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COB 6.1 Product disclosure4

Application

COB 6.1.1 R

COB 6.1 to COB 6.5 apply to a firm:

  1. (1)

    which sells, personally recommends or arranges (brings about) for the sale of a packaged product (other than units in a simplified prospectus scheme)7 to a private customer or to the trustees of an occupational pension scheme or to the trustee or operator of a stakeholder pension scheme; or

  2. (1A)

    7which is an operator of a simplified prospectus scheme or which sells, personally recommends or arranges (brings about) for the sale of units in such a scheme to a client, whether or not held within a PEP or an ISA; or

  3. (2)

    which manages, sells or personally recommends a cash deposit ISA or cash deposit CTF for or to a private customer; or6

  4. (3)

    which effects, personally recommends or arranges for a variation of a life policy for or to a private customer; or

  5. (4)

    which effects, personally recommends or arranges income withdrawals or short-term annuities8 for a private customer; or

    8
  6. (5)

    which is a long-term insurer and receives:

    1. (a)

      a request from a private customer for a quotation for the surrender value of a life policy; or

    2. (b)

      any other indication that a private customer wishes to surrender a life policy: or1

  7. (6)

    which receives a request from a private customer for a retirement quotation in respect of any of the following contracts provided by it:

    1. (a)

      a personal pension scheme;

    2. (b)

      a stakeholder pension scheme;

    3. (c)

      a free-standing additional voluntary contribution contract;

    4. (d)

      (where an open-market option is available under the contract terms) a retirement annuity contract; or

    5. (e)

      (where an open-market option is available under the contract terms) a pension buy-out contract; or14

  8. (7)

    which enters into a distance contract with a retail customer to accept deposits.43

COB 6.1.1A R

4In COB 6.1 to COB 6.5, references to a private customer include, in relation to the conclusion of a distance contract, a retail customer.53

COB 6.1.2 G
  1. (1)

    COB 6.2.21 R (Exceptions from the requirement to provide key features for life policies) and COB 6.2.24 R (Exceptions from the requirement to provide key features for key features 7schemes) contain exemptions from the requirement to produce key features in relation to life policies and key features schemes7 For simplified prospectus schemesCOB 6.2.35 R (Exceptions from the requirement to provide the simplified prospectus) and COB 6.2.36 R (Exception from the requirement to provide a simplified prospectus: firms offering a funds supermarket service) contain similar exemptions from the requirement to provide a simplified prospectus.7

    7
  2. (2)

    COB 6.4.3 G to COB 6.4.5 G and COB 6.4.19 R to COB 6.4.20 G set out how the rules apply where packaged products are sold to the trustees of certain occupational pension schemes or to the trustees or operators of stakeholder pension schemes.

7Application of COB 6.2.46R and COB 6.2.47R7

COB 6.1.2A R

COB 6.2.46 R (UCITS Directive: requirement to offer a simplified prospectus for section 264 schemes) and COB 6.2.47 R (Sale of a section 264 scheme by distance contract) apply7 to a firm when it sells, personally recommends or arranges for the sale of a UCITS scheme which is a recognised scheme under section 264 of the Act (Schemes constituted in other EEA States) to a client.

7

Purpose

COB 6.1.3 G

COB 6.1 to COB 6.5 amplify Principle 7 (Communications with clients), which requires a firm to pay due regard to the information needs of its customers. In the case of packaged products there is a special need to ensure that private customers are supplied with information which will highlight particular packaged product features. This also needs to be achieved in a way which will optimise the private customer's ability to make a comparative analysis of different packaged products. These rules also address a similar information need in relation to cash deposit ISAs, cash deposit CTFs and when a firm enters into a distance contract to accept deposits with a retail customer.46

Requirement to produce key features

COB 6.1.4 R
  1. (1)

    A product provider or stakeholder pension scheme operator must, for each packaged product which it offers produce key features which, as to design and content, comply with the requirements of COB 6.1, COB 6.2 and COB 6.5.

  2. (2)

    A firm to which COB 6.4.13 (1) applies must, for each cash deposit ISA or cash deposit CTF it offers, produce the information document required by COB 6.5.42 R or COB 6.5.42A instead of key features. That information document must comply with COB 6.1, COB 6.2 and COB 6.5 as to design and content.46

  3. (3)

    (1) does not apply in relation to a simplified prospectus scheme.7

Quality and production of key features

COB 6.1.5 R

A firm must ensure that any key features or information document it produces in relation to a packaged product, cash deposit ISA or cash deposit CTF is in writing, whether in printed hard copy or in electronic format, and:56

  1. (1)

    is produced and presented to at least the same quality and standard as the associated sales or marketing material being used by the firm to promote the packaged product, cash deposit ISA or cash deposit CTF to customers; and6

  2. (2)

    is separate from any other material given to the customer, unless it is produced for a key features scheme7, or stakeholder pension scheme; in that case it may be included as part of another item of sales or marketing material, but only if the key features or information document appears with due prominence.2

    7
COB 6.1.6 G

Separate in COB 6.1.5 R (2) means stand-alone for these purposes. Where key features are produced in hard copy printed format, firms should, in complying with COB 6.1.5 R, have particular regard to the quality of paper, the type size and the use of colour printing. Where an electronic format is used, the firm should pay regard to the design and appearance of the key features screens, as compared to other screens being used to promote the product. Where key features are permitted to be included within another item, the need for due prominence is unlikely to be satisfied if they are hidden away at the end, or are produced in such small type that their impact on the reader is likely to be materially less than other parts of the document or series of screens.

COB 6.2 Provisions of key features or simplified prospectus8

Application

COB 6.2.1 R

COB 6.2 applies to a firm in accordance with COB 6.1.1 R.

Medium for provision of key features3

COB 6.2.2 R

The key features or information which the rules in COB 6.2, COB 6.2 and COB 6.4 require a firm to provide to a private customer in relation to a packaged product, cash deposit ISA or cash deposit CTF must be provided by the firm in a durable medium.356

COB 6.2.3 G

For detailed guidance on electronic provision please refer to COB 1.8 (Application to electronic media) and COB 3.14 (The internet and other electronic media).

COB 6.2.4 G

Firms are reminded that any key features, simplified prospectus8 or other information required by COB 6.2 to 8COB 6.5 is a form of financial promotion and therefore the financial promotion rules contained in COB 3 apply (subject to the application provisions in COB 3.1 to COB 3.3).3

8
COB 6.2.5 G

COB 3.7 requires a firm to keep records of non-real time financial promotions to private customers for certain periods of time. These periods are: indefinitely for a record relevant to a pension transfer or pension opt out; six years for a record relevant to a life policy, pension contract or stakeholder pension scheme; and three years in any other case.

COB 6.2.5A G

Where this chapter requires key features, a simplified prospectus8 or other information to be given, it does not require the same information to be provided again if the private customer already has it.3

Life policies

COB 6.2.6 G

COB 6.2.7 R - COB 6.2.18 R are disapplied by COB 6.2.21 R in relation to certain customers resident outside the United Kingdom.

COB 6.2.7 R

When a firm sells, personally recommends or arranges the sale of a life policy to a private customer, the private customer must be provided with appropriate key features before the private customer completes an application for the policy, subject to COB 6.2.9 R (Sales through intermediaries) and COB 6.4.27 R to 10COB 6.4.31A R10 (telephone sales3 and other exemptions).5

COB 6.2.8 G

Where a private customer has responded to a direct offer financial promotion, the mailing package or financial promotion will have included example-based key features - there is no requirement to provide a further set of key features to such a private customer in respect of the same transaction.

3Exception for life policies: sales through intermediaries

COB 6.2.9 R

COB 6.2.7 R does not apply to a product provider when its life policy is sold on the personal recommendation of, or arranged to be sold by, another person, provided that other person:3

  1. (1)

    is a firm (or appointed representative) operating from an establishment maintained by the firm (or appointed representative) in the United Kingdom; or3

  2. (2)

    is operating from an establishment in an EEA State whose law imposes an obligation on the person to provide information about the life policy in accordance with articles 3 and 5(1) and (2) of the Distance Marketing Directive.37

COB 6.2.10 G

3[Deleted]

COB 6.2.11 G

3[Deleted]7

Life policies: pre-completion variations

COB 6.2.12 R
  1. (1)

    Where key features have already been provided by a firm to a private customer in accordance with COB 6.2.7 and the terms for the proposed life policy are subsequently altered before the private customer completes an application form, the firm must ensure that the private customer is provided with revised key features, unless the alteration is one or more of the following:3

    1. (a)

      the amount of the premium is changed;3

    2. (b)

      the amount of any commission or remuneration payable is reduced;3

    3. (c)

      a rider benefit is added, removed or amended.3

  2. (2)

    If (1)(a) to (c) apply, then, subject to COB 6.4.27 to COB 6.4.31 (telephone sales and other exemptions), if the contract is to be a distance contract with a retail customer, the retail customer must be provided with details of such changes in a durable medium in good time before the contract is concluded.35

COB 6.2.13 G

COB 6.2.12 R is intended to allow simple changes to be made before a private customer commits himself without further packaged product disclosure information being provided. Changes in the amount of premium alone, of whatever size, will not require revised key features if the underlying purpose of the proposed contract is unchanged. So, for example, an increase in the proposed regular premium for a personal pension policy, will not require revised key features; nor will a change in premium and sum assured under a mortgage policy if the loan has to be increased before the house sale is finalised. However, changes to the type of packaged product or the underlying purpose would require revised key features - examples being a change from regular to single premiums under a personal pension policy, or a change from maximum life cover to balanced or standard protection under a flexible whole-life policy, with or without a change in premium. Revised key features would be required where the rate or basis of commission or remuneration was increased, but not where the amount increased simply because of a change in premium.

COB 6.2.14 R

Where key features have already been provided to a private customer by a firm, and the terms of the proposed life policy are materially altered after the private customer completes an application form, the private customer must be provided with details of the change in a durable medium as soon as practicable and offered revised key features.3

COB 6.2.15 G

What constitutes 'materially altered' requires consideration of the facts in the circumstances of each case. Changes which lead to an increase in the proposed premium of 25 per cent or less can be regarded as not material and can be ignored, so long as the underlying policy terms and conditions are the same. Other changes to the terms of the proposed contract, such as an increase in the rate or basis of commission, a different charges structure or an extension of the policy term should be regarded as material.3

Variations to existing life policies

COB 6.2.16 R

When a policyholder applies to vary a life policy issued on or after 1 January 1995 (or is recommended to do so) and the variation of the policy gives rise to a right to cancel under COB 6.7.7 R, the policy holder must be provided with:3

  1. (1)

    the information required by COB 6.5.15 R to COB 6.5.19 R, COB 6.5.23 R to COB 6.5.25 R, COB 6.5.27 R to COB 6.5.28 R and COB 6.5.38 R; and3

  2. (2)

    in the case of a variation which results in a new distance contract, all the contractual terms and conditions and the information in COB App 1;3

in a durable medium by the firm personally recommending, arranging or effecting the variation in good time before it is put into effect, unless COB 6.2.19 R (sales through intermediaries) or COB 6.4.27 R to COB 6.4.31 R (telephone sales and other exemptions) applies.35

COB 6.2.16A R
  1. (1)

    4When a long-term care insurance contract which is

    1. (a)

      not a pure protection contract and which was issued on or after 1 January 1995; or

    2. (b)

      a pure protection contract and which was issued on or after 31 October 2004;

    is varied so as to bring into effect provisions for long-term care benefits, the firm must provide the private customer with appropriate key features in good time sufficient to enable the private customer to consider them before the variation takes effect.

  2. (2)

    If the circumstances of the variation, whether by the exercise of an option or otherwise, make it impossible to provide the key features before the variation takes effect, the firm must do so as soon as possible afterwards.

COB 6.2.17 G

Key features were introduced for new policies sold from 1 January 1995. One way of meeting the requirements of COB 6.2.16 R is by providing a complete set of new key features to the policyholder.3

COB 6.2.18 R
  1. (1)

    4When a policyholder applies to vary:4

    1. (a)

      a life policy issued before 1 January 1995; or4

    2. (b)

      a pure protection contract issued before 31 October 2004 and which would after 30 October 2004 be a long-term care insurance contract;4

    (or is personally recommended to do so) and the variation of the policy gives rise to a right to cancel under COB 6.7.7 R, information must be given to the policyholder by the firm that is personally recommending, arranging or effecting the variation before it is put into effect, unless COB 6.2.19 R or COB 6.4.27 R to COB 6.4.31 R (telephone sales and other exemptions) applies.

  2. (2)

    When giving the information in (1), the firm must:35

    1. (a)

      believe on reasonable grounds that the information given is sufficient to enable the policyholder to understand the consequences of the variation; and3

    2. (b)

      in the case of a variation which results in a new distance contract, in good time before the variation is put into effect, provide all the contractual terms and conditions and the information in COB App 1.3

COB 6.2.19 R

COB 6.2.16 R and COB 6.2.18 R do not apply to a product provider when the variation to its life policy is effected on the personal recommendation of or arranged by another person, provided that other person:3

  1. (1)

    is a firm (or appointed representative) operating from an establishment maintained by the firm (or appointed representative) in the United Kingdom; or3

  2. (2)

    is operating from an establishment in an EEA State whose law imposes an obligation on the person to provide information about the variation to the life policy in accordance with articles 3 and 5(1) and (2) of the Distance Marketing Directive.37

COB 6.2.20 G

3[Deleted]

Exception for life policies: non-UK customers3

COB 6.2.21 R

There is no requirement for key features to be provided for a new life policy or a variation to an existing policy if, at the time that the private customer signs the application, he is habitually resident:3

  1. (1)

    (except for distance contracts with retail customers) in an EEA State other than the United Kingdom; or3

  2. (2)

    outside the EEA and he is not present in the United Kingdom.13

6Exceptions for life policies: variations held within a CTF

COB 6.2.21A R

COB 6.2.7 does not apply to a CTF provider in relation to a variation to an existing policy held within a CTF, if:

  1. (1)

    the terms and conditions, including all charges, are the same as applied at the time of the purchase, or the most recent purchase or payment, of the existing policy; and

  2. (2)

    key features outlining those terms and conditions were issued to the customer in respect of that previous purchase.6

Provision of key features: key features 8schemes7

COB 6.2.22 R
8
  1. (1)

    When a firm sells, personally recommends or arranges for the sale of akey features scheme8 to a private customer, unless COB 6.2.24 R (exceptions) or COB 6.4.27 R to 10COB 6.4.31A R10 (telephone sales and other exemptions) applies, the private customer must be provided with appropriate key features for the scheme before he completes an application for the scheme holding.8

    8
  2. (2)

    (1) does not apply where the operator of the scheme has elected that the scheme will comply with COB 6.2.26 R to COB 6.2.45A R9 instead of the provisions in COB 6 that relate to key features.8

  3. (3)

    (2) does not apply to an investment trust.8

COB 6.2.23 G
  1. (1)

    COB 6.2.22 R applies not just to new purchases but also to any recommendation or application to transfer the value of a particular fund holding within a key features scheme8 to a different fund within the same scheme.

    8
  2. (2)

    Where a private customer has responded to a direct offer financial promotion, the mailing package or direct offer financial promotion should have included example-based key features - there is no requirement to provide a further set of key features to such a private customer in respect of the same transaction.37

Exceptions from the requirement to provide key features for key features 8schemes

COB 6.2.24 R

A firm need not provide key features to a private customer in respect of a key features scheme8 if:

8
  1. (1)

    the firm is a product provider and the scheme holding is sold on the personal recommendation of, or arranged to be sold by another person, provided that other person:3

    1. (a)

      is a firm (or appointed representative) operating from an establishment maintained by the firm (or appointed representative) in the United Kingdom; or3

    2. (b)

      is operating from an establishment in an EEA State whose law imposes obligations on the person to provide information about the scheme holding in accordance with articles 3 and 5(1) and (2) of the Distance Marketing Directive; or3

  2. (2)

    at the time he signs the application, the private customer is habitually resident outside the EEA and is not present in the United Kingdom; or

  3. (3)

    (except for distance contracts with retail customers) the scheme holding is purchased by a private customer on an execution-only basis; or3

  4. (4)

    the scheme holding is purchased on behalf of a private customer by an investment manager exercising discretion; or

  5. (5)

    the sale of the scheme holding is arranged or recommended by an investment manager who is not exercising discretion and the private customer has agreed, either in relation to that specific holding or generally, that key features need not be provided; or

  6. (6)

    a private customer is making a purchase of a scheme holding (whether or not held within a CTF) in a key features scheme8 in which he already has a scheme holding and has already been provided with appropriate key features covering the purchase; or36

  7. (7)

    a private customer is transferring from accumulation units to income units of the same scheme (or vice versa) and has already been supplied with key features which cover the transfer.83

    8
COB 6.2.24A R

3[Deleted]

COB 6.2.25 R

3[Deleted]27

Purpose of the COB 6 provisions on the simplified prospectus8

COB 6.2.25A G

8The purpose of COB 6.2.26 R (Production and publication of simplified prospectus), COB 6.2.27 R (Revision of simplified prospectus) to COB 6.2.32 R (Offering a simplified prospectus), COB 6.2.37 R (Table: Contents of the simplified prospectus), COB 6 Annex 2 R (Total expenses ratio) and COB 6 Annex 3 R (Portfolio turnover rate) is to give effect to the provisions of the Management Company Directive (2001/107/EC) which amended the UCITS Directive, in so far so as it imposes a series of obligations on Member States in relation to the simplified prospectus. The simplified prospectus is a pre-sale marketing document which contains sufficient information about a simplified prospectus scheme to enable an investor to make an informed decision about whether to acquire units in the scheme to which it relates.

8Production and publication of simplified prospectus9

COB 6.2.26 R
  1. (1)

    An operator of a simplified prospectus scheme must, for each simplified prospectus scheme in respect of which it is the operator, produce and publish a simplified prospectus in accordance with the rules in this section and ensure that it contains in summary form each of the matters referred to in COB 6.2.37 R.

    28
  2. (2)

    A simplified prospectus must be incorporated in a written document or in any durable medium.

  3. (3)

    An operator of a simplified prospectus scheme must be satisfied on reasonable grounds that each simplified prospectus which it produces:

    1. (a)

      includes all such information as is necessary to enable an investor to make an informed decision about whether to acquire units in the scheme;

    2. (b)

      does not omit any key item of information;

    3. (c)

      wherever possible is written in plain language which avoids technical language and jargon; and

    4. (d)

      adopts a format and style of presentation which is clear and attractive to the average reader, so that it can be easily understood by him.

  4. (4)

    The simplified prospectus may be attached to the full prospectus as a removable part of it.

  5. (5)

    [deleted]9

  6. (6)

    [deleted]9

Revision of simplified prospectus

COB 6.2.27 R

8An operator of a simplified prospectus scheme must, for each simplified prospectus scheme of which it is the operator, keep its simplified prospectus up-to-date and must revise it immediately on the occurrence of any material change.

COB 6.2.28 G

8It is the FSA's view that any change to a simplified prospectus scheme that would be likely to influence the average investor in deciding whether to invest in the scheme or realise his investment in it should be regarded as a material change for the purposes of COB 6.2.27 R. Examples would be changes to the scheme's objectives or investment policy. The FSA would expect a simplified prospectus to be updated at least annually.

Filing requirements

COB 6.2.29 R

8A UCITS management company must for each UCITS scheme it manages file the scheme's initial simplified prospectus, together with each revision to it, with:

  1. (1)

    the FSA; and

  2. (2)

    the competent authority of each EEA state in which its units are to be marketed in the exercise of an EEA right.

UK firms exercising passporting rights in respect of UCITS scheme

COB 6.2.30 R
  1. (1)

    8A UCITS management company must for each UCITS scheme it manages and in respect of which it is marketing units in another EEA State in the exercise of an EEA right, produce a simplified prospectus for the scheme drawn up in accordance with the requirements contained in this section.

  2. (2)

    The simplified prospectus must be drawn up in the, or one of the, official languages of the EEA State for which it was prepared or in a language approved by the competent authority of that State.

  3. (3)

    The simplified prospectus may, without alteration, be used for marketing purposes in the EEA State for which it was prepared and in which the units of the simplified prospectus scheme are to be sold.

COB 6.2.31 G
  1. (1)

    8In translating the simplified prospectus from English into the or one or more of the official languages of the EEA State in which the simplified prospectus scheme is to be marketed, or into a language approved by the competent authority of that State, it is permissible under article 28.3 of the UCITS Directive, as amended, in the FSA's view, for figures expressed in pounds sterling to be converted into the appropriate local currency such as euros. It is not necessary, for example, for the simplified prospectus of a scheme that is to be marketed across the EEA in the exercise of an EEA right, to have to refer to each amount in pounds sterling, in euros and additionally in every other local currency of an EEA State in which units of the scheme are to be marketed that has not adopted the euro as its currency.

  2. (2)

    Operators considering marketing the units of their simplified prospectus schemes in another EEA State in the exercise of an EEA right should have regard to the local marketing legislation of such country.

    9

Offering a simplified prospectus

COB 6.2.32 R
  1. (1)

    8When a firm sells, personally recommends or arranges (brings about) for the sale of a simplified prospectus scheme, it must offer the scheme's up-to-date simplified prospectus free of charge to any person who may become a subscriber to the scheme before a contract for the sale of units is concluded.

  2. (2)

    The requirement in (1) will be met by a firm in relation to a private customer if it or any other firm provides him with a copy of the simplified prospectus in accordance with COB 6.2.33 R (1).

Obligation on a firm to provide a simplified prospectus

COB 6.2.33 R
  1. (1)

    8When a firm sells, personally recommends or arranges (brings about) for the sale of a simplified prospectus scheme to a private customer in the United Kingdom, the firm must provide him with the up-to-date simplified prospectus for the scheme before he completes an application for the scheme holding unless COB 6.2.35 R or COB 6.2.36 R or COB 6.4.27 R to 10COB 6.4.31A R10 (telephone sales and other exemptions) apply.

  2. (2)

    (1) does not apply to a UCITS management company when it sells units in a UCITS scheme without personally recommending or arranging for the sale of such units.

COB 6.2.34 G
  1. (1)

    8COB 6.2.33 R applies not just to new purchases but also to any recommendation or application to transfer the value of a particular fund holding within a scheme to a different sub-fund within the same scheme.

  2. (2)

    Where a private customer has responded to a direct offer financial promotion, the mailing package or direct offer financial promotion should have included the simplified prospectus for the scheme, in which case there is no requirement to provide a further simplified prospectus to such a private customer in respect of the same transaction.

  3. (3)

    COB 6.2.33 R may apply to either the operator or the distributor of a simplified prospectus scheme depending on how units in the scheme are to be sold.

  4. (4)

    Where one of the exceptions in COB 6.2.35 R or COB 6.2.36 R applies, firms should bear in mind that they must still comply with COB 6.2.32 R (Offering a simplified prospectus) which represents an absolute requirement of the UCITS Directive and as such, cannot be made subject to any exclusions. For example, a firm offering a funds supermarket service which is entitled to the benefit of the exception in COB 6.2.36 R must ensure that every private customer is offered the simplified prospectus of each relevant simplified prospectus scheme before a contract for the sale of units is concluded.

Exceptions from the requirement to provide the simplified prospectus

COB 6.2.35 R

8A firm need not, unless a private customer specifically requests it, provide a simplified prospectus to a private customer for a simplified prospectus scheme if:

  1. (1)

    the firm is a product provider and the scheme holding is sold on the personal recommendation of, or arranged to be sold on the personal recommendation of, or arranged to be sold by another person, provided that other person:

    1. (a)

      is a firm (or appointed representative) operating from an establishment maintained by the firm (or appointed representative) in the United Kingdom; or

    2. (b)

      is operating from an establishment in an EEA State whose law imposes obligations on the person to provide information about the scheme holding in accordance with articles 3 and 5(1) and (2) of the Distance Marketing Directive; or

  2. (2)

    at the time the private customer signs the application, the private customer is habitually resident outside the EEA and is not present in the United Kingdom; or

  3. (3)

    (except for distance contracts with retail customers) the scheme holding is purchased by the private customer in the course of an execution-only transaction; or

  4. (4)

    the scheme holding is purchased on behalf of the private customer by an investment manager exercising discretion; or

  5. (5)

    the sale of the scheme holding is arranged or recommended by an investment manager who is not exercising discretion and the private customer has agreed, either in relation to that specific holding or generally, that the simplified prospectus need not be provided; or

  6. (6)

    a private customer is making a purchase of a scheme holding (whether or not held within a CTF) in a scheme in which he already has a scheme holding and has already been provided with the up-to-date simplified prospectus which covers the purchase; or

  7. (7)

    a private customer is transferring from accumulation units to income units of the same scheme (or vice versa) and has already been supplied with the up-to-date simplified prospectus of the scheme which covers the transfer.

Exception from the requirement to provide a simplified prospectus: firms offering and intermediaries selling a funds supermarket service9

COB 6.2.36 R
  1. (1)

    8A firm to which COB 6.2.33 R (Obligation on a firm to provide a simplified prospectus) applies when it:

    9
    1. (a)

      offers a funds supermarket service; or

    2. (b)

      9sells, personally recommends or arranges(brings about) the sale of a simplified prospectus scheme through a funds supermarket service;

    need not, unless a private customer requests it, provide a private customer with a simplified prospectus for any simplified prospectus scheme to which the funds supermarket service relates provided it complies with the condition in (2).

  2. (2)

    The condition is that the firm must instead provide the private customer with the abbreviated form of9 composite key features document that is permitted under 9COB 6.5 (Content of key features) and 9which covers each of the key features schemes and simplified prospectus schemes to which the 9funds supermarket service relates.

COB 6.2.37 R

Contents of the simplified prospectus

8This table belongs to COB 6.2.26 R (1)

Contents of simplified prospectus

Note:

This table sets out the required contents of the simplified prospectus. It reproduces Schedule C (Contents of the simplified prospectus) of the Management Company Directive (2001/107/EC), as amplified by the Commission Recommendation (2004/384/EC).

This Table also includes, and cross-refers to, other material which the FSA considers should be included.

Brief presentation of the simplified prospectus scheme (in this Table referred to as "the scheme").

9

(1)

when the scheme was created and an indication of the EEA State where the scheme has been registered or incorporated;

(2)

in the case of a scheme having different investment compartments (sub-funds), the indication of this circumstance;

(3)

the name and contact details of the operator (when applicable);

(4)

the expected period of existence of the scheme (when applicable);

(5)

the name and contact details of the depositary;

(6)

the name and contact details of the auditors;

(7)

the name and brief details of the financial group (e.g. a bank) promoting the scheme;

Investment information

(8)

a short description of the scheme's objectives including:

(a)

a concise and appropriate description of the outcomes sought for any investment in the scheme;

(b)

a clear statement of any guarantees offered by third parties to protect investors and any restrictions on those guarantees; and

(c)

a statement, where relevant, that the scheme is intended to track an index or indices, and sufficient information to enable investors both to identify the relevant index or indices and to understand the extent or degree of tracking pursued;

Notes:

1.

Information on (8)(a) should include a statement as to whether there is any arrangement intended to result in a particular capital or income return from the units or any investment objective of giving protection to their capital value or income return and, if so, details of that arrangement or protection.

2.

The information disclosed under (8)(b) should include an explanation of what is to happen when an investment is encashed before the expiry of any related guarantee or protection.

(9)

the scheme's investment policy, including:

(a)

the main categories of eligible financial instruments which are the object of investment;

(b)

whether the scheme has a particular strategy in relation to any industrial, geographic or other market sectors or specific classes of assets, e.g. investments in emerging countries' financial instruments;

(c)

where relevant, a warning that, whilst the actual portfolio composition is required to comply with the broad legal and statutory rules and limits, risk-concentration may occur in regard of certain tighter asset classes, economic and geographic sectors;

(d)

if the scheme invests in bonds, an indication of whether they are corporate or government, their duration and the ratings requirements;

(e)

if the scheme uses financial derivative instruments, an indication of whether this is done in pursuit of the scheme's objectives, or for hedging purposes only;

(f)

whether the scheme's management style makes some reference to a benchmark; and in particular whether the scheme has an 'index tracking' objective, with an indication of the strategy to be pursued to achieve this; and

(g)

whether the scheme's management style is based on a tactical asset allocation with high frequency portfolio adjustments;

provided the information is material and relevant;

Note:

The information referred to in paragraphs (8) and (9) may be set out as a single item in the simplified prospectus (e.g. for the information on index tracking), provided that the information so combined does not lead to confusion of the objectives and policies of the scheme. The order of the information items may be adapted to reflect the scheme's specific investment objectives and policy.

(10)

a brief assessment of the scheme's risk profile by investment compartment or sub-fund, including:

(a)

overall structure of the information provided:

(i)

a statement to the effect that the value of investments may fall as well as rise and that investors may get back less than they put in;

(ii)

a statement that details of all the risks actually mentioned in the simplified prospectus may be found in the full prospectus;

(iii)

a description in words of any risk investors have to face in relation to their investment, but only where such risk is relevant and material, based on risk impact and probability; and

(b)

details regarding the description (in words) of the following risks:

(i)

specific risks:

The description referred to in paragraph (10)(a)(iii) should include a brief and understandable explanation of any specific risk arising from particular investment policies or strategies or associated with specific markets or assets relevant to the scheme such as:

A

the risk that the entire market of an asset class will decline thus affecting the prices and values of the assets (market risk);

B

the risk that an issuer or a counterparty will default (credit risk);

C

only where strictly relevant, the risk that a settlement in a transfer system does not take place as expected because a counterparty does not pay or deliver on time or as expected (settlement risk);

D

the risk that a position cannot be liquidated in a timely manner at a reasonable price (liquidity risk);

E

the risk that the investment's value will be affected by changes in exchange rates (exchange or currency risk);

F

only where strictly relevant, the risk of loss of assets held in custody that could result from the insolvency, negligence or fraudulent action of the custodian or of a subcustodian (custody risk); and

G

risks related to a concentration of assets or markets; and

(ii)

horizontal risk factors:

The description referred to in paragraph (10)(a)(iii) should also mention, where relevant and material, the following factors that may affect the product:

A

performance risk, including the variability of risk levels depending on individual fund selections, and the existence, absence of, or restrictions on any guarantees given by third parties;

B

risks to capital, including potential risk of erosion resulting from withdrawals/cancellations of units and distributions in excess of investment returns;

C

exposure to the performance of the provider/third-party guarantor, where investment in the product involves direct investment in the provider, rather than assets held by the provider;

D

inflexibility, both within the product (including early surrender risk) and constraints on switching to other providers;

E

inflation risk; and

F

lack of certainty that environmental factors, such as a tax regime, will persist;

(iii)

possible prioritisation of information disclosure:

In order to avoid conveying a misleading image of the relevant risks, the information items should be presented so as to prioritise, based on scale and materiality, the risks so as to better highlight the individual risk profile of the scheme;

(11)

the historical performance of the scheme (where applicable) and a warning that this is not an indicator of future performance (which may be either included in or attached to the simplified prospectus), including:

(a)

disclosure of past performance:

(i)

the scheme's past performance, as presented using a bar chart showing annual returns for the last ten full consecutive years. If the scheme has been in existence for fewer than ten years but at least for a period of one year, it is recommended that the annual returns, calculated net of tax and charges, be given for as many years as are available; and

(ii)

if a scheme is managed according to a benchmark or if its cost structure includes a performance fee depending on a benchmark, the information on the past performance of the scheme should include a comparison with the past performance of the benchmark according to which the scheme is managed or the performance fee is calculated;

Note:

Comparison should be achieved by representing the past performance of the benchmark and that of the scheme through the use of appropriate graphs to assist the reader to make the comparison.

(b)

disclosure of cumulative performance:

Disclosure should be made of the cumulative performance of the scheme over the ten year period referred to in paragraph (11)(a)(i). A comparison should also be made with the cumulative performance (where relevant) of a benchmark, when comparison to a benchmark is required in accordance with paragraph (11)(a)(ii);

Note:

Where the scheme has been in existence for fewer than ten years but at least for a period of one year, disclosure of the past cumulative performance should be made for as many years as are available.

(c)

exclusion of subscription and redemption fees, subject to appropriate disclosure:

A statement should be made that past performance of the scheme does not include the effect of subscription and redemption fees.

Notes:

1.

Where a comparison is being made with the cumulative performance of a benchmark as required by paragraph (11)(b), the comparison should be achieved by representing the past performance of the benchmark and that of the scheme through the use of appropriate graphs to assist the reader to make the comparison.

2.

The scheme's historical performance may be produced as a separate attachment to the simplified prospectus.

(12)

a profile of the typical investor the scheme is designed for;

Economic information

(13)

the scheme's applicable tax regime, including:

(a)

the tax regime applicable to the scheme in the UK; and

(b)

a statement which explains that the regime of taxation of the income or capital gains received by individual investors depends on the tax law applicable to the personal situation of each individual investor and/or to the place where the capital is invested and that if investors are unclear as to their fiscal position, they should seek professional advice or information from local organisations, where available;

Note:

This information should include a statement in relation to SDRT provision, explaining how the scheme may suffer stamp duty reserve tax as a result of transactions in units and whether the operator's policy is such that an SDRT provision may be imposed.

(14)

details of any entry and exit commissions relating to the scheme and details of the scheme's other possible expenses or fees, distinguishing between those to be paid by the Unitholder and those to be paid from the scheme's or the sub-fund's assets, including:

(a)

overall contents of the information provided:

(i)

disclosure of a total expense ratio (TER), calculated as indicated in COB 6 Annex 2 R, except for a newly created fund where a TER cannot yet be calculated;

(ii)

on an ex ante basis, disclosure of the expected cost structure, that is an indication of all costs available according to the list set forth in COB 6 Annex 2 R so as to provide investors, in so far as possible, with a reasonable estimate of expected costs;

(iii)

all entry and exit commissions and other expenses directly paid by the investor;

(iv)

an indication of all the other costs not included in the TER, including disclosure of transaction costs;

(v)

as an additional indicator of the importance of transaction costs, the portfolio turnover rate, calculated as shown in COB 6 Annex 3 R; and

(vi)

an indication of the existence of fee-sharing agreements and soft commissions;

Notes:

1.

In explaining the function of the TER to the reader, appropriate wording should be used in the simplified prospectus. For example, TER might be explained in the following terms:

"The TER shows the annual operating expenses of the scheme - it does not include transaction expenses. All European funds highlight the TER to help you compare the annual operating expenses of different schemes."

2.

It is the FSA's understanding that the disclosure of a reasonable estimate of expected costs on an ex ante basis, as required by paragraph (14)(a)(ii), only applies to new schemes where a TER cannot yet be calculated. Where a TER can be calculated for a simplified prospectus scheme, there is no need to have to disclose a reasonable estimate of expected costs on an ex ante basis in accordance with paragraph (14)(a)(ii), in addition to the TER.

3.

In disclosing details of all entry and exit commissions relating to the fund and details of the scheme's other possible expenses or fees, the firm must present the information in the format required by COB 6.2.38 R (1) (Reduction in yield). Compliance with this rule will ensure that the information is presented in the form of an impact of charges table based on reduction in yield figures, so as to assist the comprehension of the reader.

4.

Paragraph (14)(a)(vi)) should not be interpreted as a general validation of the compliance of any individual agreement or commission with the provisions of the Handbook . Taking into account current market practice, consideration should be given as to how far the scheme's existing fee-sharing agreements and comparable fee arrangements are for the exclusive benefit of the scheme.

5.

The simplified prospectus should make a reference to the full prospectus for detailed information on these kinds of arrangements, which should allow any investor to understand to whom expenses are to be paid and how possible conflicts of interest will be resolved in his/her best interest. The information provided in the simplified prospectus should remain concise in this respect.8

(b)

information about 'fee sharing agreements' and 'soft commissions':8

(i)

identification of 'fee-sharing agreements';

Note:

For the purposes of paragraph (14)(b)(i), fee-sharing agreements should be taken as those agreements whereby a party remunerated, either directly or indirectly, out of the assets of a scheme agrees to split its remuneration with another party and which result in that other party meeting expenses through this fee-sharing agreement that should normally be met, either directly or indirectly, out of the assets of the scheme.8

(ii)

identification of soft commissions;

Note:

For the purposes of paragraph (14) (b) (ii), soft commissions should be regarded as any economic benefit, other than clearing and execution services, that an asset manager receives in connection with the scheme's payment of commissions on transactions that involve the scheme's portfolio securities. Soft commissions are typically obtained from, or through, the executing broker.8

(c)

presentation of TER and portfolio turnover rate;8

Note:

Both the TER and the portfolio turnover rate may be either included in or attached to the simplified prospectus in the same paper as information on past performance.

Commercial information

(15)

how to buy the units;

Note:

This should include an explanation of any relevant right to cancel or withdraw from the purchase, or, where it is the case, that such rights do not apply.

(16)

how to sell the units;

(17)

in the case of a scheme having different investment compartments (sub-funds), an explanation of how to switch from one investment compartment into another and any charges applicable in such cases;

(18)

when and how dividends on units or shares of the scheme (if applicable) are distributed;

(19)

when and where prices of units are published or made available;

Additional information

(20)

a statement that, on request, the full prospectus and the annual and half-yearly reports of the scheme may be obtained free of charge before the conclusion of the contract and afterwards, together with details of how they may be obtained or how a person may gain access to them;

(21)

the name and contact details of the FSA as being the competent authority which has authorised or registered the scheme;

(22)

details of a contact point (person or department, and, if appropriate the times of day etc.) where additional information may be obtained if needed;

(23)

the date of publication of the simplified prospectus.

General Note:

In making the disclosures required by paragraphs (8) to (19) of this Table, the information must be presented in the form of questions and answers. This format is designed to assist the comprehension of the reader. This requirement will not apply in relation to a simplified prospectus that is to be used to market the units of the scheme in another EEA state or in relation to a simplified prospectus that is to be used to market the units of the scheme exclusively to persons who are not private customers.98

Reduction in yield

COB 6.2.38 R
  1. (1)

    8In disclosing the information required by paragraph (14) of COB 6.2.37 R (Table: Contents of the simplified prospectus), a firm should set out the information in the format required by, and include the contents of, COB 6.5.30 R (Table for key features8 schemes) to COB 6.5.35 R (Calculation method for "effect of charges to date" for key features8 schemes) and COB 6.5.38 R (Commission and commission equivalent for life policies, key features8 schemes and stakeholder pension schemes), as if such provisions applied to simplified prospectus schemes, as modified by COB 6.2.39 R (Table).

  2. (2)

    Where the units of a simplified prospectus scheme are to be marketed and sold in another EEA State, or exclusively to persons who are not private customers,9 the operator of the scheme need not comply with the requirements in (1) for the simplified prospectus that is to be used to market the scheme in that EEA State.

  3. (3)

    Note 3 to paragraph (14) of COB 6.2.37 R (Table: Contents of the simplified prospectus) and COB 6.2.38 R to COB 6.2.40 G cease to have effect on 30 June 2009, unless re-made.

COB 6.2.39 R

Application of COB 6.5.30R to COB 6.5.35R, and COB 6.5.38R

8This table belongs to COB 6.2.38R

Application of COB 6.5.30 R to COB 6.5.35 R, and COB 6.5.38 R

Rule

Description

Modification

COB 6.5.31 R

Table

Substitute "COB 6.2.43 R (1)" for the reference to COB 6.5.15 R (2).

COB 6.5.32 R (1) , (2) and (3)

Scheme projections

Substitute "COB 6.2.43 R (1)" for the references to COB 6.5.15 R (2).

COB 6.5.32 R (3) and COB 6.5.32 R (7)(a)

Scheme projections

Substitute "client" for the references to "private customer".

COB 6.2.40 G

8The FSA intends to review the operation of COB 6.2.38 R and COB 6.2.39 R in 2008 and will re-examine these RIY requirements from first principles at that time. This will be done with a view to determining whether the retention of the RIY information and format, in addition to the disclosure of the European TER standard, remains appropriate in the light of the then prevailing circumstances, including consumer understanding of the issues. Should the result of that review indicate that these RIY requirements should be retained or otherwise changed, the FSA will consult publicly on its proposals in accordance with section 155(1) of the Act.

Distance contracts for the sale of simplified prospectus schemes

COB 6.2.41 R

8When a firm sells, personally recommends or arranges (brings about) for the sale of a simplified prospectus scheme to a retail customer in circumstances where a distance contract is being concluded, it must ensure that the retail customer is provided in good time with all the contractual terms and conditions and the information in COB App 1.1 before the contract for the scheme holding is concluded.

COB 6.2.42 G

8 Firms should bear in mind the guidance at COB 6.2.5A G. Where a simplified prospectus is provided to a retail customer in circumstances where a distance contract is being concluded, this chapter does not require the same information to be provided again to the customer as a result of COB 6.2.41 R. Firms should note, however, that while the contents of a simplified prospectus and the contractual terms and conditions and the information required by COB App 1.1 substantially overlap, there are differences between them. Consequently it is necessary for firms additionally to provide the contractual terms and conditions and the information required by COB App 1.1 to the extent that such information is not covered by the contents of the simplified prospectus.

9

Projection for simplified prospectus scheme

COB 6.2.43 R
  1. (1)

    8When a firm sells, personally recommends or arranges for the sale of a simplified prospectus scheme to a private customer and the proposed transaction is for a scheme:

    1. (a)

      which relates to an election to make income withdrawals or purchase of a short-term annuity11; or

    2. (b)

      where the private customer's primary objective is to acquire:

      1. (i)

        a specified sum of money on a specified date; or

      2. (ii)

        a specified sum of money on death; or

      3. (iii)

        an annuity of a specified amount payable as from a specified date;

    the firm must provide the private customer with a projection, illustrating how the principal terms of the proposed transaction apply to him.

  2. (2)

    (1) does not apply to a UCITS management company when it sells units in a UCITS scheme without personally recommending or arranging for the sale of such units.

  3. (3)

    (1) does not apply to a direct offer financial promotion in relation to units in a simplified prospectus scheme.

COB 6.2.44 G

8A projection may be provided by a firm for a simplified prospectus scheme where COB 6.2.43 R (1) does not require one, at a firm's discretion. Likewise it is at the firm's discretion to decide whether it is appropriate to include the projection, whether or not required by COB 6.2.43 R (1), as part of the simplified prospectus.

PEP and ISA investments

COB 6.2.45 R
  1. (1)

    8When a firm sells, personally recommends or arranges for the sale of a unit in a simplified prospectus scheme to a private customer which is to be held within a PEP or ISA, it must provide him with the following additional information:

    1. (a)

      a description of the nature of the services the firm will provide for the private customer in relation to the PEP or ISA;

    2. (b)

      [deleted]8

    3. (c)

      [deleted]8

    4. (d)

      a statement that the favourable tax treatment of ISAs may not be maintained;

    5. (e)

      how and when statements (if any) will be sent;

    6. (f)

      an explanation how the ISA or plan may be terminated or transferred to another ISA or PEP manager;

    7. (g)

      whether the ISA is a mini or maxi-ISA agreement and an explanation of the differences between the two; and

    8. (h)

      whether the private customer has a choice to reinvest income, where uninvested money will be held and whether interest is paid on such money.

  2. (2)

    (1) does not apply to a UCITS management company when it sells units in a UCITS scheme without personally recommending or arranging for the sale of such units.

  3. (3)

    (1) does not apply to the extent that a private customer is making a purchase of a scheme holding in a simplified prospectus scheme in which he already has a scheme holding and has already been provided with the information set out at (1)(a) to (h) which remains up-to-date.

9Child trust fund investments

COB 6.2.45A R

9When a firm sells, personally recommends or arranges for the sale of a unit in a simplified prospectus scheme to a private customer which is to be held within a CTF, it must provide him with the information required by COB 6.5.40 R (7) (Further information for life policies, key features schemes, stocks and shares ISAs, PEPs, CTFs and stakeholder pension schemes).

UCITS Directive: requirement to offer a simplified prospectus for section 264 schemes

COB 6.2.46 R
  1. (1)

    8When a firm sells, personally recommends or arranges (brings about) for the sale of a UCITS scheme which is a recognised scheme under section 264 of the Act (Schemes constituted in other EEA States) to a client, it must offer the client free of charge a copy of the scheme's most recent simplified prospectus9 before an application for the scheme holding is completed.

  2. (2)

    The simplified prospectus9 must meet the requirements of the UCITS Directive necessary for the scheme to enjoy the rights conferred by the Directive.

  3. (3)

    When the scheme holding is purchased on behalf of a client by an investment manager exercising discretion, the requirement in (1) will be satisfied by the investment manager being offered the simplified prospectus9 free of charge before the application form for a scheme holding is completed.

  4. (4)

    A firm must not carry on any of the activities referred to in (1) in relation to a UCITS scheme which is a recognised scheme under section 264 of the Act unless it is satisfied on reasonable grounds that:

    1. (a)

      the scheme's simplified prospectus9 has been sent to the FSA before any units in the scheme are marketed in the UK; and

      9
    2. (b)

      the information contained in the simplified prospectus9 is up-to-date and is not in need of revision;

    and that any subsequent amendments thereto have been sent to the FSA.

Sale of a section 264 scheme by distance contract

COB 6.2.47 R

8If the sale in COB 6.2.46 R (1) is by way of a distance contract, to a retail customer, the firm must provide all the contractual terms and conditions and the information in COB App 1.1.

9Composite documents for several schemes, sub-funds and classes

COB 6.2.48 G

9In the FSA's view, a firm may, for the purposes of COB 6.2.22 R and COB 6.2.33 R (Obligation on a firm to provide a key features/simplified prospectus), combine the required information on several simplified prospectus schemes, key features schemes or recognised schemes under section 264 of the Act (Schemes constituted in other EEA States) or any combination of them into a composite document, provided the document continues to comply with the general requirements such as being clear. Similarly, the information on different sub-funds or classes within a scheme may be combined into a composite document or provided as separate documents. Where the latter approach is adopted, references in COB 6.2.26 R to COB 6.2.45 R to "scheme" or "simplified prospectus scheme" should be taken as referring to the relevant sub-fund or class , as applicable.

9Multiclass schemes: use of representative class

COB 6.2.49 G

9In the FSA's view, where a simplified prospectus scheme has more than one class of unit , the simplified prospectus may be prepared on a representative class basis, provided this is made clear and there is no material difference in the classes concerned. The same applies for an umbrella , as regards any sub-fund with more than one class of units.

COB 6.3 Post-sale confirmation: life policies

Application

COB 6.3.1 R

COB 6.3 applies to a firm in accordance with COB 6.1.1 R, in respect of life policies.1

COB 6.3.2 G

The requirement on long-term insurers to issue post-sale confirmation applies only to life policies which are packaged products. COB 6.3 does not require a long-term insurer to issue post-sale confirmation in respect of schemes, pure protection contracts or stakeholder pension schemes.

COB 6.3.3 R

When a private customer buys a life policy which is a packaged product or varies such an existing life policy, and the variation gives rise to a right to cancel under COB 6.7.7 R, the long-term insurer must send to, or in the case of an industrial assurance policy must either give or send to, the private customer the information required in COB 6.5.46 R, unless COB 6.3.6 R applies.

COB 6.3.4 G

Post-sale confirmation can be provided in printed hard copy and sent through the post direct to the private customer. For industrial assurance policies, the post-sale confirmation may be delivered by the firm's representative rather than sent by post. When a private customer has approached the firm or has responded by submitting his application through an electronic medium (such as e-mail or through the Internet), the post-sale confirmation may be provided by the same means. But electronic methods should only be used where the private customer expects to communicate in this way (see COB 1.8 (Application to electronic media).

COB 6.3.5 R

The post-sale confirmation required by COB 6.3.3 R must be sent or given to the private customer as soon as reasonably practicable after the contract is effected.2

Exceptions to post-sale confirmation

COB 6.3.6 R

A long-term insurer need not send or give the post-sale confirmation required by COB 6.3.3 R when:

  1. (1)

    the long-term insurer has taken reasonable steps to determine that the life policy or variation is purchased or effected on behalf of a private customer by an investment manager exercising discretion; or

  2. (2)

    the life policy is purchased by the trustees of an occupational pension scheme; or

  3. (3)

    the life policy is purchased by the trustees or manager of a stakeholder pension scheme or if the life policy is otherwise sold as a stakeholder product;3

    3
  4. (4)

    a life policy issued before 1 January 1995 is being varied; or

  5. (5)

    at the time the private customer signs the application for the new life policy or variation, he is habitually resident:

    1. (a)

      in an EEA State other than the United Kingdom; or

    2. (b)

      outside the EEA and he is not present in the United Kingdom.

COB 6.4 Product disclosure: special situations

Application

COB 6.4.2 G

Firms are reminded that, under COB 6.2.2 R, the key features required to be provided to a private customer under COB 6.4 must be provided by the firm in a durable medium. See also COB 6.2.3 G - COB 6.2.5 G.1 For simplified prospectus schemes, firms are referred to COB 6.2.26 R to COB 6.2.45 R for the applicable provisions in relation to simplified prospectuses.5

Occupational pension schemes

COB 6.4.3 G

COB 6.1 (Packaged product and ISA disclosure) and COB 6.2 (Provision of key features or simplified prospectus5) apply to a firm in respect of the purchase of packaged products, whether life policies or schemes, by the trustees of money-purchase occupational schemes. There is no requirement for a firm to provide key features for packaged products sold to trustees of defined benefit pension schemes.

COB 6.4.4 R
  1. (1)

    When a firm sells, personally recommends or arranges the sale of a new group or master life policy, the first in a series of individual life policies or the first units in a particular key features scheme5 or simplified prospectus scheme5 to or for the trustees of a money-purchase occupational scheme, it must provide the trustees with key features, in accordance with COB 6.2.7 R to COB 6.2.25 R or for a simplified prospectus scheme, with a simplified prospectus, in accordance with COB 6.2.26 R to COB 6.2.45 R5.

    5
  2. (2)

    In COB 6.2 to COB 6.5, for the purposes of (1), the firm must treat the trustees as private customers.

  3. (3)

    In addition to the information to be provided to trustees under COB 6.4.4 R (1), the firm must ensure that key features or the simplified prospectus5 are made available to the trustees to distribute to all scheme members at the outset of the scheme and for subsequent new members.

  4. (4)

    The requirement in COB 6.4.4 R (3) applies to main scheme benefits and to additional voluntary contributions where members' benefits are linked to earmarked segments of life policies or schemes. It does not apply where trustees make pooled investments and make their own arrangements for allocation of investment returns to determine members' benefits, whether attached to defined benefit pension schemes or money purchase occupational scheme.

COB 6.4.5 G
  1. (1)

    The illustrative figures within the key features provided under COB 6.4.4 R (1) can be on an example basis, using a range of representative actual or hypothetical scheme members (covering, for example, different ages, sexes and salaries), so that the trustees can assess the effectiveness of the investment for their pension scheme members.

  2. (2)

    The definition of money-purchase occupational scheme includes executive pension plans (established for directors, executives and senior employees), small self-administered schemes that provide money-purchase benefits and additional voluntary contribution schemes.

  3. (3)

    Group personal pension schemes are not occupational pension schemes and COB 6.4.4 R does not apply to them. Firms should therefore provide each person who is offered membership of a group personal pension scheme with key features or a simplified prospectus5 in accordance with COB 6.1 and COB 6.2. This does not preclude generic key features being sent out as part of a financial promotion, provided that a post-sale confirmation is issued in accordance with COB 6.3.3 R.

  4. (4)

    The objective of COB 6.4.4 R (3) is to ensure that prospective scheme members have access to information about the occupational pension scheme that could enable comparison with alternative personal investments. Firms may decide for themselves the format (but not content) of this information. For example, individual sets of key features can be supplied or a schedule of details which the trustees or their advisers can assimilate into other pension scheme communications.

Self-invested personal pension schemes

COB 6.4.6 R
  1. (1)

    A firm which sells, personally recommends or arranges the sale of a packaged product (other than a simplified prospectus scheme5) to or for a member, prospective member or trustees of a self-invested personal pension scheme, must provide key features to that member or trustees,in accordance with COB 6.2.7 R to COB 6.2.25 R or for the sale of a simplified prospectus scheme, provide a simplified prospectus to that member or trustees, in accordance with COB 6.2.26 R to COB 6.2.45 R5.

  2. (2)

    In COB 6.2 to COB 6.5, for the purposes of (1), members, prospective members and trustees must be treated by the firm as private customers.

COB 6.4.7 G

Investments within a self-invested personal pension scheme (a "SIPP") are effected by the trustees on behalf of scheme members. Key features or a simplified prospectus5 should be given to the trustees and to members of SIPPs when packaged products (whether life policies or schemes) are recommended by a firm to scheme members or effected by SIPP trustees. Notice of the right to cancel should also be copied to SIPP members in these circumstances, in accordance with COB 6.7.31 R.1

Income withdrawals and short-term annuities7

COB 6.4.8 R

When a firm personally recommends, arranges or effects income withdrawals or purchase of short-term annuities7 to or for a private customer, the customer must be provided with key features or with a simplified prospectus5 in good time before he signs any form of application or authority electing to make those withdrawals or purchases7, whether that election 7or purchase is made with advice on investments or on an execution-only basis, unless COB 6.4.10 R to COB 6.4.12 R or COB 6.4.27 R to COB 6.4.31 R (telephone sales and other exemptions) applies.13

COB 6.4.9 R

In relation to an election to make income withdrawals, or short-term annuities,7 the requirement for the provision of key features or a simplified prospectus5 in:

  1. (1)

    COB 6.2.7 R also applies when an existing life policy is to be endorsed;

  2. (2)

    COB 6.2.22 R or, for simplified prospectus schemes, COB 6.2.33 R also applies when an existing scheme holding is to be used.

COB 6.4.10 R

In relation to an election to make income withdrawals, or purchase of short-term annuities,7 the requirements of COB 6.4.11 R and COB 6.4.12 R override the relevant requirement in COB 6.2 (Provision of key features or simplified prospectus5), where there is conflict, but only where this would not contravene a requirement of the UCITS Directive5.

COB 6.4.11 R

When a private customer makes a series of elections within a period of 12 months to make income withdrawals,7 or purchase of short-term annuities, the firm that is personally recommending, arranging or effecting the elections may provide one combined set of key features, or simplified prospectuses5 for those elections, or may provide separate sets of key features for elections which relate to life policies and key features schemes5 or separate simplified prospectuses for simplified prospectus schemes5.

5
COB 6.4.12 R

Where income is being taken, no less than six weeks before the end of the annuity period for a short-term annuity or at intervals no longer than 12 months from the date of an election by a private customer to make income withdrawals the product provider of the unvested pension scheme must:7

7
  1. (1)

    provide the private customer with such information required by COB 6.6.13 R as will enable the private customer to review the options available7; and

    7
  2. (2)

    inform the private customer how to obtain advice on investments in respect of his unsecured or alternatively secured pension7, and that it would be in his best interests to do so.

    7

Cash deposit ISAs and cash deposit CTFs4

COB 6.4.13 R

When a firm manages, personally recommends or sells a cash deposit ISA or cash deposit CTF to a private customer, that customer must be provided with the information specified in whichever of COB 6.5.42 R or COB 6.5.42A R applies to it in good time before the customer is bound by the transaction, unless COB 6.4.27 R to COB 6.4.31 R (telephone sales and other exemptions) applies.134

Traded life policies

COB 6.4.14 R

When a firm personally recommends that a private customer should purchase a traded life policy, the customer need not be provided with key features, if the firm instead supplies the information in COB 6.5.44 R in good time before the customer is asked to complete any form of application or authority giving effect to the purchase of the traded life policy.1

Stakeholder pension schemes

COB 6.4.15 R

When a firm sells, manages, personally recommends or arranges the sale of a stakeholder pension scheme to or for a private customer, the firm must, subject to COB 6.4.18 R and unless COB 6.4.27 R to 6COB 6.4.31A R6 (telephone sales and other exemptions) applies, provide the private customer with key features or a simplified prospectus5 before the private customer completes an application for the stakeholder pension scheme.3

COB 6.4.16 R

When a firm proposes to deal with a private customer on the telephone for the purposes of providing information through a decision tree about stakeholder pension schemes, the firm may do so only if it has adequate evidence to show that the private customer has access to a copy of a decision tree (as specified in COB 6.5.8 R) during the conversation.

COB 6.4.17 G

COB 6.4.16 R is intended to ensure that, where a firm takes a private customer through the decision tree process by telephone, it takes reasonable care to ensure that the private customer has a decision tree in front of him. For example, on first contact firms could enquire whether the private customer has a decision tree, and if not, send one to him before taking him through the decision tree process during a follow-up telephone call.

COB 6.4.18 R

COB 6.4.15 R does not apply to a stakeholder pension scheme operator when its stakeholder pension scheme is sold on the personal recommendation of, or arranged to be sold by, another person, provided that other person:1

  1. (1)

    is a firm (or an appointed representative) operating from an establishment maintained by the firm (or appointed representative) in the United Kingdom; or1

  2. (2)

    is operating from an establishment in an EEA State whose law imposes an obligation on the person to provide information about the stakeholder pension scheme in accordance with articles 3 and 5(1) and (2) of the Distance Marketing Directive.1

COB 6.4.19 R
  1. (1)

    When a firm sells, personally recommends or arranges the sale of a new group or master life policy, the first in a series of individual life policies or the first units in a particular key features scheme5 or simplified prospectus scheme5 to the trustees or the operator of a stakeholder pension scheme, it must provide the trustees or operator with key features, in accordance with COB 6.2.7 R to COB 6.2.25 R or for a simplified prospectus scheme, with a simplified prospectus, in accordance with COB 6.2.26 R to COB 6.2.45 R5.

    5
  2. (2)

    In COB 6.2 to COB 6.5, for the purposes of (1), the firm must treat trustees and operators as private customers.1

COB 6.4.20 G

The illustrative figures within the key features provided under COB 6.4.19 R can be on an example basis, using a range of representative actual or hypothetical scheme members (covering, for example, different ages, sexes and salaries), so that the trustees or operator can assess the effectiveness of the investment for scheme members.

COB 6.4.21 R

When a firm provides a private customer with information through a decision tree concerning membership of a stakeholder pension scheme, but does not give advice on investments or make a personal recommendation, the firm must provide the private customer with a written notice in accordance with COB 6.4.22 R and COB 6.4.23 R.

COB 6.4.22 R

A written notice required by COB 6.4.21 R must be provided by the firm no later than 8 business days after the cancellation period commences.1

COB 6.4.23 R

The notice in COB 6.4.22 R must:

  1. (1)

    confirm that no advice on investment has been given and that the private customer has decided that the stakeholder pension scheme is appropriate as a result of the answers he has given to the questions posed in the decision tree; and

  2. (2)

    include a copy of the decision tree indicating the answers which the private customer has given.

COB 6.4.24 G

After giving information through a decision tree in accordance with COB 6.4.16 R and before the customer completes the application, a firm could satisfy COB 6.4.15 R by providing an adequate oral explanation (for example over the telephone in the case of a call-centre) about the main features of the stakeholder pension scheme (as outlined in COB 6.2.11 G). Written key features must then be given or sent along with the copy decision tree in accordance with COB 6.4.21 R -COB 6.4.23 R within five business days.

1Entering into a distance contract for accepting deposits (other than a cash deposit ISA)3

COB 6.4.25 R
  1. (1)

    1A retail customer must be provided with all the contractual terms and conditions and the information in COB App 1 in a durable medium in good time before he is bound by a distance contract or offer under which the firm will accept deposits (other than a cash deposit ISA, for which see COB 6.5.42 R), unless an exemption in COB 6.4.27 R to COB 6.4.31 R (telephone sales and other exemptions) applies.3

COB 6.4.26 G

1[deleted]3

3Exemption: telephone sales

COB 6.4.27 R
  1. (1)

    1Where this chapter requires key features, a simplified prospectus5 or other information to be provided, in the case of voice telephony communications, a firm:

    1. (a)

      must provide the customer at the beginning of the telephone conversation with the name of the firm and (if the call is initiated by the firm) the commercial purpose of the call;4

    2. (b)

      provided the customer gives his explicit consent to receiving only limited information, may proceed on the basis of at least the following information:3

      1. (i)

        the name of the person in contact with the customer and his link with the firm;

      2. (ii)

        a description of the main characteristics of the service;

      3. (iii)

        the total price to be paid by the customer to the firm for the service, including all related fees, charges and expenses, and all taxes paid through the firm together with a statement, where relevant, that commission or remuneration will be paid to the adviser or representative, or, where an exact price cannot be indicated, the basis for the calculation of the price enabling the customer to verify it;

      4. (iv)

        where relevant, notice of the possibility that other taxes or costs may exist that are not paid through the firm or imposed by it;

      5. (v)

        the existence or absence of a right to cancel the service under COB 6.7 and, where there is such a right, its duration and the conditions for exercising it, including information on the amount which the customer may be required to pay if the contract is terminated early or unilaterally under its terms, as well as the consequences of not exercising it; and

      6. (vi)

        that other information is available on request, and the nature of that information, and4

      7. (vii)

        in addition to (a) and (b) above, where the product is a CTF, provided the customer gives his explicit consent to receiving only limited information, may proceed on the basis of the information referred to in COB 6.5.40 R (7) given orally.4

  2. (2)

    If the customer does not give his explicit consent to receiving limited information, and the parties wish to proceed by telephone, the firm must prior to the conclusion of the contract provide all of the information required by COB App 1 orally to the customer.3

  3. (3)

    In the case of either (1) or (2), the firm must send the private customer immediately after the contract is concluded, the required key features, simplified prospectus5 or other information (as applicable) in a durable medium.

COB 6.4.28 G

1Firms are reminded of the requirements in COB 3.8.21 G (Real time financial promotions) and COB 3.10 (Unsolicited real time financial promotions) in relation to telephone calls that may fall within the definition of a financial promotion. Firms are also reminded that in relation to a stakeholder pension schemeCOB 6.4.16 R continues to apply.3

3Exemption: certain other means of distance communication

COB 6.4.29 R

3This exemption applies where this chapter requires a key features, simplified prospectus5 or other information to be provided in relation to a distance contract, if the distance contract is concluded at the customer's request using a means of distance communication (other than telephone) which does not enable provision of the information in a durable medium before the customer is bound by the contract or offer. In that case, the firm must provide key features, simplified prospectus5 or other information to the customer in a durable medium immediately after the conclusion of the contract.2

3Exemption: successive or separate operations under an initial service agreement

COB 6.4.30 R

This exemption applies where this chapter requires a key features, simplified prospectus5 or other information to be provided in relation to a distance contract, if the firm has an initial service agreement with the customer and the contract is in relation to a successive operation or a separate operation of the same nature under that agreement (see COB 1.10.2 G (1)).2

3Exemption: other successive and separate operations

COB 6.4.31 R

3This exemption applies where this chapter requires a key features, simplified prospectus5 or other information to be provided in relation to a distance contract, if:

  1. (1)

    the firm has no initial service agreement with the customer:

  2. (2)

    the firm has performed an operation for the customer within the last year: and

  3. (3)

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

6Exemption: automatic enrolment of employees in pension schemes

COB 6.4.31A R

6This exemption applies where a private customer is automatically enrolled by his employer in a stakeholder pension scheme, a pension policy or a pension contract provided through the workplace. In that case, in good time before the private customer is bound by the contract or offer, he must be provided with the appropriate key features or other information.

COB 6.4.32 R

2At each anniversary of the date on which a long-term care insurance contract which is based on single premium investment bonds was entered into, the insurer must:

  1. (1)

    provide the private customer with a table based on the format of COB 6.5.24 containing at least the current fund value and projected future policy values (as in column "What you might get back");

  2. (2)

    where it is the case, inform the private customer of the possibility that future policy values may be insufficient to fulfil the original purpose of the contract; and

  3. (3)

    inform the private customer how to obtain advice on investments in respect of long-term care insurance contracts, and that it is in his best interest to do so.

COB 6.4.33 G

2In the case of a long-term care insurance contract in which:

  1. (1)

    long-term care benefits are available after commencement of the policy at the option of the policyholder; and

  2. (2)

    as a result of the exercise of that option a new contract of insurance is offered to the policyholder;

provision is made in TC 2.5.5A R so that, in respect of the contract containing the option, an employee, although engaged in advising on long-term care insurance contracts need not be required to pass an appropriate examination for long-term care insurance contracts to do so.

4Exemption: Revenue allocated accounts

COB 6.4.34 R

4When a firm opens a Revenue allocated CTF, the firm must send the private customer on the first available opportunity after the account has been opened, whichever of the key features or other information is required in a durable medium.

COB 6.4.35 G

4In considering what the first available opportunity mentioned in COB 6.4.34 R is, firms may take into account that there may generally be a delay between a Revenue allocated CTF being opened and the customer being informed that it had been opened.

COB 6.5 Content of key features and important information: life policies, key features schemes, ISA and CTF cash deposit components and stakeholder pension schemes19

Application

COB 6.5.1 R

COB 6.5 applies in accordance with COB 6.1.1 R.

General

COB 6.5.2 R

A firm must ensure, unless COB 6.5.3 R applies, that:

  1. (1)

    the key features it produces for a life policy or a key features scheme other than a stakeholder pension scheme (whether or not held within a PEP or an ISA) 19includes the information required by COB 6.5.11 R, set out in the order shown divided by appropriate and prominent sub-headings, some of which are prescribed in the rules;

    19
  2. (2)

    the information it produces under COB 6.4.13R (1) for a cash deposit ISA or cash deposit CTF complies with whichever of COB 6.5.42 Ror COB 6.5.42A applies to it;15

  3. (3)

    the information document or abbreviated form of key features it produces:

    1. (a)

      relating to friendly society tax exempt policies or traded life policies contains the applicable information specified in COB 6.5.43 R- COB 6.5.44;14

    2. (b)

      relating to broker funds contains the applicable information in COB 6.5.45;14

  4. (4)

    the post-sale confirmation document it produces contains the applicable information specified in COB 6.5.46 R;11

  5. (5)

    the key features it produces or issues for a stakeholder pension scheme:

    1. (a)

      includes the relevant sub-headings set out at COB 6.5.11 R, the applicable information specified in COB 6.5.12 R - COB 6.5.40 R appropriate to those sub-headings; and

    2. (b)

      is, subject to COB 6.5.6 R, accompanied by or includes the decision trees specified in COB 6.5.8 R, unless the stakeholder pension scheme is being purchased as a result of a personal recommendation; and11

  6. (6)

    11all:14

    1. (a)

      key features; and14

    2. (b)

      abbreviated key features mentioned at COB 6.5.2 (3)(a) above,14

    it produces in relation to a distance contract with a retail customer include or are accompanied by all the contractual terms and conditions and the information in COB App 1 except to the extent that they are separately provided to the retail customer in a durable medium in good time before the retail customer is bound by the contract or offer.14

COB 6.5.3 R

A firm may adapt the prescribed content and format requirements in COB 6.5 only when it can demonstrate that this is necessary to reflect the terms and nature of a particular product and that, in relation to a distance contract with a retail customer, in doing so it does not omit the contractual terms and conditions and information in COB App 1.11

COB 6.5.4 G
  1. (1)

    Where the rules in COB 6.5 do not require the use of prescribed text, firms may give the relevant information using their own words and style.

  2. (2)

    For the purposes of COB 6.5.2 R (1):

    1. (a)

      a firm which offers more than one key features scheme19 may choose whether to produce separate key features for each scheme (including a fund or sub-fund or share class), or to produce a single key features to cover a range of funds (provided the differences between those funds are made clear);

      19
    2. (b)

      where a publication covers more than one key features scheme19 (for example, in the case of a year book comprising information on all the funds offered by a unit trust manager), it might consist of a key features section at the beginning giving details common to all the relevant funds (whether unit trusts, ICVCs, sub-funds of an umbrella scheme or share classes within an ICVC), followed by separate pages setting out, for each fund, those items which are specific to it, for example 'Aims', 'Risk Factors' and 'Charges and their Effect'.

      19

Stakeholder pension schemes: decision trees

COB 6.5.5 G

There is no obligation to supply a decision tree as specified in COB 6.5.8 R where a firm has personally recommended a stakeholder pension scheme to a private customer. Firms may wish to supply a copy of any decision tree used as part of the advice process along with the mandatory suitability letter.5

COB 6.5.6 R

Where a firm knows that a certain decision tree or trees will not be relevant to a private customer to whom key features are to be given, the firm can omit them and include only the relevant decision tree or trees.

COB 6.5.7 G

There are three versions of the decision trees for employed persons, the self-employed and those not in employment. The specified introductory text is a required part of each decision tree. Firms are permitted to issue one decision tree, consisting of the introductory text and the relevant version of the flowcharts, where the employment status of the customer is known. In other circumstances, the introductory text and all three versions of the flowcharts should be included. This guidance applies whether decision trees are within the key features or are used separately.

COB 6.5.8 R
  1. (1)

    Whether a firm produces decision trees within or separate from key features, it must (unless COB 6.5.9 R applies and subject to COB 6.5.8A R) reproduce the text, content and format set out in COB 6 Annex 1.

  2. (2)

    If COB 6 Annex 1 is subsequently amended:

    1. (a)

      the firm must amend its decision trees as soon as reasonably practicable and, in any case, within three months of the date when the amendments to COB 6 Annex 1 come into force; and

    2. (b)

      the firm may continue to use decision trees that complied with the previous version of COB 6 Annex 1 until it has done so.

COB 6.5.8A R

A firm must ensure that its decision trees include:

  1. (1)

    (in the place in the relevant table in the Further information text at COB 6 Annex 1 where the square brackets appear):

    1. (a)

      in the heading of the table, the current tax year; and

    2. (b)

      the Basic State Pension rates and Pension Credit minimum income rates for the current tax year;

  2. (2)

    (where the square brackets appear) at the bottom of the cover page and at the bottom of each page of the flow charts, the current tax year; and

  3. (3)

    (where the square brackets appear) in the introductory text where additional explanatory text within Further information is signposted, the appropriate page number.512

COB 6.5.8B R
  1. (1)

    A firm must, subject to (2), make the changes required by COB 6.5.8A R as soon as reasonably practicable and, in any case, within three months of the start of the tax year.

  2. (2)

    Where, in any year, a firm is required to make changes to the trees under COB 6.5.8 R and COB 6.5.8A R, it may make both sets of changes at the same time, provided that it does so within the time limits in COB 6.5.8 R (2)(a).5

COB 6.5.8C G
  1. (1)

    The FSA expects to review the decision trees once each year and will amend them as necessary as near as possible to the start of the new tax year. The amended version of the decision trees will be published on the FSA's web-site and available in printed form when the rules are amended each year. Firms must bring their trees into line with the amended rules within three months, but may continue to use their "old" trees until they have done so.

  2. (2)

    Firms are required, by COB 6.5.8A R, to insert the Basic State Pension rates and Minimum Income Guarantee rates for the current tax year into the relevant table in the introductory text to their decision trees each year and to identify the relevant year in the heading of the table and also at the bottom of the pages specified in COB 6.5.8A R (2). The rules require firms to do this within three months of the start of the tax year if no other changes to the trees are required. However, COB 6.5.8B R (2) allows them to delay updating the Basic State Pension and Minimum Income Guarantee rates until the same time as they make any other amendments to their trees which they are required to make under COB 6.5.8 R, provided that they do so within no more than three months of the date when those amendments come into force.

  3. (3)

    The appropriate rates will be those announced by the Government (usually, but not necessarily, in the Chancellor of the Exchequer's annual Budget) as applying to the tax year in question. The relevant Basic State Pension and Minimum Income Guarantee rates for the current tax year will be included in the version of the trees published by the FSA.5

COB 6.5.8D R

A firm must ensure, subject to COB 6.5.8 R (2), that it uses only the most recent version of its decision trees.5

COB 6.5.8E R

Where a firm makes use of both electronic and hard copy versions of the decision trees specified in COB 6.5.8 R, it must synchronise the timing of any changes to those trees as far as reasonably practicable.5

COB 6.5.8F G

Firms are expected to ensure that they make the necessary changes to all of their trees at the same time (or as close to the same time as possible), including those used by other organisations for which they are responsible, in order to minimise the risk of consumer confusion. This may mean delaying changes to the trees in some instances until the firm is able to make all of the required changes, but all of a firm's trees must be amended within the time period allowed.5

COB 6.5.9 R

The only adaptations, other than those in COB 6.5.8A R - COB 6.5.8E R, that a firm may make to the decision trees specified in COB 6.5.8 R are those suitable to brand the decision tree with the corporate image of the firm, to reflect the design of its stakeholder pension scheme promotional material or to reflect the use of interactive delivery.5

COB 6.5.10 G
  1. (1)

    There is a limited scope within COB 6.5.9 R to depart from the prescribed decision tree format and content in order to blend in the trees with other promotional materials such as key features or internet financial promotions. However, the text and general design should follow the prescribed content and format. Firms will be aware that the FSA publishes its own version of the decision trees for public use: firms may consider them as examples of acceptable design.

  2. (2)

    Examples of items and formatting where no adaptations should be made include:

    1. (a)

      the text - both content and order, whether in the introduction, the boxes within the flowcharts, or any other sections of the decision trees;

    2. (b)

      the use of boxed items within the introductory text;

    3. (c)

      the use of emphasis (firms can choose the method of giving emphasis, such as size, bold or italic text);

    4. (d)

      the vertical flow and pagination of the flowcharts within the decision trees;

    5. (e)

      the boxes within the flowchart pages, these should be rectangular and filled with one consistent colour, except that two tints of the base colour may be used to highlight tick boxes and to differentiate columns of figures;

    6. (f)

      the directional arrows linking the boxes within flowchart pages, these should be of one design and the same colour as fills the flowchart boxes.

  3. (3)

    Examples of items where adaptations can be made include:

    1. (a)

      the typeface and font size of the text;

    2. (b)

      the pagination of the introductory text and the use of columns;

    3. (c)

      the edging of boxes (for example, use of shadow or rounded corners);

    4. (d)

      the use of background colours, for example, to match corporate colours or product brochures (see (2)(e));

    5. (e)

      separate colour schemes to differentiate between sets of decision trees, for example between employed and self-employed versions;

    6. (f)

      the use of an extra colour to highlight headings within flowchart pages and to identify separate versions of the decision trees;

    7. (g)

      the size of paper used (A4 is recommended, but other sizes are possible, provided that the flowchart pages are clear and legible);

    8. (h)

      where delivery is through an interactive computer-based system, the wording of the introductory text that explains how to use the decision trees.

COB 6.5.11 R

Table of Information/Applicable provisions

This table belongs to COB 6.5.2 R (1)

Information

Applicable provisions

Title

COB 6.5.12 R

Nature of life policy or key features scheme 19 or stakeholder pension scheme

19

COB 6.5.13 R - COB 6.5.14 G

An example

COB 6.5.15 R - COB 6.5.19 R

Description of the life policy or key features scheme19 or stakeholder pension scheme

19

COB 6.5.20 R

Tables:

Life policies

Key features schemes 19

19

COB 6.5.23 R - COB 6.5.26 R

COB 6.5.30 R - COB 6.5.32 R

Deductions summary:

Life policies

Key features schemes 19

19

COB 6.5.27 R - COB 6.5.29 R

COB 6.5.33 R - COB 6.5.36 G

Commission and remuneration

COB 6.5.38 R - COB 6.5.39 G

Further information

COB 6.5.40 R

Title

COB 6.5.12 R

A firm must include this heading: 'key features of the [name of life policy/key features scheme19/stakeholder pension scheme]'.

19

Nature of life policy or key features 19scheme or stakeholder pension scheme

COB 6.5.13 R
  1. (1)

    A firm must describe the nature of the life policy or key features scheme19 or stakeholder pension scheme under the following headings: 'its aims', 'your commitment', or, 'your investment' (whichever is more appropriate) and 'risk factors'.

    19
  2. (2)

    Under 'risk factors' a firm must give a brief description of the factors which may have an adverse effect on performance or are otherwise material to the decision to invest.

COB 6.5.14 G

The description which a firm is required to provide under 6.5.13R(2) might include information on the matters set out in the following non-exhaustive list:

  1. (1)

    whether the value of the capital and any income from it might fluctuate;

  2. (2)

    cancellation issues, including the fact that, if the value of the investment falls before notice of cancellation is given, a full refund of the original investment may not be provided but rather the original amount less the fall in value;

  3. (3)

    particular risks, if any, associated with the underlying assets in which the packaged product is invested;

  4. (4)

    risks associated with the markets in which investments will be made, with particular reference to emerging markets; such risks might include dealing difficulties, settlement and custody practices;

  5. (5)

    special risks such as capital erosion or constraints on capital growth in the case of funds where charges are deducted from capital, or where buying income or dividend stripping forms part of the investment strategy;

  6. (6)

    volatility, in particular with regard to higher volatility funds such as geared futures and options schemes and warrant schemes and the fact that the loss on realisation of the investment could be very high, even equalling the amount originally invested;

  7. (7)

    the inclusion of a 'market value adjustment' in respect of with-profits funds, and the risk that, in adverse circumstances, benefits could be reduced;

  8. (8)

    potential problems with investment in property in respect of liquidity, and the fact that repurchase or surrender might be delayed during a period when the property is not readily saleable, and that property valuation is a matter of judgement by a valuer;

  9. (9)

    in the case of a broker fund, whether the private customer has the right, or may be required, to transfer out of that fund to any other fund or scheme of a firm; if so, the name of the fund or scheme, the transfer terms and the circumstances in which, and by whom, such a transfer may be required or made;

  10. (10)

    the risk that a current favourable situation may not be maintained in future, for example the tax treatment of ISAs;

  11. (11)

    the fact that if the private customer does not maintain contributions he may not meet any target benefit which has been projected and may lose the benefits of any life protection;

  12. (12)

    in the case of a new fund, the risk that, if its assumed size is not achieved, the proportion of charges and expenses allocated to the investment may be higher and the value of the investment consequently reduced;

  13. (13)

    the fact that there is no guarantee that a life policy such as an endowment assurance used to repay an interest-only mortgage will produce sufficient funds at the end of the mortgage term and that the amount the investor will have to continue to pay may need to increase to achieve repayment of the loan;

  14. (14)

    the fact that with personal pensions there may be penalties if the private customer takes the benefits before the stated retirement date;

  15. (15)

    in the case of a guaranteed packaged product, where it is a possibility, the fact that there may be a capital shortfall at the end of the contract; where there is a fixed regular payment of income, it should be drawn to the attention of the private customer that such payments often involve a risk to capital; 913

  16. (16)

    for a security or an investment trust savings scheme which satisfies the conditions specified in COB 3.8.9 G (6), the fact that the investment may be subject to sudden and large falls in value and that the private customer may get back nothing at all if the fall in value is sufficiently large;91313

  17. (17)

    guarantees or other actual or potential liabilities, and their effect or potential effect, whether they are attributable to:

    1. (a)

      the contractual terms and benefits of the packaged product which the private customer is or may be acquiring; or

    2. (b)

      the contractual terms and benefits of any of the product provider's other products; or

    3. (c)

      the business activities of the product provider or its associates;

    if they have or may have a material adverse effect on the returns to the private customer or are otherwise material to his decision to invest; and13

  18. (18)

    in the case of a long-term care insurance contract which is based on single premium investment bonds, the fact that the income produced by the bonds may be insufficient to continue to meet the premiums of the underlying contract of insurance. The description could also explain the consequences of this, including, if it is the case, that capital may be eroded, further single premium may be payable, or the cover reduced.13

    10

An example

COB 6.5.15 R

A firm must include a projection, illustrating how the principal terms of the proposed transaction apply to the private customer:

  1. (1)

    where the proposed transaction is for a life policy other than: 17

    1. (a)

      a long-term care insurance contract which is a pure protection contract;1317

    2. (b)

      a linked life stakeholder product.17

    3. (c)

      one that relates to a CTF or a stakeholder product sold through basic advice,17

  2. (2)

    where the proposed transaction does not relate to a CTF or a stakeholder product sold through basic advice and is for a key features scheme19 or a linked life stakeholder product:17

    19
    1. (a)

      and relates to an election to make income withdrawals or purchase of a short-term annuity21; or

    2. (b)

      where the private customer's primary objective is to acquire;

      1. (i)

        a specified sum of money on a specified date; or

      2. (ii)

        a specified sum of money on death; or

      3. (iii)

        an annuity of a specified amount payable as from a specified date.

COB 6.5.16 G

A projection may be included for key features schemes19 where COB 6.5.15 R (2) does not require one, at a firm's discretion.

19
COB 6.5.16A G

13A projection is not appropriate for a long-term care insurance contract which is a pure protection contract. Policy benefits and premiums must be illustrated in accordance with the relevant provisions of COB 6.5.49 R.

COB 6.5.17 G

Where the proposed transaction is for a stakeholder pension scheme, a specimen projection will have been included in the decision tree. There is no requirement in these rules for a personalised projection in the key features for a stakeholder pension scheme. Where projections are given for stakeholder pension schemes in other circumstances, for example where a scheme member requests a personalised projection, they should follow the standard projection rules in COB 6.6 (Projections).

COB 6.5.18 R
  1. (1)

    All projections included in key features, except a specimen projection in a decision tree for a stakeholder pension scheme, must be calculated in accordance with COB 6.6 (Projections), using the lower, intermediate and higher rates of return in COB 6.6.50 R, and followed by the appropriate statements form COB 6.6.15 R.

  2. (2)

    In addition, if the projection in (1) is for a pension scheme or a stakeholder pension scheme, a firm may also include a type P projection in the key features (see COB 6.6.34 R (5)). The pension must assume increases linked to the retail prices index using the appropriate intermediate rate in COB 6.6.51 R. 6

COB 6.5.19 R
  1. (1)

    A life policy projection in key features must be specific to the private customer, calculated on the basis of the private customer's age and sex, the sum assured, the premium and other principal factors of the proposed life policy unless:

    1. (a)

      the life policy is a single premium life policy; or

    2. (b)

      the total premiums payable do not exceed ÂŁ120 a year (or ÂŁ130 a year if the premiums are paid every four weeks); or

    3. (c)

      the total premiums are less than ÂŁ1,000; or

    4. (d)

      the key features are part of a direct offer financial promotion; or17

      17
    5. (e)

      the projection is in respect of a stakeholder product (which is not a stakeholder pension).17

  2. (2)

    If (1)(a), (b), (c) or (d) applies and no customer specific projection is included, a projection must be provided which typically represents the type of business which the firm conducts (or proposes to conduct) in relation to the life policy in question.

  3. (3)

    A scheme projection in key features must be based on either:

    1. (a)

      the actual amount which the private customer is proposing to invest; or

    2. (b)

      an amount which typically represents the type of business which the firm conducts (or proposes to conduct) in relation to the scheme in question;

    unless it is for income withdrawals or purchase of a short-term annuity21, when it must be on the basis of (a).

Description of the life policy or key features 19scheme or stakeholder pension scheme

COB 6.5.20 R

In addition to COB 6.5.13 R and COB 6.5.18 R, a firm must set out in the form of questions and answers a description of the principal terms of the life policy, key features scheme19, or stakeholder pension scheme, and any other information necessary to enable the private customer to make an informed decision.

19
COB 6.5.21 G

The information required by COB 6.5.20 R should include:

  1. (1)

    for a life policy such as an endowment which is being used to repay an interest-only mortgage loan, details of how and when the private customer will be notified whether the life policy is on target to provide sufficient funds to repay the loan and, if it is not, what options the private customer has;

  2. (2)

    for a life policy, the consequences of making the life policy paid up or taking a contribution holiday;

  3. (3)

    for an FSAVC, a prominent warning that, as an alternative, a scheme AVC exists which may offer better terms, details of which can be obtained from the occupational pension scheme administrator;

  4. (3A)

    for a long-term care insurance contract, information to make policyholders aware of the importance of:13

    1. (a)

      regularly reviewing their circumstances and the likely costs of long-term care with a view to ensuring that their long-term care needs continue to be appropriately covered; and 13

    2. (b)

      seeking advice in the event of change affecting the policyholder's long-term care needs, or in the event of a variation of the contract terms so as to provide long-term care benefits;13

  5. (3B)

    for a long-term care insurance contract in which the insurer has the right to review the premium:13

    1. (a)

      a statement of that fact, the frequency of any right to vary the premium payable and a description of the circumstances which would give rise to a variation of the premium, for example, a change in claims experience;13

    2. (b)

      a statement of the consequences of not paying any increased or extra premium resulting from any review, such as a reduction in policy benefits;13

    3. (c)

      a statement of the rate of investment return assumed in the premium calculation together with a note of each other main assumption subject to variation;13

    4. (d)

      a statement that the higher the assumed rate of investment return, the greater the chances of being asked to pay increased or extra premiums following a premium review;13

    5. (e)

      if the rate of investment growth assumed in the premium calculation is more than the intermediate rate shown in COB 6.6.50 R, an illustration of the potential increased regular premium or additional single premium that may be payable following the first premium review, assuming that the rate of investment return achieved up to the review and assumed thereafter was at the intermediate rate shown in COB 6.6.50 R;13

  6. (3C)

    for a long-term care insurance contract in which long-term care benefits are available after commencement of the policy at the option of the policyholder, a statement of the amount of premium payable for that option. Where any change to the level of cover requires further underwriting this should, where possible, be made clear at the outset.13

  7. (4)

    for a long-term care insurance contract which is based on single premium investment bonds -13

    1. (a)

      a statement drawing attention to the possible effect on the capital invested where withdrawals are taken to pay for care; this can be communicated by including a standard, non-client-specific, example comparing the effect of claim payments on the value of the life policy, first assuming no claims and then assuming a claim beginning at age 80 and lasting for five years; the standard mid rate of return should be used assuming claim payments at the highest benefit level payable under the life policy; and

    2. (b)

      information to make the private customer aware that he can use key features to compare the investment potential of different product providers'packaged products, for example surrender values at various times and the effect of deductions;

  8. (5)

    for a personal pension scheme, including a group personal pension scheme, a clear and prominent indication of the general availability of stakeholder pension schemes and the fact that these might meet the consumer's needs at least as well as the personal pension scheme on offer;

  9. (6)

    for a stakeholder pension scheme, a description of the default investment option offered under regulation 3(5) of the Stakeholder Pension Schemes Regulations 2000;

  10. (7)

    for an individual pension account:

    1. (a)

      where the key features relate to a stakeholder pension scheme or personal pension scheme and the firm chooses to highlight, within key features or elsewhere, that the investment will be made through an IPA, a statement:

      1. (i)

        identifying by name any IPA eligible investments which are to be or may be held as assets of the stakeholder pension scheme or personal pension scheme; and

      2. (ii)

        indicating which of those assets will benefit from the Stamp Duty Reserve Tax exemption available to IPA's;

    2. (b)

      where the firm is acting as an operator or distributor of a regulated collective investment scheme or investment trust savings scheme and elects to include within key features a statement that some or all of the investments are IPA eligible investments, an indication in respect of each such investment whether pension scheme members will benefit from the Stamp Duty Reserve Tax exemption available to IPA's12;20

      20
  11. (8)

    for a life policy or a key features scheme19 which is to be held within a CTF the information referred to in COB 6.5.40 R (7); and2015

    1920
  12. (9)

    for a with-profits policy, a cross-reference to the CFPPFM (see COB 6.10.9G G (8)).20

Tables and deductions summaries for life policies, key features 19schemes and stakeholder pension schemes

COB 6.5.22 G
  1. (1)

    COB 6.5.23 R - COB 6.5.29 Rset out the Tables, Deductions Summary and method of calculating the 'Effect of deductions to date' for life policies.

  2. (2)

    COB 6.5.30 R to 19COB 6.5.36 G set out the Tables, Deductions Summary and method of calculating 'Effect of deductions to date' for key features schemes19.

    19
  3. (3)

    COB 6.5.37 R outlines a simplified illustration of charges for stakeholder pension schemes. There is no requirement for the tables of figures or the reduction in yield summary required for life policies or schemes.

Tables for life policies

COB 6.5.23 R

For life policies which can have a surrender value, a firm must include the contents of COB 6.5.24 R unless COB 6.5.28 R applies.

COB 6.5.24 R

The early years

This table belongs to COB 6.5.23 R

The early years

WARNING - if you cash in during the early years you could get back less than you have paid in.

The last two columns assume that investments will grow at [insert the intermediate rate appropriate to the type of life policy set out in COB 6.6.50 ] a year.

At end of year

Total paid in to date

[Total actual deductions to date]

Effect of deductions to date

What you might get back

ÂŁ

ÂŁ

ÂŁ

ÂŁ

1

2

3

4

5

The later years

Notes: The column headed 'Total actual deductions to date' is optional. If included, it must follow the requirements in COB 6.5.23 - COB 6.5.29. In the case of a Holloway sickness policy, an indication of the total cost of risk benefits expressed as a figure in ÂŁs may be given by way of a footnote to the column headed 'Effect of deductions to date'.

COB 6.5.25 R

When completing COB 6.5.24 R, a firm must:

  1. (1)

    under the heading 'the early years' include figures for the first five years of the life policy or, if the life policy has a fixed term of less than five years, as many of them as fall before the maturity date;

  2. (2)

    under the heading 'the later years' include figures for the tenth and every subsequent fifth year of the term of the life policy (or of the contract period as defined in COB 6.6.25 R if that is shorter) and for the final year, except in the following cases:

    1. (a)

      for a whole-life policy, figures must be included for every tenth year and:

      1. (i)

        the final year, assuming that the life policy will continue (unless and until converted to a fixed term) until the insured life (or the youngest insured life) attains the age of 75 years or to a term of ten years if that is later; or

      2. (ii)

        the year in which the projected fund reaches zero if earlier than (i); the consequences of this must be drawn to the private customer's attention;

    2. (b)

      in the case of a single premium life policy with no fixed term, a term of ten years should be assumed, but figures for a longer term may be shown in addition;

    3. (c)

      for a ten-year life policy, the figures for the final year may be included in the 'early years' table;

    4. (d)

      21for an alternatively secured pension, figures must be included for each year for a term of ten years, but figures for a longer term can be shown in addition; and

    5. (e)

      where there is any significant discontinuity in the trend of surrender or transfer values, figures should be given for all the intervening years.

  3. (3)

    in the 'Total paid in to date' column, include cumulative totals of premiums paid (making adjustment as necessary to take account of any automatic premium changes);

  4. (4)

    in the 'Total actual deductions to date' and 'Effect of deductions to date' columns, include the cumulative sum of the charges and expenses (as defined in COB 6.6.23 R) and the cost of any protection benefits expected to be levied against the life policy; they must be calculated in accordance with COB 6.5.29 R;

  5. (5)

    in the 'What you might get back' column, include projections of surrender values for the life policy:

    1. (a)

      these must be calculated in accordance with COB 6.6.38 R (projections of surrender values) assuming the premium and any other relevant matters given for the purposes of COB 6.5.13 R (Nature of policy) and COB 6.5.15 R (An Example);

    2. (b)

      the surrender value of a premium on a particular date must be calculated by assuming that any premium payable on that date is payable on the following day; and

    3. (c)

      where any surrender values are guaranteed they must be provided with a suitably adjusted heading and introductory text;

  6. (6)

    where the life policy is a personal pension, replace 'What you might get back' with 'What the transfer value might be' and make suitable amendments to the explanatory text; for a personal pension policy with income withdrawals or short-term annuity21 it must be replaced with 'Open market value';

  7. (7)

    where the private customer is entitled to exercise and has chosen, or expressed the intention, to exercise the right to make partial surrenders, include a column headed 'Withdrawals' or, in the case of a personal pension with income withdrawals or short-term annuity21, 'Total income taken'; the sum of withdrawals must be shown;

  8. (8)

    for a personal pension with income withdrawals or short-term annuity21, include a table headed 'What effect will the deductions have?' instead of 'The early years' and 'The later years'; where there is any charge or penalty in calculating the open market value, all the years to which this applies should be given; and

  9. (9)

    in the case of a long-term care insurance contract based on single premium investment bonds, where the standard ten-year table does not illustrate adequately how the charges taken from a policy can increase considerably with age:13

    1. (a)

      the table must be extended to show figures at ten-year intervals and the year in which the private customer attains 100 years or the year the fund is exhausted if earlier; but

    2. (b)

      the standard ten-year figure must be used for the reduction in yield and the accompanying words amended accordingly;17

      17
  10. (10)

    in the case of a stakeholder product (which is not a stakeholder pension) the table may be given on the basis of generic figures and values.17

COB 6.5.26 R

COB 6.5.23 R - COB 6.5.25 R do not apply to a life policy which will never have a surrender value; the following warning must be given instead of the tables: 'WARNING - this policy has no cash-in value at any time'.

Deductions summary for life policies

COB 6.5.27 R

The following statements must appear beneath the information required by COB 6.5.23 R, unless COB 6.5.28 R applies:

  1. (1)

    'What are the deductions for?'

  2. (2)

    'The deductions include [the cost of life cover, sickness benefits,] [commissions/remuneration,] expenses, charges, any surrender penalties and other adjustments.'

  3. (3)

    'The last line in the table shows that over the full term of the policy the effect of the total deductions could amount to ÂŁx.'

and then either:

  1. (4)

    'Putting it another way, leaving out the cost of life cover [and sickness benefits] this would have the same effect as bringing investment growth from x% a year down to y% a year.' or

  2. (5)

    'Putting it another way, if the growth rate were to be x%, which is in no way guaranteed, this would have the effect of reducing it to y% a year.'

COB 6.5.28 R

The information relating to 'Total actual deductions to date' and 'Effect of deductions to date' in COB 6.5.23 R, and the information relating to reduction in yield required by COB 6.5.27 R, do not need to be given for the following categories of life policy:

  1. (1)

    a without-profits life policy of which the benefits, except on surrender or variation, are guaranteed benefits;

  2. (2)

    a life policy for a term not exceeding five years; and15

  3. (3)

    a life policy held within a CTF.15

Calculation method for 'effect of deductions to date' for life policies

COB 6.5.29 R

In COB 6.5.24 R the 'Total actual deductions to date' and the 'Effect of deductions to date' must be calculated for each of the years detailed in COB 6.5.25 R. These are the amounts of all deductions that are expected to be levied against the assets and premiums in respect of charges and expenses (as defined in COB 6.6.23 R), and surrender penalties, as well as allowance for the cost of risk benefits (defined in COB 6.6.28 R) to the end of the year. They must be calculated as follows.

  1. (1)

    The premiums must be accumulated at the intermediate rate prescribed in COB 6.6.49 R for the category of life policy to which the key features relates (the 'prescribed rate'), making no allowance for charges and expenses and other deductions.

  2. (2)

    'Effect of deductions to date' must be derived by subtracting the amount shown in the column 'What you might get back' from premiums accumulated in accordance with (1).

  3. (3)

    The figures in the column 'Effect of deductions to date' must reflect the charges and expenses accumulated at the prescribed rate. The column headed 'Total actual deductions to date' must show the sum of actual deductions.

  4. (4)

    The deductions for each year must be calculated by subtracting from the 'Effect of deductions to date' for that year the 'Effect of deductions to date' for the previous year (if any), increased by the amount of interest for the year calculated at the prescribed rate.

  5. (5)

    'Total actual deductions to date' is the sum of the figures derived in accordance with (4) for the year in question and all previous years; where it is negative, nil must be shown for that year.

Table for key features 19schemes

COB 6.5.30 R

For key features schemes19, a firm must include the contents of COB 6.5.31 R unless the key features scheme19 is to be held within a stakeholder CTF.15

19 19
COB 6.5.31 R

This table belongs to COB 6.5.30 R

How will charges and expenses affect my investment?

[Give an indication of the nature and amount or rate of the charges and expenses which the private customer will or may bear, including any relevant proportion of scheme charges deducted directly from the fund or not directly attributed to the account of the private customer. In describing the nature of charges state how the charges will be made, in particular whether they will be taken from capital or income. Include a statement that dealing costs are not included.]

[Give a statement that there is a buying price and a selling price (if that is the case) and that the difference between them is called the 'spread', and an indication of where up-to-date information may be obtained on these prices.]

Their effect on an investment of ÂŁ______ assuming growth of [insert the intermediate rate appropriate to the type of scheme (set out in COB 6.6.49 )] a year, is set out below

[Where (except as described in COB 6.5.15 (2) ) a projection is not a requirement, include a statement that the figures are not guaranteed and serve only to demonstrate the effect of charges and expenses on an investment.]

At end of year

Investment to Date

Effect of deductions to date

What you might get back [at the appropriate intermediate rate]

ÂŁ

ÂŁ

ÂŁ

1

3

5

10

COB 6.5.32 R

When including the contents of COB 6.5.31 R, a firm must replace the wording in brackets as directed by the instructions in those brackets and:

  1. (1)

    when the inclusion of a scheme projection within key features is compulsory in accordance with COB 6.5.15 R (2), include figures calculated in accordance with COB 6.6 (Projections):

    1. (a)

      at the end of years 1, 3, 5 and 10 and (optionally) for years 2 and 4;

    2. (b)

      then for each fifth year following the tenth year which falls within the period of the projection; and

    3. (c)

      the final year of the projection;

  2. (2)

    when a scheme projection is not required by COB 6.5.15 R (2) but is included at a firm's discretion, include figures at the end of years 5 and 10 and (optionally) for years 1 and 3 or for years 1 to 4, all calculated in accordance with COB 6.6 (Projections);

  3. (3)

    in the 'Investment to date' column, include:

    1. (a)

      the actual amount which the private customer is proposing to invest; or

    2. (b)

      an amount which is representative of the type of business which the firm conducts (or proposes to conduct) in relation to the contract in question;

    but where, under COB 6.5.15 R (2), a projection is included in the key features, the amount shown as the 'Investment' must be the same as the amount used as the basis for the projection;

  4. (4)

    in the 'Effect of deductions to date' column, include the cumulative sum of charges and expenses (as defined in COB 6.6.23 R) for each of the years shown, these figures must be calculated in accordance with COB 6.5.35 R- Calculation Method for Effect of charges to date;

  5. (5)

    in the 'What you might get back' column, include figures taking account of charges and expenses showing what the value might be if the scheme were cashed in;

  6. (6)

    where the contract is a personal pension, replace 'What you might get back' with 'What the transfer value might be', and make suitable amendments to the explanatory text; for a personal pension contract with income withdrawals or short-term annuity21 the replacement must be 'Open market value';

  7. (7)

    include extra columns in the Table in the following cases:

    1. (a)

      where the private customer is entitled to exercise and has chosen, or expressed the intention, to exercise the right to make partial withdrawals, an extra column must be included headed 'Withdrawals' or, in the case of a personal pension contract with income withdrawals or short-term annuity21, 'Total income taken'; 'Withdrawals' must include distributions of income;

    2. (b)

      where the investment involves periodic redemptions at pre-determined intervals to make payments to the private customer, a column headed 'Redemptions' is needed;

    3. (c)

      where the investment distributes income and does not involve the automatic reinvestment of this income, a column headed 'Income' must be included;

    in (a), (b) and (c) the arithmetic sum of the withdrawals or redemptions or income payments must be stated, on the assumption that these are made throughout on the same basis as contemplated at the time the projection was prepared; the method set out in COB 6.6.36 R must be used to calculate distributions of income;

  8. (8)

    for a personal pension contract with income withdrawals or short-term annuity21, include in a table under the heading 'What effect will deductions have?' figures for every fifth year; where there is any charge or penalty in calculating the open market value, all the years to which this applies must be given;

    21
  9. (9)

    include a statement that allowance for tax relief has been made in the calculation where any tax relief available to the scheme has been taken into account in the calculation of charges and expenses.

  10. (10)

    in the case of a stakeholder product (which is not a stakeholder pension) the table may be given on the basis of generic figures and values.17

Deductions summary for key features 19schemes

COB 6.5.33 R

The statements in (1) and (2), or in (1) and (3) must appear beneath the information required by COB 6.5.31 R:

  1. (1)

    'The last line in the table shows that over [n] years the effect of the total charges and expenses could amount to ÂŁx';

  2. (2)

    'Putting it another way, if the growth rate were to be (x)%, which is in no way guaranteed, this would have the effect of reducing it to (y)% a year';

  3. (3)

    'Putting it another way, this would have the same effect as bringing investment growth from (x)% a year down to (y)% a year'.24

COB 6.5.34 R
  1. (1)

    The figure [n] in the prescribed wording in COB 6.5.33 R is the number of years in figures given at the bottom of the table, as appropriate for each transaction.

  2. (2)

    The 'Investment to date' must be accumulated to the end of [n] years at the relevant rate of return (x)% making full allowance for the charges and expenses (as specified in COB 6.6.23 R).

  3. (3)

    The rate of return (y)% must be found which, if applied (on a compound basis) to the amounts included in the 'Investment to date' column over the [n] years, without making any allowance for the charges and expenses, would produce the same sum as that calculated in (2).

Calculation method for 'effect of charges to date' for key features 19schemes

COB 6.5.35 R

For each year, figures must be given for the effect of deductions assuming the fund grows in accordance with a relevant rate of return (as defined in COB 6.6.33 R). These calculations must reflect all deductions (charges and expenses as defined in COB 6.6.23 R) expected to be levied against the fund and against the private customer's investment. The calculations must be made on the basis of the following principles:

  1. (1)

    for each year the 'Investment' must be accumulated, at the relevant rate of return (as specified in COB 6.6.33 R), to the end of each year, making due allowance for the charges and expenses;

  2. (2)

    for each year the 'Investment' must be accumulated, at the relevant rate of return, to the end of each year, but making no allowance for the charges and expenses;

  3. (3)

    the 'Effect of deductions to date' is the amount calculated in (1) subtracted from the amount calculated in (2);

  4. (4)

    a rate of return which is lower than the relevant rate of return must be used where the firm expects that rate would imply an overstatement of the investment potential; and

  5. (5)

    the calculations specified in (1) and (2) must allow for any partial encashment of units or shares or distributions of income where under the terms of the scheme the private customer has exercised, or has expressed the intention of exercising, an option to make such encashments or to receive such income or where such encashments or distributions will automatically apply. The allowance must be assumed in accordance with the estimated rate or amount, unless to do so would be inappropriate for that scheme.

COB 6.5.36 G

COB 6.5.35 R (5) applies, for example, to money market schemes and bond funds.

Stakeholder pension schemes

COB 6.5.37 R
  1. (1)

    The statement in (2) must appear beneath or within the information required by COB 6.5.20 R.

  2. (2)

    "There is an annual charge of [y]% of the value of the funds you accumulate. If your fund is valued at ÂŁ500 throughout the year, this means we deduct [ÂŁ500 x y/100] that year. If your fund is valued at ÂŁ7500 throughout the year, we will deduct [ÂŁ7500 x y/100 that year."

CTFs and stakeholder products: annual charges17

COB 6.5.37A R
  1. (1)

    17If a firm imposes one annual charge including expenses, it need not make the detailed disclosures required by COB 6.5.24 and COB 6.5.30; but if it does not make those disclosures, it must instead include either:

    1. (a)

      the following statement (the last sentence must be included if and only if it is clear at the time of acquisition that the annual charge will reduce to r% after a fixed period):

      "There is an annual charge of [y]% of the value of the funds you accumulate. If your fund is valued at ÂŁ250 throughout the year, this means we deduct [ÂŁ250 x y/100] that year. If your fund is valued at ÂŁ500 throughout the year, this means we deduct [ÂŁ500 x y/100] that year. After ten years these deductions would reduce to [ÂŁ250 x r/100] and [ÂŁ500 x r/100] respectively."

      or;

    2. (b)

      the information required by COB 6.5.20.

Commission and commission equivalent for life policies, key features 19schemes and stakeholder pension schemes16

COB 6.5.38 R

A firm must include under the heading 'How much will the advice cost?' either the statement prescribed in (1), (1A) or (1B), as applicable, or the information required by (2):13

  1. (1)

    for life policies (other than long-term care insurance contracts which are pure protection contracts) or stakeholder pension schemes: 'Your adviser will give you details about the cost. The amount will depend on the size of the premium and the length of the policy term. It will be paid for out of the deductions'; or13

  2. (1A)

    for key features schemes19: 'Your adviser will give you details about the cost. The amount will depend on the size of your [use: 'investment' or 'contribution'] [add if appropriate: 'and in the case of regular savings the period for which you make them']. It will be paid for out of the charges'; or

    19
  3. (1B)

    for long-term care insurance contracts which are pure protection contracts: 'Your adviser will give you details about the cost. The amount will depend on the size of the premium and the length of the policy term.'13

  4. (2)
    1. (a)

      the amount or value in cash terms of the commission or remuneration, and an indication of the timing of these payments; and16

    2. (b)

      a statement that commission or equivalent is paid for out of 'the deductions or charges, if more appropriate' and, if applicable, that the amount will depend on the size of the premium or contribution and the length of the life policy, scheme or stakeholder pension scheme term.164

COB 6.5.39 G

The information given under COB 6.5.38 R (2) may include the name of the representative to whom the commission or equivalent is to be paid.16

Further information for life policies, key features 19schemes, 22stocks and shares 22ISAs, PEPs, CTFs and stakeholder pension schemes15

COB 6.5.40 R

A firm must include the following information in the key features, separately or as part of the information required by COB 6.5.2 R:

  1. (1)

    for life policies:

    1. (a)

      a clear indication, in one place, of the nature and amount or rate of any charges or expenses which the private customer will or may bear; if charges or expenses are levied in the form of reduced investment, both the method and effect must be clearly explained; in the case of a single premium charge for mortality or morbidity under linked benefit policies, it is sufficient to describe its nature and basis;

    2. (b)

      the information that Annex III to the Consolidated Life Directive requires to be communicated to policyholders, which is specified in COB 6.5.49 R; and

    3. (c)

      an explanation how the private customer may obtain further information about compensation arrangements and other matters relating to the life policy;

  2. (2)

    for all key features schemes19, an explanation that other information about the scheme is available on request and how it may be obtained;

    19
  3. (3)

    for regulated collective investment schemes that constitute key features schemes19and for such investments held within a PEP or an ISA:

    1. (a)

      a statement where details of the latest estimated distribution yield and buying and selling prices can be found;

    2. (b)

      in the case of any purchase, how and when the price to be allocated in respect of each payment will be determined;

    3. (c)

      whether certificates will be issued and, if so, when they will be sent;

    4. (d)

      how units or shares may be redeemed and when payment on redemption will be made;

    5. (e)

      the names and addresses of the scheme manager or authorised corporate director, and the names of the trustees, or depositary (if any);

    6. (f)

      where and how copies of scheme particulars, annual and half-yearly reports and accounts and prospectuses can be obtained;

    7. (g)

      an explanation of any relevant right to cancel or withdraw, or, where it is the case, that such rights do not apply;

    8. (h)

      how complaints and queries are dealt with and how further details of compensation arrangements (if any) can be obtained;

    9. (i)

      a summary of the private customer's potential liability (if any) to income tax and capital gains tax;

    10. (j)

      whether the private customer has a choice to reinvest income, where uninvested money will be held and whether interest is paid on such money;

    11. (k)

      for single-priced schemes:

      1. (i)

        how the scheme may suffer dealing costs as a result of transactions in units; and

      2. (ii)

        whether it is the authorised fund manager's policy that investors who carry out such transactions may be liable to contribute towards those dealing costs by means of a dilution levy or dilution adjustment, and, if not, an explanation of how this may affect the future growth of the scheme;

    12. (l)

      in relation to SDRT provision:

      1. (i)

        how the scheme may suffer stamp duty reserve tax as a result of transactions in units; and

      2. (ii)

        whether the authorised fund manager's policy is such that an SDRT provision may be imposed;

    13. (m)

      if there is any arrangement intended to result in a particular capital or income return from the units or shares or any investment objective of giving protection to their capital value or income return:

      1. (i)

        details of that arrangement or protection;

      2. (ii)

        for any related guarantee, sufficient details about the guarantor and the guarantee to enable a fair assessment of the guarantee; and

      3. (iii)

        a description of the risks that could affect achievement of that return or protection including details of what happens when an investment is encashed before the expiry of any related guarantee or protection;

    14. (n)

      if there is a class of limited issue shares or limited issue units, a summary of the restrictions on the issue and sale of those shares or units.

  4. (4)

    for investment trust savings schemes and for such investments held within a PEP or an ISA:

    1. (a)

      when shares will be purchased for the scheme, where uninvested money will be held and whether interest is paid;

    2. (b)

      where information about the investment trustshare price, yield, and premium and discount information can be obtained;

    3. (c)

      where information about the net asset value and latest dividend can be found;

    4. (d)

      whether the private customer has a choice to reinvest income, how it is reinvested, or how it is paid to the private customer;

    5. (e)

      details of any nominees with which shares are registered;

    6. (f)

      how shares can be sold and how the sale proceeds are determined;

    7. (g)

      whether applications and payments will be acknowledged and whether contract notes or certificates are issued;

    8. (h)

      whether there will be a statement of account showing details such as number and cost of shares and balance of cash;

    9. (i)

      an explanation of any right to withdraw or cancel (as specified in COB 6.7) or, where it is the case, that such rights do not apply;

    10. (j)

      where the investment trust report and accounts may be obtained;

    11. (k)

      information about the manager and administrator of the scheme;

    12. (l)

      the private customer's options in the case of items such as rights issues;

    13. (m)

      how to stop investing in or how to leave a scheme and the position in respect of the shares held;

    14. (n)

      terminations or alterations by the scheme manager;

    15. (o)

      taxation details in respect of the private customer's investment; and

    16. (p)

      how complaints are dealt with and how further details of compensation arrangements (if any) can be obtained;

  5. (5)

    for ISAs with a stocks and shares (equity and insurance)22 component and PEPs, in addition to (1), (2), (3) or (4):

    2222
    1. (a)

      a description of the nature of the services which will be provided for the private customer;

    2. (b)

      [deleted]22

      22
    3. (c)

      [deleted]22

      22
    4. (d)

      a statement that the favourable tax treatment of ISAs may not be maintained;

    5. (e)

      how and when statements (if any) will be sent;

    6. (f)

      an explanation how the ISA or plan may be terminated or transferred to another ISA or PEP manager; and

    7. (g)

      whether the ISA is a mini-or maxi-ISA agreement and an explanation of the differences between the two.

  6. (6)

    For stakeholder pension schemes, an explanation how complaints are dealt with and how further details of compensation arrangements (if any) can be obtained.

  7. (7)

    For investments held within a CTF:15

    1. (a)

      a prominent statement that after money is paid into a CTF it is locked in, and that this means that it can only be accessed by the child when he is 18, except as permitted by the CTF Regulations, and any contributions made to the CTF cannot be returned to the donor;15

    2. (b)

      if the CTF is a stakeholder CTF, an explanation of the minimum standards (as described in paragraph 2 of the Schedule to the CTF Regulations) and CTF lifestyling approach (as described in paragraph 2 of the Schedule to the CTF Regulations), together with a statement that satisfying these minimum standards does not mean that the investment is suitable for a customer or that there is any guarantee of performance;15

    3. (c)

      if the CTF is a non-stakeholder CTF, a prominent statement that it is not a stakeholder CTF and that a stakeholder CTF is available from a named alternative CTF provider, together with a detailed description of that stakeholder CTF;15

    4. (d)

      a statement that the CTF will not be opened until any cancellation period has expired; and15

    5. (e)

      a balanced comparison between stakeholder CTFs and non-stakeholder CTFs.15

COB 6.5.41 G

14[deleted]11

COB 6.5.42 R

If COB 6.4.13 R applies, for a cash deposit ISA, the private customer must be given the following information (in accordance with COB 6.4.13 R) and, in relation to a distance contract with a retail customer, all the contractual terms and conditions and the information in COB App 1 in place of key features:1114

  1. (1)

    [deleted]22

  2. (2)

    a statement making it clear whether the ISA is a mini or a maxi-ISA agreement and explaining the differences between the two;

  3. (3)

    the minimum amount needed to open an account;

  4. (4)

    the maximum yearly deposit;

  5. (5)

    the interest rate earned, and if and how it may vary;

  6. (6)

    the calculation of interest;

  7. (7)

    how to make withdrawals and any limits;

  8. (8)

    details of the arrangements for the application of the right to cancel, including the following:11

    1. (a)

      the options available on cancellation (a firm must either assist the private customer in switching accounts or refund all monies deposited together with interest);11

    2. (b)

      information about how cancellation will operate in circumstances where the account forms part of a maxi-ISA which contains other components;11

    3. (c)

      a statement that the effect of cancelling the last component has the effect of cancelling the entire ISA agreement and may also (where it is the case) delay the customer from entering into another ISA agreement until the next tax year; and11

    4. (d)

      a statement that a private customer who exercises a right to cancel will not incur any additional charges or be affected by any notice period; 11

  9. (9)

    the arrangements for handling complaints;

  10. (10)

    that the favourable tax treatment may not be maintained;

  11. (11)

    that compensation may be available from the Financial Services Compensation Scheme;

  12. (12)

    where applicable, that the firm cannot accept money directly and acts only as agent in arranging the cash deposit ISA, identifying the principal to whom such monies should be made payable, and explaining that the principal has accepted responsibility for the activities of the firm in relation to the cash deposit ISA;

  13. (13)

    where a private customer can obtain further information about ISAs and, if applicable, other products within the firm's range; and

  14. (14)

    a warning that a mini- and maxi-ISA may not be opened in the same tax year and that, by opening a mini cash ISA, the customer will be limiting the amount of investment in equities that he can make through ISAs, if he does not already have a mini stocks and shares or insurance ISA (not applicable for a TESSA-only ISA).10

COB 6.5.42A R

15If COB 6.4.13 applies, for a cash deposit CTF, the private customer must be given in place of key features:

  1. (1)

    the information contained in COB 6.5.42 (4) and COB 6.5.42 (8) and in COB 6.5.40 (7);

  2. (2)

    details of the arrangements for exercising any right to cancel;

  3. (3)

    a statement explaining where a private customer can obtain further information about CTFs

  4. (4)

    in relation to a distance contract with a retail customer, all the contractual terms and conditions and the information in COB App 1.

Friendly Society tax exempt policies

COB 6.5.43 R

Where a private customer buys a tax-exempt policy issued by a friendly society, or agrees to make additional contributions to such a policy, the firm may, where there is a right to cancel under COB 6.7 (Cancellation and withdrawal), issue an abbreviated form of key features containing the following details:14

  1. (1)

    the amount of the contribution;

  2. (2)

    the term over which the contribution will be paid;

  3. (3)

    material differences between the terms of any increase and those of the existing policy;14

  4. (4)

    the amount or value in cash terms of the commission or remuneration; and14

  5. (5)

    in relation to a distance contract with a retail customer, all the contractual terms and conditions and the information in COB App 1.1114

Traded life policies

COB 6.5.44 R

When personally recommending the purchase of a traded life policy, a firm may provide a private customer with the information in COB 6.5.49 R and, in relation to a distance contract with a retail customer, all the contractual terms and conditions and the information in COB App 1 in place of key features (in accordance with COB 6.4.14 R).11

Broker funds

COB 6.5.45 R

In relation to any fund or scheme of which the firm is a broker fund adviser, at the same time as providing a private customer with a suitability letter (in accordance with COB 5.3 (Suitability)) or before any change in investment objectives or strategies, the firm must inform the private customer in writing of:

  1. (1)

    the investment objectives, and the policies and strategies which are proposed to be followed to achieve those objectives;

  2. (2)

    the relevant published index or other indicator with which comparison of the performance of the fund or scheme may fairly be made, which is, in the case of:

    1. (a)

      life policies or pension funds:

      1. (i)

        where the long-term insurer has its own managed unit-linked life or pension fund, the average performance of that managed fund; or

      2. (ii)

        the average performance of one or more other funds, which are not broker funds, into which under the terms of the policy the private customer may switch, the objectives of which do not conflict with those of the broker fund; or

      3. (iii)

        where there is no such fund, the sector average of general managed life or pension funds;

    2. (b)

      broker unit trusts, the sector average of unit trusts appropriate to the objectives and strategy of the broker unit trust;

  3. (3)

    a published index or sector average which the firm must identify as appropriate to the investment objectives and strategy of the fund or scheme under comparison; and

  4. (4)

    the name of any person providing advice under the arrangement.

Other information: post-sale confirmation: life policies

COB 6.5.46 R

The post-sale confirmation to be given to private customers in accordance with COB 6.3.3 R must include the information required by COB 6.5.15 R - COB 6.5.19 R(an Example), COB 6.5.23 R to COB 6.5.28 R (Tables and Deductions Summary) and COB 6.5.38 R (Commission and commission equivalent).16

Consolidated Life Directive annex III: 'information for policyholders'

COB 6.5.47 R
  1. (1)

    A firm to which COB 6.5.40 R (1)(b) applies must communicate in writing the information prescribed in COB 6.5.49 R to the policyholder, before the policy is concluded, in an official language of the EEA State of the commitment.

  2. (2)

    This information may be in another language if the policyholder so requests, and the law of the EEA State so permits or the policyholder is free to choose the law applicable.

COB 6.5.48 G

The headings and other wordings within COB 6.5.49 R follow those used in the European Directives.

COB 6.5.49 R

Consolidated Life Directive annex III table of 'information for policyholders'

This table belongs to COB 6.5.47 R

Consolidated Life Directive - 'information for policyholders'

Information about the assurance undertaking

Information about the commitment

1. The name of the undertaking and its legal form

4. Definition of each benefit and each option

2. The name of the EEA State in which the head office and, where appropriate, the agency or branch concluding the policy is situated

5. Term of the policy

3. The address of the head office and, where appropriate, of the agency or branch concluding the policy

6. Means of terminating the policy

7. Means of payment of premiums and duration of payments

8. Means of calculation and distribution of bonuses

9. Indication of surrender and paid-up values and the extent to which they are guaranteed

10. Information on the premium for each benefit, both main benefits and supplementary benefits, where appropriate

11. For unit-linked policies, definition of the units to which the benefits are linked

12. Indication of the nature of the underlying assets for unit-linked policies

13. Arrangements for application of the right to cancel

14. General information on the tax arrangements applicable to the type of policy

15. The arrangements for handling complaints concerning policies by policyholders, lives assured or beneficiaries under policies, including, where appropriate, the existence of a complaints body, making clear that its existence is without prejudice to the right to take legal proceedings.

16. Law applicable to the policy where the parties do not have a free choice or, where the parties are free to choose the law applicable, the law the long-term insurer proposes to choose. 8

Life policies: requests for quotations for surrender values

COB 6.5.50 R

When a long-term insurer receives:

  1. (1)

    a request from a private customer for a quotation for the surrender value of a life policy; or

  2. (2)

    any other indication that a private customer wishes to surrender a life policy;

which is of a type which may be traded on an existing secondary market for life policies, it must, before or when providing the quotation (or, if no quotation is provided, before accepting a surrender), make the policyholder aware in writing of:

  1. (3)

    the fact that, as an alternative to surrendering to the long-term insurer, the life policy may be traded on that secondary market;

  2. (4)

    the fact that there may be financial benefits in trading the life policy when compared to surrendering it to the long-term insurer;

  3. (5)

    how the policyholder may trade the life policy on the secondary market should he decide to do so; and

  4. (6)

    other relevant options available to the policyholder.3

COB 6.5.51 G
  1. (1)

    When complying with COB 6.5.50 R, a long term insurer may identify whether the policy is of a type which may be traded by obtaining information from a trade association or other body which holds information on the relevant secondary market.

  2. (2)

    COB 6.5.50 R (5) requires a firm to ensure that the policyholder is made aware of the existence of the secondary market and how he might access it. A firm may, if it wishes, go further than this (for example, by telling the policyholder more about the market and the procedures) but it is not obliged to do so.

  3. (3)

    The other relevant options referred to in COB 6.5.50 R(6) may, for example, include informing the policyholder about making the policy paid-up or taking a loan against the policy, and about the desirability of obtaining professional advice before surrendering.3

COB 6.5.52 R

Where a long-term insurer believes that COB 6.5.50 R does not apply because its own policies are of a type which are not tradable, it must review the position every six months and make and retain records indefinitely to support its view.3

Open market option: "Wake-up letter"

COB 6.5.53 R
  1. (1)

    A firm must provide a scheme member or policyholder described in (2) with the information set out in (3) in writing:

    1. (a)

      when there is a request for a retirement quotation more than four months before the scheme member's or policyholder's intended retirement date; and

    2. (b)

      at least four months before the scheme member's or policyholder's intended retirement date.

  2. (2)

    A person in relation to whom (1) applies is a private customer who:

    1. (a)

      is a member of a personal pension scheme; or

    2. (b)

      is a member of a stakeholder pension scheme; or

    3. (c)

      is the holder of a free-standing additional voluntary contribution contract; or

    4. (d)

      (where an open market option is available under the contract terms) is the holder of a retirement annuity contract; or

    5. (e)

      (where an open market option is available under the contract terms) is the holder of a pension buy-out contract.

  3. (3)

    The information which a firm must provide in writing under (1) is an explanation of:

    1. (a)

      the open market option (including the fact that companies offer different annuity rates and different types of annuity, and that these include:18

      18
      1. (i)

        annuities which provide level or increasing benefits;18

      2. (ii)

        annuities which cover either a single life or make provision for a spouse or a partner; and18

      3. (iii)

        annuities which may be with or without guarantee on the early death of the scheme member or policyholder;18

      and that the scheme member or policyholder may get a better deal by shopping around);18

    2. (b)

      the financial advantages and disadvantages in general terms of making use of this option when compared with taking a pension annuity with that firm;

    3. (c)

      how the scheme member or policyholder may make use of the open market option should he decide to do so; and

    4. (d)

      the advisability of taking professional advice.3

COB 6.5.53A R

18A firm to which COB 6.5.53 R (3)(a) applies must also provide general information explaining characteristic features of the types of annuity mentioned.

COB 6.5.54 G

Principle 7 (Communications with clients) requires a firm to pay due regard to the information needs of its clients and communicate information to them in a way which is clear, fair and not misleading. In the FSA's view, a firm would not normally be able to satisfy its obligations under Principle 7 if it sent the information required under COB 6.5.53 R (1)(b) more than six months before the scheme member's or policyholder'sintended retirement date.3

COB 6.5.55 G
  1. (1)

    A firm may comply with its obligations under COB 6.5.53 R (3)(a) (b) (c) and (d) and COB 6.5.53A R18 by providing a copy of the FSA's factsheet about annuities entitled "Your pension 'it's time to choose'". However, if a firm is aware that its pension scheme or contract offers particular features which are likely to be relevant to customers' decisions (for example, an option to acquire an annuity at a guaranteed rate of interest) then the firm would also be expected to draw attention to those features. Firms can obtain copies of this factsheet by contacting the FSA's Consumer Helpline on 0845 606 1234.

  2. (2)

    Where a firm provides the FSA 's factsheet about annuities ("Your pension "it's time to choose?") under COB 6.5.53 R, it may wish to include the following wording in its covering letter:"The enclosed factsheet about your options is from the Financial Services Authority (FSA), the independent watchdog set up by Parliament. Please read this document carefully".3

Open market option: "Reminder letter?"

COB 6.5.56 R

A firm which has provided information under COB 6.5.53 R must, at least six weeks before his intended retirement date, remind the scheme member or policyholder of that communication, and must provide him with an estimated final transfer value.3

Pension income withdrawals and phased retirement

COB 6.5.57 R

When a scheme member or policyholder described in COB 6.5.53 R (2) indicates to the provider of that scheme or policy that he is considering or has decided:

  1. (1)

    to discontinue an income withdrawal arrangement; or

  2. (2)

    to take out a further sum of money from his pension fund to buy an annuity as part of a phased retirement arrangement;

the provider of that scheme or policy must send the scheme member or policyholder the information required by COB 6.5.53 R, unless the scheme member or policyholder has already been sent the information by the provider in the previous 12 months. 7

COB 6.5.58 G

COB 6.5.57 R is intended to ensure that, when a scheme member or policyholder is considering or has decided to discontinue an income withdrawal arrangement and buy an annuity, he receives a further reminder from his current provider of the information required by COB 6.5.53 R (3). Similarly, where a scheme member or policyholder has opted for phased retirement, COB 6.5.57 R requires his pension plan provider to send him this information when he is about to buy a further annuity. This may be several years after the information on the open market option was previously sent to the scheme member or policyholder and will ensure that he is made aware, at the time he decides to buy an annuity, of the advantages and disadvantages of using the open market option. However, it is not necessary to send the information to scheme members or policyholders described in COB 6.5.57 R (1) or (2) if the provider has already done so in the previous 12 months.7

COB 6.6 Projections

Application

Purpose

COB 6.6.2 G

COB 6.6 amplifies Principle 7 (Communications with clients), which requires a firm to pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading. A projection needs to be carried out on a basis of uniform and consistent rates of investment return so that firms do not seek to compete on the basis of wholly speculative forecasts as to the potential value of future benefits. This should ensure that private customers purchasing a life policy, key features scheme, simplified prospectus scheme, 9or stakeholder pension scheme receive information about possible future returns from their investment in a way which is fair and not misleading.

9

Content

COB 6.6.3 G

COB 6.6 sets out:

  1. (1)

    when these rules apply COB 6.6.4 R - COB 6.6.7 R);

  2. (2)

    the information and statements to accompany projections COB 6.6.8 R - COB 6.6.18 R);

  3. (3)

    what records must be kept of projections issued to customers COB 6.6.19 R);

  4. (4)

    the method of calculating a projectionCOB 6.6.20 G - COB 6.6.53 G);

  5. (5)

    the method of calculating the effect of deductions (the reduction in yield) which must be included within key featuresCOB 6.6.54 G - COB 6.6.62 R);

  6. (6)

    the method of calculating charges and expenses relating to key features schemes or simplified prospectus schemes9. COB 6.6.63 G - COB 6.6.79 G);

    9
  7. (7)

    assumptions to be used when converting a retirement fund into an annuity COB 6.6.80 R - COB 6.6.85 R); and

  8. (8)

    how to produce a pension transfer value analysis COB 6.6.86 G - COB 6.6.93 R).

General

COB 6.6.4 R

A firm must not provide a projection for a life policy, key features scheme, simplified prospectus scheme, 9or stakeholder pension scheme unless the projection is calculated and presented in accordance with the rules in COB 6.6.

9

Exceptions

COB 6.6.5 R

COB 6.6.4 R does not apply to a firm when it provides a projection:

  1. (1)

    of the benefits payable under a defined benefit occupational pension scheme, unless they are money-purchase benefits;

  2. (2)

    issued with a view to determining a maximum contribution allowed by HM Revenue and Customs8, provided the assumptions used in calculating such a contribution are disclosed;

  3. (3)

    if the benefits are fixed and do not depend on an assumption of a future investment return;

  4. (4)

    of a benefit under an existing contract where the date to which the benefit is being projected is not more than six months after the date on which the projection is given;

  5. (5)

    contained in a decision tree as specified in COB 6.5.8 R;

  6. (6)

    of the benefits payable under pension scheme or a stakeholder pension scheme if they were:

    1. (a)

      calculated and issued in accordance with regulations made under section 113 of the Pensions Schemes Act 1993; or

    2. (b)

      calculated and issued as in (a) and, in addition, includes one or more of the following benefits:

      1. (i)

        the projected fund at the projection date; or

      2. (ii)

        the cash sum and the residual pension in real terms; or

      3. (iii)

        the pension in real terms calculated assuming a rate of return 1% per annum less than that prescribed in the regulations; or

    3. (c)

      calculated as in (a) or (b) but where the illustration of benefits is not required to be issued under the regulations by reference to proximity to the projection date or the small size of the fund.

  7. (7)

    provided in accordance with COB 8.2.4 R and COB 8.2.17 E where the life policy, key features scheme, simplified prospectus scheme, 9or stakeholder pension scheme is a structured capital-at-risk product.24

    9
COB 6.6.5A G
  1. (1)

    A revised projection to take account of a different marital or civil partnership 10status or projection date will fall within the exception in COB 6.6.5 R (6) as long as it meets the conditions of that rule.

  2. (2)

    Where the exception in COB 6.6.5 R (6) does not apply and a firm provides a real value projection for a pension scheme or a stakeholder pension scheme, then normally it would be a type P projection if in terms of prices or a type Q projection if in terms of earnings. The calculation method is set out in COB 6.6.34 R (5).2

Higher volatility funds

COB 6.6.6 R

A firm must not provide a projection of possible investment returns or realisable values, or figures or statements which would enable the calculation of such a projection, for an investment in a higher volatility fund.

Projections issued by independent intermediaries

COB 6.6.7 R

A firm must, in addition to complying with other rules in this section, ensure that a projection given to a particular customer is relevant to that customer's circumstances. 7

Information to accompany projections

COB 6.6.8 R
  1. (1)

    A document containing a projection must include the information detailed in COB 6.5 (Key Features) under the headings 'An Example', 'Tables', 'Deductions Summary' and 'Commission and Remuneration', unless (2) applies.

  2. (2)

    The information under the headings 'Tables', 'Deductions Summary' and 'Commission and Remuneration' need not be included in a projection issued in respect of:

    1. (a)

      an existing contract; or

    2. (b)

      a financial promotion (other than a direct offer financial promotion); or

    3. (c)

      an execution-only transaction relating to a key features scheme or a simplified prospectus scheme9.

      9
  3. (3)

    If the projection relates to a contract to which regular premiums or contributions can be made, the total amount or number of premiums or contributions payable over the projection term must be made clear.

  4. (3A)

    If the projection is a type P projection or a type Q projection, the basis used for increases in premiums or contributions must be disclosed.

  5. (4)

    Other than a type P projection or a type Q projection, where a projection is given which makes allowance for increases in premiums or contributions, the premium or contribution in the final year must be shown (or, where the rate of possible future increments is based upon rates of growth in a salary or index, details of that salary or index).2

Generic and stochastic projections

COB 6.6.9 R
  1. (1)

    A firm may provide a generic projection for illustrative purposes based on a single rate of investment return only in the following circumstances:

    1. (a)

      in a financial promotion (other than a direct offer financial promotion) which comprises a table (or extracts from a table) published by a newspaper, magazine or other periodical publication, or by the firm itself, which compares illustrative projections from at least five product providers; or

    2. (b)

      where the purpose is to indicate the likely cost of a proposed transaction; or

    3. (c)

      to provide an estimate of the additional premium or contribution required to achieve a specified target; or

    4. (d)

      when providing a type P projection or a type Q projection.

  2. (2)

    A firm which provides a generic projection must ensure that:

    1. (a)

      it does not relate solely to an existing contract;

    2. (b)

      the rate of return used does not exceed the higher projection rate for its class of business;

    3. (c)

      where the rate used exceeds the middle rate by more than 0.5 percentage point, a statement is included advising why it is believed reasonable to project at such a high rate of return;

    4. (d)

      where the charges and expenses (as described in COB 6.6.23 R) of the product provider are available, they are used, or an estimate is given based on the firm's knowledge of the charges and expenses applicable to similar contracts;

    5. (e)

      it is accompanied by the written statements contained in COB 6.6.17 R; and

    6. (f)

      key features or a simplified prospectus9 are supplied in accordance with COB 6.1 to COB 6.5 (Key Features) if a recommendation is subsequently made.

  3. (3)

    A firm may issue a stochastic projection only where:

    1. (a)

      the purpose is to indicate a range of possible outcomes; and

    2. (b)

      either:

      1. (i)

        it is provided for the purpose of a proposed transaction; or

      2. (ii)

        it is provided in addition to a projection which: (A) is not a stochastic projection but which complies with COB 6.6.4 R; or (B) is a projection excepted under COB 6.6.5 R(6).

  4. (4)

    A firm which issues a stochastic projection must ensure that:

    1. (a)

      it is based on a reasonable number of simulations and is consistent with the economic assumptions underlying the rates of inflation in COB 6.6.48A R and the intermediate rates of return in COB 6.6.50 R and COB 6.6.51 R;

    2. (b)

      its presentation does not reduce the impact of non-stochastic projections; and

    3. (c)

      it is issued only in circumstances in which the firm has taken reasonable steps to ascertain that the customer will be able to understand the stochastic projection.23

COB 6.6.9A E
  1. (1)

    For the purposes of COB 6.6.9 R (3)(a) and (4)(a) and (b):

    1. (a)

      to indicate a range of expected outcomes, a firm should present the results:

      1. (i)

        as amounts showing the median (50%) figure and, in addition, at least the amounts at 10% and 90%, or at least the amounts at 20% and 80%; or

      2. (ii)

        graphically showing the frequency of results from at least 10% to 90%; or

      3. (iii)

        in a diagrammatic form which indicates both the range and frequency of results;

    2. (b)

      to base the stochastic projection on a reasonable number of simulations, a firm should incorporate the results of at least 500 simulations; to enable consistent projections to be issued and to facilitate recreating previously issued projections, a firm should use the same set of simulations until the investment model or the underlying assumptions are revised; and

    3. (c)

      to be consistent with the economic assumptions, a firm should ensure that:

      1. (i)

        the parameters of each asset class are consistent with each other and the median (50%) result for a fund invested 70% in UK equities and 30% in UK government fixed interest stocks does not exceed a projection calculated using the intermediate rate of return from COB 6.6.50 R or COB 6.6.51 R; and

      2. (ii)

        the investment model is tested and adjusted so that the results are consistent with COB 6.6.9 R(4)(a).

  2. (2)

    Compliance with (1) may be relied upon as tending to establish compliance with COB 6.6.9 R(3)(a) and (4)(a) and (b).3

Pension projections

COB 6.6.10 R

For pension targeting, a firm's own assumptions as to future rates of return (but not exceeding the higher rate of return as specified in COB 6.6.49 R), salary increases and inflation must be used to determine the level of contributions. Any allowance for salary increases used in pension targeting must not be less than the rate of return assumed before retirement less 3% per annum.

COB 6.6.11 R

A projection in respect of the protected rights for an appropriate personal pension must, for the purpose of comparison, include a projection which:

  1. (1)

    is calculated to the customer's State retirement age, using the lower and higher real rates of return specified in COB 6.6.52 R, together with a statement of the benefits which the minimum contributions would secure if the customer did not take out an appropriate personal pension;

  2. (2)

    [deleted]

  3. (3)

    aggregates contributions in respect of the current and the next two tax years;

  4. (4)

    is followed by the appropriate personal pension projection and a description of any differences in:

    1. (a)

      presentation, for example, real or monetary rates of return, joint or single life;

    2. (b)

      the dates from which the benefits are assumed to be payable;

    3. (c)

      the nature of the benefits, for example, index-linked or limited price indexation ('LPI') increases.2

COB 6.6.12 G

COB 6.6.11 R (1) to (3) require that, where the contract is in respect of contracting-out of the State Second Pension, there should be a comparison using real rates of return of the benefits being given up and the relevant contract. COB 6.6.11 R (4) permits additional projections provided that the differences are described.2

COB 6.6.13 R

A projection for an unsecured or alternatively secured pension11 from a personal pension or stakeholder pension scheme:

11
  1. (1)

    must include:

    1. (a)

      a statement of the initial amount of maximum income as specified in the current tables published by the Government Actuary for 11an unsecured or alternatively secured pension;

      111111
    2. (b)

      a statement of the assumed initial level of income and the assumed basis for future years and in particular where there is a short-term annuity, if subsequent short-term annuities are assumed11;

    3. (c)

      a schedule showing under the heading 'WHAT THE BENEFITS MIGHT BE' the amount of income and the fund at each, or every fifth11, anniversary for each of the rates of return specified in COB 6.6.49 R;

      11
    4. (d)

      a statement of the projected open market values and the amounts of annuity at age 75 or the date at which it is reasonably assumed an annuity will be purchased; and which for an alternatively secured pension will be after ten years;11 and

    5. (e)

      a statement of the amount of annuity that could be secured using an immediate annuity rate available in the market; and

  2. (2)

    must assume that the current rate of gilt-index yield will continue to apply in projecting amounts of minimum and maximum income throughout the term of the projection.2

Statements to accompany projections

COB 6.6.14 R
  1. (1)

    A document containing a projection must include the appropriate statements set out in COB 6.6.16 R - COB 6.6.18 R.

  2. (2)

    A statement may be altered if a firm believes on reasonable grounds that it is not wholly appropriate to the contract in question. But the alteration must not reduce the significance or impact of the statement.

  3. (3)

    Any statement required to accompany a projection must appear adjacent to the projected values and be in a type size no smaller or less prominent than that used for the projected values.

COB 6.6.15 R
  1. (1)

    The statements in COB 6.6.16 R must accompany each projection for a life policy, key features scheme or simplified prospectus scheme9 as indicated, except a generic projection given in accordance with COB 6.6.9 R (see COB 6.6.17 R), or a protected rights annuity projection calculated in accordance with COB 6.6.11 R (see COB 6.6.18 R).

    9
  2. (2)

    For a pension scheme or stakeholder pension scheme, the appropriate statement from item 4 of COB 6.6.16 R must appear immediately after the projection.

  3. (3)

    Where a pension scheme or stakeholder pension scheme projection, using monetary rates of return in COB 6.6.51 R, is provided at the same time as a type P projection or a type Q projection, the appropriate statement from COB 6.6.16 4 must appear immediately after the projection. The remainder of the appropriate statements in COB 6.6.16 R need only be included once, as long as the firm makes it clear that these statements apply to both types of projection.2

COB 6.6.16 R

Statements to accompany projections of life policies, 9key features schemes, simplified prospectus schemes, 9or stakeholder pension schemes (excluding generic projections and protected rights annuity projections)

This table belongs to COB 6.6.15 R

Statements to accompany projections of life policies, key features schemes, simplified prospectus schemes, 9 or stakeholder pension schemes (excluding generic projections and protected rights annuity projections)

9

1. These figures are only examples and are not guaranteed - they are not minimum or maximum amounts. What you will get back depends on how your investment grows and on the tax treatment of the investment.

2. [You could get back] [your retirement fund could be] more or less than this.

3. All firms use the same rates of growth for projections but their charges vary. [They also use the same rates to show how funds may be converted into pension income].

4. (a) Do not forget that inflation would reduce what you could buy in the future with the amounts shown.

(b) This illustration shows, in today's prices, the pension that might be payable when you retire. This means we have allowed for future inflation to give you an indication of how much you would be able to buy with your pension if it were payable today.

5. [Your pension income will depend on how your investment grows and on interest rates at the time you retire].

6. These rates of return are not necessarily appropriate [for contracts written in] [for units traded in] [for shares traded in] currencies other than sterling.

7. Benefits may also be affected by fluctuations in exchange rates.

Note:

In respect of statement 4, the firm must include the appropriate statement (a) or (b).

Statement 5 applies to pension contracts only and statements 6 and 7 apply to non-sterling investments only. 2

COB 6.6.17 R

Statements to accompany generic projections

This table belongs to COB 6.6.15 R

Statements to accompany generic projections

These figures are only illustrative.

An assessment of your needs will be confirmed before a recommendation can be made OR Your needs will be confirmed before a recommendation can be made.

Key features or a simplified prospectus , together with 9 a projection which is personal to your circumstances, will be provided if a recommendation for an investment product is made.

9
COB 6.6.18 R

Statements to accompany projections for protected rights contracts

This table belongs to COB 6.6.15 R

Statements to accompany projections for protected rights contracts

1. These figures are only meant to give you a rough idea of the amount of pension you might get compared with the benefit that you would be giving up under the State Second Pension.

2. The figures show what might happen if we achieved an investment return of [x%] or [y%] each year on top of the rate of earnings inflation.

3. They are only examples and are not guaranteed - they are not minimum or maximum amounts. What you will get back depends on how your investment grows.

4. You could get back more or less than this.

5. All firms use the same rates of growth for projections but their charges vary. They also use the same rates to illustrate how funds may be converted into pension income.

6. Your pension income will depend on how your investment grows and interest rates at the time you retire.

Note: [x%] and [y%] in statement 2 are the real rates of return used in the projection as specified in COB 6.6.51 . 2

Records

COB 6.6.19 R

A firm must ensure that a record of a projection provided to a customer is made and retained, unless it relates to a proposal which does not proceed. The record must be retained for a minimum period of:

  1. (1)

    six years in the case of a record relevant to a life policy, pension contract or stakeholder pension scheme;

  2. (2)

    indefinitely in the case of a record relevant to a pension transfer or pension opt-out;

  3. (3)

    three years in any other case.

The calculation of a projection

COB 6.6.20 G

COB 6.6.21 R - COB 6.6.53 G set out:

  1. (1)

    definitions of key terms used in the calculation of a projection (COB 6.6.21 R);

  2. (2)

    the basic approach to be used when calculating a projection for life policies (COB 6.6.34 R), Holloway sickness policies (9COB 6.6.35 R), key features schemes or simplified prospectus schemes9(COB 6.6.36 R) and stakeholder pension schemes (COB 6.6.34 R);

    9
  3. (3)

    principles which must be taken into account when calculating a projection including general principles which may apply to all life policies, key features schemes, simplified prospectus schemes9and stakeholder pension schemes (COB 6.6.37 R - COB 6.6.38 R) and specific principles applicable to certain types of product or features within a product (9COB 6.6.39 R - COB 6.6.46 R);

    9
  4. (4)

    tables containing the rates of return to be used when calculating a projection depending on the type of contract being projected COB 6.6.47 R - COB 6.6.53 G).

Key terms used in the calculation of a projection

COB 6.6.21 R

The descriptions of defined terms in COB 6.6.22 R to COB 6.6.33 R apply to all references to those terms in COB 6.6.34 R - COB 6.6.78 G which detail the method of calculating projections and of calculating charges and expenses and the recommended method of calculating scheme expenses.

Adjusted premium

COB 6.6.22 R
  1. (1)

    The adjusted premium is the premium or contribution payable under the contract during the contract period (defined in COB 6.6.25 R), disregarding any increases that cannot be quantified at the commencement of the contract (but allowing for any increases which are assumed and disclosed in the key features or projection).

  2. (2)

    When calculating the amount of premium or contribution, a firm may deduct:

    1. (a)

      the cost of any rider benefits;

    2. (b)

      any part of a premium or contribution which is payable in respect of an exceptional mortality risk.9

Charges and expenses

COB 6.6.23 R
  1. (1)

    For a key features scheme, simplified prospectus scheme9 or unit-linked life policy, charges and expenses are all explicit charges and expenses the customer will or may bear:

    9
    1. (a)

      including:

      1. (i)

        all other deductions and expenses which will or may bear upon the fund (including charges in respect of any collective investment scheme or insurance fund in which any funds of the contract in question are invested but excluding dealing costs of the underlying portfolio); and

      2. (ii)

        all deductions from the premium or contribution payable which do not accrue to the benefit of the customer by way of contribution to the value of the benefit;

    2. (b)

      having regard to:

      1. (i)

        the principal terms of the contract; and

      2. (ii)

        any tax relief which will be available to the fund or key features scheme or simplified prospectus scheme9 in respect of so much of the fund's or scheme's gross expenses as can be properly attributed to the contract.

        9
  2. (2)

    For a with-profits contract, or a unit-linked life policy where not all charges and expenses are determined in accordance with (1), charges and expenses are such expenses as the firm reasonably determines to be appropriate to the contract having regard to:

    1. (a)

      the principal terms of the contract;

    2. (b)

      any tax relief which will be available to the firm in respect of so much of the firm's gross expenses as can properly be attributed to the contract;

    3. (c)

      any transfers to shareholders' funds, or equivalent retentions from established surplus offset by any sustainable rate of transfer of surplus from non-profit business;

    4. (d)

      dealing costs of the underlying portfolio which should be excluded; and

    5. (e)

      any guidance published by the Institute of Actuaries or the Faculty of Actuaries (or by both jointly).

  3. (3)

    If a contract has explicit charges, it should be assumed that they continue at a rate no less than that at which similar charges are being made at the time when the projection or calculation of the effect of the charges is made.

COB 6.6.24 G

For the calculation of the effect of deductions in projections, charges are all explicit charges adjusted for tax as in COB 6.6.23 R (1)(b) and expenses are all other deductions. For stakeholder pension schemes, charges are all explicit charges and expenses for the underlying policy or contract, including any charges levied by the manager or trustees of the stakeholder pension scheme.

Contract period

COB 6.6.25 R

The contract period of a life policy, key features scheme, simplified prospectus scheme9or stakeholder pension scheme is the period beginning with the commencement of the contract and ending as follows:

9
  1. (1)

    for a contract which contains an option under which benefits may be:

    1. (a)

      payable earlier than the date on which they would be payable if the option were not exercised; and

    2. (b)

      the marketing of which seeks to draw to the attention of customers the existence of an option or surrender value, so that it is reasonable to infer that the firm expects some customers to purchase the contract with the intention of exercising the option or surrendering the contract in whole or in part;

    on the earliest date on which an option may be exercised or the contract may be surrendered (in whole or in part);

  2. (2)

    for a contract which is a whole life assurance the premiums under which are regular premiums:

    1. (a)

      the anniversary of the commencement of the contract which first falls after the seventy-fifth birthday of the person whose life is assured under the contract, taking, if there are two or more such persons:

      1. (i)

        the older or oldest if the benefits under the contract are payable on the death of the first of them to die; and

      2. (ii)

        the younger or youngest in any other case; or

    2. (b)

      the tenth anniversary of the commencement of the contract;

    whichever is the later;

  3. (3)

    in the case of an endowment assurance or a non-pension deferred annuity, the premiums under which are regular premiums, on the maturity date;

  4. (4)

    in the case of an endowment assurance or a non-pension deferred annuity under which the only premium payable is a single premium and the term of which does not exceed ten years, on the maturity date;

  5. (5)

    in the case of a Holloway sickness policy, on the latest date on which the sickness benefit will cease to be payable;

  6. (6)

    in the case of a pension contract other than an immediate annuity, on the maturity date or, if the contract provides for annuities at various dates, the latest date at which an annuity may be purchased, except for an alternatively secured pension, where this is at the tenth anniversary of the contract;11

  7. (7)

    in the case of an immediate annuity, on the date to which the customer is expected to live, calculating the expectancy of life for this purpose by reference to an appropriate mortality basis; and

  8. (8)

    for the purpose of this section 'maturity date' means:

    1. (a)

      in relation to an endowment type assurance, the date specified in the contract as the maturity date;

    2. (b)

      in relation to a pension contract or stakeholder pension scheme, the vesting date of the annuity payable under the contract or, if no vesting date for the annuity is specified in the contract, the date specified in relation to the annuity as the retirement date by the firm in the projection in question, being a date not earlier than the earliest date on which the annuity could vest and not later than the latest such date.

COB 6.6.26 R

In the case of any contract which falls within both COB 6.6.25 R (1) and one or more of COB 6.6.25 R (2)- (7), the contract period must be determined by reference to COB 6.6.25 R (1).

COB 6.6.27 R

In the case of any contract not falling within COB 6.6.25 R, then:

  1. (1)

    for key features schemes and simplified prospectus schemes9, the contract period will end on the tenth anniversary of the commencement date of the contract; and

    9
  2. (2)

    for all other contracts there will be two contract periods, the first ending on the fifth anniversary of the commencement date of the contract, and the second ending on the tenth anniversary of the commencement date.

Cost of risk benefits

COB 6.6.28 R

Cost of risk benefits means:

  1. (1)

    explicit mortality or morbidity charges (at a level no lower than the current level); or

  2. (2)

    the implicit cost or effect of mortality or morbidity appropriate to the class of customers;

and risk benefits means all forms of mortality and sickness benefits under a contract.

Relevant contribution

COB 6.6.29 R

The relevant contribution is the actual payment or payments to be made by the customer, or a sum which reasonably reflects the amounts which the customer is proposing to invest, into a key features scheme or simplified prospectus scheme9, except in the case of a protected rights annuity (see COB 6.6.31 R).

9

Relevant premium

COB 6.6.30 R

The relevant premium is the actual premium payable under a life policy less an amount equal to the cost of any rider benefit, except in the case of a protected rights annuity (see COB 6.6.31 R).

Relevant premium or contribution for protected rights annuities

COB 6.6.31 R

The relevant premium or contribution in relation to a protected rights annuity is an amount that may reasonably be estimated to be paid by the Secretary of State or the Department of Social Services for Northern Ireland by way of minimum contributions in respect of the customer involved.

COB 6.6.32 G

The relevant premium or contribution may include amounts in respect of minimum contributions expected to be paid in future years. This applies if the estimate for those years makes allowance for the most recent assumptions published by the Government Actuary in respect of the future years, and these assumptions and the period of any projection are made clear.

Relevant rate of return

COB 6.6.33 R

The relevant rate of return is the intermediate projection rate appropriate to the category of business as set out in COB 6.6.50 R - COB 6.6.52 R, or the lower rate if COB 6.6.38 R (1) (Projections of surrender values and transfer values) applies.

Basic calculation method life policy or stakeholder pension scheme calculation

COB 6.6.34 R
  1. (1)

    A projection of any future benefit payable under a life policy or stakeholder pension scheme must be calculated by reference to the relevant premium for the policy or stakeholder pension scheme.

  2. (2)

    The relevant premium must be accumulated to the projection date at the rate of return for its class of business as detailed in COB 6.6.50 R to COB 6.6.52 R, subject to charges and expenses (as described in COB 6.6.23 R) and the cost of risk benefits. The intermediate projection rate need not be used for an existing contract.1

  3. (3)

    An allowance must be made where a customer has exercised or has expressed the intention to exercise an option to effect a partial surrender of a policy.

  4. (4)

    Allowance must not be made for income withdrawals, surrenders, lapses or early discontinuance, except as in (3).

  5. (5)

    A type P projection or a type Q projection must be calculated as follows:

    1. (a)

      the relevant premium for the pension scheme or stakeholder pension scheme must be used;

    2. (b)

      the relevant premium, with allowance for premium increases as specified in COB 6.6.48A R, must be accumulated to the projection date at the intermediate monetary rate of return detailed in COB 6.6.51 R subject to charges and expenses (as described in COB 6.6.23 R) and the cost of risk benefits;

    3. (c)

      the retirement fund from (b) must then be converted to a real retirement fund by discounting from the projection date using the rate of increase in the retail prices index (for type P projection) or the rate of increase in earnings (for type Q projection) in COB 6.6.48A R;

    4. (d)

      the pension must be calculated from the real retirement fund using the appropriate intermediate rate in COB 6.6.51 R, using the mortality tables in COB 6.6.84 R, the format in COB 6.6.82 R (7) and expenses in COB 6.6.83 R.2

Holloway sickness policy calculation

COB 6.6.35 R

For a Holloway sickness policy issued by a friendly society, a rate of bonus no greater than that last declared by the friendly society must be accumulated, with allowance for applicable charges and expenses (as described in COB 6.6.23 R) at the rates of return set out in COB 6.6.50 R until the projection date.

9Key features scheme and simplified prospectus scheme9 calculation

COB 6.6.36 R
  1. (1)

    A projection of any future benefit payable under a key features scheme or simplified prospectus scheme9must be calculated by reference to the relevant contribution for the scheme.

    9
  2. (2)

    The relevant contribution must be accumulated to the projection date at the rates of return for the relevant class of business as detailed in COB 6.6.50 R, subject to charges and expenses (as described in COB 6.6.23 R). The intermediate rate of return need not be used for an existing contract.1

  3. (3)

    An allowance must be made where a customer has exercised or expressed the intention to exercise an option under the key features scheme or simplified prospectus scheme9 to make withdrawals, either by:

    9
    1. (a)

      encashment of units; or

    2. (b)

      distribution of income, which must be calculated using an estimated gross distribution yield, reduced by the rate of tax relevant to the contract; the distribution yield must be rounded to the higher 0.1%.

  4. (4)

    No allowance must be made for the distribution of income except as in (3).

  5. (5)

    A type P projection or, a type Q projection must be calculated in accordance with COB 6.6.34 R (5) but substituting "contribution" for "premium" throughout.2

General rules applicable to the calculation of projections

COB 6.6.37 R
  1. (1)

    A projection must be rounded down to not more than three significant figures.

  2. (2)

    Where the projection, other than a projection in real terms of a pension contract or stakeholder pension scheme, is less than the amount guaranteed under the life policy, key features scheme or simplified prospectus scheme9, the projection must be increased to that guaranteed amount.

    9
  3. (3)

    Where a customer is entitled, and has expressed the intention, to increase the premium or contribution by an amount linked to future salary or other index increases, the relevant premium or contribution may be calculated:

    1. (a)

      for a type P projection or a type Q projection, making allowance for increases at the relevant rate set out in COB 6.6.48A R; and

    2. (b)

      for all other cases, by making allowance for such increases on the same basis as that used for administration charges in COB 6.6.47 R.2

Projections of surrender values and transfer values

COB 6.6.38 R

A projection of a surrender or transfer value:

  1. (1)

    must be given using the intermediate rate of return appropriate to its category of business, unless:

    1. (a)

      the firm reasonably expects the rate to overstate the potential of the contract, in which case a lower rate of return must be used and disclosed; or

    2. (b)

      the customer so requests, in which case a lower rate of return may be used, and the fact that it has been used must be disclosed;

  2. (2)

    must make allowance for partial surrenders of a contract where the contract terms permit this and the customer has exercised this option or expressed the intention to do so;

  3. (3)

    must allow for the firm'ssurrender value basis and reflect the current approach of the firm towards applying penalties on surrender, including less than full credit for accrued terminal bonus, specific penalties or exit charges; and

  4. (4)

    for a with-profits contract where bonus rates apply, must ensure that the bonus rates supported by the relevant premium are assumed to apply throughout the term of the contract.

Rules specific to products or features of products: annuities

COB 6.6.39 R
  1. (1)

    Any projection of an annuity with one or more years to maturity must show an annuity value based on the higher and lower rates of return as set out in COB 6.6.50 R to COB 6.6.52 R, and make allowance for:

    1. (a)

      mortality (as set out in COB 6.6.84 R) and also, in the case of life policies, morbidity appropriate to the class of customers; and2

    2. (b)

      charges and expenses (as described in COB 6.6.23 R).

  2. (2)

    Any projection of an annuity with less than one year to maturity must be calculated using annuity rates no more favourable than the firm's current immediate annuity rates.

  3. (3)

    Where a firm which does not offer annuities issues a projection for a contract the proceeds of which are to be applied to the purchase of an annuity, the firm must use annuity rates no more favourable than those currently being used in the open market for such a projection.

COB 6.6.40 R

In the case of a contract for an immediate annuity:

  1. (1)

    the uniform rate of continuous change in annuity supported by the actual premium to be paid must be determined for each rate of return with allowance for:

    1. (a)

      mortality appropriate to the class of customer; and

    2. (b)

      charges and expenses (as described in COB 6.6.23 R) on the assumptions used when calculating the firm's own annuity rates;

  2. (2)

    the rate of continuous change in annuity calculated must then be:

    1. (a)

      applied to the initial annuity under the contract which is the subject of the projection; and

    2. (b)

      assumed to be maintained throughout the term of the contract.

Appropriate personal pensions and protected rights annuities

COB 6.6.41 R
  1. (1)

    The retirement fund for a protected rights annuity under an appropriate personal pension scheme or stakeholder pension scheme must be calculated by accumulating the relevant contribution less charges and expenses (as described in COB 6.6.23 R) at the relevant rates of return for the period.

    1. (a)

      The relevant period is either:

      1. (i)

        where the relevant contribution is a minimum contribution, from the 1st September following the end of the tax year to which the minimum contribution relates up to the maturity date; or

      2. (ii)

        where the relevant contribution is a transfer value, from the commencement of the contract up to the maturity date.

    2. (b)

      The relevant rates of return are:

      1. (i)

        in the case of a protected rights annuity projection issued in accordance with COB 6.6.11 R (1), the real rate of return in COB 6.6.52 R;

      2. (ii)

        in the case of any other protected rights annuity projection, the monetary rates of return in COB 6.6.51 R.

  2. (2)

    The annuity must be calculated by reference to the retirement fund using the relevant rates of return set out in COB 6.6.51 R, with allowance for mortality (as set out in COB 6.6.84 R) charges and expenses and the relevant rate of increase in payment.2

Pension schemes or stakeholder pension schemes

COB 6.6.42 R
  1. (1)

    An additional projection may be given for a pension scheme or stakeholder pension scheme where the period to maturity is five years or less. This:

    1. (a)

      may be calculated using the intermediate rates of return specified in COB 6.6.51 R or COB 6.6.52 R;

    2. (b)

      may use a current annuity rate calculated using a rate of return no higher than the higher rate specified in COB 6.6.51 R or COB 6.6.52 R.

  2. (2)

    If the firm providing the projection offers annuities, it must use its own annuity rates.2

Single premium contracts

COB 6.6.43 R

A projection relating to a series of single premiums (other than a protected rights annuity) may be a calculation set out as if those premiums were regular premiums, provided:

  1. (1)

    it is not otherwise given on a misleading basis;

  2. (2)

    the firm is bound unconditionally, and by express terms of the contract, to accept all single premiums which may be paid by the customer under the contract.

With-profits endowment business

COB 6.6.44 R

For with-profit endowment assurance where the amount of any guaranteed benefit payable on death is not calculated by reference to the total value of the premiums paid under the contract before that event:

  1. (1)

    the cost of risk benefits must allow for the bonus rate or rates supported by the relevant premium (given the basic sum assured for such a policy with an appropriate office premium) calculated for each rate of return; and

  2. (2)

    the rate or rates of bonus must then be applied under the policy which is the subject of the projection and be assumed to be maintained throughout the term of the policy.

With-profits whole life assurance business

COB 6.6.45 R

For with-profit whole life assurance other than a policy the bonuses under which are added to the surrender value:

  1. (1)

    the cost of risk benefits must allow for the bonus rate or rates supported by the premium (given the basic sum assured for such a policy with an appropriate office premium) calculated for each rate of return; and

  2. (2)

    the rate or rates of bonus must then be applied under the policy which is the subject of the projection and be assumed to be maintained throughout the term of the policy.

Contracts with reviewable administration charges

COB 6.6.46 R

In respect of policies with reviewable administration charges:

  1. (1)

    a firm must make allowance for increases in administration charges which are reviewable at the firm's discretion, on a basis which:

    1. (a)

      is fair and reasonable; and

    2. (b)

      takes into account the firm's pricing policy as regards future levels of administration charges;

  2. (2)

    increases must be assumed at the appropriate rates of increase in COB 6.6.48A R for type P projections and type Q projections and the rates in COB 6.6.47 R for other projections, for any contracts where:

    1. (a)

      an administration charge is reviewable by the firm (whether or not any increases are contractually linked to an external index); or

    2. (b)

      expenses in respect of future renewal or claims costs are expressed as monetary amounts.2

COB 6.6.47 R

Table of assumed rates of increase for policies with reviewable administration charges

This table belongs to COB 6.6.46 R

Basis of review

Assumed rate of increase

Lower rate of return

Intermediate rate of return

Higher rate of return

Administration charge reviewed in line with price increases

0.5%

2.5%

4.5%

Administration charge reviewed in line with earnings increases

2%

4%

6%

Contracts with rider benefits or extra premiums for underwriting risks

COB 6.6.48 R

In respect of a contract with rider benefits, or where an extra premium is being charged for an increased underwriting risk:

  1. (1)

    the rider benefit or extra premium charged for an impaired life, hazardous pursuit, or on the grounds of occupation, must be taken into account when determining a projection;

  2. (2)

    if a deduction is made from the actual premium for a rider benefit or increased underwriting risk (or both), the sum of the amounts of the relevant premium must be quoted with the projection; and

  3. (3)

    for policies with rider benefits, a firm may apply the following procedure:

    1. (a)

      if the policy is also available without the rider benefit, then the same values must be projected as would be projected for such a policy with the premium appropriately reduced; and

    2. (b)

      if the contract is available only with one or more rider benefits, the firm must deduct a fair estimate of the cost of the extra benefits from the premium when determining the projection; if a fair estimate cannot be made, a rough estimate (rounded to the next higher 10% of the total premium payable by the policyholder) must be deducted.

Rate of inflation assumptions

COB 6.6.48A R

For pension schemes and stakeholder pension schemes, the following rates of inflation must be used when calculating type P projections or type Q projections:

  1. (1)

    rate of increase in the Retail Prices Index (for type P projections): 2.5%;

  2. (2)

    rate of increase in earnings (for type Q projections): not less than 1.5% in excess of the rate of increase in the Retail Prices Index in (1). 2

Rate of return assumptions

COB 6.6.49 R
  1. (1)

    The appropriate rates of return for the type of contract being projected, taken from COB 6.6.50 R - COB 6.6.52 R, must be used when calculating a projection;

  2. (2)

    reduced rates of return must be used if the firm expects the rates in the tables to overstate the investment potential of a contract;

  3. (3)

    reduced rates of return may be used if requested by a customer; and

  4. (4)

    whenever reduced rates are used, they must be disclosed in the document containing the projection.

COB 6.6.50 R

Rate of return assumptions for all 9key features schemes, simplified prospectus schemes9, ordinary branch non-pensions, industrial branch, friendly 9s9ociety, immediate annuity and Holloway sickness policies (all monetary rates of return)

This table belongs to COB 6.6.49 R

6

Rate of return assumptions for all key features schemes, simplified prospectus schemes 9 , ordinary branch non-pensions, industrial branch, friendly s 9 ociety, immediate annuity and Holloway sickness policies (all monetary rates of return)

9 9

Lower rate

Intermediate rate

Higher rate

(a) Non-tax-exempt business relating to key features schemes, simplified prospectus schemes9, ordinary branch non-pensions and industrial branch business

9

4%

6%

8%

(b) Holloway sickness policies

4%

6%

8%

(c) Tax-exempt business held within an ISA , PEP or CTF or by afriendly society, relating to key features schemes, simplified prospectus schemes9, ordinary branch non-pensions and industrial branch business6

9

5%

7%

9%

(d) immediate annuities

5%

7%

9%

Note:9

In relation to key features schemes and simplified prospectus schemes 9: The monetary rates of return above include any distribution of income. The rates of return may be used for contracts for units denominated in currencies other than sterling unless it is expected they will overstate the investment potential of the contract.2

9 9
COB 6.6.51 R

Rate of return assumptions for pension contracts and stakeholder pension schemes excluding contracts for immediate annuities and protected rights annuities issued in accordance with COB 6.6.11 R (1)

This table belongs to COB 6.6.49 R

Rate of return assumptions for pension contracts and stakeholder pension schemes excluding contracts for immediate annuities and protected rights annuities issued in accordance with COB 6.6.11 (1)

Lower

Intermediate

Higher

rate

rate

rate

(a) in deferment

Monetary rates of return

5%

7%

9%

(b) after vesting -

Monetary rates of return 8

Y+1.5% 8

8

Y+3.5% 8

8

Y+5.5% 8

8

For annuities linked to the retail price index

Y-1%

Y%

Y+1%

For annuities linked to LPI (limited price indexation)

Y-1%

Y%

Y+1%

Note: For the after vesting rates of return: Y= 0.5 * ( ILG5 + ILG0) -0.5 8and rounded to the nearest 0.2%, with an exact 0.1% rounded down.

Where: ILG5 is the real yield on the FTSE Actuaries Government Securities Index-linked Real Yields over 5 years assuming 5% inflation, and ILG0 is the real yield on the FTSE Actuaries Government Securities Index-linked Real Yields over 5 years assuming 0% inflation.

The ILG0 and ILG5 yields to be used in the calculation of Y are the yields on the 15 February, or, where necessary, the previous working day. The rate of return Y must be updated on the following 6 April each year and used up to and including 5 April of the next year.2

COB 6.6.52 R

Rate of return assumptions for protected rights annuity projections given in accordance with COB 6.6.11 R (1)

This table belongs to COB 6.6.49 R

Rate of return assumptions for protected rights annuity projections given in accordance with COB 6.6.11 (1)

Lower

Intermediate

Higher

rate

rate

rate

(a) In deferment: for periods in excess of five years - real rates of return

1%

N/A

3%

for periods of five years or less - monetary rates of return

5%

7%

9%

(b) after vesting: - for annuities linked to the retail prices index

1% 8

8

2% 8

8

3% 8

8
COB 6.6.53 G

The rates of return in COB 6.6.50 R - COB 6.6.52 R are assumed to compound annually and allow for inflation.

Calculation of the reduction in yield due to the effect of charges and expenses content

COB 6.6.54 G

9 COB 6.6.55 R - COB 6.6.62 R set out the rules to be used when calculating the effect of deductions (the 'reduction in yield') to be provided within key features (COB 6.5) or in a projection accompanying a simplified prospectus (COB 6.2.43 R) for all types of life policies, key features schemes and simplified prospectus schemes. COB 6.6.63 G - COB 6.6.79 G provide guidance in assessing the expenses and charges relating to key features schemes and simplified prospectus schemes.

Basic calculation method of the reduction in yield

COB 6.6.55 R
  1. (1)

    A firm must accumulate the adjusted premium to the end of the contract period at the relevant rate of return, making:

    1. (a)

      full allowance for the charges and expenses (as described in COB 6.6.23 R); and

    2. (b)

      no allowance for charges and expenses.

  2. (2)

    A firm must then calculate the rate of return which, if applied (on an annual compound basis) to the adjusted premium over the contract period, without making any allowance for the charges and expenses, will produce the same sum as that calculated under (1)(a).

  3. (3)

    The reduction in yield is the difference between the relevant rate of return and the rate of return found in (2).

COB 6.6.56 R
  1. (1)

    When a firm is calculating a projection, charges which relate to benefits for any mortality or morbidity risks, or a proportion of them, must be assumed not to be made:

    1. (a)

      providing the assumption does not produce figures for the effect of charges deductions which suggest that the charges under the contract are lower than they actually are; and

    2. (b)

      only in so far as they are attributable solely to benefits for mortality or morbidity risks, a proper apportionment being made of any composite charges.

  2. (2)

    When a charge cannot be apportioned, (1) will not apply, but the firm may include in the information required to be given within a projection a statement to the effect that the reductions have been calculated without disregarding charges relating to benefits for any mortality or morbidity risks.

Alternative calculation method of the reduction in yield for a life policy

COB 6.6.57 R

The following alternative method of calculation of the reduction in yield may be used at a firm's discretion for a life policy:

  1. (1)

    The adjusted premium must be accumulated to the end of the contract period at the relevant rate of return, making full allowance for the charges and expenses (as described in COB 6.6.23 R).

  2. (2)

    If the accumulated value will reach zero before the end of the contract period, the accumulation must cease at that stage; subsequent references in this rule to the contract period are to be taken where relevant as referring to that shorter calculation period.

  3. (3)

    In making this calculation, the total of all charges and expenses not solely attributable to the risk benefits must be assessed separately and accumulated to the end of the contract period at the relevant rate of return.

  4. (4)

    The adjusted premium must be accumulated to the end of the contract period at the relevant rate of return, making no allowance for charges and expenses.

  5. (5)

    The reduction in yield must be calculated in accordance with, COB 6.6.55 R, but using the shorter calculation period specified in (2), if applicable.

Other provisions

COB 6.6.58 R

In the case of a protected rights annuity, the effect of charges and expenses (as described in COB 6.6.23 R) may be calculated on the assumption that premiums will continue to be paid after the first year.

COB 6.6.59 R

The reduction in yield or the effect of charges and expenses must be expressed to the nearest tenth of 1%.

Unit-linked contracts with more than one fund

COB 6.6.60 R
  1. (1)

    Where there is more than one fund into which the premiums under a unit-linked contract are expected to be paid initially (disregarding any option of the customer to require the funds to be changed):

    1. (a)

      the effect of charges and expenses must be calculated separately in relation to each such fund;

    2. (b)

      unless a representative figure is shown in accordance with (3), each of those reductions in yield must be shown in the information required within key features; and

    3. (c)

      a brief explanation of the difference between them may be included.

  2. (2)

    If any of the funds referred to in (1) is a unitised with-profits fund, the calculation relating to that fund must be made on the with-profits expenses basis as described in COB 6.6.23 R (2).

  3. (3)

    If, in the case of any contract, two or more of the calculations of the effect of charges and expenses would produce results which are so similar that one may fairly be regarded as representative of the other or others, only one figure for the effect of charges and expenses need be shown, accompanied by an indication that it is a representative figure.

Regular and single premium contracts

COB 6.6.61 R

In the case of any contract where the premiums include both a regular and a single premium:

  1. (1)

    the reduction in yield should be calculated separately for the regular premiums and for the single premium; and

  2. (2)

    each of those reductions in yield should be shown in the information required in COB 6.5 (Contents of key features) with a brief indication of the difference between them.

Table of specimen values of the reduction in yield

COB 6.6.62 R

Where COB 6.6.60 R or COB 6.6.61 R applies in relation to the calculation of the reduction in yield, either:

  1. (1)

    different tables must be shown with the values calculated separately for each fund or for the regular premiums and the single premiums (as the case may require); or

  2. (2)

    one table may be used, but it must contain those values calculated separately as required by (1), and it must make clear to the customer (or any potential customer in the case of a financial promotion) what the different values refer to.

Charges and expenses disclosure for 9key features schemes and simplified prospectus schemes9

COB 6.6.63 G

COB 6.6.65 G - COB 6.6.79 G set out rules and guidance on how to calculate charges and expenses (as described in COB 6.6.23 R) for key features schemes and simplified prospectus schemes9.

9

Charges and expenses disclosure for authorised unit trusts

COB 6.6.65 G
  1. (1)

    Charges and expenses as described in COB 6.6.23 R means "all explicit charges and expenses, and includes all other deductions and expenses which will or may bear upon the fund". The following paragraphs give guidance on the assessment and apportionment of expenses.

  2. (2)

    Those expenses that were, or would be, reported in the Annual report and Financial Statement of authorised unit trust schemes in accordance with the Statement of Recommended Practice ("SORP") issued by the FSA, will normally provide a suitable starting point for any assessment of the level of charges and expenses. The same principles apply to funds and schemes which are not within the scope of the SORP.

  3. (3)

    Where expenses are charged directly against the assets of the fund, it will normally be appropriate to express such expenses as an annual percentage charge against the fund, which is then added to other such charges. An example is a manager's periodic charge to form an aggregate percentage charge. It is reasonable to round this charge to the nearest 0.05%.

  4. (4)

    Where a key features scheme or simplified prospectus scheme9 invests in other packaged products, it will be necessary to look through to ensure that all charges and expenses which the customer will or may bear are included. Appropriate allowance may be made for any abatement to avoid double charging. If the product provider is not required to make expense disclosure in respect of such packaged products, the charges and expenses of an equivalent product from another provider should be used. In the case of investment trusts, the method in COB 6.6.70 G (4) should be used.

    9
  5. (5)

    Where the unit trust invests in other unit trusts, charges and expenses will be based on a reasonable distribution of assets that takes account of the investment philosophy of the unit trust.5

Representative unit trust

COB 6.6.66 G
  1. (1)

    Where a document refers to investment in a number of trusts, charges and expenses (as described in COB 6.6.23 R) applicable to the trusts selected by the customer should be used. Where this is not practicable, it is permissible to use the charges and expenses of a representative unit trust.

  2. (2)

    The representative unit trust will normally be the one that is most likely to be selected by the customers to whom the material is issued. Where advantage is taken of this option, the document should include information which shows the differences if other trusts are selected. The normal presentation will be to show the differences as a reduction of investment return, or as an adjustment to the Table in key features or in the projection accompanying the simplified prospectus9. Where the reduction of investment return is used, it will not be necessary to show differences unless the rounded difference is at least 0.1% and the unrounded difference is at least 0.05%.

Types of expenses

COB 6.6.67 G
  1. (1)

    The following are those expenses and costs of investment that firms should take into account when making their calculations. The list is not comprehensive. These are in addition to explicit charges.

  2. (2)

    Examples of expenses are:

    1. (a)

      registration fees;

    2. (b)

      safe custody fees;

    3. (c)

      trustees' fees;

    4. (d)

      handling charges;

    5. (e)

      audit fees;

    6. (f)

      regulatory fees and subscriptions;

    7. (g)

      costs of investment management, but excluding dealing costs of the underlying portfolio, and costs associated with routine management and servicing of existing property investments;

    8. (h)

      bid/offer spread in the pricing of units.

  3. (3)

    The spread in (h) should be on a basis that fairly represents the expected levy of such spread in the firm's experience of normal trading conditions.

  4. (4)

    The expenses should include allowance for any value added tax which is not recoverable.

Translation to fund level

COB 6.6.68 G
  1. (1)

    The expenses and explicit charges need to be adjusted for any expected variation in costs from the period of the report to the period relevant to the disclosure expenses if such variation is believed to make a material difference.

  2. (2)

    The adjusted expenses should be expressed as a proportion of the relevant fund. For established funds, the relevant fund is the average size of the fund for the period of the report.

  3. (3)

    Where the use of the figure calculated as in (2) would be misleading, a fair estimate of the size of the relevant fund which is consistent with the adjusted expenses should be used. The same method should be used in the case of new funds. In determining the reasonable levels of expense to be assumed, account should be taken of the expense attributable to the existing fund which most closely corresponds to it, with proper regard to material differences in cost.

Review of expenses

COB 6.6.69 R

The expenses used in calculations must be reviewed whenever material changes in the levels are identified which would mean that the disclosed amounts are misleading. In any event the expenses must be reviewed at least once a year.

Charges and expenses disclosure for investment trust savings schemes charges and expenses

COB 6.6.70 G
  1. (1)

    Charges and expenses as described in COB 6.6.23 R should be taken to include all explicit charges and, in addition, all other deductions and expenses which are not financed from explicit charges. These include deductions and expenses within the trust.

  2. (2)

    The method is to identify all expenses that will be borne by the customer, and these will include not only the cost of acquiring a holding but also the cost of disposing of the investment.

  3. (3)

    Where expenses are charged directly against the assets of the investment trust, it will normally be appropriate to express the expenses as an annual percentage charge against the trust, which is then added to such charges, for example, a periodic management fee, to form an aggregate percentage charge. It will be reasonable to round to the nearest 0.05%.

  4. (4)

    Where an investment trust company (A) invests in another investment trust company (B), it will be necessary to look through to ensure that all charges or expenses which the customer will or may bear are included. Appropriate allowance may be made for any abatement to avoid double charging. Charges and expenses will be based on a reasonable distribution of assets that takes account of the investment philosophy of the investment trust company (A). If the investment trust company (B) is not required to make expense disclosure in respect of such assets, the charges and expenses of a similar company should be used.

Representative investment trust company

COB 6.6.71 G
  1. (1)

    Where a document refers to investment in a number of investment trusts, charges and expenses (as described in COB 6.6.23 R) applicable to the trusts selected by the customer must be used. Where this is not practical, it is permissible to use the charges and expenses of a representative investment trust company.

  2. (2)

    The representative investment trust company will normally be the one that is most likely to be selected by the customers to whom the material is issued. Where advantage is taken of this option, the document must include information which shows the differences if other trusts are selected. The normal presentation will be to show the differences in the other reduction of investment return, or as an adjustment to the Table in key features. Where the reduction of investment return is used, it will not be necessary to show differences unless the rounded difference is at least 0.1% and the unrounded difference is at least 0.05%.

Types of expense

COB 6.6.72 G
  1. (1)

    Expenses may be incurred either in acquiring or in holding an investment in an investment trust company. The list in (2) is not comprehensive and, in respect of other expenses, the list sets out the type of expense that should be included. The report and accounts of the investment trust company will normally provide a starting point in assessing the expenses that are charged against the assets of the investment trust company. These are in addition to disclosable charges.

  2. (2)

    Expenses to be included will be of four main types:

    1. (a)

      deductions levied against the assets of the investment trust company;

    2. (b)

      management expenses levied against the assets of the investment trust company; these expenses include management fees plus any management costs financed from commission received, directors' fees, pension contributions, non-recurring expenses, all other professional and regulator's fees and subscriptions, rents paid, depreciations, custody fees, audit fees and all other pre-tax expenses (except for interest paid); management expenses include marketing costs, if any;

    3. (c)

      expenses borne by the customer in acquiring or disposing of investment trust shares; these include adviser's commission (if any), stockbroker dealing commission on purchases and sales, stamp duty and withdrawal charges;

    4. (d)

      investment spread in the pricing of the investment trust shares.

  3. (3)

    Expenses should include allowance for any value added tax which is not recoverable.

  4. (4)

    Expenses in (2)(c) and the spread in (2)(d) should be on bases that fairly represent the expected level of such expenses and spread. Where appropriate, a representative level of expenses and the spread should be used.

Translation to trust level

COB 6.6.73 G
  1. (1)

    Having identified all the expenses in COB 6.6.72 G (2), a firm needs to express them as rates of charges and expenses (as described in COB 6.6.23 R) that can be used in projections and key features.

  2. (2)

    The process is as follows.

    1. (a)

      The expenses in COB 6.6.72 G (2)(a) and (b) should be expressed as a proportion of the overall fund using net asset value: For established companies, the relevant fund is taken to be based on the average size of the investment trust company for the period of assessment.

    2. (b)

      The expenses in COB 6.6.72 G (2)(c) and (d) will usually be expressed as a proportion of the fund based on share price or the amount of the investment, as appropriate. Some expenses will be a one-off expense or spread and some will be in the form of an annual charge.

    3. (c)

      The rates of charges and expenses calculated under (a) and (b) should be added together. The fact that the calculation at (a) used net asset value can be ignored as it is assumed that the level of discount or premium remains unaltered.

  3. (3)

    The charges and expenses will normally be historic and need to be adjusted for any expected variation in the level of costs from the period used in the assessment to the period relevant to the disclosure of the expenses if such variation is believed to make a material difference.

  4. (4)

    Where the use of the figure calculated in (3) would be misleading, a fair estimate of the size of the company which is consistent with the adjusted expenses should be used. The same method should be used in the case of new investment trusts. In determining the reasonable levels of expense to be assumed, account may be taken of the expenses attributable to the existing investment trust which most closely corresponds to it, but with proper regard to any material differences in cost.

  5. (5)

    Set-up costs may be amortised over a limited period not normally exceeding five years.

Review of expenses

COB 6.6.74 R

The expenses used in calculations must be reviewed whenever material changes in the levels are identified which would mean that the disclosed amounts are misleading. In any event the expenses must be reviewed at least once a year.

Example of the calculation of reduction in investment return

COB 6.6.75 G

COB 6.6.76 G - COB 6.6.78 G contain an example which has been prepared to assist understanding of the method of calculating the reduction in investment return. However, the figures should not be regarded as representative or indicative of likely levels of charges and expenses to be expected.

General

COB 6.6.76 G
  1. (1)

    The reduction in investment return shows the effect of all charges and expenses to the customer.

  2. (2)

    The rates of investment return allow for all tax and withholding tax for which the product provider is responsible. The current rate of tax may be used to calculate the net distribution of income. Where appropriate, the net distributions are offset from the rate of investment return.

  3. (3)

    It is not necessary to allow for daily changes so that monthly steps are acceptable.

  4. (4)

    The rates of return are assumed to compound annually. The twelfth root is used to calculate the monthly rate. This is different from the fund management charge, where normally one twelfth of the annual rate is deducted monthly.

  5. (5)

    The bid/offer spread should be allowed as an initial charge so that subsequent figures are on the basis of the bid price, except where the context requires allowance to be made for the spread.

The parameters

COB 6.6.77 G
  1. (1)

    Contract details: unit trust for a term of 10 years with a single investment of ÂŁ6,000 (SP).

  2. (2)

    Distributions: at the rate of 2.4% per annum, distributed as 1.2% of the offer value at the end of each half year.

  3. (3)

    Charges:

    1. (a)

      initial charge of 3% of investment (IC);

    2. (b)

      fund management charge of 1/12 of 1.25% per month (FMC) on distribution units;

    3. (c)

      attributable expenses of 1/12 of 0.25% per month (AE);

    4. (d)

      investment spread of 3% (IS) making total bid/offer spread of 6%.

  4. (4)

    Calculation:

    1. (a)

      investment of ÂŁ6,000 (SP) less (IC+IS) giving an initial bid value of ÂŁ5,640

    2. (b)

      interest of 6% pa or 0.4868% per month less (FMC + AE) = 1.004868 x (1- 0.015/12) 1 = 0.3612% per month

    3. (c)

      the value after 10 years as shown in COB 6.6.79 G is ÂŁ6,720

    4. (d)

      the internal rate of return necessary to generate ÂŁ6,720 plus distributions over 120 months from an initial investment of ÂŁ6,000 is 0.3030% per month or 3.7% per annum

    5. (e)

      one method of creating the table is to use 20 periods of six months, each of which end with the payment of a distribution.

    6. (f)

      after 6 months:

      1. (i)

        the bid value of the fund before the distribution is 6000 x 0.94 x (1.003612)^6 = ÂŁ5,763

      2. (ii)

        the distribution is 0.012 x 5763/0.94 = ÂŁ73

      3. (iii)

        the fund carried forward is 5763 - 73 = ÂŁ5,690

      4. (iv)

        after the end of Year 1, that is, after the second 6 months

      5. (v)

        the bid value of the fund before the distribution is 5690 x (1.003612)^6 = ÂŁ5,814

      6. (vi)

        the distribution is 0.012 x 5814/0.94 = ÂŁ74

      7. (vii)

        the fund carried forward is 5814 - 74 = ÂŁ5,740

      8. (viii)

        this bid value is disclosed as there is no exit penalty as what you might get back.

    7. (g)

      the "effect of deductions" is calculated from the accumulation of the investment with no allowance for charges and expenses but with allowance for income:

      1. (i)

        the accumulated fund after 1 year with no allowance for charges is [6000 x (1.004868)^6 - 73] x (1.004868)^6 - 74 = ÂŁ6,210

      2. (ii)

        the "effect of deductions" is this figure less "what you might get back", that is, ÂŁ6,210 - ÂŁ5,740 = ÂŁ470

    8. (h)

      this process is continued throughout the term of the table; after 10 years, the accumulated investment at 0.4868% per month with no allowance for charges and expenses but with allowance for the same distributions of income is ÂŁ8,621; "What you might get back" is ÂŁ6,723 so the "effect of deductions" is the difference or ÂŁ1,898;

    9. (i)

      the deduction in investment return is determined by calculating the rate of interest which accumulates the investment with no allowance for charges and expenses but with allowance for income to ÂŁ6,723; this is 0.3030% per month (0.4868% per month gives ÂŁ8,621); the yearly rate is (1.00303)^12 - 1 or 3.7%.

COB 6.6.78 G

In COB 6.6.79 G projected amounts are rounded down to three significant figures.

COB 6.6.79 G

Specimen table of presentation of the effect of charges and expenses

This table belongs to COB 6.6.75 G

At end of year

Investment to date ÂŁ

Income to date ÂŁ

Effect of deductions to date ÂŁ

What you might get back ÂŁ

1

6,000

148

470

5,740

3

6,000

451

715

5,940

5

6,000

766

998

6,150

10

6,000

1,600

1,890

6,720

The last line in the table shows that over 10 years the effect of total charges and expenses could amount to ÂŁ1,890.

Putting it another way, this would have the same effect as bringing the illustrated investment growth from 6.0% a year down to 3.7% a year.

Assumptions for pension annuities

COB 6.6.80 R

The formulae shown must be used for calculating the factors for converting a retirement fund into an annuity. The formulae in COB 6.6.81 R assume that the annuity will be payable monthly in advance for a term certain of n years (typically five):

  1. (1)

    for an RPI-linked and LPI-linked annuity (excluding a protected rights annuity): use Factor (1);

  2. (2)

    for an annuity which is static or has fixed rates of escalation: use Factor (2);

  3. (3)

    for a spouse's reversionary annuity (excluding a protected rights annuity, and whether or not there is overlap with any guaranteed period under the associated single life annuity): use Factor (3);

  4. (4)

    [deleted]

  5. (5)

    for a protected rights annuity: use Factor (5).2

COB 6.6.81 R

Table of formulae for pension annuity factors

This table belongs to COB 6.6.80 R and COB 6.6.82 R

Factor

Formula

(1)

(1+E)*[ä n (12) + D x+n /D x * ä x+n (12) ]

(2)

(1+E)*[ä n (12) + D x+n /D x * ä x+n (12) ]

(3)

(1+E)*[a y -a x:y ]

(4)

(1+E)*[ä f (12) + 0.45*(a m -a m:f )]

(5)

(1+E)*[ä f (12) + 0.50*(a m -a m:f )]

(6) namely a x (12)

= a x + 13/24

(7) namely ä x:t (12)

= 13/24 * a x:t + 11/24* a x:t 1

COB 6.6.82 R
  1. (1)

    All factors must be rounded to three decimal places before being applied to the retirement fund.

  2. (2)

    In the formulae the letters a and D have their normal actuarial notation meanings. In formulae for two lives, x is the member and y is the spouse or civil partner10, and for the protected rights formulae, f indicates the use of female mortality and m that for males. In addition, a monthly annuity is either Factor (6) or (7).

  3. (3)

    For retirement other than on a birthday, the factors must be obtained by linear interpolation on complete months. Where a member is not able (for practical reasons or otherwise) to determine the exact age at retirement, it must be assumed that the exact age at retirement is then the age at the last birthday.

  4. (4)

    Where the projection is of an annuity after taking a tax-free lump sum, the table must be used with the retirement fund reduced by the projected tax-free lump sum before rounding. Any tax-free lump sum illustrated should be rounded to three significant figures, unless the lump sum is equal to the amount of a loan.

  5. (5)

    Where a retirement fund includes both protected rights and non-protected rights benefits, the appropriate factors are to be used for each relevant part of the total fund.

  6. (6)

    Where there are protected rights funds and the person is not expected to be married or registered as a civil partner10 at retirement, an illustration of single life pensions may be provided. The factor must be calculated using the same assumptions as formula (5) in COB 6.6.81 R but ignoring the reversionary annuity part of the formula.

  7. (7)

    For type P projections, the annuity should assume 50% spouse's reversionary pension unless the firm has evidence that a different assumption would be more appropriate.2

COB 6.6.83 R

In the formulae in COB 6.6.81 R, the allowance for expenses (E) is 4% for all annuities.2

COB 6.6.84 R

In the formulae in COB 6.6.81 R, mortality rates must be calculated as follows:

  1. (1)

    the mortality tables to be used are PMA92 (for males) and PFA92 (for females) appropriate to the individual's year of birth with the medium cohort projection improvements8; these tables are published by the Faculty of Actuaries and Institute of Actuaries;2

  2. (2)

    where there are two lives concerned, for reversionary and for protected rights annuities, the husband is normally to be taken as being three years older than his wife; where the firm is aware that the wife is more that six years younger than her husband, an exact calculation must be performed using actual ages;

  3. (3)

    protected rights annuities must be calculated for both sexes on the basis that the member experiences female mortality and the spouse experiences male mortality.

COB 6.6.85 R

In the formulae in COB 6.6.81 R, the mortality functions must be calculated at a rate of interest J, where:

  1. (1)

    J = (1 + I)/(1 + R) - 1;

  2. (2)

    R is the rate of escalation increase appropriate for the customer in formulae (2) and (3) in COB 6.6.80 R; it is 3% for pre-April 1997 protected rights benefits in formula (4), and zero otherwise;

  3. (3)

    the rate of return assumptions (1) are as set out in the tables in COB 6.6.50 R - COB 6.6.52 R with real rates of return being used for formulae (1) and (5) in COB 6.6.81 R and monetary rates otherwise; and

  4. (4)

    different factors will need to be calculated where a projection is being prepared on lower and higher rates of return, and where appropriate also the intermediate rate.

Pension transfer value analysis requirements content

COB 6.6.86 G

COB 6.6.87 R - COB 6.6.93 R outline how a pension transfer value analysis should be prepared. A pension transfer value analysis should provide a comparison between the potential benefits available to the customer from an occupational pension scheme of which he is a member and the potential benefits that would be available to him under a personal pension or buy-out contract.

Basis of a pension transfer value analysis

COB 6.6.87 R
  1. (1)

    The basis for the pension transfer value analysis must be clear, fair and not misleading.

  2. (2)

    The information analysed must include details relevant to the customer's circumstances:

    1. (a)

      spouse's, dependants' and children's pensions;

    2. (b)

      early retirement provision, including provision for retirement in ill-health;

    3. (c)

      a transfer value quotation detailing:

      1. (i)

        guarantee period;

      2. (ii)

        pre- and post-April 1988 Guaranteed Minimum Pension and excesses;

      3. (iii)

        revaluation rates both in deferment and payment, and whether they are guaranteed or discretionary;

      4. (iv)

        tax-free cash arrangements;

    4. (d)

      lump sum death benefits;

    5. (e)

      transfer club arrangements, if applicable;

    6. (f)

      relevant earnings;

    7. (g)

      period of service;

    8. (h)

      scheme details (for example, benefits, bridging pensions, guarantee periods, position before and after normal retirement date, history of discretionary increases);

    9. (i)

      whether members' benefits have been equalised for service from 17 May 1990;

    10. (j)

      ill-health benefits.

Required comparisons

COB 6.6.88 R

The analysis must contain the following:

  1. (1)

    where the period before benefits are assumed to commence is one year or more:

    1. (a)

      a statement of the rates of return, calculated as in COB 6.6.92 R (2), which would have to be achieved under the transfer contract in order to provide the same level of benefits as those which would be afforded by the occupational pension scheme if the customer were to retire at normal retirement date ("the Target Benefits");

    2. (b)

      if in the firm's opinion early retirement would be materially more favourable to the customer than retirement at normal retirement date, a statement of the rates of return, calculated as in COB 6.6.92 R (2), which would have to be achieved under the transfer contract in order to provide the same pension as that afforded by the occupational pension scheme, assuming early retirement at a date on which the customer may be expected, or will have the option, to retire;

    3. (c)

      a statement of the value of the benefits payable on the death of the customer, under the transfer contract and under the occupational scheme, on the assumption that the customer were to die on the day after the date on which the transfer contract is assumed to have commenced; comparisons assuming other dates of death may be included if they are likely to enhance understanding of the differences between the benefits payable under the transfer contract and the occupational pension scheme;

  2. (2)

    where the period before benefits are assumed to commence is less than one year:

    1. (a)

      a statement of the annuity payable under the transfer contract and of the comparable Target Benefits;

    2. (b)

      where the normal retirement date under the occupational pension scheme is not within a year, a statement of the rates of return, calculated as in COB 6.6.92 R (2), which would have to be achieved under the transfer contract in order to provide the Target Benefits.

COB 6.6.89 R
  1. (1)

    In all cases (except in a case within COB 6.6.88 R (2) in respect of the annuity) a statement of the assumptions must be provided which complies with the requirements of COB 6.6.90 R.

Required assumptions

COB 6.6.90 R
  1. (1)

    The assumptions in COB 6.6.91 R must be made for the purposes of the required calculations, except as envisaged by this rule.

  2. (2)

    The assumptions may be varied only to incorporate more cautious assumptions.

  3. (3)

    If an annuity interest rate different from the Annuity Interest Rate (as specified in COB 6.6.91 R) is used, it must be the interest rate for annuities in payment provided that it is a multiple of 0.5% per annum and must not exceed the Annuity Interest Rate.2

  4. (4)

    Where the occupational pension scheme has a record of discretionary increases in pension, the assumptions must be consistent with the published practice of the trustees, if any, or based on a comparison of the increases granted over the last five years with a published index. It must be assumed that increases will continue, and allowance must be made for continuation by:

    1. (a)

      relying on any statement by the trustees of their practice;

    2. (b)

      comparing recent experience with the increase in the retail price index and restricting the future allowance to a maximum of the increase in the retail price index;

    3. (c)

      making a default assumption of limited pension indexation;

    4. (d)

      assessing the likelihood whether such increases will continue to be paid.

    Figures may be provided showing the effect of applying a factor representing the likelihood of such continuation.

COB 6.6.91 R

Assumptions to be made

This table belongs to COB 6.6.90 R

Formula

Annuity interest rate ("AIR")

The intermediate after vesting monetary rate of return in COB 6.6.51 (b)

Retail prices index

2.5%

Average earnings index ("AEI") and section 21 orders

4.0%

Pre-retirement limited price indexation revaluation

2.5%

Post-retirement limited price indexation increases

2.5%

Index-linked pensions

The rate of intermediate return in COB 6.6.51 for annuities linked to the retail price index

Note:

The interest rate in deferment must not be assumed but calculated as required by COB 6.6.92 . 2

Method of calculation

COB 6.6.92 R
  1. (1)

    In calculating the Target Benefits for the purposes of the comparisons required by COB 6.6.88 R, regard must be had to benefits which commence at different times.

    1. (a)

      Where a benefit becomes payable at a different age from the age at which the Guaranteed Minimum Pension becomes payable, the benefit must be valued from its appropriate commencement date.

    2. (b)

      In the case of pensions payable only for a limited period, an allowance must be made.

  2. (2)

    The method of calculating the rate to be used for the purpose of the comparisons required by COB 6.6.88 R is:

    1. (a)

      make the assumptions required by COB 6.6.91 R;

    2. (b)

      on those assumptions, calculate the Target Benefits;

    3. (c)

      calculate, in accordance with COB 6.6.34 R- COB 6.6.62 R which relate to the calculation of projections, the interest rate in deferment necessary to attain a transfer value sufficient to provide benefits equal to the Target Benefits.

Required disclosures

COB 6.6.93 R

The analysis must also contain:

  1. (1)

    a list of all the main assumptions made for the purposes of the analysis, set out consecutively and with equal prominence;

  2. (2)

    a warning as to the differences between the amounts of benefit under the occupational pension scheme and the level of benefits under the proposed transfer contract which depends on future investment performance and on interest rates at the time of retirement;

  3. (3)

    a description of any differences in the dates on which the pensions become payable, for example in the case of a protected rights pension under a personal pension scheme which will not become payable until the customer attains the State retirement age;

  4. (4)

    a warning of any shortfall in the value of the death benefits provided by the transfer contract and, where there is such a shortfall, if appropriate, a quotation for provision to make good the shortfall.

COB 6.7 Cancellation and withdrawal

Application

COB 6.7.1 R

COB 6.7 applies to:

  1. (1)

    a product provider except when providing a non-investment insurance contract8;

  2. (1A)

    a CTF provider;9

  3. (2)

    an insurer which provides pure protection contracts which are long-term care insurance contracts8;

  4. (3)

    a firm when acting as an EIS manager, ISA manager, CTF provider or plan manager, or when selling on to a customerunits which the firm has bought or redeemed as principal for that purpose;910

  5. (4)

    a deposit-taking firm, when acting as ISA manager, CTF provider or as the firm responsible for holding deposits in respect of another firm's cash deposit ISA or cash deposit CTF;9

  6. (5)

    the operator of a stakeholder pension scheme;5

  7. (6)

    a firm which enters into distance contracts with retail customers, the making or performance of which constitutes, or is part of:5

    1. (a)

      dealing as agent, advising or arranging in relation to designated investments, unless the distance contract is concluded merely as a stage in the provision of another service by the firm or another person (see COB 1.10.6 G);5

    2. (b)

      any other designated investment business; or5

    3. (c)

      accepting deposits;5

    but not including a distance contract entered into by an appointed representative as principal.5

COB 6.7.2 G

COB 6.7 (Cancellation and withdrawal) does not act to cancel distance contracts entered into by an appointed representative as principal to provide intermediation services to a retail customer. Regulations 9 (Right to cancel) to 13 (Payment for services provided before cancellation) of the Distance Marketing Regulations may apply instead (see regulation 4(3)).578

COB 6.7.3 G

5[deleted]42

COB 6.7.4 G

COB 6.7.5 G summarises the applicable cancellation and withdrawal rights and the maximum period of reflection. Firms should have regard to the detailed rules and guidance in all cases, particularly for the detailed exemptions.5

COB 6.7.5 G

5Cancellable investment agreements.

This table belongs to COB 6.7.4 G

77797779999999999779999999

Cancellable investment agreements

Post-sale right to cancel?

Pre-sale right to withdraw?

Maximum period of reflection (but see COB 6.7.11 R)

A. Contracts where the right arises regardless of means of sale.

Appropriate personal pension (APP)

Yes5, 67

No

30 days

Cash deposit ISA

Yes5, 67

No

14 days

Life policy (including pension policy, pension annuity or within ISA or CTF)9

Yes1, 5, 6, 129

No1

30 days7

Personal pension contract

Yes1, 5, 67

No1

30 days7

Stakeholder pension scheme (SHP)

Yes1, 5, 67

No1

30 days7

Certain variations of existing life policies, pension contracts and SHP's

Yes1, 5, 6, 89

No1

30 days7

B. Contracts where the right arises only if advice is given or if sold by distance contract.

Units in an AUT, recognised scheme or ICVC (within an ISA or PEP)

(1) if sold by distance contract;

No

No

(2) if sold otherwise with advice

Yes4

No4

14 days

Units in an AUT, recognised scheme or ICVC (within a CTF):9

(1) if sold by distance contract9

Yes10, 129

No9

(2) non-stakeholder CTFs not sold by distance contract sold with advice9

Yes11, 129

No9

(3) non-stakeholder CTF not sold by distance contract sold without advice9

No9

No9

(4) stakeholder CTFs not sold by distance contract9

No9

No9

ISA, PEP or CTF not mentioned in any other row9

(1) if sold by distance contract

Yes5, 6, 129

No

14 days

(2) if sold otherwise with advice

No

Yes3, 99

7 days

Units in an AUT, recognised scheme or ICVC (outside an ISA, PEP or CTF)9

(1) if sold by distance contract

No

No

(2) if sold otherwise with advice

Yes

No

14 days

EIS

(1) if sold by distance contract

Yes5, 6

No

14 days

(2) if sold otherwise with advice

No

Yes3

7 days

C. Contracts where the right arises for distance contracts only

Distance contract to accept deposits

Yes5, 6

No

14 days

Distance contract not mentioned in another row the making or performance of which constitutes, or is part of, designated investment business

Yes5, 6, 7

No

14 days

Notes:

1. For a pension annuity or pension transfer (and a relevant variation), the firm can, in certain circumstances, choose to provide the right to cancel, in whole or part, through a right to withdraw in COB 6.7.19 R. A firm may offer a right to withdraw, even where there is no right to cancel.7

72. [Deleted]

3. There is no right to withdraw for a second or subsequent EIS or ISA, or (for an EIS or non-packaged product ISA or PEP) where the firm has previously disclosed to the customer that no such rights will apply.

4. For units in an AUT, recognised scheme or ICVC (within an ISA or PEP), the firm can choose to offer a seven-day pre-sale right to withdraw rather than a post-sale right to cancel (see COB 6.7.14 (1)). There is no right to cancel or withdraw for a second or subsequent ISA.

5. There is no post-sale right to cancel for a distance contract where the price depends on fluctuations in the financial market place outside the firm's control which may occur during the cancellation period.

6. There is no post-sale right to cancel for a distance contract:

(a) where the performance of the distance contract has been fully completed by both parties at the customer's express request before the customer exercises his right to cancel; or

(b) where a firm has an initial service agreement with the customer and the contract is in relation to a successive operation or separate operation of the same nature under that agreement (see COB 1.11.3 R).9

In the case of life policies held within a CTF sold by distance contract, the right to cancel applies only to any initial service agreement.9

7. For a distance contract to give advice, arrange deals, or deal as agent see COB 1.11.3 R (Distance contracts for intermediation services).

8. There is no right to cancel for variations of life policies held within a CTF.9

9. For contracts relating to a CTF, there is no right to withdraw.9

10. The initial service agreement is cancellable.9

11. The cancellation rules that apply are the same as those that apply to the underlying investments.9

12. Where a right to cancel applies to an agreement relating to a CTF that has been opened, the money may be reinvested but will not be returned to the private customer.98

Purpose

COB 6.7.6 G

COB 6.7 reinforces Principle 6 (Customers' interests), which requires a firm to pay due regard to the interests of its customers and treat them fairly. In certain circumstances, customers who are entering into an investment agreement will be entitled to a period of reflection during which they can decide whether to proceed with their purchase.

Post-sale right to cancel56

COB 6.7.7 R

A retail customer has a right to cancel:56

  1. (1)

    a contract specified in row 1 of COB 6.7.15 R or COB 6.7.17 R, unless the right to cancel is disapplied or replaced by anything in row 2 of COB 6.7.15 R or COB 6.7.17 R;5

  2. (2)

    a contract for a stakeholder pension scheme for which a right to cancel applies under COB 6.7.12 R;5

  3. (3)

    a contract for a cash deposit ISA, unless the right to cancel is disapplied for a distance contract by case 15 of row 2 to COB 6.7.17 R, or a cash deposit CTF if the cash deposit CTF is sold by distance contract;579

  4. (4)

    a variation of a life policy, pension contract or stakeholder pension scheme for which a right to cancel applies under COB 6.7.23 R, COB 6.7.23A R and COB 6.7.26A R.46

COB 6.7.8 R

The trustees of an occupational pension scheme or the trustees and managers of a stakeholder pension scheme must be treated so far as necessary as a retail customer for the purposes of the cancellation rules , and acquire the same right to cancel as a retail customer.5

COB 6.7.9 G
  1. (1)

    COB 6.7.8 R applies when trustees purchase life policies or schemes as investments of their pension schemes. Individual members of stakeholder pension schemes have a right to cancel initial membership of the scheme and, in some circumstances, a subsequent variation of their contributions.

  2. (2)

    A product provider or operator of a stakeholder pension scheme may be unsure whether any of the situations in row 2 of COB 6.7.17 R applies to the contract in question. In such circumstances the product provider or operator of a stakeholder pension scheme may find it convenient to contract with an intermediary for the provision of documentary evidence needed to confirm the status of customers. However, the responsibility for ensuring compliance with the cancellation rules remains with the product provider or operator of a stakeholder pension scheme.57

5Cancellation period

COB 6.7.10 R

When a retail customer has a right to cancel under COB 6.7.7 R, that right must (unless COB 6.7.11 R applies) be exercised:5

  1. (1)

    (in the case of a life policy, personal pension policy, personal pension contract or stakeholder pension scheme) within 30 days; or5

  2. (2)

    (in any other case) within 14 days.5

COB 6.7.10A R

5The cancellation period begins on:

  1. (1)

    (other than for distance contracts, cash deposit ISAs and CTFs) the date the customer receives the reminder notice of his right to cancel in accordance with COB 6.7.30;9

  2. (2)

    (for distance contracts , cash deposit ISAs and CTFs) the later of:9

    1. (a)

      (for a life policy ) the day the retail customer is informed that the contract has been concluded; or

    2. (b)

      (for any other contract) the day of the conclusion of the contract; or

    3. (c)

      the day on which the retail customer receives the contractual terms and conditions and other information required by COB 3.9, COB 4.2 or COB 6, as applicable.

COB 6.7.11 R

Where the terms of the firm's contract give the retail customer a longer period to cancel (that is, in excess of the 14 or 30 days specified), the firm must disclose in the information about the right to cancel the differences between the retail customer's rights under COB 6.7.10 R and the terms of the contract, which operate independently.5

Right to cancel a stakeholder pension scheme

COB 6.7.12 R
  1. (1)

    A retail customer who has entered into a contract for a stakeholder pension scheme has a right to cancel, unless

    the right to cancel is disapplied for a distance contract by case 15 of row 2 to COB 6.7.17 R.57

  2. (2)

    When the retail customer has entered into a contract for a stakeholder pension scheme involving recurring contributions to that stakeholder pension scheme, only the first contribution will attract a right to cancel provided that:5

    1. (a)

      the intention or option to make regular contributions has been disclosed in advance of the retail customer entering into the investment agreement; and5

    2. (b)

      the retail customer's intention to make regular contributions is evidenced.5

COB 6.7.13 G

For the purposes of COB 6.7.12 R (2)(a), disclosure of the option to make regular contributions may, for example, take place in key features. For the purposes of COB 6.7.12 R (2)(b), a retail customer's intention to make regular contributions could, for example, be demonstrated by the establishment of a direct debit mandate or instructions to an employer to deduct regular contributions from salary.5

Pre-sale right to withdraw5

COB 6.7.14 R

A retail customer has a right to withdraw an offer to enter into:5

  1. (1)

    an EIS , ISA or PEP:7

    1. (a)

      following advice on investments;7

    2. (b)

      which is not a distance contract;7

    3. (c)

      unless a right to cancel is offered under COB 6.7.7 R (3), COB 6.7.15 R or COB 6.7.17 R; and7

    4. (d)

      subject to cases 8 and 9 of row 2 COB 6.7.17 R;7

    the right to withdraw procedures are that the offer made by the customer to enter into the contract cannot be accepted by the firm until at least seven days after the offer is made; or57

  2. (2)

    a pension annuity or a pension transfer (or a relevant variation), to the extent that the right to cancel is provided through a right to withdraw under the procedures set out in COB 6.7.19 R.574

COB 6.7.15 R

5Cancellable contracts and exceptions - life

This table belongs to COB 6.7.7 R (1).

9779

Cancellable contracts and exceptions- life

Long-term insurance contracts which a retail customer has a right to cancel under COB 6.7.7 R (1) (subject to row 2):

Row 1

A. life policy (whether or not held within an ISA or CTF - see notes 1, 2, 3, 6 and 7 in COB 6.7.16 R) (see COB 6.7.23 R regarding variation of an existing life policy);9

B. appropriate personal pension which is a pension policy;

C. pure protection contract.

Row 2

There is no right to cancel where any one or more of the following cases applies:

1. pension fund management policy (but see note 5 in COB 6.7.16 R);

2. life policy that relates to or is associated with securing benefits under a defined benefits pension scheme (but see note 5 in COB 6.7.16 R);

3. any life policy for a term of six months or less (unless note 3 in COB 6.7.16 R applies) (see also note 5 in COB 6.7.16 R);

4. pension policy or stakeholder pension scheme funded (wholly or in part) from payments derived from:

(a)

a pension transfer, to the extent that the right to cancel is provided through the right to withdraw (see COB 6.7.14 R (2)), using the cancellation substitute in COB 6.7.19 R; or7

(b)

compensation or redress paid by a firm following a review undertaken in relation to a complaint;

5. traded life policy;

6. life policy effected by the trustees of an occupational pension scheme or the employer, or the manager or trustees of a stakeholder pension scheme that represents a:

(a)

pension buy-out contract; or

(b)

purchase of a without-profits deferred pension annuity; or

(c)

defined benefits pension scheme or a single premium payment to any occupational pension scheme with a pooled fund (that is, underlying investments are not earmarked for individual scheme members); or

(d)

purchase made to insure and secure members' pension benefits under a money-purchase occupational scheme or stakeholder pension scheme (unless it is the master, first or only policy);

7. pension annuity that is:

(a)

due to commence within a year and a day of the contract, to the extent that the right to cancel is provided through the right to withdraw (see COB 6.7.14 R (2)), using the cancellation substitute in COB 6.7.19 R; or7

(b)

funded (wholly or in part) from compensation or redress paid by a firm following a review undertaken in relation to a complaint;

8. the retail customer, other than an EEAECA recipient , at the time he signs the application, is habitually resident:

(a)

in an EEA State other than the United Kingdom (but see note 4 and note 5 in COB 6.7.16 R); or

(b)

outside the EEA and is not present in the United Kingdom;

9. pure protection contract effected by the trustees of an occupational pension scheme, an employer or a partnership to secure benefits for employees or the partners in the partnership;

10. life policy which is a distance contract where the price depends on fluctuations in the financial market place outside the firm's control which may occur during the cancellation period;

11. the contract is a distance contract where:

(a)

the performance of the distance contract has been fully completed by both parties at the retail customer's express request before the retail customer exercises his right to cancel; or

(b)

a firm has an initial service agreement with the retail customer and the contract is in relation to a successive operation or separate operations of the same nature under that agreement (see COB 1.10.2 G).9821

COB 6.7.16 R

Notes to cancellable contracts and exceptions - life5

This table belongs to COB 6.7.15 R

55108

Notes to COB 6.7.15R:

1.

Recurring single premium life policy: Under certain conditions, only the first premium in what might be a series of premiums attracts cancellation rights under COB 6.7.7 R (1). The conditions are:

11

(a) the option to make a series of single premium payments is disclosed at outset (for example, in the key features); and

(b) the intention is evidenced (for example, by the retail customer establishing a direct-debit mandate).5

2.

Multiple contracts: Where a retail customer enters into a set of contracts at the same time (for example, the different components held within a maxi-ISA and with the same firm), and that set is being purchased to fulfil one investment objective of the retail customer, the firm may treat the multiple contracts as being one contract for the purposes of COB 6.7. But if it does so, the firm must ensure that the customer retains a right to cancel each contract separately. This note applies also to a group of 10life policies8 which have been established as part of a specific marketing arrangement. Such an arrangement may not have an investment objective.5 The cancellation rights for any non-investment insurance contracts are set out in ICOB 6.108

8