12A direct offer financial promotion relating to a simplified prospectus scheme must contain the information required by COB 6.2.37 (Table: Contents of the simplified prospectus).

    13
  3. (3)

    13A direct offer financial promotion relating to a recognised scheme under section 264 of the Act (Schemes constituted in other EEA States) must contain the information which the competent authority of the recognised scheme's Home State requires a simplified prospectus to contain.

  4. (4)

    13Where a direct offer financial promotion relates to a funds supermarket service, the promotion may, instead of meeting the requirements in (1), (2) and (3), take the form of a composite key features document that complies with the requirements of COB 6.5 (Content of key features) provided that it contains a clear statement that the simplified prospectus of each simplified prospectus scheme and simplified prospectus of each recognised scheme to which the service relates is available free of charge on request.

COB 3.9.11G
13
  1. (1)

    13The information should follow, where possible, the same order as key features or, as the case may be, the simplified prospectus. But adjustments may be made to the order, where this would assist design and understanding of the material.12

  2. (2)

    13Where the direct offer financial promotion relates to more than one key features scheme, simplified prospectus scheme or recognised scheme under section 264 of the Act (Schemes constituted in other EEA States) or any combination of them, the information to be provided in the promotion may be presented on a composite basis.

Execution-only dealing services

COB 3.9.12R

A direct offer financial promotion relating to an execution-only dealing service must in particular, if it is the case, contain a clear statement that:

  1. (1)

    the firm's procedures are such that there may be a delay in the execution of a customer order, including the reason for and the normal maximum extent of any such delay;

  2. (2)

    customer orders may on occasion be aggregated (in which case the statement must comply with COB 7.7.4 R).

COB 3.9.13G

The purpose of COB 3.9.12 R (1) is to ensure that explanations are given when firms' procedures might, for example, involve dealing every hour or at certain times of the day. Details of external factors over which the firm has no control are not required.

Potential problem areas for direct offer financial promotions.

COB 3.9.14G

To assist firms' compliance with COB 3.8.4 R (1) and COB 3.8.8 R(1) in relation to a direct offer financial promotion, further guidance is given in COB 3 Annex 4 G.5

Investments which can fluctuate in value

COB 3.9.15R
  1. (1)

    A direct offer financial promotion relating to an investment which can fluctuate in value, or which offers income distributions which may fluctuate, must make this clear in terms which are likely to be understood by the kind of recipient to whom the financial promotion is communicated.

  2. (2)

    The explanation given in conformity with (1) must be set out with due prominence and in a print size no smaller than that used in the main text of the financial promotion.

COB 3.9.16G

The FSA will expect the explanation required by COB 3.9.15 R to be contained within the main body of the financial promotion, and not in small print at the very end. Firms which choose to include it in a separate stand-alone statement should satisfy themselves on reasonable grounds that this is likely to offer the best prospect of it being seen and read and should record such reasons for the purposes of COB 3.7 (Records).

COB 3.9.17G

Examples of explanations which could meet COB 3.9.15 R are:

  1. (1)

    'You are not certain to make a profit; you may lose money/make a loss';

  2. (2)

    'You may not get back the full amount of your investment';

  3. (3)

    (for investment income): 'The income is not fixed - it can go up or down';

  4. (4)

    (for contingent liabilities): 'You could lose all the money you invested and you may have to pay more later';

  5. (5)

    (for higher volatility funds): 'This investment may be subject to sudden and large falls in value, you could get back nothing at all';

  6. (6)

    (for property funds):

    1. (a)

      'This fund invests in property and land. This can be difficult to sell - so you may not be able to sell/cash in this investment when you want to. We may have to delay acting on your instructions to sell your investment';

    2. (b)

      'The value of property is generally a matter of a valuer's opinion rather than fact';

  7. (7)

    (for an Enterprise Investment Scheme):

    1. (a)

      'It may be difficult to sell your investment, or to get accurate information about how much it is worth or how risky it is';

    2. (b)

      'These are unquoted securities which may have more risks than quoted securities or shares';

    3. (c)

      'Investments in unquoted securities may be difficult to sell. Market makers may not be prepared to deal in them. This scheme may invest in private companies and restrictions may apply to the transfer of these private company securities';

    4. (d)

      'Proper information for working out the current value of investments may not be available';

  8. (8)

    (for property enterprise trusts and Enterprise Zone Property Unit Trusts):

    1. (a)

      'The value of the property in these schemes can go down as well as up. The initial price of Enterprise Zone property may be distorted as a result of the tax allowances and other benefits available - it may often be necessary to pay a higher price for this property compared with other property';

    2. (b)

      'There is no established market in this investment';

    3. (c)

      'This investment is designed to be held for a very long time (normally 25 years). You may have difficulty selling it. You should not invest in this if you may need to sell early';

    4. (d)

      'Do not invest in this investment unless you have carefully thought about whether you can afford it and whether it is right for you';

  9. (9)

    (for non-readily realisable investments): You may have difficulty selling this investment at a reasonable price and, in some circumstances, it may be difficult to sell it at any price. Do not invest in this unless you have carefully thought about whether you can afford it and whether it is right for you;

  10. (10)

    (for front end loaded contracts): We take most of our charges in the early years of this investment. This means that if you withdraw during this time you may lose money/get back less than you invested;

  11. (11)

    (for with-profit life policies): The value of this policy depends on how much profit we make and how we may decide to distribute this profit;

  12. (12)

    (for penny shares): There is an extra risk of losing money when shares are bought in some smaller companies including penny shares. There is a big difference between the buying price and the selling price of these shares. If they have to be sold immediately, you may get back much less than you paid for them. The price may change quickly and it may go down as well as up;

  13. (13)

    (for foreign currency denominated investments): Changes in the rates of exchange between currencies may cause your investment/the income to go down or up;

  14. (14)

    (for investments where the market is restricted): There is only one market maker', and/or `the only market maker is the communicator of the financial promotion or an associate of the issuer;4

  15. (15)

    (for a security or an investment trust savings scheme which satisfies the conditions specified in COB 3.8.9 G (6)): 'This investment may be subject to sudden and large falls in value and you could get back nothing at all'.4

Life policies

COB 3.9.18R

A direct offer financial promotion which relates to a life policy must state:

  1. (1)

    which benefits (if any) are fixed amounts, and what those amounts are; and

  2. (2)

    which benefits are not fixed amounts.

COB 3.9.18AG

10Firms are reminded of the provisions in COB 4.3, COB 5.2 and COB 5.3 requiring particular disclosures to clients in relation to life policies.

Taxation

COB 3.9.19R

A direct offer financial promotion must include a summary of the taxation of any investment to which it relates and the taxation consequences for investors generally.

COB 3.9.20R

A firm must include in a direct offer financial promotion:

  1. (1)

    a warning that taxation levels, bases and (if relevant) reliefs can change;

  2. (2)

    the assumed rate of taxation;

  3. (3)

    (where taxation reliefs are mentioned) statements:

    1. (a)

      distinguishing between reliefs which apply directly to investors and anyone else;

    2. (b)

      that the reliefs are the ones which currently apply; and

    3. (c)

      that the value depends upon the circumstances of the investor; and

  4. (4)

    where the words 'free from tax liability', or similar are used and it is the case, a statement making clear that this describes the benefits when paid to the investor, and a statement with equal prominence that the income is payable out of a fund which has already paid income tax, corporation tax or capital gains tax (whichever applies).

EIS or non-packaged product, ISA, PEP or CTF with no right of withdrawal69

COB 3.9.21R

A direct offer financial promotion which relates to an EIS or non-packaged product ISA, PEP or CTF for which no right to withdraw is given under case 8 of row 2, COB 6.7.17 R, must include the statement required by that provision.69

COB 3.9.22G

6[Deleted]

Charges for regulated collective investment schemes

COB 3.9.23R

A direct offer financial promotion relating to a regulated collective investment scheme must give an adequate explanation of the charging structure and make clear:

  1. (1)

    whether all or part of the scheme expenses will be taken out of capital or income; and

  2. (2)

    the likely long-term effect on capital or income.

Penny shares

COB 3.9.24R

If an indication of the price of a particular penny share is included in a direct offer financial promotion, the bid-offer spread must also be included (based on the best price available in the relevant market at the time for transactions of the largest bid or offer price of that share).

Branded funds

COB 3.9.25R

A direct offer financial promotion relating to a branded fund must include a statement that the firm responsible for the promotion does not manage the investments in the branded fund, together with the name and address of the manager.

Enterprise Investment Schemes

COB 3.9.26R

A direct offer financial promotion relating to an Enterprise Investment Scheme must contain:

  1. (1)

    the information specified in COB 3 Annex 2 R;

  2. (2)
    1. (a)

      either a copy of the prospectus; or

    2. (b)

      if no prospectus is required under Part VI of the Act, the information specified in COB 3.9.27 G relating to each company in which the Enterprise Investment Scheme manager has a material interest and intends to acquire interests on behalf of the scheme;

  3. (3)

    a prominent statement that applications may only be made and accepted subject to the terms and conditions of the Enterprise Investment Scheme particulars and prospectus (if applicable); and

  4. (4)

    a prominent explanation of any right to withdraw (under COB 6.7) or, where it is the case, that such rights will not apply.

COB 3.9.27G

To meet the requirements of COB 3.9.26 R, a direct offer financial promotion relating to an Enterprise Investment Scheme should include the following information about the company issuing the EIS shares:3

  1. (1)

    assets and liabilities;

  2. (2)

    financial position;

  3. (3)

    profits and losses;

  4. (4)

    prospects; and

  5. (5)

    rights attaching to the EIS shares.

COB 3.9.28R

In addition to the requirements of COB 3.9.26 R, a direct offer financial promotion relating to a private offer of EIS shares must include the information specified in COB 3 Annex 3 R.

Income withdrawal and short-term annuity14

COB 3.9.29R

A direct offer financial promotion relating to, or offering a facility for, income withdrawals or a short-term annuity14 must include the following explanations:

  1. (1)

    the14 value of the fund may be eroded14, especially if investment returns are poor and a high level of income is taken; this could result in a lower income in the future14;

    1414
  2. (2)

    the investment returns may be less than those shown in the illustrations;

  3. (3)

    annuity or scheme pension 14rates may be at a worse level in the future;14

    14
  4. (4)

    when maximum withdrawals are taken or the maximum short-term annuity is purchased, high levels of income may not be sustainable; and14

    14111414
  5. (5)

    the maximum income that can be withdrawn under an alternatively secured pension after age 75 is significantly less than the maximum that applies before age 75.14

9Child trust funds

COB 3.9.30R

9A direct offer financial promotion relating to a CTF must contain the information referred to in COB 6.5.40 R (7).

Structured capital at risk products15

COB 3.9.31R

5When communicating or approving a direct offer financial promotion for a structured capital-at-risk product a firm must ensure that the following information is included in the mailing pack or included by a clearly visible electronic link if using email, the Internet or other electronic media:

  1. (1)

    an explanation of the types of capital-at-risk products generally available and how they would typically work;

  2. (2)

    an explanation of the risks associated with investing in these capital-at-risk products;

  3. (3)

    details of the key issues that consumers should consider before investing in a capital-at-risk product; and

  4. (4)

    information about how to complain to the firm and how complaints can subsequently be referred to the Financial Ombudsman Service.

COB 3.9.32G
  1. (1)

    5When a firm complies with its obligations under COB 3.9.31 R it should ensure that the information it provides includes in particular the following:

    1. (a)

      reference to the different risk profiles of generally available capital-at-risk products when compared with capital secure products such as deposits;

    2. (b)

      reference to the fact that, because of the risk to capital, capital-at-risk products should only form part of an investment portfolio;

    3. (c)

      reference to the fact that, before buying, investors should check they understand the way the product is priced, the charges involved, the length of time their money will be tied up and the consequences of cashing in the product early; and

    4. (d)

      contact details for the FSA's consumer helpline and website.

  2. (2)

    The FSA would regard a firm that provides a copy of the FSA's factsheet about capital-at-risk products entitiled 'Capital-at-risk products' as complying with its obligations under COB 3.9.31 R. Firms can obtain copies or buy the artwork by using the FSA's online order form at www.fsa.gov.uk/pubs, Consumer publications.

  3. (3)

    Where a firm provides a copy of the FSA's factsheet, it may wish to include the following wording in its covering literature:"The enclosed factsheet about capital-at-risk products is from the Financial Services Authority (FSA), the independent watchdog set up by Parliament. Please read this document carefully.".