COBS 6.2B Describing advice services

Application

COBS 6.2B.2R
  1. (1)

    This section does not apply to a firm when it makes a personal recommendation or provides basic advice to an employee, if that recommendation or advice is provided under the terms of an agreement between the firm and that employee’s employer which is subject to the rules on consultancy charges (COBS 6.1C).

  2. (2)

    This section does not apply to a firm when it makes a personal recommendation to a retail client in relation to a Holloway sickness policy, provided that the Holloway policy special application conditions are met.

COBS 6.2B.3G

P2P agreements are neither financial instruments nor retail investment products. This section does not apply to a firm when it is advising on P2P agreements.

COBS 6.2B.4G
  1. (1)

    This section applies in accordance with the territorial scope of the general application of this sourcebook as modified in COBS 1 Annex 1.

  2. (2)

    But the effect of COBS 6.2B.1R(1) and COBS 6.2B.6R to COBS 6.2B.9R includes that:

    1. (a)

      this section does not apply to a firm that provides investment advice to a retail client in relation to a retail investment product that is not a financial instrument if the retail client is outside the United Kingdom; and

    2. (b)

      a firm that carries on MiFID or equivalent third country business with a retail client outside the United Kingdom need only have regard to financial instruments and structured deposits (and not other retail investment products) in conducting its assessment for the purposes of COBS 6.2B.11R.

Introduction

COBS 6.2B.5G

This section transposes provisions in MiFID on describing advice services relating to financial instruments and structured deposits for all clients and reproduces a number of provisions of the directly applicable MiFID Org Regulation as explained in COBS 1.2. The requirements apply in relation to MiFID, equivalent third country or optional exemption business. The requirements are extended to apply to other investment advice and cover other retail investment products when the client is a retail client in the United Kingdom.

Interpretation of rules and guidance: relevant products

COBS 6.2B.6R

In this section a “relevant product” is:

  1. (1)

    where the client is a retail client in the United Kingdom, a financial instrument, structured deposit or other retail investment product; or

  2. (2)

    otherwise, a financial instrument or structured deposit.

[Note: article 1(4) of MiFID]

Interpretation of EU provisions: MiFID business

COBS 6.2B.7R

A firm must treat obligations in relation to financial instruments as extending to other retail investment products when complying with the provisions in this section marked “EU” in the course of MiFID business with a retail client in the United Kingdom.

COBS 6.2B.8G

References to financial instruments include structured deposits (but not other retail investment products) when a firm is complying with the provisions in this section marked “EU” in the course of MiFID business with a retail client outside the United Kingdom or with a professional client.

[Note: article 1(2) of the MiFID Org Regulation]

Interpretation of EU provisions: non-MiFID business

COBS 6.2B.9R

In relation to business that is not MiFID business, a firm must comply with provisions in this section marked “EU” as if they were rules but:

  1. (1)

    reading references to financial instruments as including structured deposits and (if the client is a retail client in the United Kingdom) other retail investment products;

  2. (2)

    (for business that is not equivalent business of a third country investment firm or MiFID optional exemption business) the firm need not comply with the following provisions of the MiFID Org Regulation:

    1. (a)

      the requirement in paragraph 2 of article 52(1) of the MiFID Org Regulation (reproduced in COBS 6.2B.32EU) not to give undue prominence to their independent advice services;

    2. (b)

      the requirement in article 52(4) of the MiFID Org Regulation (reproduced in COBS 6.2B.36EU) to distinguish the range of financial instruments issued or provided by entities not being closely linked with the firm; and

    3. (c)

      the requirement in article 53(3)(c) of the MiFID Org Regulation (reproduced in COBS 6.2B.29EU) that a firm does not allow a natural person to provide both independent advice and restricted advice.

Interpretation: non-independent advice and restricted advice

COBS 6.2B.10G

This section refers to both “restricted advice” and “non-independent advice”. These terms have the same meaning.

Firms holding themselves out as independent

COBS 6.2B.11R

If a firm informs a client that it provides independent advice, that firm must assess a sufficient range of relevant products available on the market which must:

  1. (1)

    be sufficiently diverse with regard to their:

    1. (a)

      type; and

    2. (b)

      issuers or product providers,

    to ensure that the client’s investment objectives can be suitably met; and

  2. (2)

    not be limited to relevant products issued or provided by:

    1. (a)

      the firm itself or by entities having close links with the firm; or

    2. (b)

      other entities with which the firm has such close legal or economic relationships, including contractual relationships, as to present a risk of impairing the independent basis of the advice provided.

    [Note: article 24(7)(a) of MiFID]

COBS 6.2B.12R

COBS 6.2B.11R does not apply to group personal pension schemes if a firm discloses information to a client in accordance with the rule on group personal pension schemes (COBS 6.1C.20AR).

COBS 6.2B.13G

The combined effect of COBS 6.2B.6R and COBS 6.2B.11R is that the assessment undertaken by a firm for the purpose of COBS 6.2B.11R must:

  1. (1)

    where the client is a retail client in the United Kingdom, include a sufficient range of financial instruments, structured deposits and other retail investment products; or otherwise

  2. (2)

    include a sufficient range of financial instruments and structured deposits,

which in each case must meet the requirements as to diversity and scope in COBS 6.2B.11R(1) and (2) respectively.

Requirements for firms providing focused independent advice

COBS 6.2B.14G

A firm that holds itself out as providing independent advice may provide broad and general advice or specialist and specific advice.

[Note: recital 71 to the MiFID Org Regulation]

COBS 6.2B.15EU

53(2) An investment firm that provides investment advice on an independent basis and that focuses on certain categories or a specified range of financial instruments shall comply with the following requirements:

(a) the firm shall market itself in a way that is intended only to attract clients with a preference for those categories or range of financial instruments;

(b) the firm shall require clients to indicate that they are only interested in investing in the specified category or range of financial instruments; and

(c) prior to the provision of the service, the firm shall ensure that its service is appropriate for each new client on the basis that its business model matches the client’s needs and objectives, and the range of financial instruments that are suitable for the client. Where this is not the case the firm shall not provide such a service to the client.

[Note: article 53(2) of the MiFID Org Regulation]

COBS 6.2B.16G
  1. (1)

    COBS 6.2B.15EU means that a firm providing independent advice need not provide advice on all relevant products. A firm may market itself as, for example, an independent stockbroker that provides independent advice on shares only. A firm might alternatively market itself on the basis of providing independent advice on a particular product market such as ethical and socially responsible investments. The requirements in COBS 6.2B.15EU apply to ensure that clients of a firm that provides independent advice on a focused basis properly understand the nature of the advice that they will receive and that the service is appropriate.

  2. (2)

    A firm that provides independent advice in respect of a relatively narrow market should not hold itself out as acting independently in a broader sense. A firm which specialises in providing advice in respect of a particular market might include reference to the provision of independent investment advice in its name. However, it would need to be clear in any marketing materials, and when describing its service, that it only provides independent advice in respect of that particular product market.

Sufficient range

COBS 6.2B.17G

The extent of the assessment which a firm is required to undertake in order to meet the requirement to assess a sufficient range of relevant products will depend on:

  1. (1)

    the nature of the independent advice service provided by the firm (general or focused) for the purposes of COBS 6.2B.15EU;

  2. (2)

    the investment objectives of the client (COBS 6.2B.11R(1)); and

  3. (3)

    the firm’s close links and relationships with product providers and issuers (COBS 6.2B.11R(2)).

COBS 6.2B.18EU

53(1) Investment firms providing investment advice on an independent basis shall define and implement a selection process to assess and compare a sufficient range of financial instruments available on the market in accordance with Article 24(7)(a) of Directive 2014/65/EU. The selection process shall include the following elements:

(a) the number and variety of financial instruments considered is proportionate to the scope of investment advice services offered by the independent investment adviser;

(b) the number and variety of financial instruments considered is adequately representative of financial instruments available on the market;

(c) the quantity of financial instruments issued by the investment firm itself or by entities closely linked to the investment firm itself is proportionate to the total amount of financial instruments considered; and

(d) the criteria for selecting the various financial instruments shall include all relevant aspects such as risks, costs and complexity as well as the characteristics of the investment firm’s clients, and shall ensure that the selection of the instruments that may be recommended is not biased.

Where such a comparison is not possible due to the business model or the specific scope of the service provided, the investment firm providing investment advice shall not present itself as independent.

[Note: article 53(1) of the MiFID Org Regulation]

COBS 6.2B.19G
  1. (1)

    COBS 6.2B.11R does not require a firm providing independent advice to assess every relevant product available on the market before making a personal recommendation.

    [Note: recital 73 to MiFID]

  2. (2)

    Notwithstanding (1), since the assessment conducted by the firm must be such as to ensure the client’s investment objectives can be suitably met, a firm providing independent advice should be in a position to advise on all types of relevant product within the scope of the market (for the purposes of COBS 6.2B.15EU) on which it provides advice. When the client is a retail client in the United Kingdom, this means being in a position to advise on all types of financial instrument, structured deposit and other retail investment products.

  3. (3)

    For example, a firm providing independent advice on personal pension schemes should be in a position to consider all personal pension schemes. What will constitute a sufficient range of personal pension schemes to be considered before providing a client with a personal recommendation will, however, depend upon the investment objectives of that client.

  4. (4)

    A firm not specialising in a particular market would generally be expected to be in a position to consider all relevant product types which would be capable of meeting the investment objectives of its clients.

  5. (5)

    If a firm that provides focused independent advice is not able to recommend a financial instrument that would meet the investment objectives of a client, the firm should not provide that client with a personal recommendation. For example, if a firm providing independent advice on shares considered that a client’s investment objectives would be better met by way of investment in an accumulation product, it should not provide that client with a personal recommendation.

Guidance on the independence standard

COBS 6.2B.20G

A personal recommendation on a relevant product that invests in a number of underlying relevant products would not of itself enable the firm providing the personal recommendation to satisfy the requirement to have considered a sufficient range of relevant products which are sufficiently diverse (COBS 6.2B.11R), even if the relevant product invests in a wide range of underlying investments.

COBS 6.2B.21G

The effect of COBS 6.2B.11R(2) is that a firm which is subject to any form of agreement with an issuer or provider of relevant products that confines that firm to providing advice on relevant products issued or provided by that other person only will not be in a position to provide independent advice.

COBS 6.2B.22G

The fact that a firm is owned by, or owns, in whole or in part, the issuer or provider of relevant products does not prevent that firm from providing independent advice, provided that the firm’s assessment of relevant products is:

  1. (1)

    not limited to relevant products issued or provided by that related issuer or provider (COBS 6.2B.11R(2));

  2. (2)

    proportionate; and

  3. (3)

    not biased (COBS 6.2B.18EU).

COBS 6.2B.23G

In providing independent advice to a retail client in the United Kingdom a firm should consider financial products other than relevant products which are capable of meeting the investment needs and objectives of that retail client, examples of which could include national savings and investments (ns&i) products and cash deposit ISAs.

Use of platforms

COBS 6.2B.24R

A firm which:

  1. (1)

    holds itself out to a retail client in the United Kingdom as acting independently; and

  2. (2)

    relies upon a single platform service to facilitate the majority of its personal recommendations,

must ensure that, as appropriate, the selection of relevant products made available by the platform service provider is such as to enable the firm to satisfy the requirements of COBS 6.2B.11R.

COBS 6.2B.25G

When a firm considers whether a platform service provider’s selection of relevant products enables it to satisfy the requirements of COBS 6.2B.11R, a firm should take into account any fees, commission or non-monetary benefits the platform service provider receives in relation to those relevant products.

Use of panels

COBS 6.2B.26G

A firm providing independent advice may satisfy the requirement to assess a sufficient range of relevant products which are sufficiently diverse (COBS 6.2B.11R) by using ‘panels’. Such a firm would need to ensure that any panel is sufficiently broad in its composition to enable the firm to make personal recommendations based on an assessment of a sufficient range of relevant products available on the market which are sufficiently diverse. The firm would need to review the panel regularly and ensure that the client’s investment objectives can be suitably met.

COBS 6.2B.27G

When using a panel a firm may exclude a certain type or class of relevant product from the panel if, after review, there is a valid reason, consistent with this section and the client’s best interests rule, for doing so.

COBS 6.2B.28G

If a firm providing independent advice chooses to engage a third party to conduct an assessment of the relevant products available on the market, the firm remains responsible for complying with the requirements of COBS 6.2B.11R to ensure that its advice is based on an assessment of a sufficient range of relevant products which are sufficiently diverse as to ensure that the client’s investment objectives can be suitably met.

Requirements for firms providing both independent and restricted advice

COBS 6.2B.29EU

53(3) An investment firm offering investment advice on both an independent basis and on a non-independent basis shall comply with the following obligations:

(a) in good time before the provision of its services, the investment firm has informed its clients, in a durable medium, whether the advice will be independent or non-independent in accordance with Article 24(4)(a) of Directive 2014/65/EU and the relevant implementing measures;

(b) the investment firm has presented itself as independent for the services for which it provides investment advice on an independent basis; and

(c) the investment firms has adequate organisational requirements and controls in place to ensure that both types of advice services and advisers are clearly separated from each other and that clients are not likely to be confused about the type of advice that they are receiving and are given the type of advice that is appropriate for them. The investment firm shall not allow a natural person to provide both independent and non-independent advice.

[Note: article 53(3) of the MiFID Org Regulation]

COBS 6.2B.30G

A firm that offers an unlimited range of regulated mortgage contracts, or gives advice in relation to contracts of insurance on the basis of a fair analysis, but offers restricted advice on relevant products should not hold itself out as acting independently for its business as a whole, for example by holding itself out as an independent financial adviser. However, it may disclose that it offers an unlimited range of regulated mortgage contracts or gives advice in relation to contracts of insurance on the basis of a fair analysis provided it makes clear in accordance with the fair, clear and not misleading rule (COBS 4.2.1R) that it provides restricted advice on relevant products.

COBS 6.2B.31G

A firm that provides basic advice on stakeholder products may still use the facilities and stationery it uses for other business in accordance with the rule on basic advice on stakeholder products: other issues (COBS 9.6.17 R (2)).

COBS 6.2B.32EU

52(1) Where advice is offered or provided to the same client on both an independent and non-independent basis, investment firms shall explain the scope of both services to allow investors to understand the differences between them and not present itself as an independent investment adviser for the overall activity. Firms shall not give undue prominence to their independent investment advice services over non-independent investment services in their communications with clients.

[Note: article 52(1) of the MiFID Org Regulation]

Disclosing the nature of advice provided

COBS 6.2B.33R
  1. (1)

    A firm must disclose to a client, in good time before the provision of investment advice or basic advice:

    1. (a)

      whether its advice will be:

      1. (i)

        independent advice; or

      2. (ii)

        restricted advice;

    2. (b)

      whether the advice will be based on a broad or more restricted analysis of different types of relevant products; and

    3. (c)

      where the advice will be restricted advice, whether the range will be limited to relevant products issued or provided by entities having close links with the firm or any other legal or economic relationships, such as contractual relationships, so as to present a risk of impairing the independent basis of the advice provided.

[Note: article 24(4)(a)(i) and (ii) of MiFID]

  1. (2)

    A firm must include the term “independent advice” or “restricted advice” or both, as relevant, in the disclosure.

COBS 6.2B.34R
  1. (1)

    A firm must provide the information required by COBS 6.2B.33R in a comprehensible form in such a manner that the client is reasonably able to understand the nature and risks of the investment service and of the specific type of financial instrument that is being offered and, consequently, to take investment decisions on an informed basis.

  2. (2)

    That information may be provided in a standardised format.

[Note: article 24(5) of MiFID]

COBS 6.2B.35EU

52(1) Investment firms shall explain in a clear and concise way whether and why investment advice qualifies as independent or non-independent and the type and nature of the restrictions that apply, including, when providing investment advice on an independent basis, the prohibition to receive and retain inducements.

[Note: article 52(1) of the MiFID Org Regulation]

COBS 6.2B.36EU

52(2) Investment firms providing investment advice, on an independent or non-independent basis, shall explain to the client the range of financial instruments that may be recommended, including the firm’s relationship with the issuers or providers of the instruments.

52(3) Investment firms shall provide a description of the types of financial instruments considered, the range of financial instruments and providers analysed per each type of instrument according to the scope of the service, and, when providing independent advice, how the service provided satisfies the conditions for the provision of investment advice on an independent basis and the factors taken into consideration in the selection process used by the investment firm to recommend financial instruments, such as risks, costs and complexity of the financial instruments.

52(4) When the range of financial instruments assessed by the investment firm providing investment advice on an independent basis includes the investment firm’s own financial instruments or those issued or provided by entities having close links or any other close legal or economic relationship with the investment firm as well as other issuers or providers which are not linked or related, the investment firm shall distinguish, for each type of financial instrument, the range of the financial instruments issued or provided by entities not having any links with the investment firm.

[Note: article 52(2), (3) and (4) of the MiFID Org Regulation]

Medium of disclosure

COBS 6.2B.37G

A firm should provide the disclosure information required by the rule on describing the breadth of a firm’s advice service (COBS 6.2B.33R) in a durable medium or through a website (if it does not constitute a durable medium) provided the website conditions are satisfied.

Additional oral disclosure for firms providing restricted advice

COBS 6.2B.38R

If a firm provides restricted advice and engages in spoken interaction with the retail client, in addition to the disclosure required by COBS 6.2B.33R, a firm must disclose orally in good time before the provision of its investment advice that it provides restricted advice and the nature of that restriction.

COBS 6.2B.39G

Examples of statements which would comply with COBS 6.2B.38R include:

  1. (1)

    “I am a [Firm X] adviser offering restricted advice, which means that my advice is restricted to advice on [Firm X] [products/stakeholder products] only”; or

  2. (2)

    “I am a [Firm X] adviser offering restricted advice, which means that my advice is restricted to advice on [products/stakeholder products] from a limited number of companies that [Firm X] has selected”.

Record keeping

COBS 6.2B.40G

Firms are reminded of the general record keeping requirements in SYSC 3.2 and SYSC 9. A firm should keep appropriate records of the disclosures required by this section.

Systems and controls

COBS 6.2B.41G
  1. (1)

    Firms are reminded of the systems and controls requirements in SYSC.

  2. (2)

    A firm providing restricted advice should take reasonable care to establish and maintain appropriate systems and controls to ensure that if there is no relevant product in the firm’s range of products which meets the investment needs and objectives of the client, no personal recommendation should be made.

  3. (3)

    A firm specialising in a particular market should take reasonable care to establish and maintain appropriate systems and controls to ensure that it does not make a personal recommendation if there is a relevant product outside the market on which it provides investment advice which would meet the investment needs and objectives of the client.