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COB 5.7 Disclosure of charges, remuneration and commission

Application

COB 5.7.1R

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

Purpose

COB 5.7.2G

Principle 7 (Communications with clients) requires a firm to pay due regard to the needs of its clients and communicate information to them in a way that is clear, fair and not misleading. The purpose of this section is to ensure that a private customer is made aware of the costs to him, directly or indirectly, of financial services, so that he is better able to make informed choices.

Disclosure of charges

COB 5.7.3R
  1. (1)

    Before a firm conducts designated investment business with or for a private customer, the firm must disclose in writing to that private customer the basis or amount of its charges for conducting that business and the nature or amount of any other income receivable by it or, to its knowledge, by its associate and attributable to that business.

  2. (2)

    If the designated investment business in (1) is in respect of an execution-only transaction:

    1. (a)

      which does not relate to a packaged product; and

    2. (b)

      where prior written disclosure would delay the transaction;

    the firm may instead:

    1. (c)

      make the disclosure required by (1) orally before the transaction is executed; and

    2. (d)

      provide written confirmation of the matters disclosed to the private customer within five business days of the execution.2

COB 5.7.4G
  1. (1)

    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 indicate 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, simplified prospectus5 or in the minimum information that the firm is required to provide to the private customer in accordance with COB 6.2 (Provision of key features or simplified prospectus5) and COB 6.4 (Product disclosure: special situations). When a firm is a broker fund adviser, disclosure should include any fees payable to the firm or its associate in connection with that activity by a provider firm. In the case of advice provided in connection with packaged products a firm should, in accordance with COB 4.3.3 R, have provided its customer with a fees and commission statement setting out the maximum rates of any fees which the customer will pay and/or with an indication of the maximum rates of commission (or equivalent) which it, or its representatives, may 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 accordance with COB 4.3.5 R it has confirmed the exact amount or rate that it will charge.4

  2. (2)

    In addition it is necessary that a private customer should, as soon as is practicable, be informed of the exact rate or the exact amount in cash terms of any commission (or equivalent) which the firm or its representatives will receive in respect of a specific transaction.4

  3. (3)

    In the case of a packaged product, product related charges and expenses will be disclosed in the key features document, simplified prospectus5 or in the minimum information that the firm is required to provide to private customers in accordance with COB 6.2 (Provision of key features or simplified prospectus5) and COB 6.4 (Product disclosure: special situations). When a firm is a broker fund adviser, disclosure should include any fees payable to the firm or its associate in connection with that activity by a product provider.4

4Disclosure of commission (or equivalent) for packaged products

COB 5.7.5R
  1. (1)

    4When a firm sells, personally recommends or arranges the sale of a packaged product to a private customer, and subsequently on the request of a private customer, the firm must disclose to the private customer, in cash terms:

    1. (a)

      any commission equivalent payable by it to a representative or appointed representative; and

    2. (b)

      any commission or commission equivalent receivable by it, or by any of its associates in connection with the transaction

    unless COB 5.7.9 R or COB 5.7.10 R applies.

  2. (2)

    In (1)(b) a firm is, in respect of any transaction, to be regarded as receiving commission equivalent if:

    1. (a)

      it is received from a product provider ("P"), or an associate of P; and

    2. (b)

      either P or its associate is in the same immediate group as the firm; and

    3. (c)

      the value of the commission equivalent (as assessed in accordance with these rules) is greater than the amount of commission in cash terms.

  3. (3)

    In (1) and (2) "cash terms" in relation to commission does not include the value of any indirect benefits which the firm may receive in accordance with COB 2.2.1

COB 5.7.6R

In determining the amount to be disclosed as commission equivalent in accordance with COB 5.7.5 R, a firm must put a proper value on the cash payments, benefits and services provided to its representatives in connection with the transaction.4

COB 5.7.7G

4[deleted]

COB 5.7.8E
  1. (1)

    When determining the value of cash payments, benefits and services under COB 5.7.6 R, a firm should follow the provisions of COB 5.7.16 E.4

  2. (2)

    Compliance with COB 5.7.8 E (1) may be relied on as tending to establish compliance with COB 5.7.6 R.

  3. (3)

    Contravention of COB 5.7.8 E (1) may be relied on as tending to establish contravention of COB 5.7.6 R.

Exceptions to the disclosure for packaged products

COB 5.7.9R

COB 5.7.5 R does not apply if:

  1. (1)

    the firm is acting as an investment manager; or

  2. (2)

    the firm is not acting as an outgoing ECA provider and the transaction is effected for a private customer who is habitually resident overseas; or

  3. (3)

    the firm is not acting as an outgoing ECA provider and the packaged product is a life policy and the private customer is not present in the United Kingdom at the time the application is made; or

  4. (4)

    the firm is acting as an outgoing ECA provider and the transaction is effected for a private customer who is habitually resident outside the EEA; or

  5. (5)

    the firm is acting as an outgoing ECA provider, the packaged product is a life policy and the private customer is not present in the EEA at the time the application is made.3

COB 5.7.10R

The requirement in COB 5.7.5 R to disclose to a private customer the amount or value, in cash terms, of commission or equivalent does not apply if the firm provides the private customer with example key features or a simplified prospectus5, in accordance with COB 6.2.7 R (Life policies), 5COB 6.2.22 R (Schemes) and COB 6.2.33 R (Obligation on a firm to provide a simplified prospectus) as applicable5, provided that the firm discloses to the private customer the actual amount or value of commission or equivalent within five business days of effecting the transaction.4

5

Guidance on disclosure requirements for packaged products

COB 5.7.11G

The disclosures required by COB 5.7.5 R should be made in a manner that is clear, fair and not misleading, as required by COB 2.1.3 R (Clear, fair and not misleading communication), and that indicates the timing of any payment. For example, when a firm exchanges its right to future commission payments for a lump sum, whether by way of a loan or other commercial arrangement, it should disclose the amount of commission receivable by it that has been exchanged for the lump sum.

COB 5.7.12G

If the precise rate or value of commission or equivalent is not known in advance, the firm should estimate the rate likely to apply to the representative in respect of the transaction.4

COB 5.7.13G

The disclosures required by COB 5.7.5 R should normally be made in writing. For example, if a specific key features document, simplified prospectus5 or projection is provided to a private customer, the required disclosures should either be contained in the projection or the key features document or simplified prospectus5, or be given to the private customer in a separate written statement at the time these documents are given to the private customer. When a private customer does not make a written application to enter into a transaction contemplated by COB 5.7.5 R, for example, when the transaction is a telephone deal for units in a regulated collective investment scheme, the firm may disclose the amount or value of commission or equivalent orally. In these circumstances, the firm should give written confirmation as soon as possible after the date of the transaction, and in any event within five business days. In preparing its written disclosure statement, a firm may wish to follow the guidance on content and wording set out in COB 5.7.17 G.4

COB 5.7.14G

The collection of premiums payable under a life policy by introducers acting as the appointed collecting agents of a product provider will not be treated by the FSA as a transaction for the purposes of COB 5.7.5 R.

COB 5.7.15R

If the terms of a packaged product are varied in circumstances that require the issue of a cancellation notice, a firm must disclose to a private customer in writing any consequent increase in commission or equivalent receivable by it in relation to that transaction.4

COB 5.7.16E

Calculating commission equivalent4

This table forms part of COB 5.7.8 E.

44444

Calculating commission equivalent4

This table sets out the basis on which the firm should determine the value of cash payments, benefits and services to be disclosed as commission equivalent under COB 5.7.5 R. Benefits and services, as set out in parts B and C below, need be included only where their value is such that they could not be provided to a firm as an indirect benefit under COB 2.2.6 G (Packaged products - guidance on indirect benefits) and COB 2.2.7 G (Reasonable indirect benefits).4The result of the calculation should be that the amounts disclosed as commission equivalent are, as far as possible, the same as the amounts and value of commission which would be paid in a corresponding sale.4

Part A: Cash payments

1.

These cover all payments by a firm to a representative, appointed representative or a firm in the same immediate group in relation to a transaction in a packaged product, including:4

(a)

payments to any representative of the firm in respect of the transaction (for example, a manager's override), including any payments from the firm to introducers;4

(b)

bonus payments made for the achievement of certain sales targets;

(c)

that element of any payment made in relation to other business which may be considered to result directly or indirectly from the transaction; for example, any extra element of commission equivalent payable on the sale of a mortgage which is to be repaid through an investment in a packaged product;4

(d)

payments resulting directly from business written in previous years (for example, renewal commission equivalent), which are conditional on the completion of minimum amounts of new business;4

(e)

payments made by an associate of the firm to an associate of the representative;

(f)

salaries and other payments which do not relate directly to any one transaction, provided they are treated similarly to 'benefits' and 'services' (see paragraph 14).4

2.

In determining the amounts to be included in the calculation, a firm should have regard to the following:

(a)

When the precise rate of commission equivalent is not known in advance (for example, if retrospective volume overrides apply), the firm should estimate the rate likely to apply to the representative in question. This could, for example, be based on an average rate applicable to particular groupings of representatives or on a best estimate for each representative. It should never be below any minimum rate applicable to that representative or sale.4

(b)

When payments are credited to an 'account' from which periodic withdrawals may be made, the amount included should be that credited to the account whether or not the recipient intends to withdraw it immediately. If a representative is able to 'overdraw' an account, all amounts to be credited in respect of a transaction, up to any 'borrowing limit', should be included as if they were credited at the time the transaction was effected.

(c)

When a payment is made before the firm receives the premium or the investment monies to which it relates (for example, indemnity commission equivalent), it should be included as being received at the time of payment. If the representative or the provider firm wishes to explain this arrangement to the customer, he is free to do so, provided this does not detract from the required disclosure.4

(d)

When the firm arranges for a lump sum to be paid to a representative through a third party, in exchange for the income stream to which the representative is entitled (for example, a factoring arrangement), the lump sum should be included as if it were a payment from the firm.

(e)

When a firm provides, or arranges for a third party to provide, a loan to a representative, on the security of, or in the expectation of, future payments from the firm, the amounts to be included are the payments to the representative on which the provision of the loan is based, as if they were received at the time the transaction was effected, irrespective of their actual timing.

(f)

When an agent is employed and remunerated by the firm'sappointed representative , the payments to be included should be those made by the firm to the appointed representative , not those made by the appointed representative to its own employee.

Part B: Benefits

3.

These include the cost to the firm of all non-monetary benefits provided by it to a representative. These benefits include any item that could be considered as a benefit or expense under the Income and Corporation Taxes Act 1988 (ICTA). A benefit should be included whether or not the representative is liable to income tax on it and whether it is chargeable to tax.

4.

The type of benefits covered by paragraph 3 include the use of a car, attendance at conferences, subsidised loans, contributions to pension schemes, national insurance contributions, the value of any voucher outside the ICTA definition of benefit or expense, and the value of shareoption (taking into account any discount on issue and assuming that the shares in question grow at a reasonable rate in line with other investments).

Part C: Services

5.

These include benefits which could not be provided to a firm, A, as an indirect benefit (under COB 2.2.3 R (Prohibition of inducements) and COB 2.2.6 G (Packaged products - guidance on indirect benefits)), and which A would therefore have to fund out of its disclosable commission. For those services which can be provided as an indirect benefit, it is not necessary for the firm providing the benefit, B, actually to provide services to another firm, A, for B to be able to apply this criterion in relation to its employees, representatives or agents.4

6.

The following services should be included:

(a)

office accommodation and equipment, including telephone, photocopying and fax;

(b)

loans where a commercial rate of interest is not charged, including commission equivalent advances overdue for repayment;4

(c)

general stationery and mailing or distribution costs;

(d)

computer hardware and software (except software which specifically relates to the firm'spackaged product, such as software used in supporting the pensions review process or for producing illustrations, projection and product information);

(e)

clerical and administrative support (except support given in relation to the pensions review process);

(f)

business insurance cover, including professional indemnity and fidelity guarantee;

(g)

recruitment;

(h)

compliance monitoring;

(i)

customer services;

(j)

business planning services;

(k)

line management.

7.

To put a value on these services, the following costs should be included:

(a)

all overheads attributable to a particular cost item (for example, the cost of a compliance official);

(b)

salary costs pro rata where individuals are only engaged part-time on relevant business;

(c)

rent and associated premises costs at an appropriately reduced rate where the premises are also used for other business activities;

(d)

only that proportion of the cost of lead generation promotions attributable to the generation of relevant business (but including the placing of any financial promotion, and its mailing or provision of access to third party customers);

(e)

only the marginal additional compliance costs of ensuring that representatives and their support and training material comply with relevant rules;

(f)

the commercial value of a service which is the use of an asset owned by the firm (for example in the case of a property, its full market rent);

(g)

in respect of appointed representative, the costs of any promotion in a newspaper or elsewhere and the provision of representative-specific literature in connection with a direct offer financial promotion;

(h)

in respect of a firm in the same immediate group and connected appointed representatives, where the name of the company is included in the direct offer financial promotion, the costs of any promotion in a newspaper or elsewhere and the provision of literature specific to the representative in connection with a direct offer financial promotion.4

8.

The following costs should be excluded:

(a)

any contributions made by a representative out of his own resources;

(b)

the cost of corporate awareness advertising;

(c)

training costs;

(d)

underwriting, policy administration and claims handling costs;

(e)

costs of developing and maintaining computer systems for the provision of projections of benefits, customer-specific key features documents, simplified prospectuses5 or other product information;

(f)

costs of compensating customers;

(g)

the costs of head office and branch level management and support, other than payments to managers falling under Part 1, for representatives, where these services could also be provided to a firm not in the same immediate group, for example, broker consultants and 'inspectors';4

(h)

'collecting remuneration' payable in respect of industrial assurance policies or by friendly societies, provided that the amounts excluded do not exceed the genuine costs of premium collection; comparison with the remuneration payable to collectors who are not representatives or with the renewal remuneration payable on ordinary branch business may provide a guide.

Part D: Calculation methodology4

9.

Estimating commission equivalent4

The cost of benefits and services should normally be based on the most recent relevant experience of the firm, except where one of the following applies:4

(a)4

the firm has reasonable grounds to believe that the commission equivalent for the period concerned will be higher than that implied by the experience; or4

(b)4

the firm has strong grounds to believe that the commission equivalent for the period concerned will be lower than that implied by the experience; or4

(c)4

no such experience is available.4

If any of (a) to (c) applies, the estimate should be based on and evidenced by business plans which the firm is satisfied on reasonable grounds are achievable.4

10.

Firms that receive or expect to receive:4

(a)4

commission in respect of packaged products which are not its own products or the products of a product provider who is in the same immediate group; and4

(b)4

commission equivalent in respect of its own products4

must ensure that the costs and benefits attributed to these products do not exceed the amounts that can be financed from that commission.4

Construction of commission equivalent scales4

11.

The total costs of cash payments, benefits and services should be assessed and the normal approach is to split them into new business costs and after sale servicing costs. The costs of each of these functions should be assessed directly in relation to the work carried out by the representatives.4

12.

(a)

The commission equivalent costs identified in 11 should be spread across the business using a new business commission equivalent scale and a servicing commission equivalent scale respectively. The new business commission equivalent scales when applied to the total value/volumes of business should reproduce the total new business commission equivalent costs, and similarly for the servicing scales.4

(b)

The commission equivalent scales should distinguish between products for which the commission equivalent to representatives is likely to be different.4

13.4

Where the representative's commission equivalent includes a cash payment related to volume and/or value of the transactions sold, the following method would be appropriate:4

(a)4

The basic payment scale should comprise a new business payment scale and a servicing payment scale. The cost of benefits and services should be expressed in the form of a new business uplift factor and a servicing uplift factor. So the "new business uplift factor" would be the cost of new benefits and services divided by the new business payments. The "servicing uplift factor" would be the cost of servicing benefits and services divided by servicing payments.4

(b)4

The payment scales should be grossed up by new business uplift factors or servicing uplift factors as appropriate to reflect the cost of benefits and services. The grossed up scales represent the new business and servicing commission equivalent scales, and are applied to each contract to derive the commission equivalent to be disclosed.4

(c)4

Where the level of payment in the first year of a policy equals the level of payment in subsequent years then "new business payments" refers to payments in the first year of a contract and "servicing payment" refers to the level of payment in subsequent years.4

(d)4

If servicing costs are expected to be incurred in any year in which no servicing payments are to be made on a contract, disclosure should still be made, for example by using a technique similar to that described in 14.4

14.4

(a)4

When a representative receives a salary, or other payment unrelated to volume or sales:4

(i)4

this should be amalgamated with the cost of benefits and services; and4

(ii)4

the total costs should be apportioned over individual transactions in a way that reflects the value of a contract to a firm or thefirm'simmediate group.4

(b)4

Where a firm is a distributor for a product provider within the same immediate group, the firm must apportion total costs over individual transactions in a way that reflects the value of the contract to the firm'simmediate group.4

15.4

Where other methods of commission equivalent are employed, for example, part salary and part related to the volume/value of the sale, the salary element should be added to the cost of benefits and services and the method in 13 should be used.4

16.4

Where a representative agrees to forgo part of his or her normal payment to improve the terms of the contract, the same uplift factor (in line with 13(a)) may be applied to the reduced payment, or the same monetary cost of benefits and services may be used, subject to the following constraints:4

(a)4

the same uplift factor approach should only be adopted if the customer will also receive the full benefit of the lower of:4

(i)4

the reduction in the amount of disclosed commission equivalent for non-financial benefits and services; and4

(ii)4

an equivalent proportion of the policy loadings intended to cover non-financial benefits and services.4

(b)4

Where the 'same uplift factor' approach is adopted, the proportion of payments forgone must be allowed for in calculating the uplift factor.4

(c)4

Where an average scale of commission equivalent is used, the percentage reduction in payment in respect of the individual representative may be applied to the average payment in order to calculate the reduced payment.4

17.4

The firm should review the commission equivalent scales if at any time it becomes aware that the commission equivalent figures have become misleading. A review should take place at least annually.4

18.4

When an identical commission equivalent scale applies to all representatives (although they might earn differing percentages of it), the same average amount of commission equivalent (and the value of other benefits and services) in respect of identical transactions may be disclosed, regardless of the percentage of the scale paid to each individual representative. Averaging may be used for representatives on the same scale and employees of firms in the same immediate group, but not appointed representatives.4

Payments to associates4

19.4

Where a firm pays commission equivalent to a another firm in the same immediate group, or an appointed representative which is an associate of the firm, it should ensure that the calculation of the sum to be disclosed is the higher of:4

(a)4

all payments, benefits and services provided to the firm or appointed representative, from whatever source, plus an additional allowance for profit of 15% - unless the firm can demonstrate that another figure (higher or lower) is more appropriate; and4

(b)4

the cash payments actually paid by the firm, plus the value of services provided.4

COB 5.7.17G

Remuneration and commission disclosure statements: content and wording.

This table forms part of COB 5.7.13 G.

5

Remuneration and commission disclosure statements: content and wording

A firm may wish to follow the guidance on content and wording in this table when drawing up its written statement of remuneration or commission under COB 5.7.5 R.

Degree of accuracy

1.

To help the customer understand, the firm may round large amounts of commission or remuneration to three significant figures (that is, where the leading three figures are sufficient to convey the magnitude of the result, for example £122 instead of £122.35).

Sample wordings

2.

Examples of appropriate remuneration or commission disclosure wordings, for:

(a)

independent intermediaries and other intermediaries (in a direct offer financial promotion or post-sale information): "For arranging this policy/contract XYZ Ltd will pay commission to IFA Ltd £..."

(b)

representatives employed by an appointed representative: "For arranging this policy/contract XYZ Ltd will pay remuneration and provide services to AR Ltd worth £..."

(c)

representatives employed by an appointed representative (at the point of sale or in a direct offer financial promotion): "For arranging this policy/contract AR Ltd expects to receive remuneration and services from XYZ Ltd worth £..."

(d)

representatives employed directly by the firm (including self-employed sole trader appointed representatives):

(i)

"for arranging this policy/contract I expect to receive remuneration and services from XYZ Ltd worth £..."; or

(ii)

"for arranging this policy XYZ Ltd expect to incur sales costs of £..."; or

(iii)

an acceptable post sale alternative might be: "for arranging this policy XYZ Ltd has provided remuneration and services to your adviser worth £..."; 1

this type of approach would be suitable either to a salaried or commissioned representative.

3.

The description of the monetary amount (just shown as '£...') in the examples in paragraph 2 will vary according to the incidence and basis of remuneration or commission. Examples of some common cases are:

(a)

indemnified payments (on a monthly payment contract): "£X immediately and £Y each month from the Nth month to the end of the term"

(b)

level basis (on an annual payment whole life contract): "£X each year"; but in the case of a sale by any representative, the provision of benefits and services would probably require instead a statement in the form: "£X immediately and £Y each year thereafter".

(c)

fund related basis:

(i)

using the same rate of growth and the same periods as those in the key features document or the simplified prospectus5, the example will normally show the commission or remuneration in the first year in which it is paid and the tenth year; or

(ii)

for an investment of £P, "For arranging this policy, XYZ Ltd will pay commission to IFA Ltd of £X, and half a percent of the fund value each year. For example, if your fund was worth £P, we would pay £X per year: if it was worth £2xP, we would pay £Z per year. Commission is paid every six months".

(d)

increasing payment basis: "£X immediately and a variable amount in each year thereafter, being, for example, £Y in the second year and increasing to £Z by the final year".