07/18. Financial Services Authority. Conduct of Business regime

Transcription

1 Policy Statement 07/18 Financial Services Authority Conduct of Business regime Including feedback on: CP07/9: Conduct of Business regime Non-MiFID deferred matters; CP07/16: Consequential Handbook Amendments; and MiFID Permissions and Notifications Guide October 2007

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3 Contents Overview 3 Section A: Feedback to CP07/9 5 Part I: Specialist Regimes and additional topics from Annex 5 of CP06/ Corporate Finance 6 2 Commodity and Exotic Derivatives 8 3 Non-Financial Spread Betting 10 4 Service Companies 11 5 Locals 12 6 Depositaries 13 7 Lloyd s 14 8 Collective Investment Scheme (CIS) operators 16 9 Occupational Pension Scheme (OPS) firms Authorised Professional Firms (APFs) carrying on non-mainstream regulated activities UCITS Qualifiers Investment Companies with Variable Capital (ICVCs) Best Execution, Order Handling, Client Limit Orders and Client Order Record Keeping Investment Research Client Categorisation 28 The Financial Services Authority 2007

4 Part II: Other non-mifid topics Non-MiFID Projections and Charges Information for Packaged Products Financial Promotion Section Part III: Other related topics Telephone Recording Recording of voice conversations and electronic communications Client Assets Sourcebook 54 Section B: Feedback to CP07/16 55 Part I: Policy Matters Disapplication of SYSC 2 and changes to SYSC Disapplication of CF8 (apportionment and oversight) Transaction Reporting Post-trade transparency and Trade Data Monitors (TDMs) Other matters 67 Part II: Consequential Amendments Consequential Handbook Amendments 73 Section C: Feedback to Permissions and Notifications Guide an update Late Implementation 77 Annex 1: List of non-confidential responses Annex 2: Handbook text Annex 3: TDM Instrument from September Board and TDM Guidelines Annex 4: Amendments to Handbook Guides OMPS, EMPS and SERV 2 PS07/18: Conduct of Business regime (October 2007)

5 Overview Introduction and purpose The purpose of this policy statement (PS) is to provide feedback on responses to the following consultations: CP07/9: Conduct of Business regime: non-mifid deferred matters (May 2007); CP07/16: Consequential Handbook Amendments (July 2007); and Our proposed precautionary measures applicable to incoming firms from lateimplementing EEA states (published as part of our September 2007 update to the MiFID Permissions and Notifications Guide (PNG)). This PS substantially completes the consultation programme arising from implementation of the Markets in Financial Instruments Directive (MiFID) and our reform of the conduct of business regime 1. We are grateful for comments received, and have given them careful consideration in preparing this feedback. Structure and scope This PS is relevant to all firms affected by the implementation of MiFID and our reform of the conduct of business regime. Section C is of particular relevance to those incoming EEA firms, regulated markets and Multilateral Trade Facilities (MTFs) that provide investment services in the UK from states that will be late in implementing MiFID. The structure of the PS broadly follows the order of the consultations listed above, and the chapters in those papers. Key issues The proposals in CP07/9 that attracted most response were those on telephone recording and Section 150 rights (s.150). 2 1 In the CPs, we used the term NEWCOB to distinguish clearly the proposed new sourcebook from the existing one, COB; for reference to specific provisions of the Handbook text, we use the term COBS. The latter is consistent with the Handbook text at Annex 2 and will be the identifier used for the new sourcebook in the online Handbook. In this PS we have focussed much more on the differences between COB and the new COBS rules (as the NEWCOB regime is now being implemented). 2 Section 150 of the Financial Services and Markets Act 2000 (FSMA provides private persons with a statutory right of action for loss resulting from the breach of a rule by a firm). Financial Services Authority 3

6 On telephone recording we have decided, in light of concerns expressed particularly about the cost-benefit analysis of our proposals, to defer final policy decisions and rule-making until This will enable us to give further consideration, in discussion with industry, to the issues raised by respondents. On s.150 rights, in CP07/9 we proposed that private persons should have a statutory right of action in relation to breaches of all of the rules in the new Conduct of Business sourcebook. We have decided such rights should apply with one exception. We will modify s.150 rights for the MiFID-derived rule that requires firms to ensure that all their communications to clients are fair, clear and not misleading; s.150 rights will only apply if firms have not taken reasonable steps to ensure this outcome. On CP07/16, our proposals on Trade Data Monitors (TDMs) attracted most responses. Changes to the TDM regime, taking account of those responses, were made by the FSA Board in September 2007, and were published in Handbook Notice Full feedback on the responses is set out in Section B of this PS. On the Permissions and Notifications Guide (PNG) update, our proposed precautionary rule on late implementation received strong support, and it has now been made unchanged. It is consistent with the CESR Statement on Late Implementation of MiFID, published in October This signals the collective intent of CESR members to operate for an interim period in a way that will enable cross-border business to continue. Changes to the FSA Handbook The changes to the Handbook covered by this PS are contained in one instrument the MiFID (Deferred Matters and Consequential Amendments) Instrument 2007 which is at Annex 2. The changes to the Handbook come into effect on 1 November 2007, but with transitional arrangements for certain requirements applicable to non-mifid firms and business. These relate mainly to COBS requirements (for example, best execution and various of the Specialist Regimes), and are explained in more detail in each relevant chapter. Queries on specific requirements in the Handbook should be addressed first to your normal supervisory contact in the FSA. For most firms this will be the FSA s Firm Contact Centre: Tel: Fax: [email protected] Alternatively, our COBS and Transaction Reporting Policy Teams are on hand to help at [email protected] and [email protected] respectively. Post: Firm Contact Centre Financial Services Authority 25 The North Colonnade Canary Wharf London E14 5HS Copies of this Policy Statement are available to download from our website Alternatively, paper copies can be obtained by calling the FSA order line: PS07/18: Conduct of Business regime (October 2007)

7 Section A: Feedback to CP07/9 Part I: Specialist Regimes & additional topics from Annex 5 of CPO6/19 Financial Services Authority 5

8 1 Corporate Finance Introduction 1.1 In CP07/9, we proposed to maintain and, in some cases, to extend the exemptions under the concessionary Specialist Regime for non-mifid corporate finance business. We propose disapplying provisions on consumers understanding of risk, information about the firm, suitability, personal account dealing, and customer order and execution records. Where existing provisions would be retained, we proposed applying the COBS equivalent of the existing COB rules. Responses to CP07/9 In CP07/9, we asked: Q1: Do you agree with our proposals to maintain the concessionary regime for firms engaged in non-mifid corporate finance business? 1.2 We received six responses, four of which agreed with our proposals in their entirety. The others broadly agreed, but considered that the personal account dealing provision should not be disapplied for corporate finance business, as this provision is not costly for firms and it represents an important control in the fight against insider dealing and market abuse. In addition, one of these respondents considered for the same reasons that we should not disapply the customer order and execution records provision. Our response: The customer order and execution records provision was disapplied for non-mifid corporate finance business because firms carrying out corporate finance business who fall outside the scope of MiFID will generally not carry on the activities which may be subject to the customer order record-keeping requirements in COBS The non-mifid scope regime will generally apply to firms undertaking corporate finance business who either fall within the MiFID Article 2(1)(c) exemption for professional firms or to those corporate finance firms who fall within the Article 3 exemption (i.e. those firms who only provide investment advice without holding client money or assets, as corporate finance firms who receive and transmit orders will, generally speaking, transmit orders to entities outside the specified list in the Article 3 exemption). 6 PS07/18: Conduct of Business regime (October 2007)

9 Therefore, firms who execute customer orders or who transmit orders on for execution as part of their corporate finance activities will generally be MiFID scope firms carrying on MiFID business and will need to comply with the customer order and execution records provisions in COBS We have therefore disapplied this provision for non-mifid scope corporate finance business and not changed the Handbook text. The personal account dealing provision was disapplied for non-mifid scope firms conducting corporate finance business as it was considered to have been possible to rely on Principle 3 (Management and control) and Principle 8 (Conflicts of interest) to provide appropriate control for personal account dealing. On reflection we consider that the personal accountability provision helpfully elucidates what is acceptable conduct and will so will not entail additional costs. As a result, we have amended the Handbook text to apply this provision to non-mifid scope firms who conduct corporate finance business. Transitional Provisions 1.3 Corporate finance firms have until 1 May 2008 to implement the changes. COB, as it was in force on 31 October 2007, will continue to apply to non-mifid scope firms conducting corporate finance business until 1 May 2008 under these transitional provisions. Financial Services Authority 7

10 2 Commodity and Exotic Derivatives Introduction 2.1 This chapter summarises the three responses we received on our proposals as set out in chapter 2 of CP07/9 in respect of commodity and exotic derivatives. 2.2 Whilst respondents generally welcomed our proposals to retain the current concessionary regime for oil and energy market activity that falls outside the scope of MiFID, we received some comments requesting clarification or guidance on our proposals. Responses to CP07/9 In CP07/9 we asked: Q2: Do you agree we should maintain existing standards in view of the EU s review? 2.3 The following comments were made and questions raised: other FSA rules applying to these firms (such as SYSC, MAR and SUP) where changes have not yet been proposed should not be changed until the EU s review is complete; whether for the purposes of client reporting, OMPs will, in complying with COBS 17 (Reporting information to clients), need to provide different information to what they currently provide; and what action is required from non-mifid scope firms which currently hold waivers relating to other sourcebooks, e.g. SUP 17 (Transaction reporting) and TC. Our response: A non-scope SYSC CP on the possible extension of the common platform of requirements on systems and controls to non-mifid and non-crd scope firms (except insurers) is due in December This draft rule in CP07/9 proposed that COBS 17.1 (which became COBS 16.1 in PS07/2) should apply to non-mifid oil and energy market activity. On reflection we believe that COBS 16.2 should apply rather than COBS 16.1 because it is a more direct equivalent of the existing rule. This should not require firms to provide different information to what they currently provide. 8 PS07/18: Conduct of Business regime (October 2007)

11 Chapter 11 of the MiFID Permissions and Notifications Guide indicated that firms should review the waivers they currently have against changes to the rules, including in SUP and TC. If a firm concludes that it will need a waiver of the new Handbook provisions that come into effect on 1 November 2007, it will need to make a fresh waiver application. Transitional Provisions 2.4 Firms will have until 1 May 2008 to implement the changes. COB, as it was in force on 31 October 2007, will continue to apply to non-mifid scope business related to commodity derivatives (including non-scope energy and oil market activity) until 1 May 2008 under these transitional provisions. Financial Services Authority 9

12 3 Non-Financial Spread Betting Introduction 3.1 This chapter summarises the four responses we received on our proposals as set out in chapter 3 of CP07/9 in respect of non-financial spread betting. 3.2 We proposed disapplying the best execution rules on non-financial spread betting when firms do not give investment advice in relation to these transactions. We also proposed disapplying the rules from 1 November 2007 because most existing waivers are due to expire in November. Responses to CP07/9 In CP07/9, we asked: Q3: Do you agree with our proposals for non-financial spread betting? 3.3 We received a response from the Financial Services Consumer Panel, a joint response from trade associations and two responses from firms. 3.4 All respondents agreed with the proposal to disapply the best execution rules on non-financial spread betting. Our response: We are disapplying the best execution rules for non-financial, non-advised spread betting transactions. The disapplication will take effect on 1 November Firms will no longer have to apply for waivers from best execution in respect of nonfinancial spread betting transactions and all existing waivers will lapse on this date. 10 PS07/18: Conduct of Business regime (October 2007)

13 4 Service Companies Introduction 4.1 This chapter summarises the responses we received on our proposals as set out in chapter 4 of CP07/9 in respect of service companies. 4.2 We proposed maintaining the existing approach in COB by applying only the new COBS rules equivalent to the limited set of COB rules which currently apply (including investment research recommendations and financial promotions). Responses to CP07/9 In CP07/9, we asked: Q4: Do you agree with our proposals for service companies? 4.3 We received one response, from a company, which agreed with our proposal. Our response: We are implementing the proposals we consulted on in CP07/9. Financial Services Authority 11

14 5 Locals Introduction 5.1 We made no policy proposals in respect of Locals in chapter 5 of CP07/9. Responses to CP07/9 5.2 We did not receive any responses or comments. 12 PS07/18: Conduct of Business regime (October 2007)

15 6 Depositaries Introduction 6.1 This chapter summarises the five responses we received on our proposals as set out in chapter 6 of CP07/9 for revising the depositaries Specialist Regime in COB Our approach was to continue with the current concessionary approach but additionally disapply the rule dealing with information about the firm. 6.2 Respondents supported our approach, but queries were raised about inducements and financial promotions. Responses to CP07/9 In CP07/9 we asked: Q6: Do you agree with the proposed approach to COB 11.4 for Depositaries? 6.3 One respondent queried why it was necessary to continue to apply the inducement provisions to depositaries. They argued that it was unlikely that depositaries would make or receive inducements. There was a request for clarification about our proposal to apply the COBS standard of financial promotion to depositaries. In PS07/6 the chapters on financial promotion (COBS 5) and communication with clients (COBS 4) were merged into COBS 4 (Communicating with clients, including financial promotions). The respondent wanted clarity that only the financial promotion aspects of COBS 4 and not the wider general communication rule would apply. Our response: We accept that it unlikely that depositaries will make or receive inducements but applying this provision ensures there are no loopholes in the provision. We have revised the rules to make clear that only the financial promotion parts of COBS 4 apply to depositaries. Transitional Provisions 6.4 Firms will have until 1 May 2008 to implement the changes. COB, as it was in force on 31 October 2007, will continue to apply to non-mifid scope depositaries until 1 May 2008 under these transitional provisions. Financial Services Authority 13

16 7 Lloyd s Introduction 7.1 In chapter 7 of CP07/9, we proposed not to carry forward the current application of detailed rules in COB 12 (Lloyd s), which consisted of application provisions and definitions as well as cross-references to other chapters in COB. We said that we would add guidance to remind firms carrying out Lloyd s market activities that the Principles for Businesses will continue to apply to those activities. In addition, we proposed to continue to apply the client categorisation and financial promotion rules to firms carrying on Lloyd s market activities. 7.2 We set out the consultation feedback below. We have not changed our proposed policy in response to this feedback. Responses to CP07/9 In CP07/9, we asked: Q7: Do you agree with our proposed approach to COB 12 (Lloyd s)? 7.3 We received one response to our proposals for Lloyd s, raising two issues. 7.4 The first issue relates to section 150 of FSMA 4 (s.150). While a contravention of a rule in COB would give rise to rights of action for damages by private persons who suffer a loss (including Lloyd s members), a contravention of the Principles would not. We said in the CP that we do not expect this to have a significant effect on consumers. But the respondent had a lingering concern that the potential availability of recompense under s.150 may itself have been sufficient enough to prevent abuses. 4 Section 150 of FSMA provides that a 'private person', or in specified cases a non-private person, may take out an action for damages through the courts if he suffers loss as a result of a contravention by an authorised person of a rule made by the FSA. 'Private person' is defined by statutory instrument and includes individuals provided they are not carrying on regulated activities. 14 PS07/18: Conduct of Business regime (October 2007)

17 Our response: Our approach to COB 12 does not alter the behaviours which we expect from firms in relation to relevant conduct of business issues. As we said in chapter 18 of CP07/9, s.150 is a useful protection, but its importance in practice should not be overstated. Most clients who suffer a loss due to misconduct by firms will pursue their claims through the Financial Ombudsman Scheme, where s.150 is not relevant, rather than through the courts. And where action is taken in the courts, clients may claim under the general law e.g. in contract or in negligence, rather than under s.150. So using alternative sources of compensation following a breach therefore makes it unlikely that the existence of s.150 is itself sufficient to prevent abuses. We have also altered the way that s.150 applies in relation to the fair, clear and, not misleading rule (see chapter 18). 7.5 Secondly, the respondent requested clarification that Lloyd s underwriting can continue to be promoted to suitable potential new Members under the new financial promotion regime (COBS 4). Our response: Lloyd s underwriting can continue to be promoted to suitable potential new Members under COBS 4. Our financial promotion regime applies proportionately and contains exemptions from which firms communicating a financial promotion in relation to Lloyd s market activities can benefit. For example, COBS 4 has different requirements for firms depending on whether they are communicating with retail or professional clients. Also, the Financial Promotions Order exempts certain communications (e.g. to sophisticated investors ) from the financial promotion regime in relation to non-mifid scope business. Transitional Provisions 7.6 Firms conducting Lloyd s market activities will have until 1 May 2008 to implement the changes. COB, as it was in force on 31 October 2007, will continue to apply to such activities until 1 May 2008 under these transitional provisions. Financial Services Authority 15

18 8 Collective Investment Scheme (CIS) operators Introduction 8.1 The CIS operators Specialist Regime in COB 10 applies to scheme management activity. In CP 45 (which consulted on COB proposals in 2000) we said that this: amounts generally to asset management of the property of the scheme. 8.2 CP 45 went on to point out that: The proposed scope of Chapter 10 means that to the extent that a CIS operator undertakes regulated activity that is outside scheme management activity, the CIS operator must comply with any additional relevant rules of COB. For instance, a firm which is a CIS operator would be required to observe the appropriate rules in COB outside Chapter 10, in relation to its unit dealing activity, or its activity as a trustee firm, or its financial promotion activity. 8.3 In chapter 8 of CP07/9 we proposed to continue this approach with a Specialist Regime for scheme management activity which applies the COBS equivalent of most of the existing provisions in COB chapter 10, disapplying rules on suitability for the operator of an unregulated scheme and the modification of the order allocation rule for operators running schemes for intermediate customers. We thought the first unnecessary and that the second was rendered unnecessary by the move away from the use of a specified time period in the order allocation rule. Responses to CP07/9 In CP07/9, we asked: Q8: Do you agree with our proposals for CIS operators? 8.4 The nine respondents broadly agreed with our proposals to retain similar treatment of CIS operators. No respondent to chapter 8 of CP07/9 disagreed with our proposal to disapply the rules on suitability for the operators of unregulated schemes and drop the modification of the allocation rule. One respondent said that the former change would bring marginal benefit. 16 PS07/18: Conduct of Business regime (October 2007)

19 8.5 The main concerns expressed about our proposals related to best execution. In the context of CIS operators, some respondents queried why the rule in COB 10, that regulated CISs must be treated as private clients for best execution purposes, was being copied across into COBS. They pointed out that there is no opt-out from best execution for professional clients in COBS (unlike for intermediate customers in COB) but best execution requirements are stricter where a client is a private rather than professional client. Other concerns were expressed about the impact of the best execution rules to dealing in units in CISs. 8.6 One respondent queried why the exemption for CIS operators from the requirement in COB to provide terms of business to a customer had not been copied across into COBS 9 which deals with client agreements. The respondent suggested that the absence of such an exemption cut across the prospectus, as the document which governs the relationship between the operator and the investor. Our response: The responses to the consultation suggested that our proposed approach to the Specialist Regime for CIS operators was appropriate. We therefore confirm our approach. The main discussion of best execution for non-mifid scope firms is contained in chapter 13 of this PS. However, we agree with respondents that it is not necessary to require that CISs should be treated as private clients for best execution purposes and have revised the Handbook text accordingly. We are not creating an exemption for CIS operators from the client agreement provisions in COB 9. The existing exemption in COB 4 from the requirement to provide terms of business is overridden by other provisions (in COB 3 and 6) implementing the Distance Marketing Directive for distance transactions with a retail customer. COBS 5.1.5R imposes a duty on a firm within the scope of the Distance Marketing Directive to provide terms of business. This duty is further amplified in COBS Transitional Provisions 8.7 CIS operators will have until 1 May 2008 to implement the changes. COB, as it was in force on 31 October 2007, will continue to apply to CIS operators until 1 May 2008 under these transitional provisions. Financial Services Authority 17

20 Occupational Pension 9 Scheme (OPS) firms Introduction 9.1 In chapter 9 of CP07/9, we set out our proposal for OPS firms; those firms whose primary activity is to undertake investment management on behalf of a group occupational pension or welfare trust. We proposed to apply the MiFID standards to the business of OPS firms but to adjust those standards where, in our view, they were not appropriate in the OPS context. We also proposed to maintain our current policy approach by replicating the existing COB modifications within the MiFID framework, with the exception of COB 7.5.4R. Responses to CP07/9 In CP07/9, we asked: Q9: Do you agree with our proposals to continue the existing policy approach? 9.2 Most respondents did not answer this question. However, a handful of respondents raised other issues. 9.3 One respondent did not want consumers to bear the cost of the changes we were proposing for OPS firms. 9.4 Another respondent believed our proposals for the application of best execution to OPS firms were unworkable because an OPS firm has to seek best execution but investment managers are not obliged to treat OPS firms as retail customers 5. The implication is that OPS firms have to request best execution or request to be treated as retail customers on a case-by-case basis. The respondent stated that this could lead to inconsistent treatment for the underlying customer, making it difficult for OPS firms to achieve best execution and even more challenging for the firm to formulate an execution policy. 5 Under MiFID, pension funds and their management companies will be classified as per se eligible counterparties (ECPs), see CP07/9, paragraph 9.10 unless they otherwise request a different categorisation and agree that with their counterparty. 18 PS07/18: Conduct of Business regime (October 2007)

21 9.5 A respondent also stated that the modification of the suitability requirement (reference COB R) had not been rolled-over into COBS and requested this modification be included in the final rules. The same respondent also pointed out that the modification of COBS as set out in (3) 6 has incorrect cross-references. Our response: By replicating the existing COB regime as far as possible and making adjustments to the rules only where necessary, we have tried to ensure that costs (to both firms and customers) are kept to a minimum. As authorised firms, OPS firms will be classified as per se eligible counterparties (ECPs), they will not be entitled to best execution, but have the right to request it 7. We have acknowledged in CP07/9 that OPS firms may incur costs negotiating with firms to obtain best execution (and this may have to be on a case-by-case basis). However, MiFID does not provide flexibility for us to modify this requirement. We believe that the suitability requirements for OPS firms have been maintained in the COBS sourcebook. COB R currently requires the manager of an OPS to take reasonable steps to ensure the suitability of specific transactions and of the investment portfolio under management with regard to the investment objectives specified in the portfolio mandate. This requirement is reflected in chapter 9 of the new COBS rules, 8 which is expressly applied to OPS firms. 9 COBS R(2)(c) requires firms, when managing a client s investments, to obtain the necessary information on the client s objectives in order to take a decision relating to the investments. COBS R(1) clarifies that the reference to client includes an OPS. 10 Given that chapter 9 of the COBS Rules has a similar effect as COB R, there is no need to reinstate this rule. One respondent suggested that the cross-references in chapter 19 of the draft COBS sourcebook were incorrect. Due to subsequent changes in the draft text, these crossreferences have now been completely updated. 11 The relevant rule can now be found in COBS R(3). This provision refers to the rules at COBS R(2) and COBS R(1) which cater specifically for OPS firms. 12 In general terms, the rule will enable an OPS firm not to provide information/confirmation regarding execution of (individual) client orders if it provides a periodic statement to the professional client containing the information required by COBS R. Transitional Provisions 9.6 OPS firms will have until 1 May 2008 to implement the changes. COB, as it was in force on 31 October 2007, will continue to apply until 1 May 2008 under these transitional provisions. 6 This reference was given in CP06/19, and has subsequently been updated (see response above). 7 See paragraph 9.10, CP07/9. 8 The relevant Handbook text can be found in PS07/6. 9 COBS R (2)(b). 10 See the Annex 2 to this Policy Statement. 11 See the Annex 2 to this Policy Statement. 12 See Handbook text in Annex 3 to PS07/6. Financial Services Authority 19

22 10 Authorised Professional Firms (APFs) carrying on non-mainstream regulated activities Introduction 10.1 In CP07/9, we proposed carrying forward our existing policy of disapplying much of COB for Authorised Professional Firms (APFs) in respect of their non-mainstream activities (NMRAs) We also proposed some minor modifications to the conduct of business regime for such firms due to the simplification and re-presentation of the New Conduct of Business Sourcebook, COBS. (This was previously referred to as the NEWCOB regime). Responses to CP07/9 In CP07/9 we asked: Q10a: Do you have any comments on our proposal to carry forward the current disapplication of much of COB for APFs carrying on NMRAs? Q10b: Do you have any comments on our proposed modifications to the NEWCOB regime for APFs carrying on NMRAs? 10.3 We received 6 responses, most of which agreed with our proposals. One respondent queried the interaction between the proposed exemptions for APFs in respect of their NMRAs and the exemptions, in COBS 19, for non-mifid corporate finance business One respondent considered that the description of our proposals in the CP suggested that APFs carrying on NMRAs would not be subject to COBS in respect of any of their regulated activities (mainstream or non-mainstream). Our response: The exemptions for APFs in respect of their NMRAs and the exemptions in COBS 19 for non-mifid corporate finance business should be read cumulatively for corporate finance firms that are also APFs. So, for example, corporate finance business conducted by APFs is excluded from the need to provide client agreements. 20 PS07/18: Conduct of Business regime (October 2007)

23 We did not intend to give the impression that our proposals were in respect of all the activities of APFs carrying on NMRAs. In addition, the draft Handbook text on which we consulted made clear those areas of COBS that we proposed should not apply to an APF with respect to its NMRAs. We have now made the rules on which we consulted although we have changed some of the rule references due to the re-numbering of COBS, as announced in CP07/6. Financial Services Authority 21

24 11 UCITS Qualifiers Introduction 11.1 In CP07/9 we proposed to apply the COBS equivalents of the three COB rules which currently apply to UCITS Qualifiers (financial promotion, investment research recommendations and electronic commerce). Responses to CP07/9 In CP07/9, we asked: Q11: Do you agree that we should apply to UCITS Qualifiers the equivalent rules in NEWCOB to those which currently apply to them in COB? 11.2 The two responses to chapter 11 of CP07/9 agreed with our proposal. Our response: We have implemented our proposals as set out in CP07/9. 22 PS07/18: Conduct of Business regime (October 2007)

25 Investment Companies with 12 Variable Capital (ICVCs) Introduction 12.1 Following a decision confirmed in PS07/2, ICVCs will be subject to the financial promotion rules from 1 November In CP07/9 we proposed, subject to that change, to continue to disapply COBS for ICVCs. Responses to CP07/9 In CP07/9, we asked: Q12: Do you agree that we should disapply COBS for ICVCs? 12.2 The seven responses we had to chapter 12 of CP07/9 agreed with our proposal to continue to disapply COBS rules for ICVCs. One respondent queried why PS07/2 brought ICVCs within the financial promotion rules when they are unlikely to make a financial promotion. Our response: We are continuing to disapply COBS rules except for the financial promotion rules for ICVCs. The issue relating to financial promotion is discussed in chapter 17 of this PS. Financial Services Authority 23

26 13 Best Execution, Order Handling, Client Limit Orders and Client Order Record Keeping Introduction 13.1 In CP07/9 we proposed extending the application of the MiFID-based COBS rules (COBS 11.2) on best execution and client order handling to non-mifid scope firms and business, where this business involves: the execution of orders; placing client orders for execution as part of portfolio management or the transmission of orders to other entities for execution; where the order relates to a MiFID financial instrument. Responses to CP07/ Many respondents welcomed the approach we proposed in CP07/9 and acknowledged that a consistent approach in respect of conduct of business obligations was desirable for firms and business within and outside the scope of MiFID. However, we have been made aware that firms are concerned that the publication of the proposed COBS best execution rules for non-mifid scope business in May 2007 with an implementation date of 1 November 2007 would not allow them sufficient time to implement the new rules. Our response: We accept that non-mifid scope firms subject to the COB best execution rules may face practical difficulties in implementing the COBS best execution rules by 1 November Accordingly, the COBS best execution rules will not be brought into effect until 1 May 2008 to give firms time to prepare for the changes. Under a transitional provision (see below), the existing COB best execution rules will continue to apply until that date. Other transitional provisions will allow firms who wish to comply with COBS 11.2 before 1 May 2008 to do so Some respondents indicated that they considered the application of best execution and some other conduct of business rules to non-mifid business to be superequivalent to MiFID. Some also argued that by applying these rules to non-mifid scope business that we are treating non-mifid firms as MiFID firms when they are not. 24 PS07/18: Conduct of Business regime (October 2007)

27 Our response: While certain designated investment business is out of scope under MiFID, we retain discretion to apply conduct of business rules to such business under COBS. When applying best execution to non-mifid scope business, we have sought to preserve as far as possible the scope of the current COB best execution rule (which covers a wider range of business than the MiFID provisions do) in an effort to create a level playing field and limit unnecessary changes. We do not accept that applying discretionary conduct of business rules equates to an extension of the scope of MiFID or is a superequivalent measure just because the business is non-mifid scope. We retain discretion to apply conduct of business rules to non-mifid scope business and consider our proposals on the application of best execution to non-mifid scope business to be proportionate as they seek to preserve the scope of the current COB best execution rules Several respondents raised concerns about the application of best execution to the purchase or sale of units in a collective investment scheme (CIS). These respondents pointed out that our proposals for non-mifid scope firms would extend the best execution requirement beyond the scope of the current COB 7.5 best execution rule. In particular, respondents indicated that the COBS rules do not replicate COB 7.4.5R (1)(b) which exempts orders for the purchase or sale of units in a regulated collective investment scheme from, or to, the operator of that scheme from best execution. The rules proposed in CP07/9 would have applied best execution to CIS operators acting as ISA managers in relation to units in the funds they provide and to CIS operators who purchase and sell units in a CIS direct to clients. Respondents argued that our proposals in CP07/9 failed to take the potential costs of such a change adequately into account. Our response: We accept that the COBS rules as currently drafted would extend best execution beyond the scope of the current COB best execution regime and that such a change in the scope of the application of the best execution rule may have cost implications for firms. The 7.4.5R(1)(b) exemption will remain in place under the transitional provision extending the application of the best execution rules to 1 May A second transitional provision will delay the implementation of the COBS best execution rule for orders of CIS units from 1 May 2008 to 31 October 2008 to allow time for us to consult and conduct a full cost benefit analysis on the effects of the removal of the existing COB exemption. This will not affect the application of MiFID best execution requirements to MiFID business Some respondents argued that all intermediaries should be exempted from best execution when purchasing and selling units in a CIS. Others took the view that as the UK has decided to take advantage of MiFID s Article 3 exemption for firms that only receive and transmit orders and/or provide investment advice, any application of best execution to such intermediaries (regardless of which product is being traded) would be superequivalent to MiFID. Another respondent stated that it believed that best execution does not currently apply at all to independent financial advisers (IFAs) under COB. Financial Services Authority 25

28 Our response: As set out above, we do not accept that applying conduct of business rules to intermediaries that are exempt under Article 3 of MiFID is superequivalent. Rather, our approach when exercising our discretion to implement conduct of business rules to non-mifid scope business is to maintain consistency for scope and non-scope firms when dealing in the same instruments while keeping the scope of any non-mifid rules within the current COB perimeter. Under COB 7.5.3R a firm that executes a customer order in a designated investment must provide best execution. The COB Glossary definition of execute includes instructing another person to execute a transaction. The current COB best execution rule therefore applies to IFAs and other intermediaries. However, intermediaries (including IFAs) are not required to provide best execution when purchasing or selling units in a CIS to or from the operator of the CIS by virtue of the COB 7.4.5R(1)(b) exemption. The transitional provisions we have put in place preserve the current exemption applying to trading in CIS units until 31 October We intend to undertake a full consultation and cost benefit analysis before the COBS best execution rules take effect Some respondents asked for clarification on the position of Child Trust Funds (CTFs). One respondent asked why the rules have been drafted to cover CTFs when HM Treasury has made a statement on the treatment of CTFs indicating that they are outside MiFID scope. Our response: As COB 7.5 applies to CTFs, any disapplication of best execution from CTFs in COBS would be a rolling back of the current best execution obligation. Best execution will continue to apply to CTFs under COBS as it has done under current COB. Transitional Provisions 13.7 COBS TP2.4AR will delay the implementation of the COBS best execution rules for non-mifid scope firms and business until 1 May Firms retain discretion to comply with COBS 11.2 before 1 May 2008 under COBS TP2.4BR. If a firm exercises this discretion, TP2.4C requires the firm to make a record of the date of the decision and the date from which the firm will comply with COBS COBS TP2.4D will have the effect of emulating within COBS the COB 7.5.4R(1)(b) best execution exemption. This transitional provision will apply to non-mifid scope client orders for the purchase or sale of units in a CIS from or to the operator of the CIS scheme and will be in effect from 1 May 2008 until 31 October PS07/18: Conduct of Business regime (October 2007)

29 14 Investment Research Introduction 14.1 In CP07/9, we proposed to apply the COBS MiFID standard for investment research to non-mifid scope firms, if they produce investment research The main implication from this proposal is that non-independent research will need to be clearly identified, treated as a marketing communication, and contain a clear statement that it has not been prepared in-line with the requirements for independent research. This proposal is aimed at ensuring that recipients are likely to understand the circumstances of production of research and should avoid the confusion which could be expected if different standards were applied to MiFID and non-mifid scope firms. Responses to CP07/9 In CP07/9, we asked: Q14: Do you agree that the MiFID investment research standards should be applied to research produced by authorised firms who are outside the scope of MiFID? 14.3 The six responses received on chapter 14 of CP07/9 agreed with our proposal. Our response: We have made some minor amendments which clarify the application of the investment research provisions, but the substance of the Handbook remains as consulted on in CP07/9. Transitional Provisions 14.4 Non-MiFID scope firms who produce investment research will have until 1 May 2008 to implement the changes. COB 7.16, as it was in force on 31 October 2007, will continue to apply until 1 May 2008 under these transitional provisions. Financial Services Authority 27

30 15 Client Categorisation Introduction 15.1 In May 2007 we consulted on various matters relating to the non-mifid nonretail client categorisation regime. In summary, we proposed adopting the MiFID categorisation terminology for such business but to modify definitions and criteria applying to non-mifid scope business, where appropriate, to avoid unnecessary costs and to minimise disruption to firms business. Responses to CP07/9 In CP07/9, we asked: Q15a: Do you agree with our approach which would apply the quantitative test in relation to elective professional clients only in relation to MiFID business and equivalent business of a third country investment firm? Q15b: Do you agree with our proposed approach to the definition of per se professional client? Q15c: Do you agree with our approach which would disapply the requirement that clients be assessed on a company basis for all non-mifid business? Q15d: Do you agree with our proposals to adopt the MiFID definition of eligible counterparty business? Q15e: Do you agree with our proposal that firms provide clients with appropriate notice of their categorisation? Q15f: Do you agree with our proposal to apply the general notification requirement only to new clients accepted after 1 November 2007? 28 PS07/18: Conduct of Business regime (October 2007)

31 15.2 Where respondents commented on our client categorisation proposals, they were generally supportive of our approach. Some respondents disagreed with our proposal that non-mifid scope firms should provide their clients with an appropriate notice of their categorisation. These respondents stated that some firms were not currently required to notify customers of their classification, but only to categorise them and treat them accordingly. These respondents continued that to require notification would be disproportionately costly with little benefit for consumers. Our response: The client categorisation regime is fundamental to both the client s and the firm s understanding of the duties and obligations that arise under the regulatory regime. So we still believe that the client should be made aware of the relevant client category. On the basis that most firms communicate in one form or another with their clients or prospective clients it is our view that in practice the incremental cost of requiring firms to notify their clients of their client category would be minimal. We therefore have proceeded on the basis set out in CP07/9 except as set out below. A. Definition of per se professional client 15.3 A number of trade association responses raised concerns in respect of our proposed definition of a non-mifid scope per se professional client, stating that it represented a significant change from the existing COB regime, narrowed the types of client that could automatically be treated as professional and would lead to significant additional costs for firms In CP07/9 we proposed retention at COBS 3.5.2(3) of the existing COB criteria for large undertakings to be treated as eligible counterparties. Respondents argued that we had not gone far enough in preserving the existing categorisation regime for non-mifid scope business. They requested that the following elements of the existing definition of intermediate customers should be brought into the list of per se professionals: (d) a body corporate (including a limited liability partnership) which has (or any of whose holding companies or subsidiaries has) (or has had at any time during the previous two years) called-up share capital or net assets of at least 5m (or its equivalent in any other currency at the relevant time); (f) a partnership or unincorporated association which has (or has had at any time during the previous two years) net assets of at least 5m (or its equivalent in any other currency at the relevant time) and calculated in the case of a limited partnership without deducting loans owing to any of the partners; (g) a trustee of a trust (other than an occupational pension scheme, SSAS, personal pension scheme or stakeholder pension scheme) which has (or has had at any time during the previous two years) assets of at least 10m (or its equivalent in any other currency at the relevant time) calculated by aggregating the value of the cash and designated investments forming part of the trust s assets, but before deducting its liabilities; and Financial Services Authority 29

32 (h) a trustee of an occupational pension scheme or SSAS, or a trustee or operator of a personal pension scheme or stakeholder pension scheme where the scheme has (or has had at any time during the previous two years): (i) at least 50 members; and (ii) assets under management of at least 10m (or its equivalent in any other currency at the relevant time) Respondents argued that these categories were regularly relied upon by firms and that removal would cause firms to incur additional costs, arising from the application of additional retail protections or the process of opting clients back up to professional status or turning away business. Respondents also requested that the large undertaking criterion should be moved from the definition of per se professional to within the non- MiFID scope definition of eligible counterparty. Our response: In implementing our policy for non-mifid scope categorisation our intent was to minimise additional costs and disruption faced by firms by moving to MiFID terminology but modifying criteria where appropriate. In the light of the comments by the trade associations we therefore are implementing the following amendments to the draft rules consulted upon in CP07/9: Amend COBS R(3)(a) to lower the called-up share capital threshold for body corporates from 10m to 5m and apply this same threshold to net assets as an alternative criterion. Allow partnerships or unincorporated associations with net assets of 5m to be classified as per se "professional" clients for non-mifid scope business. Allow trustees of trusts with assets of at least 10m to be classified as per se professional clients for non-mifid scope business. Move the large undertaking test at COBS 3.5.2R to the elective eligible counterparty definition at COBS 3.6.4R. B. Scope of ECP business definition under COBS 15.6 We also propose a limited extension to the scope of non-mifid scope ECP business. In CP07/9 we had proposed adopting the MiFID scope definition of eligible counterparty business (ECP) for non-mifid scope business The current proposed definition of eligible counterparty business is limited to certain investment services and related ancillary services including the reception and transmission of orders. The existing definition of inter-professional business covers acting as an arranger, covering both Article 25(1) and 25(2) of the Regulated Activity Order. Whilst most Article 25(1) arranging business involves reception and transmission of orders and some Art 25(2) business will involve ancillary services, Art 25(2) arranging will not involve the reception and transmission of orders and may also not involve the provision of ancillary services. We therefore propose introducing a new limb to the definition to cover arranging that does not involve the provision of an investment or ancillary service. 30 PS07/18: Conduct of Business regime (October 2007)

33 C. Client Categorisation Local Authorities 15.8 In Annex 4 of our August 2006 paper on Implementing MiFID s Client Categorisation Regime we indicated that local authorities mapped across to per se professional client under the regional government heading. The Commission has subsequently expressed its view that this term should be construed narrowly and that the definition of professional client in Annex II of the Directive is aimed at comprising major public entities with considerable exposure to and experience in the financial markets. The Commission has indicated that it follows that, for MiFID scope business, the reference to regional governments does not extend to public administrations at large and does not include e.g. local governments or municipalities or their respective administrations. We, however, take the view that local authorities are clearly undertakings and therefore if they meet the relevant size criteria in COBS 3.5 then they can be treated as per se professional clients. In addition, where a local authority is acting in its capacity as the administrator of a pension scheme it is likely to fall into the limb of the definition covering pension funds or their management companies (COBS 3.6.2R(5)) In line with our general approach of minimising the additional costs in relation to non-mifid scope business, we have amended the definition in COBS 3.5.2R(3) to clarify that local authorities are per se professional clients in respect of such business. PRIN and Client Categorisation In CP07/16 (Consequential Handbook Amendments (July 2007)) we included a section on the application of the Principles for Businesses (PRIN) 6, 7, 8 and 9 (the Customer Principles ), which rely for their application on the definition of customer i.e. client other than eligible counterparty. Principles either do not apply, or are significantly cut back, for business conducted with a market counterparty (under current COB) or an eligible counterparty (under the new COBS categorisation regime). Our Response: As set out in CP07/16 we propose to retain the current application of PRIN to non-designated investment business by recreating the effect of the existing definition of market counterparty within the PRIN Sourcebook, and renaming that category eligible counterparty. This is subject to our consulting further in the forthcoming consultation paper on non-mifid scope firms and the common platform which will be published in Q Transitional Provisions We have also included a transitional provision designed to remove the need for a firm to notify a client that is currently a market counterparty if it is to be treated under PRIN from 1 November 2007 as an eligible counterparty. Financial Services Authority 31

34 Section A: Feedback to CP07/9 Part II: Other non-mifid topics 32 PS07/18: Conduct of Business regime (October 2007)

35 16 Non-MiFID Projections and Charges Information for Packaged Products Introduction 16.1 This chapter summarises the responses we received to our proposals on non-mifid projections and charges information for packaged products, as set out in chapter 16 of CP07/9, and provides feedback on our conclusions Our main proposal is to retain the current illustration requirements for non-mifid business, but to: simplify the rules; allow greater use of generic projections, but only where the circumstances of the individual do not affect the premium or potential return; make the use of projections voluntary where they do not add value or context to the overall disclosure material; and require real (inflation adjusted) projections to be provided at the point of sale for pensions For packaged products which are classed as MiFID business, we proposed retaining but simplifying the current charge disclosure requirements We received helpful and detailed responses on these proposals. Many of the comments raised technical and drafting points, without material policy implications, and which we have taken into account in producing the final rules Three of our proposals attracted more substantive comment however: real projections, the use of the keyfacts logo and the handling of SIPPs. In summary, we have decided to: not apply the requirement for real projections for pensions until the Department for Work and Pensions (DWP s) review of Statutory Money Purchase Illustration (SMPI) requirements is concluded; require a keyfacts logo and regulatory message to be provided on standalone Key Features Illustrations (KFIs); and Financial Services Authority 33

36 retain the proposed treatment of SIPPs, in keeping with our consultation on this matter following CP06/5. However, we recognise that further work is needed in this area We have provided detailed responses on the policy areas that attracted the most comment. Responses to CP07/9 In CP07/9, we asked: Q16: Do you agree with our proposed changes to the current rules and guidance in respect of non-mifid projections? A. Voluntary, generic and alternative projections 16.7 Most respondents welcomed the additional flexibility to use generic illustrations. However: Some argued that this may not necessarily lead to lower costs for firms as they would likely continue to produce personalised projections; Some argued that generic cost of advice information should be allowed where generic projections or charges are provided, particularly for simple remuneration structures; Some considered that requiring generic projections for pensions to cover different contract periods and contributions could overload clients with information; and Some considered that the greater flexibility could make it more difficult for consumers to compare products and called for the post-implementation review to test this Generally, firms welcomed our commitment in CP07/9 to provide guidance on when a projection might be omitted, or generic projections or personalised projections provided There were particular requests for clarification of the requirements relating to alternative projections and which rules applied to projections for existing business. For instance, it was noted that the proposed rules appeared to no longer include the allowances in COB 6.6.9R, such as for generic projections using a single rate of return. Our response: We welcome support for our general proposals for greater flexibility over when projections must be provided and whether they have to be personalised or not. We consider that it remains appropriate to provide firms with greater flexibility to use generic projections or opt up to personal projections. We also believe that the supplemental requirements applying, where generic projections are provided for personal pensions, are necessary to ensure consumers receive the information they need. We have therefore not made substantive changes to the proposed rules on generic projections. In relation to the disclosure of the cost of advice, feedback on our proposals for commission disclosures can be found in PS07/14. Such disclosures are important but they do not have to be included in a KFD or KFI. Whilst we recognise that personalised illustrations and commission disclosures may be produced using the same illustration systems, the new requirements offer firms greater flexibility. 34 PS07/18: Conduct of Business regime (October 2007)

37 In keeping with our general approach in helping firms to understand our new conduct of business requirements, we are developing a range of tools such as e-learning packages, case studies, and workshops for firms to use as necessary. We have clarified the rules on alternative projections. These higher-level rules effectively replace COB B. Real projections for pensions and consistency with Statutory Money Purchase Illustrations (SMPI) Most respondents agreed with our move to increase the consistency between information provided at the point of sale and information which would be provided through annual statements, including the Statutory Money Purchase Illustration (SMPI) (which shows real figures). However, opinion was mixed on our proposal to require point of sale personal pension projections to include a figure showing benefits in real terms With regards to our cost benefit analysis, some respondents maintained that our estimates were not supported by their own analysis of costs, and further concluded that there was no tangible evidence that using real projections would improve consumer understanding Some respondents asked for particular clarifications in more technical areas. Most of the respondents noted several potential areas where detailed assumptions differed between our basis and that required for SMPI projections. Our response: We continue to believe that the consumer benefits of requiring projections for pensions in real terms outweigh the costs. Having a projection in real terms would make projections at the point of sale more consistent with existing SMPI requirements and so mitigate potential misunderstandings about the difference between the two. It should also result in consumers having a more realistic sense of the likely value of their pension. We fully appreciate the need for real projections to be calculated in a manner which is consistent with SMPIs. However, the DWP is currently considering replacing their detailed disclosure requirements, including prescription relating to the post sale regime for statements or SMPIs, with a more principles-based approach. For this reason we have decided to offer firms, as an interim position whilst the post-sale regime remains under consideration, the ability to explain clearly the impact of inflation through means other than the provision of real figures. Firms may of course provide such information through real figures, as now. We have made minor changes so that firms may, with an appropriate explanation, follow SMPI assumptions rather than our basis for these figures. Once the direction of the DWP s work on a principles-based approach and the post-sale regime is clear, or, at the latest, by the end of 2010, we will consult on bringing into effect mandatory requirements consistent with that regime for including real figures within pension projections. Financial Services Authority 35

38 C. Quality of the KFD, the Key Facts logo and regulatory message A number of firms disagreed with the proposal to require the keyfacts logo and regulatory message to be included on standalone KFIs, though there had been general support for their inclusion on KFDs. They argued that this would entail significant costs which would not be justified by corresponding consumer benefits. A number of firms said that if an illustration issued with a KFD were explicitly linked to the KFD, for instance through sign-posting, then the illustration would naturally be considered part of the KFD A small number of firms misunderstood the requirement for illustrations to be produced to the same quality as sales or marketing material to mean that they would have to be in colour and pre-printed. They believed that this would incur unnecessary costs. Our response: We have decided to maintain the requirement for standalone KFIs for new business to include the keyfacts logo and regulatory message. Representations from firms highlighted the cost of this proposal but did not provide a basis for thinking the costs would be significantly different from the 7.7m estimated by PricewaterhouseCoopers for us in We recognise that firms will incur costs, but the logo and regulatory message are necessary to help consumers recognise the significance of the KFI. This is important given the significance of the information that the KFI contains on charges and benefits. The logo and the regulatory message will help make the KFI easily identifiable and prominent when provided to a client alongside other product information documents. It should be noted that firms are not required to produce a separate KFI, since they can include this information in a KFD if they wish. In particular, firms that make use of generic projections will be able to benefit from including the KFI in the KFD. Recognising that they are often printed at the point of sale, we have re-drafted the rules to make clear that KFIs - unlike KFDs - do not have to be pre-printed. We still expect them to be clear and of an appropriate quality. D. Reduction in yield/effects of charges table Some of firms said that where products have simple charging structures, firms should have the flexibility to include a stakeholder-style paragraph as consumers might find this easier to understand than a table Other respondents felt that the continued inclusion of the effect of charges table and Reduction in Yield (RIY) figures in the product disclosures for non-life products was unnecessary and could confuse consumers. Our response: We have decided to retain our requirement for effect of charges tables and RIY figures to be disclosed for most packaged products. We consider these disclosures important in ensuring consumers receive understandable information on charges which can be readily compared between different products with potentially different charging structures. We also note that the requirement to provide these charges disclosures for UCITS funds will cease to have effect on 30 June 2009 unless remade. 36 PS07/18: Conduct of Business regime (October 2007)

39 E. The treatment of SIPPS A number of respondents raised concerns about the exemption of SIPPs from the requirement to provide projections, effect of charges tables and RIY information within KFIs or KFDs. They believed that there may be very little practical difference between personal pensions and some SIPPs which only invest in regulated funds. The different treatment might, unfairly, make these SIPPs appear cheaper than personal pensions Some organisations also noted that the draft rules appeared to apply the exemption only to projections, and not (as intended in CP07/9) to effect of charges tables and RIY information. Our response: We have re-drafted the rules to make clear that SIPPs (at the wrapper level) will be exempt from having to provide an effect of charges table and RIY information. Firms must still provide appropriate information about charges at the wrapper level in keeping with TCF principles, as with the requirements made in PS06/7. Also, relevant disclosures have to be made for packaged products placed within the wrapper. We believe the broad distinction between SIPPs and personal pension schemes remains relevant. However, we will conduct further work to gauge the effectiveness of the rules in the light of developments in the market. We will provide an update on our views on this matter in Q We have also clarified the rules to make it clear that the general exemption from the projection rules for SIPP wrappers does not apply where an option to make income withdrawals is being exercised. Under these circumstances the projection rules for income withdrawals will apply, as originally consulted on in CP06/5 (the exemption from disclosing effect of charges tables and RIY figures still holds). F. Other issues A number of respondents noted that the Commission is reviewing the UCITS disclosure rules and that this may lead to further changes to the disclosure regime In PS07/6 we set out rules that required a keyfacts logo and regulatory messages to be included in KFDs. Some firms have since questioned whether they are able to include the logo and message on Simplified Prospectuses if they wish A number of respondents requested information on our review of projection rates and other key assumptions. Our response: We have made no material changes to our implementation of the Simplified Prospectus requirements at this time, so as to ensure firms are not unnecessarily faced with incremental changes. Our policy on the use of the keyfacts logo and regulatory message has not changed. However, we have for the sake of clarity inserted a rule into COLL at to enable firms to include the logo and message on Simplified Prospectuses if they wish. There is no requirement on firms to do so. Financial Services Authority 37

40 We committed to completing a review of our projection rates assumptions in the course of We have brought this review forward and aim to publish the results, and details of any attendant consultation, before the end of We have attempted to minimise the cost to firms of these requirements by applying an appropriate transitional period of twelve months to all of the changes outlined here. CBA Issues We have made some changes to our proposals, but in general we consider that these have no material impact on the costs and benefits we outlined in CP07/9. Our decision to defer requiring real projections at the point of sale for pensions should reduce the risk that firms face the costs of making incremental systems changes. Transitional Provisions We have also included a transitional provision which provides an appropriate period of twelve months from 1 November 2007 in respect of all of the changes outlined here. 38 PS07/18: Conduct of Business regime (October 2007)

41 17 Financial Promotion Introduction 17.1 In CP07/9 we discussed proposals for financial promotion rules to deal with the promotion of unregulated collective investment schemes (UCISs) and the exemptions available to authorised professional firms. We also introduced a transitional provision for financial promotions with a long shelf life In general, we have carried forward the substance of the provisions on which we consulted. However, we have taken account of comments made by respondents and altered the COBS 4 text in some areas to add clarity We have also received requests for clarification on how firms can promote UCISs. So, we have specifically addressed the promotion of UCISs in the financial promotion Q&A document on our website. Responses to CP07/9 In CP07/9, we asked: Q17: Do you agree with our proposals in relation to financial promotion? A. Unregulated collective investment schemes 17.4 We consulted on provisions relating to the promotion of UCISs that broadly carry forward the current regime and use the new client categorisations. Most respondents who commented supported the approach we proposed. Three respondents were not convinced by our assessment that the changes arising from the use of MiFID-style client categorisation nomenclature would result in minimal costs or benefits. However, no information on the extent of the cost implications that might arise was provided. Financial Services Authority 39

42 Our response: Promotion of unregulated collective investment schemes The effect of the proposed provisions relating to the promotion of UCISs is that both MiFID scope firms and non-mifid scope firms can promote UCISs if they can rely on an exemption in either the FSMA 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order (CIS Exemption Order) or in COBS We are retaining the substance of the text proposed. So, COBS 4.12 sets out the type of scheme that may be promoted to particular categories of person. This replicates the categories in COB 3 Annex 5 and includes a new Category 8 person that broadly replicates the current expert intermediate client category (COB 4.1.9R). Where a promotion can be made, the COBS 4 rules apply differently to MiFID or equivalent third country business and non-mifid business. This is a result of the need to implement MiFID and is intentional. B. Application of COBS 4 to authorised professional firms 17.5 In CP07/9 we proposed carrying forward the effect of the exemption currently available to authorised professional firms 14. Respondents who commented on this proposal, which also reflects exemptions within MiFID, supported it We also proposed correcting the unintended restrictions regarding the financial promotion of UCISs that apply to authorised professional firms carrying on nonmainstream regulated activities. Our response: Application of COBS 4 to authorised professional firms We are satisfied the provisions proposed for authorised professional firms are appropriate. C. Transitional provision regarding promotions with a long shelf life 17.7 Most respondents welcomed our proposed transitional provision (TP) in relation to non- MiFID financial promotions with a long shelf life. Two respondents considered that, if interpreted strictly, the TP only applied if the promotion had actually complied with COB 3, and that it would not be available where COB 3 had been properly disapplied. Our response: Transitional provision regarding promotions with a long shelf life As a result of respondents comments we have clarified the text of the TP to make it clear it is available to non-mifid financial promotions with a long shelf life that were properly exempted from COB (SI 2001/1060). 14 COB 3.1.5R. 40 PS07/18: Conduct of Business regime (October 2007)

43 D. Application of COBS 4 to ICVCs, depositaries and CIS operators 17.8 Proposals relating to Specialist Regimes were consulted on in distinct chapters of CP07/9; our policy in relation to financial promotions is summarised in this chapter. Two respondents queried whether the proposed application of COBS 4 was appropriate, given the nature of the work investment companies with variable capital (ICVCs), depositaries and collective investment scheme (CIS) operators do. Our response: Application of COBS 4 to ICVCs, depositaries and CIS operators We agreed with those respondents who noted that ICVCs and depositaries are unlikely to issue financial promotions. And, if they do, they will usually be exempt as they are likely to be addressed to other authorised firms. However, to avoid any potential loopholes, we will apply the financial promotion rules in COBS 4 to them. So, if an ICVC were to communicate or approve a financial promotion, then the financial promotion rules apply (see COBS R). Similarly, for a depositary, the financial promotion rules remain applicable (see COBS R). In relation to operators of collective investment schemes (CIS operators) the applicability of COBS 4 depends upon the activities carried out: CIS operators doing scheme management activity (this is not investor-facing activity): most of the COBS 4 rules are switched off, with the exception of the fair, clear and not misleading rule (see COBS R and COBS R); and CIS operators not doing scheme management activity (including investor-facing activities such as promoting units in the CIS): the financial promotion rules apply and the application rules in COBS 4 govern how. CBA issues 17.9 Overall we consider the minor adjustments made in this PS to the proposals consulted on will benefit firms, as the rules relating to financial promotions will be clearer. We consider any related costs to be of minimal significance. Financial Services Authority 41

44 18 Section 150 Introduction 18.1 In this chapter we provide feedback on the proposal in CP 07/9 that private persons should have Section 150 (s.150) rights of action in respect of all of the new Conduct of Business regime (i.e. COBS rules). Responses to CP07/9 In CP07/9 we asked: Q18. Do you agree with this approach to s.150 rights of action? 18.2 An equal number of respondents agreed and disagreed with the proposal The Consumer Panel and a number of major firms expressed support for the proposal. Those who disagreed, mainly trade associations, argued that because of the high-level nature of certain MiFID requirements, the giving of s.150 rights in relation to them would give rise to an increased level of liability for firms. They stated that s.150 rights should be denied for the Articles 19(1) and 19(2) MiFID requirements. Article 19(1) requires firms to act honestly, fairly and professionally in the best interests of their clients (the client s best interests rule). Article 19(2) requires firms to ensure that their communications to clients are fair, clear and not misleading It was argued that firms would be unfairly exposed to additional litigation and costs. The reasons given were the principles based nature of the rules and the absolute requirement to ensure a particular outcome rather than one which, at present, requires reasonable steps to be taken. A particular concern was the exposure of some firms to claims for passing on to their clients misleading information which had been supplied by other firms such as product providers MiFID does not allow a MiFID investment firm or third country investment firm carrying out MiFID business to rely on information supplied by other investment firms in communicating with clients. However, Non-MiFID firms, and all firms carrying out non-mifid business, will be able to rely on information supplied to them by other investment firms for certain purposes (COBS R). 42 PS07/18: Conduct of Business regime (October 2007)

45 18.5 Some respondents expressed the view that the application of s.150 rights to all of the NEWCOB regime was super-equivalent to the implementation of MiFID. It was argued that this could result in damage to the international competitiveness of UK markets relative to other EU member states and to firms deciding not to carry out certain types of business In the light of these responses, we asked a number of trade associations to provide us with information to quantify the impact of s.150 rights for the Articles 19(1) and 19(2) requirements. However, they were not able to produce any further information. Our response: The new conduct of business regime (i.e. the COBS rules) provides important protections for consumers and it was Parliament s intention to provide private persons with rights under s.150 unless we have positive reasons to disapply them. This reflects the fact that private rights of action are an important investor protection mechanism. In considering whether to fully or partially disapply the rights of action we have weighed these positive benefits against the need to avoid imposing a disproportionate requirement on firms. We continue to believe that s.150 provides a useful protection for private persons but there is a danger of overstating its impact. In nearly two decades of financial services regulation, there have been very few claims made under s.150 and its predecessor, section 62 of the Financial Services Act We accept that, because of the MiFID wording, firms face an increase in exposure to claims compared with the status quo. Nevertheless, we would still expect the vast majority of retail clients to continue to pursue their claims through the Financial Ombudsman Service rather than the Courts. Article 19(1) requires firms to act honestly, fairly and professionally in their clients best interests and this is central to the COBS rules. This will widen the scope of s.150 rights as there is no equivalent rule in COB but a breach of the Article 19(1) requirements will involve fault on the part of the firm. Article 19(2) requires firms to ensure that their communications are fair, clear and not misleading. This might encourage more claims as firms could be held liable, even though they had taken reasonable steps. We have therefore decided to apply s.150 rights to all the COB rules, but modify s.150 rights for the Article 19(2) requirement. COBS 4.2.6R will state that if, in relation to a particular communication or financial promotion, a firm takes reasonable steps to ensure it complies with the fair, clear and not misleading rule (COBS 4.2.1R), a contravention of that rule does not give rise to a right of action under s.150. This modification to s.150 rights will broadly maintain the status quo under the equivalent rule in COB. Firms will not have an unreasonable strict liability in the Courts for a breach of the Article 19(2) requirement, but private persons can still pursue claims through the Courts against firms which have failed to take reasonable steps to ensure their communications to clients are fair, clear and not misleading. Financial Services Authority 43

46 Section A: Feedback to CP07/9 Part III: Other related topics 44 PS07/18: Conduct of Business regime (October 2007)

47 19 Telephone Recording Recording of voice conversations & electronic communications Introduction 19.1 In chapter 19 of CP07/9 we set out proposals to require firms to record certain telephone lines and to retain certain electronic communications. In the light of the consultation responses we received in response to these proposals we are not proposing to make such rules at this stage The first part of this chapter summarises the responses we received on telephone recording. In the second part we summarise how taped evidence 16 can contribute to our enforcement function in combating market abuse. The third part sets out how we intend to proceed in relation to our proposals. Responses to CP07/ The respondents to CP07/9 expressed support for our efforts to detect, prevent and deter market abuse. However, most, but not all, respondents thought our telephone recording proposals would do little to assist us materially in these efforts. The main concerns expressed about chapter 19 of CP07/9 were as follows: Cost-benefit analysis. Some suggested the cost-benefit analysis was inadequate. Timing and retention. Respondents were not clear about when the obligation would take effect and queried why it was proposed that tapes and records should be kept for three years. Practicalities. Respondents raised queries about the practicality of aspects of the proposed rules, particularly regarding their impact on mobile phone conversations. Scope. Some aspects of the scope of the rules were unclear, whilst others raised questions about the coverage of certain types of firms. Competitiveness. Some respondents argued that the proposals paid insufficient regard to the competitiveness of the UK as a location for financial services business. 16 The use of the terms 'taped' and 'taping' are shorthand for recording and are not meant to imply that our proposals required recording to use tapes. Financial Services Authority 45

48 19.4 Cost and benefits. Our central estimate of the one-off cost of our proposals was 3-4m and of the additional annual cost was m. Respondents thought the figures were too low for a variety of reasons. Coverage. Our central assumption was that fully 90% of relevant phone lines were currently taped, which respondents said was too high. For example, a trade association reported that a survey of its members suggested that 16% of firms currently do not tape at all and 58% tape some calls, but not all calls likely to be caught by the CP07/9 proposals. Respondents also pointed out that our cost estimate did not include the costs of installing recording facilities at disaster recovery sites. Costs per line. Respondents said our estimates of the costs per line of installing a taping system ( 450) and the annual costs per line of maintenance and storage ( 150) were too low. For example, a trade association said that information from its members suggested that we needed to quadruple our estimates of initial costs and double our estimates of storage costs. Search. Our cost estimates did not include any costs to firms of searching tapes to comply with requests for information. Respondents said that significant staff resources could be involved in searching tapes where, for example, requests were made to have all conversations with a specific client. Collateral costs. Our cost estimates did not include any costs to firms of searching tapes and having lawyers review the resulting material to comply with requests for discovery in civil litigation or cases being dealt with by the Financial Ombudsman Service The CP did include some analysis of the sensitivity of our figures to our central assumption that 90% of relevant phone lines are currently taped. This showed that both the one-off costs and annual costs would double if only 80% of relevant lines were currently taped. As the CP stated, the cost figures we used in the cost-benefit analysis were sourced from suppliers of recording technology. We did not include figures for the costs of searching tapes in part because we do not require firms to search the tapes themselves On the benefits, respondents said that the CP did not make an adequate case as to how telephone recording would have a material effect on detecting, preventing and deterring market abuse. There were two parts to this. First, a complaint that the CP did not provide evidence as to the role taped evidence plays in enforcement cases and the extent to which current enforcement work is being hampered by the unavailability of tapes. Second, it was suggested that those determined on abusing markets would always be able to avoid leaving an evidence trail on taped lines or electronic records, and that taped evidence could have significant limitations as evidence in enforcement cases (citing the Financial Services and Markets Tribunal decision in the case of Geoffrey Alan Hoodless and George Michael Blackwell). As indicated above, the second part of this chapter sets out more information on how taped evidence can contribute to our enforcement function. 46 PS07/18: Conduct of Business regime (October 2007)

49 19.7 Timing and retention. Many respondents said it was unclear as to when we were proposing that the draft rules would take effect. They said that if we intended it to be 1 November 2007 this would give firms inadequate time to prepare, particularly given other competing regulatory demands such as the implementation of MiFID. One response said that normal project management disciplines would dictate at least a one-year implementation period After publishing the CP we clarified to relevant trade associations that it had not been our intention to require firms to comply with the proposed rules from 1 November. We accept we did not make this sufficiently clear in the CP Many respondents queried why it was necessary to suggest that firms keep tapes and electronic records for a period of three years. It was argued that suspicions of market abuse were likely to arise relatively quickly and that a retention period of three years cut across existing market practice of six months One of our consultation questions in the CP expressly sought views on the length of the retention period. In proposing a retention period of three years we were striving to strike a balance between the benefits to our enforcement function of keeping tapes and the costs to firms. Existing market practice reflects the fact that tapes are mainly retained for dispute resolution. There are different timelines involved in bringing enforcement cases in market abuse. Because of the way in which enforcement cases evolve we have in some cases requested tapes over two years after the relevant incident that is the focus of our attention Practicalities. Respondents raised several issues connected to the practicalities of the proposals. A key concern was how mobile phone conversations would be affected. It was suggested that the proposals were tantamount to a ban on the use of mobile phones as calls on such phones are not currently taped and there was scepticism about the practicality of doing so In respect of electronic communications it was suggested that some forms of these cannot at present be easily recorded in a way which complies with the record-keeping standards in our proposals. In particular, it may be difficult to prevent some communications from being deleted on an intra-day basis Paragraphs and of the CP indicated that our cost estimates were based on taping fixed telephone lines and did not take account of changes in business process that might result from the proposed rules. We said we would welcome evidence on this point and are grateful for the information that has been supplied to us about the use of mobile phones to make or receive calls that would be covered by the proposals Scope. The main concern expressed about the scope of the proposals, including from one respondent supporting them, was that they lacked clarity. Respondents suggested that it was very unclear as to what the phrase a conversation or communication which is carried on with a view to the conclusion [of either an agreement by the firm to deal as principal or deal as agent] means. Particular concerns related to the extent to which this might cover corporate finance discussions and back-office communications. Financial Services Authority 47

50 19.15 The carried on with a view to language was not intended to broaden significantly the scope of relevant conversations subject to the proposed rules. It was designed to try to prevent technical evasion of the substantive obligation. The rules contain an exemption for corporate finance business which is a widely defined glossary term Queries were also raised about the inclusion of buy-side firms and private client stockbrokers within the scope of the proposals. It was argued that the inclusion of buy side firms was unnecessary because all the conversations they had which would fall within the scope of the proposals would be caught by recording at sell-side firms. Therefore a recording obligation for buy-side firms would be duplicative. In respect of private client stockbrokers it was argued that imposing an obligation in this sector would be disproportionate because few private clients are individuals who are in a position to have access to inside information Competitiveness. Under the Financial Services and Markets Act we must have regard to the international character of financial services and markets and the desirability of maintaining the competitive position of the UK in discharging its functions. Some respondents suggested that in bringing forward the telephone recording proposals, insufficient regard had been given to competitiveness. This was because certain other financial centres do not have blanket taping requirements and that a taping obligation may have a complicated interaction with privacy and other laws in the jurisdictions of the holding companies or head offices of overseas firms with branches in the UK In developing the proposals in the CP we did look at practices in other jurisdictions. Many European jurisdictions, including France, Germany, Italy and Spain already have some form of taping obligation. The retention requirements are generally shorter than three years and they have varying scope. There is no general taping obligation in the US, although an obligation can be imposed on securities firms in certain circumstances. However, firms in the US are subject to more detailed and onerous record-keeping requirements in relation to transactions than are those in the UK. How taped evidence can contribute to our enforcement function In the light of the responses to the telephone recording proposals in CP07/9 it is useful for us to comment in more detail than we did in the CP on how we believe taped evidence can contribute to the effectiveness of our enforcement function Not every market abuse case referred to the Enforcement Division will benefit from the securing of taped material. However, where taped material exists which is relevant to the matter under investigation, the evidence has the potential to be of significant value to the investigation and to any subsequent proceedings before the Court or Tribunal The value of tape-recorded material lies in its evidential value. For example, taped evidence may demonstrate conclusively that a person did or did not engage in market abuse (or other misconduct). Taped evidence may either help to prove our case (e.g. by illustrating that the defendant disclosed inside information), or to rebut the defence case (e.g. by illustrating that, contrary to the defence case, the defendant knew that the information was inside information). Equally the evidence may serve to exonerate rather than incriminate the subject of investigation as (e.g. by 48 PS07/18: Conduct of Business regime (October 2007)

51 confirming that the defendant had other reasons for trading and did not intend to trade on the back of inside information) The case of GLG and Philippe Jabre is a good illustration of the potential value of taped evidence. The case rested critically on what was said in a particular telephone call between a salesman and a hedge fund manager over which there was a direct conflict of evidence between the two parties to the call. The absence of a tape recording meant that the issue was very difficult to resolve. Ultimately, after two years of investigation and litigation, we issued a Final Decision Notice and a fine was levied, but the case might have been resolved more quickly had there been taped evidence. The value of taped evidence over other forms of evidence The main types of evidence that may be secured in an enforcement investigation are (a) documentary evidence (this would include hard copy documents and also electronic communications such as s, instant messaging etc.); (b) oral testimony obtained through interview; and (c) information obtained from taped lines In most cases, our Enforcement division will be in a position to secure documentary evidence and/or oral testimony. Electronic documentary evidence in the form of s is usually retained as a matter of course but this is less true of other forms of electronic communication e.g. instant messaging and Bloomberg (this gap would be addressed by the proposed rules which extend to all forms of electronic communications in addition to telephone communications) Currently, taped evidence is only available where firms implement a telephone recording policy i.e. for their own purposes. Taped evidence constitutes an additional source of material for piecing together the facts of a matter and for building an enforcement case. Crucially, the evidence which might be obtained from tape recordings may not be available by other means i.e. through documentary evidence or oral testimony. The advantage of telephone evidence over documentary evidence/oral testimony is that the former more often assists to demonstrate knowledge and intent matters which are critical in terms of enforcement action but which are not always easily established In terms of evidential weight in disciplinary cases, documentary evidence and taped evidence is likely to hold most weight because it constitutes contemporaneous evidence i.e. information recorded at the time of the alleged misconduct. Information provided at interview at a later date may be less reliable for various reasons. It is provided with the benefit of hindsight and memories may have started to fade with the passage of time, or the interviewee may offer a less than truthful account of events because of the prospect of criminal/disciplinary action. Moreover, individuals may decline to attend an interview/to answer questions where they face the prospect of criminal prosecution or action for market abuse. Case study - Splits The Splits investigation is the largest investigation undertaken by our Enforcement division. Twenty one firms and over thirty individuals working across the split capital investment trust sector were placed under investigation. The investigation commenced Financial Services Authority 49

52 in October In December 2004, a global settlement was reached with all but two firms. The settlement involved the payment of 200m of compensation to investors At the start of the investigation, the firms were asked to provide documentary and taped evidence. It became clear at an early stage of the investigation that the taped evidence would constitute critical evidence against the firms and their employees Not all the firms were in a position to provide tape recordings. In the event, eleven firms were able to provide some recordings, albeit not necessarily for the complete period requested. Three of the firms had, by the time of the investigation, destroyed any tape recordings which had been made. Seven firms never made any recordings The evidence secured on the tape recordings was pivotal to our case of sector-wide misconduct. The conversations which were recorded between fund managers and brokers evidenced more than factual matters (which could, possibly, be demonstrated through other forms of evidence); the conversations evidenced what knowledge of events or matters lay behind a particular individual s actions and the purpose or intention behind those actions Whilst not all the firms were in a position to provide us with full recordings for the time period requested, the fact that some firms were able to do so enabled us to piece together a picture of events. We were able to rely on, say, transcripts obtained from Firm A, which recorded a conversation between an employee of Firm A and of Firm B. In this way, evidence was secured against Firm B, even though Firm B was not in a position to provide its own recordings. However, we were only able to do this because of the size of the investigation. Had the investigation not been so wide i.e. had fewer firms been targeted, we would not have been in a position to secure such extensive evidence We regarded the taped evidence as compelling evidence which helped to define its case and the fact that early settlement was reached was due, in no small part, to the existence of the taped recordings which firms had chosen to make and keep for their own commercial purposes. Analysis of a random sample of enforcement cases In developing the proposals that were published in CP07/9 we conducted an analysis of the role of taped evidence in decisions as to whether cases were referred to our Enforcement division and the role of taped evidence in its work We were restricted to consider only a non-random sample of cases which our Market Monitoring division had reviewed to decide whether or not they should be passed to our Enforcement division. This analysis suggests that there was a greater likelihood of a case being passed on to Enforcement if tapes were available However, at the same time we analysed a random sample of 46 cases commenced in our Enforcement division. In 23 of those cases there was no taped evidence available either because tapes were not made in the first place or tapes which had been made were no longer available. 50 PS07/18: Conduct of Business regime (October 2007)

53 19.36 In the 23 cases where taped evidence was available it had evidential value in all but one of the cases and so helped to secure an outcome to enforcement work in 19 cases. Those outcomes included us taking further action leading to the imposition of a penalty or a sanction and enabling cases to be closed down promptly. Taped evidence and the tribunal Consultation responses suggested that in considering its proposals we need to bear in mind the limitations of recordings as evidence. This point was backed up by a quotation from the Financial Services and Markets Tribunal s judgment in Hoodless and Blackwell from paragraph 23. The entire paragraph (with the selected quotes highlighted) is reproduced below: 23. In our assessment of the evidence we have reminded ourselves of four factors of particular importance in relation to the applicants in the present case. (1) Much of the evidence consisted of transcripts of telephone conversations. It is easy to be misled by such transcripts. Language is often used very loosely on the telephone, with ungrammatical constructions, false starts left uncorrected, figurative usages, and incorrect choices of words. Not everything said is intended to be taken literally or to be taken seriously. As Mr Mayhew agreed, much depends on context, on tone, and on the nature of the relationship between the speakers. We have listened to the more important conversations, where the tapes were still available, and have sought to distinguish between brokers banter and things meant more seriously. (2) It was the duty of the applicants to be candid with the regulators. Some of the questioning by FSA investigators was aggressive. It may be unrealistic to expect persons under rigorous questioning to be completely open in their answers and readily to volunteer information that, if misconstrued, may be used as ammunition to be fired back at them. The duty of frankness remains, but the significance of any lack of frankness must depend on the circumstances. (3) Solicitors (not those currently acting for the applicants) were appointed to defend HBP s position and put forward detailed refutation of FSA s criticisms. The documents put forward in late 2001 and during 2002 were the product of a collective effort by a number of people. The solicitors had a material influence on the exact wording. Where those documents have subsequently been shown to be incorrect or incomplete, we have to be cautious about attributing responsibility to the applicants themselves. Because of this factor Mr Mayhew did not place strong reliance on them. (4) By the time the applicants came to give evidence to us they had pored over the tape transcripts, documents and arguments many times, both on their own and with lawyers. For anyone in that position it would be superhuman to be able to distinguish precisely, in regard to events that occurred three years ago, between recollection and reconstruction. There was a natural keenness on their part to believe any plausible reconstruction that tended to exonerate them. Where we reject their evidence as untrue, such rejection does not automatically imply a lack of honesty or integrity on their part. To make findings of dishonesty, more is required. Financial Services Authority 51

54 19.38 The above remarks of the Tribunal, when read as a whole, clearly refer to its assessment of the weight of the evidence in that case, and not in cases generally. To that extent there is no real precedent value in terms of how the Tribunal does or ought to go about assessing taped evidence The Tribunal Rules (SI 2001 no. 2476), at Rule 19, establish the basis on which the Tribunal considers evidence (emphasis added): 2.1 Subject to the Act and these Rules, the Tribunal shall conduct all hearings under these Rules in such manner as it considers most suitable to the clarification of the issues before it and generally to the just, expeditious and economical determination of the proceedings. 2.2 Evidence may be admitted by the Tribunal whether or not it would be admissible in a court of law and whether or not it was available to the Authority when taking the referred action This clearly indicates that the Tribunal should adopt an informal attitude to the admission of evidence, guided by the principle of achieving the just, expeditious and economical determination of the proceedings For the purposes of the Regulatory Decision Committee (RDC) of the FSA, guidance as to procedure appears at DEPP 3.2.7G and G (emphasis added): 3.2.7G: The RDC will follow the procedure described in this section, but subject to that it will conduct itself in the manner the RDC Chairman or a Deputy Chairman considers suitable in order to enable the RDC to determine fairly and expeditiously the matter which it is considering G: The RDC has no power under the Act to require persons to attend before it or provide information. It is not a tribunal and will make a decision based on all the relevant information available to it, which may include views of FSA staff about the relative quality of witness and other evidence This shows that the RDC will consider all information where relevant, subject to a principle of fair and expeditious determination of the matter under consideration There are therefore no rules of the RDC or Tribunal that are likely as a general proposition to exclude or put limits on the use of taped evidence. The use of, and weight of such evidence would be decided on a case by case basis There are other cases that have come before the Tribunal in which taped evidence has been used. In the Davidson and Tatham case the Tribunal made extensive use of the taped evidence to assist its assessment of the witnesses and evidence When assessing its view of the witness Davidson, at paragraph 219 the Tribunal stated: It is also relevant that at that time he did not know that some telephone calls were taped but the taped telephone calls do not conflict with his case When discussing the context of certain evidence, taped conversation were used at para 229 (emphasis added): 52 PS07/18: Conduct of Business regime (October 2007)

55 The Authority argued that the first call, made by Mr Davidson to Mr Tatham on 28 January 2002 was evidence of Mr Davidson starting to instigate a large spread bet so that Dresdner Securities would acquire the shares which had not been taken up in the placement. The Authority contended that the reference to the need for the 20 shares to be covered was a reference to the need for a hedge. At one stage Mr Tatham also thought that. However, having heard the taped conversation we do not agree. In our view that reference was to the amount of the margin required which was then answered by Mr Tatham. The whole context of this conversation concerns the provision of margin. The conversation is consistent with Mr Davidson s case that he wanted to place a bet in the aftermarket. In particular, we note that Mr Davidson asks about buying stock in a company on the day it floats. Mr Davidson also says And that so it s going to be in the placing document then it would be well, it wouldn t be in the placing document. Those words are ambiguous and we agree with Mr Davidson that it appears that he did not know what he was talking about At para 263: We also record that the early telephone calls confirm the view that the relationship between Mr Tatham and Mr Davidson was contractual only. The only conversations between the two related to the arrangements for margin Finally, at para 274, when considering the credibility of Mr Tatham, the Tribunal noted among other things the fact that he knew his conversations with Mr Howe were all on a taped line. Next Steps on Telephone Recording We continue to believe that, for the reasons set out in the previous part, recording of telephone conversations and records of electronic communications can play an important role in helping to tackle market abuse. However, in the light of the responses to the consultation, we believe that it is appropriate to take more time to determine the correct approach in this area We do not intend to make rules on telephone recording before If we do decide to make rules, firms will be given an appropriate transition period to prepare to meet the obligation We are currently considering the points made in the consultation responses and intend to: Look again at our Cost-Benefit Analysis (CBA) in an effort to refine our estimates of the costs; Engage with firms and trade associations to consider the points made about the scope and practicalities of the proposals; Look at any proposals for an industry initiative to address the market abuse concerns that we need to tackle In the light of the discussions with industry and the further analysis of the CBA we will be ready to rework the proposals, and to establish a new timeline. Financial Services Authority 53

56 20 Client Assets Sourcebook Introduction 20.1 Chapter 20 of CP07/9 sets out our proposals as outlined in CP06/14 and PS07/2, specifically in respect of the requirement relating to the Commodity Futures Trading Commission (CFTC) and the application of CASS 6 and 7 to third country investment firms carrying on equivalent business to MiFID business. Responses to CP07/ We received no responses to our proposals in CP07/9. Our response: In view of the fact that we have not received any comments, we have implemented our proposals as set out in CP07/9. 54 PS07/18: Conduct of Business regime (October 2007)

57 Section B: Feedback to CP07/16 Part I: Policy Matters Financial Services Authority 55

58 21 Disapplication of SYSC 2 and changes to SYSC 4.3 Introduction 21.1 In chapter 3 of CP07/16 we proposed not to apply SYSC 2 (concerning a firm s apportionment and allocation of responsibilities in relation to its senior management) to common platform firms with effect from 1 November Instead we would amend SYSC 4.3 from that date, to become part of the common platform This followed consultations with the Commission, which had led us to conclude that, given the similarities between SYSC 2 and the MiFID requirements, we could rely on copy out of the MiFID provisions. We have therefore withdrawn our notification under Article 4 of the MiFID implementing Directive for the retention of SYSC 2. Responses to CP07/16 In CP07/16, we asked: Q4: Do you agree with the proposals relating to SYSC 2 and SYSC 4.3? We received four responses to this question, all of which supported our proposal. Our response: We have implemented our proposals as set out in CP07/ PS07/18: Conduct of Business regime (October 2007)

59 22 Disapplication of CF8 (apportionment and oversight) Introduction 22.1 In chapter 4 of CP07/16 we explained our proposal to remove CF8 (apportionment and oversight) for individuals who have responsibility for MiFID scope business. This amendment flows from the changes to SYSC described in chapter 21 of this paper The responsibility for apportionment and oversight will become a collective responsibility through the governing functions under the requirements in SYSC 4. We will still be able to approve those individuals who have the responsibility for apportionment and oversight within their firms through the governing functions in the approved person s regime. Responses to CP07/16 In CP07/16, we asked: Q5: Do you agree with our proposal to delete the requirement for firms doing MiFID business to have CF8 approved individuals after 1 November 2007? 22.3 We received five responses to our proposal to disapply CF8 for firms doing MiFID business. Four responses were in agreement, but one respondent expressed concern that the move to collective responsibility would result in difficulties in taking effective enforcement action against individuals. Our response: As a consequence of MiFID and the allocation of apportionment and oversight as a collective responsibility we cannot continue to require these firms to allocate CF8 to an individual. SYSC 4 provides for individual responsibility and accountability within the firm through the firm s senior personnel who effectively direct the business of the firm and who should also be approved for the governing functions. We will still be able to look to these individuals in this capacity to be responsible for apportionment and oversight. We will remove all CF8s for individuals who have responsibility for MiFID business from our Register shortly after 1 November Financial Services Authority 57

60 Firms who are eligible for the MiFID Article 3 exemption but who opt-in to do MiFID scope business should submit a Form C (Withdrawing an Approved Person) to us as soon as they establish that their individual(s) will no longer require approval for CF8 after 1 November We will update our Register after the application to opt-in to MiFID has been processed. 58 PS07/18: Conduct of Business regime (October 2007)

61 23 Transaction Reporting Introduction 23.1 This chapter summarises the responses to our proposals on Transaction Reporting and details our final policy decisions in the following areas: reportable transactions; systematic internalisers; and branch reporting. In CP07/16, we asked: Q6: Do you agree with the amendments we are making to reportable transactions, systematic internalisers and branch reporting? 23.2 The four main concerns raised by respondents were: identifying a reportable instrument; that systems changes may be hard to implement; that super-equivalence may fragment reporting across Member States and affect firms ability to implement MiFID on time; and that any new transaction reporting obligations may be particularly problematic for firms providing a service of portfolio management. Responses to CP07/ We have held meetings and discussions with trade associations, firms, approved reporting mechanism applicants and other interested parties to further explore concerns raised by our proposals in the above areas. We have considered fully all concerns raised by respondents and outline the outcome of our proposals under the appropriate headings below In light of industry opposition to CESR s recommendation that the ISIN be the unique code used to identify all instruments admitted to trading on a regulated market, CESR has agreed that derivatives admitted to trading on regulated markets where the ISIN is Financial Services Authority 59

62 not the industry method of identification, should be identified using an Alternative Instrument Identifier (AII). The AII will be a concatenation of data elements describing the characteristics of the derivative. The AII approach is likely to be highly consistent with the pre-mifid transaction reporting rules approach for reporting on exchange derivatives where no ISIN is available. Firms will need to provide the code for the derivative assigned by the market on which it is admitted to trading and various other reference data elements (such as instrument type, derivative type, strike price, maturity date etc.). The industry has welcomed this alternate approach and our rules have been amended accordingly. However, decisions on the AII have not yet been finalised by CESR and there is insufficient time to implement by the MiFID implementation deadline. Therefore, we will not require the reporting of transactions in derivatives admitted to trading on markets where the ISIN is not the industry method of identification. Once CESR decisions are finalised we will discuss with the industry the timing of the UK implementation of the AII approach but do not envisage the implementation date will be until well into We have published a special edition of MarketWatch (newsletter 22) focusing solely on the AII approach and other changes to our transaction reporting regime accompanying the implementation of MiFID. MarketWatch 22 contains a draft list of those markets where we believe the ISIN is not the industry method of identification. MarketWatch newsletters and other documents relevant to transaction reporting after MiFID can be downloaded from the transaction reporting section of our website using the following link: We also confirmed in MarketWatch 22 that CESR is pursuing a proposal under which reports for transactions in commodity, foreign exchange and interest rate derivatives admitted to trading on a regulated market would be made by each respective market to the regulatory authority responsible for that market. Under this proposal firms would not be required to report transactions in these instruments. In line with other CESR members who do not already require the reporting of transactions in such instruments we will not require firms on the implementation of MiFID to report transactions in these instruments. We do not envisage that permanent arrangements for the reporting of transactions in these instruments will be finalised until well into Therefore, during this period, we will not take any action for failure to report transactions in these instruments. Reportable transactions 23.6 To avoid possible loopholes or blind spots in our monitoring we proposed extending new SUP to ensure the continued reporting of transactions in instruments admitted to trading on exchanges outside of the EEA the value of which is derived from, or otherwise dependent upon, an equity or debt related instrument admitted to trading on a UK regulated market or prescribed market. Respondents were supportive of our objectives but noted that implementing any necessary systems changes at this stage may be problematic We stated in our cost benefit analysis that the cost of implementing this proposal would be a maximum of 3p per additional transaction report. Some respondents believed that this Cost-Benefit Analysis did not take into account the cost of introducing processes to 60 PS07/18: Conduct of Business regime (October 2007)

63 identify whether an instrument would be reportable or the cost associated with overreporting in the absence of certainty as to whether an instrument is reportable. In that context we note that MiFID requires the introduction of processes to identify whether a transaction undertaken outside of the EEA is reportable and so our proposal would require only a marginal extension to these processes Respondents suggested that implementing this proposal may be problematic in the absence of a list of reportable instruments. As noted in MarketWatch (newsletter 22) we recognise that there is a real possibility for inconsistencies between the list of financial instruments various data vendors supply and the universe of reportable instruments set out in new SUP17. Our response: During our discussions with firms and trade bodies we were asked to consider restricting our proposed extension to new SUP to derivatives where the underlying is a single equity or single debt instrument admitted to trading on a UK regulated market or prescribed market. We believe that restricting our proposal in this way would satisfy our monitoring objectives and be more manageable for firms. We recognise, however, that at this stage it may not be possible for firms to implement the systems changes required to implement amendments to our rules. We also recognise that it may be difficult for firms to ascertain whether non-eea derivative markets would use ISINs or not. We therefore propose to extend new SUP to ensure the continued reporting of transactions in instruments admitted to trading on exchanges outside of the EEA the value of which is derived from, or otherwise dependent upon, a single equity or single debt instrument admitted to trading on a UK regulated market or prescribed market. However, to allow firms adequate time to analyse and implement any necessary systems changes we shall defer the introduction of this proposal until a later date in the latter half of Although we intend to implement the proposal there will be a further consultation in Systematic internalisers 23.9 In line with CESR's recommendation that a systematic internaliser be identified in the venue identification field we proposed to amend the rule in relation to this field. We stated that where firms know that they are transacting with a systematic internaliser they will be required to include the appropriate Swift Bank Identifier Code (BIC) in this field. Respondents were supportive of this solution noting that it may not always be possible for firms to know whether their counterparty is acting as a systematic internaliser, particularly when that counterparty is in another MiFID state. We would like to confirm that reporting firms acting as a systematic internaliser will be required to include their BIC in this field. As noted in MarketWatch (newsletter 22) however, we are aware that some approved reporting mechanisms (ARMs) may not be in a position to accommodate a BIC in this field. Firms seeking to populate the venue identification field with a BIC may therefore need to contact their respective ARM(s) for confirmation. Financial Services Authority 61

64 Our response: We confirm that our rule in relation to the venue identification field has been amended in line with our proposals and in line with CESR's recommendation. We recognise however that some ARMs may not yet be in a position to accommodate a Swift Bank Identifier Code (BIC) in this field and would recommend that firms check with their respective ARM(s) before using this field in this way. Branch reporting CESR s levels on MiFID Guidance Transaction Reporting in May 2007 addressed the question to which competent authority branches should make their transaction report. We amended our rule accordingly. Respondents welcomed the CESR agreement that all transactions executed by branches can be reported to the host member state competent authority, if the investment firm elects to do so During our discussions with firms and trade bodies we were asked to provide clarification of the definition of the branch. In MarketWatch (newsletter 22) we confirmed that the location of the entity that the traders executing the transaction work for determines which entity is responsible for reporting the transaction. Respondents welcomed this definition. Our response: We confirm that our rules in relation to branches have been amended in line with our proposals and with CESR's guidance on Transaction Reporting. 62 PS07/18: Conduct of Business regime (October 2007)

65 24 Post- trade transparency and Trade Data Monitors (TDMs) Adjustments to the Trade Data Monitor framework Introduction 24.1 Chapter 6 of CP07/16 proposed to provide more flexibility in the ways in which an investment firm might confirm that a trade publication arrangement offers a safe harbour. We also said we would clarify that the onus rests on investment firms to satisfy themselves that the publication arrangements they use enable them to fulfil their publication obligations under MiFID. Most respondents welcomed the greater flexibility and clarification of roles We have issued Guidelines for Investment Firms using TDMs on our website These final guidelines take into consideration the feedback received and do not differ significantly from the consultative draft. TDMs that have asked to be named on the FSA website can be also be viewed on the FSA website page above. Firms should be aware that use of a TDM is voluntary, and that they may publish their post-trade data through other non-tdm arrangements, provided these allow investment firms to comply with MiFID publication requirements. As noted earlier, we intend to review the TDM framework after a year to assess how it is fulfilling its role in helping firms meet their MiFID publication obligations. Feedback and response to individual questions In CP07/16, we asked: Q7: Do you still consider it desirable for the FSA to provide a safe harbour for investment firms using trade publication arrangements which enable them to meet the Guidelines? Do you have any comments on the revised Handbook guidance? Financial Services Authority 63

66 24.3 Most respondents thought it desirable for us to provide a safe harbour for investment firms using a publication arrangement which allows them to meet their MiFID publication obligations. We did not receive specific comments on the revised Handbook guidance, but the joint trade associations sought to confirm the extent to which a firm can rely upon a confirmation by us or an external auditor to meet its publication obligations under the MAR sourcebook and under MiFID. Our response: The FSA Board has made the changes to the guidance (MAR G) we consulted on in July The FSA Handbook Notice was published on 28 September and the new guidance will come into force on 1 November We consider that a firm using a TDM will satisfy its obligations under MAR EU, which replicates article 32 of the MiFID Level 2 Regulation During the consultation process, we were asked to consider the interaction between the TDM framework (whereby an investment firm using a TDM can benefit from a safe harbour relating to MiFID publication obligation) and European legislation. Our response: We are satisfied that our approach with respect to the TDM framework meets European legislation. Q8: Do you have any comments on the revised Guidelines? Do you welcome the additional flexibility, outlined in paragraph 6.13, for confirming that a trade publication arrangement enables investment firms to meet the Guidelines? 24.5 All the respondents stated that they welcomed the greater flexibility in the ways in which an investment firm might confirm that a trade publication arrangement offers a safe harbour. Our response: We have adopted the more flexible approach which allows firms to seek confirmation from an external auditor that the TDM enables them to meet the Guidelines for Investment Firms using TDMs MiFID requires that any arrangement used by investment firms to make information public must satisfy certain conditions with respect to reliability, consolidatability and availability of information on a non-discriminatory commercial basis at a reasonable cost. We were asked to clarify that the Guidelines allow investment firms to meet all their MiFID publication obligations. Our response: We have revised the Guidelines to clarify that they will allow investment firms to meet all their MiFID trade publication obligations Some respondents took the opportunity to provide feedback on some of the details of the non-handbook Guidelines which were consulted on in July 2006 (CP06/14) and covered in our January 2007 feedback statement (PS07/2), but were not changed in July In most cases, respondents suggested some drafting to clarify the text (for example, with respect to security and recovery provisions). Two respondents also suggested some changes to provide more flexibility for the identification of potentially erroneous information /2006/EC. 64 PS07/18: Conduct of Business regime (October 2007)

67 Our response: We have made a small number of drafting amendments to the non- Handbook Guidelines to bring clearer clarity for investment firms wishing to use a TDM to meet its MiFID trade publication obligations. We did not amend the drafting of the provision relating to the identification of potentially erroneous information because we felt that the existing text is better aligned with the relevant MiFID obligation One respondent was of the view that the reporting requirements described in the non-handbook Guidelines may not meet the needs of investment firms, and would be difficult and costly for TDMs to provide. Our response: We have removed the reporting requirements from the Guidelines but we believe that it would be helpful if investment firms requested that a TDM makes available to its clients, on a quarterly basis, reports with the following information (UK) basis: i) total trades queried by the TDM during the quarter (also expressed on a per-firm basis, both in number and as a percentage); ii) amendments made to published trades during the quarter (also expressed on a perfirm basis, both in number and as a percentage); iii) average time lag between the execution time and the time that trades are received by the TDM; and iii) average time lag between trades received by the TDM and when it is published (not taking into account block trades which benefit from reporting delays). In our view, a TDM could usefully provide this information on its website One respondent asked us to clarify what would be the consequences if a TDM no longer allowed investment firms to meet the non-handbook Guidelines and how a TDM could lose its confirmation. Our response: In the event that it can no longer be confirmed that a TDM will enable firms to comply with their MiFID publication obligations, the safe harbour will no longer apply and the TDM will be removed from the list on our website. Q9: Do you consider that an option to meet the Guidelines via contract, outlined in paragraph 6.14, would be useful? Do you have any other comments on this option, for example, in relation to any need for an undertaking to allow further verification in relation to its trade publication arrangements? Four respondents commented on this question. However, there was no consensus of opinion. Two respondents were of the view that contractual agreements lacked the element of external verification, and questioned whether such an approach would provide sufficient assurance. One was of the view that a contract should be sufficient, and the joint associations welcomed the concept of greater flexibility but were silent on the question of further verification. Our response: We will not develop this third contractual option at this stage. Financial Services Authority 65

68 24.11 We were asked for reconfirmation that we support CESR Guideline 2 as proposed in CESR s Level 3 guidelines on publication and consolidation of MiFID market transparency data (February 2007), which states that trades can only be primarily published once. Our response: We strongly support the clarification made on this point in CESR Guideline 2: CESR considers that for the purposes of facilitating the consolidation of transparency data with similar data from other sources, investment firms trading away from an RM or MTF, RMs and MTFs that publish each trade via only one primary publication channel are in compliance with MiFID provisions. We also support CESR Recommendation 1 in the same paper, which enhances the effectiveness of Guideline PS07/18: Conduct of Business regime (October 2007)

69 25 Other matters A. Changes to PERG 25.1 In CP07/16, we proposed to add guidance to make clear our view that the exclusion in Article 71 of the Regulated Activities Order (activities carried on in connection with employee share schemes) is limited to the activities of group companies or trustees and not third party administrators acting otherwise than in their capacity as trustees. Responses to CP07/ We received one response to our proposed guidance. The respondent welcomed the clarification that we have now given and noted that the guidance will ensure a consistent approach providing certainty to providers and appropriate regulatory protection to companies providing employee share schemes and the underlying participants. Our response: We have made the proposed guidance. B. General section on territorial guidance on MiFID to go into PERG 25.3 In view of the general nature of the EEA override provisions (for example, the EEA territorial scope rule in COBS 1, Annex 1, Part 2), we proposed to add some guidance on the territorial scope of MiFID to be located in PERG. Responses to CP07/ The only responses on this issue supported our approach to clarifying the position. Our response: We have added further guidance in PERG on the ability of a Host State to impose conduct of business requirements (see Q67). C. SUP 13 passporting and update of SYSC Appendix The Annex to Chapter 13A of the Supervision manual contains a table that summarises the way that each module of the Handbook applies in relation to incoming firms. In CP 07/16 we indicated that we aimed to bring the contents of the table into line with the substantive changes we have made to the Handbook. Financial Services Authority 67

70 We also indicated that we would update SYSC Appendix and we would consider whether SYSC Appendix 1 remained the best place for this material. Responses to CP07/ There were no responses on this issue. Our response: The Handbook text in this PS updates SUP 13A Annex 1 to reflect the Handbook as it will appear on 1 November We have reviewed the material currently in SYSC Appendix 1 and moved it to sit next to the guidance as a new SUP 13A Annex 2. We have revised the material to bring it up to date with changes we have made to SYSC and also to reflect the extent to which we are able to impose rules on incoming MiFID firms in the interest of the general good. Consequently SYSC Appendix 1 has been deleted. D. Minor improvements to the financial promotion rules 25.7 In CP07/16 we consulted on improvements to the layout and clarity of the financial promotion rules so that: the limited application of COBS 4 to financial promotions communicated to eligible counterparties is clearer; and it is clearer that the rules in COBS 4.5 to 4.11 are only applicable to financial promotions addressed to, or likely to be received by, retail clients. We also consulted on a revision to the defined term excluded communication, to have this term include communications exempted by the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order Responses to CP07/ We received no negative responses to the proposals. Our response: We are satisfied that the amendments proposed improve the clarity of the application and scope of the financial promotion rules. In brief, when communicating with eligible counterparties, COBS 1, Annex 1 provides that COBS 4 (other than COBS 4.4) does not apply to eligible counterparty business 18. So COBS 4.2.1R, which requires that financial promotions are fair, clear and not misleading, does not apply to financial promotions communicated to eligible counterparties. Principle 7 provides that a firm must 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. However, given PRIN 3.4.1R, the only requirement of Principle 7 relating to eligible counterparties is that a firm must communicate information to them in a way that is not misleading. 18 In CP07/9 the FSA proposed to extend this to all eligible counterparty business carried on by a firm. 68 PS07/18: Conduct of Business regime (October 2007)

71 E. Article 35 UCITS Directive 25.9 Article 35 of the consolidated UCITS Directive requires disclosure of the fact that a simplified prospectus or prospectus exists. In CP07/16 we consulted on implementing this article in COLL without going beyond its application, as COB did. Responses to CP07/ We received no negative responses to the proposal. Our response: We are satisfied that the approach we proposed is appropriate. F. Revision of rules relating to qualified investor schemes (QIS) In CP07/16, we announced our proposal to remove the restriction on the promotion of QIS, in favour of relying on the restriction on issuing or transferring units to a purchaser. Responses to CP07/ No responses directly addressed this issue. Our response: We have now amended the rules to give effect to this proposal. In making these rules we recognise that further consultation will be needed in due course in order to amend further the categories of person to whom units can be transferred. We expect to undertake this consultation during G. Amendment to SUP R In CP07/16 we proposed to change our notification rules in Chapter 15 of the Supervision Manual to take account of the Treasury s implementation of the Article 3 MiFID exemption for receivers and transmitters and advisers. Those firms relying on the exemption to fall outside MiFID will have their permissions updated from 1 November 2007 to include a requirement which reflects the conditions of the exemption. We propose a new provision in our notification rules requiring firms to notify us in the event of breach of this new requirement. Responses to CP07/ There were no specific responses on this point Our response: We have made the proposed amendment. We are also taking the opportunity to amend SUP to require that a firm must notify us of a breach by it of the directly applicable MiFID Regulation. Financial Services Authority 69

72 H. Definition of life policy In CP07/16 we consulted on an amendment to the definition of life policy that was made in the Glossary (Conduct of Business and other Sourcebooks) Instrument Responses to CP07/ There were no responses on this issue. Our response: We are implementing the definition as made in the Glossary (Conduct of Business and other Sourcebooks) Instrument I. Client Categorisation and IPRU (INV) In CP07/16 we consulted on whether venture capital firms felt that replacing the term non-private customer with the term non-retail client (which includes eligible counterparties as well as professional clients) in IPRU(INV) 5.2.3(2)R (b) would give rise to any particular problems. Responses to CP07/ We did not receive any responses on this proposed change. Our response: We do not think that the proposed change to reflect the MiFID client categories will have a significant effect on the prudential requirements of venture capital firms who fall outside the scope of MiFID. Therefore we have made the change. J. Tied Agents In CP07/16 we consulted on Handbook amendments required to recognise that some agents of firms will be tied agents, but not also appointed representatives. Responses to CP07/ There were no responses on this issue. Our response: We have now amended the rules to give effect to this proposal. K. The Training and Competence sourcebook The training and competence rules require an employee undertaking specified activities to have passed an appropriate examination in order to be assessed as competent. This requirement would not have worked as intended for an employee working in a branch of the firm in another EEA State where there is no appropriate examination available. 19 FSA 2007/ PS07/18: Conduct of Business regime (October 2007)

73 Our response: The rule has been amended to remove the need for the employee to have passed an appropriate examination in that case. The firm must satisfy itself as to the competence of that employee by other appropriate means. L. The Fit and Proper test for Approved Persons Sourcebook We have made a minor amendment to the guidance in the Fit and Proper test for Approved Persons sourcebook (FIT). Before 1 November 2007, FIT 2.2.1G (1) states that when we are assessing competence to perform a controlled function, we will have regard to whether the individual satisfies the requirements in the Training and Competence sourcebook (TC) From 1 November 2007 both TC and SYSC will contain training and competence requirements. Our response: We have amended the guidance in FIT to show that we will have regard to the relevant training and competence requirements, whether high-level or from the TC sourcebook, when assessing an application for approval to perform a controlled function. M. CF10 (Compliance oversight) In the Permissions and Notifications Guide of May 2007 we drew the attention of UK firms carrying on MiFID business to the need to consider the more detailed responsibilities in SYSC 6 for controlled functions CF10 (Compliance oversight) amongst other things. For the avoidance of doubt, we summarise here what those are From 1 November 2007 all common platform firms will be required to appoint a compliance officer who must be responsible for the compliance function (SYSC 6.1.4R(2)). As of 1 November 2007, SUP R provides that the compliance oversight function is the function of acting in the capacity of a director or senior manager who is allocated the function set out insysc 6.1.4R(2) SYSC 6.1 sets out the requirements with respect to the compliance function for common platform firms. The requirements cover firms obligations under the regulatory system which includes the arrangements for regulating a firm or other person in or under the Act, including the threshold conditions, the Principles and other rules, the Statements of Principle, codes and guidance and including any relevant directly applicable provisions of a Regulation such as those contained in the MiFID implementing Regulation. Financial Services Authority 71

74 Section B: Feedback to CP07/16 Part II: Consequential Amendments 72 PS07/18: Conduct of Business regime (October 2007)

75 Consequential Handbook 26 Amendments Introduction 26.1 In CP07/16 we said that we needed to make consequential changes to the Handbook arising from our work to implement MiFID and create a new Conduct of Business sourcebook (COBS), including updating existing cross references and reflecting changes to glossary definitions We also said that it is possible that we may need to make other amendments before the final Handbook text is made. We proposed to include these in this policy statement The Handbook text includes text that was not included in CP07/16. We have made technical changes to improve the consequential changes that we are making. We have also included text on the following issues: typographical errors in COBS text; minor clarificatory changes to COBS 1 Annex 1; the definition of regulated market; the material in Appendix 1 to the Systems and Controls sourcebook moved to Chapter 13A of the Supervision manual; amendments in relation to exempt CAD firms; and the definition of relevant securities ; the the menu is only for use in relation to personal recommendations; the duties on third country firms in disclosing their approach to conflicts of interest; and it now omits the cross reference in ICOB and MCOB to the electronic communications rules in COBS 5.2 (which has the effect of applying the COBS e-commerce rules to those firms) in favour of a new section contained within ICOB and MCOB. Financial Services Authority 73

76 26.4 We have made a small drafting correction to COBS 9.5.2R (record keeping for suitability) in order to align the terminology and scope of the references to pensions contracts with the rest of the Handbook. The reference to pension contract becomes personal pension scheme, since personal pension scheme includes a pension contract and other (non-stakeholder) personal pensions. There is no change of policy here. Responses to CP07/16 In CP07/16, we asked: Q11: Are the consequential amendments that we have included in the Handbook text appropriate and are there any more that we have not included that ought to be made? 26.5 Responses to the consultation highlighted concerns that the additional rules, requiring firms to provide prominent warnings when issuing financial promotions for AVCs and FSAVCS, had a broader effect than was intended. Our response: We have amended COBS and the glossary term AVC to bring the rules into line with our policy intention. The rule will now require that a prominent warning be given, when issuing a financial promotion for a FSAVC, that AVCs are available. To aid clarity, we have also made some minor amendments to the rules in COBS 19.3 on product disclosure for additional voluntary contributions under occupational pension schemes. We have not consulted on these changes because there has been no change of policy from that consulted on in CP06/19 and confirmed in PS07/6. Exempt CAD Firms 26.6 Exempt CAD firms (ECFs) are exempt from the risk-based capital requirements of the re-cast Capital Adequacy Directive (CAD). Instead, they are subject to flexible financial resources requirements which allow them to have initial capital; or professional indemnity insurance (PII); or an equivalent combination. In CP06/14: Implementing MiFID for Firms and Markets, CP07/1: Quarterly Consultation (No. 11); and the related Policy Statements we set out our proposed approach to the implementation of these prudential requirements with effect from 1 November The requirements for investment management firms and securities and futures firms which are ECFs set out in IPRU (INV) 20 chapter 9. These include holding a minimum level of PII 21 (or a comparable guarantee); or initial capital of 50,000; or an equivalent trade-off. Such firms must also meet an ongoing own funds requirement equal to the initial capital requirement and, in cases where the ECF opts to meet its financial resources requirement using the PII option, it must nevertheless hold minimum initial capital of at least 5, IPRU (INV): Interim Prudential sourcebook for Investment businesses. 21 At least 1,000,000 for each claim and in aggregate 1,500,000 for all claims. There are further provisions depending on whether or not the ECF is an insurance intermediary. 74 PS07/18: Conduct of Business regime (October 2007)

77 26.8 Where an ECF conducts non-mifid scope business it must also meet the financial resources requirements specified for those activities. IPRU (INV) 9.2.3R makes any ECF which carries on investment business, other than MiFID scope business, subject to the relevant other chapter of IPRU (INV) (chapter 3 or 5). This recognises that non- MiFID scope business e.g. operating a collective investment scheme, can give rise to different risks, and in some cases may justify higher financial resources requirements than for ECF business. However, if the only designated investment business an exempt CAD firm is carrying on, in addition to MiFID investment services and activities, is making arrangements with a view to transactions in investments (article 25(2) RAO) or agreeing to carry on that activity we consider that such a firm need only comply with the requirements set out in chapter 9 and not chapters 3 or 5. We are therefore amending IPRU (INV) 9.2.3R to this effect Similarly, we are amending IPRU (INV) 5.2.3(2)R to clarify that investment management firms which are ECFs and also carry on the activity of operating a collective investment scheme that invests only in venture capital investments for non-retail clients will not be subject to the liquid capital requirement Finally, we are taking this opportunity to rectify a technical anomaly in the definition of an arranger in IPRU (INV) chapter 3 and incorporate within the definition Article 25(2) Regulated Activities Order activity (that is making arrangements with a view to transactions in investments ), as well as Article 25(1) activity ( arranging (bringing about) deals in investments ). We recognise that there may be wider policy issues associated with IPRU (INV) chapter 3 as regards the requirements applying to non- MiFID scope firms relative to ECFs and we propose to address these in due course Separately, ECFs should consider how the Companies Act audit and accounting requirements apply to them. We have amended PERG 13 Q58 to refer to changes to the Companies Act made by The Markets in Financial Instruments Directive (Consequential Amendments) Regulations Broadly, small ECFs may be exempt from statutory audit requirements where they meet the conditions of the FSMA legislation giving effect to the article 3 MiFID exemption. This may be relevant to those ECFs that have decided to opt into MiFID regulation perhaps to acquire passport rights, notwithstanding that they meet the conditions of the Article 3 MiFID exemption. There are also statutory transitional provisions for exempt CAD firms which were not ISD investment firms (for example firms which meet the conditions of article 3 MiFID but opt into MiFID regulation) and which switch off audit requirements in the case of a firm s financial year beginning before 1 November 2007 and ending after that date. 22 SI 2007/2932 Financial Services Authority 75

78 Section C: Feedback to Permissions and Notifications Guide an update 76 PS07/18: Conduct of Business regime (October 2007)

79 27 Late Implementation Introduction 27.1 We consulted in the MiFID Permissions and Notification Guide Update (PNG Update), published in September 2007, on proposed precautionary measures applicable to incoming firms from late-implementing EEA states These proposals were designed to enable firms and market operators from lateimplementing states to continue to provide investment services in the UK, either under directive passports or top-up permissions, for a limited period after 1 November 2007, and to enable us to take action against such entities where it would be appropriate to do so In this chapter, we provide feedback on the one response received and confirm our proposals. Background 27.4 In the PNG Update, we explained our view that passports given under the ISD can continue to be valid after 1 November 2007, even if a firm s home state has not (fully) implemented MiFID We proposed to make a temporary precautionary rule requiring firms from lateimplementing EEA states to comply with certain MiFID standards after 1 November 2007, unless they were already subject to comparable requirements in their home state. The rule would require such firms to meet MiFID conduct of business requirements in Articles 19 to 22(1), and 24, and the associated provisions of the Level 2 Implementing Directive, together with the client categorisation requirements in MiFID Annex II. Firms and MTF operators would also be required, where relevant, to meet the transparency requirements in Article 22 (2) and 27 to 30. The rule would apply to business falling within the scope of MiFID and current domestic regulation, including that done by EEA firms in the UK under top-up permissions; and would remain in force until 31 October Full details of our proposals and a copy of our Precautionary Measures (MiFID) Instrument 2007 can be found in the PNG Update, available from our website. Financial Services Authority 77

80 Response to our consultation In the PNG Update we asked: Q1. Do you agree with our proposed rule applying certain MiFID standards to firm s passporting into the UK from late implementing EEA states? 27.7 We received a joint response from industry trade associations. 24 The response strongly supported our proposals as set out, and agreed that it would be inappropriate to apply the specified MiFID requirements to cross-border business done under the RAO exclusions The response raised two subsidiary issues. First, it questioned whether the precautionary rule would apply if an EEA state had transposed MiFID but had given a period of grace before MiFID implementing requirements come into force for its firms Secondly, it asked that we consider the impact on firms that currently have a top-up permission typically firms doing commodity derivatives business and consider what steps might be taken to ease the administrative burden when their top-up permission is no longer required. Our response: In light of the response received, we confirm our proposal. The precautionary rule, as set out in the PNG Update, has been made as drafted. As to its application, in our view the rule applies to a firm from a late implementing state where that state has passed domestic legislation adopting MiFID but that legislation has not yet come into force, or is not enforceable against firms. In response to the suggestion that it would be helpful if FSA could take steps to ease the administrative burden for incoming EEA firms with a top-up permission in respect of commodity derivatives, when this permission is no longer required, we will consider this suggestion separately, in due course. In the meantime, given the differences in scope between the domestic regime and MiFID, some firms may wish to retain their top-up permission. We also note that our approach is consistent with the CESR Statement on Late Transposition of MiFID, published on 22 October Joint response received from: Association of Foreign Banks, Futures and Options Association, International Capital Market Association, International Swaps and Derivatives Association, London Investment Banking Association, Securities Industry and Financial Market Association. 25 Statement to ensure continuity of current passports granted to investment firms under the Investment Services Directive (ISD) in cases of late transposition of MiFID (CESR/ ). 78 PS07/18: Conduct of Business regime (October 2007)

81 Annex 1 List of non-confidential responses CP07/9 AEGON UK Advertising Association, The Alternative Investment Management Association, The Altium Capital Ltd Association of British Insurers Association of Electricity Producers Association of Friendly Societies AXA Sun Life plc Baillie Gifford & Co Bank of America Barclays Brewin Dolphin Securities Ltd British Energy British Venture Capital Association Children s Mutual, The City of London Law Society, The Close Brothers Group plc Dawnay, Day International Limited Deloitte & Touche LLP Depository and Trustee Association Direct Marketing Association Annex 1 1

82 Ernst & Young FaceTime Communications Inc Financial Services Consumer Panel First Direct Friends Provident Futures Industry Association IG Index plc Institute of Chartered Accountants, The International Financial Data Services Investment & Life Assurance Group Investment Management Association Joint trade associations (Association of Foreign Banks, Association of Private Client Investment Managers and Stockbrokers, British Bankers Association, Futures and Options Association, International Capital Market Association, Lindon Investment Banking Association, Securities Industry and Financial Markets Association, Alternative Investment Management Association.) Legal and General Group Livingstone Partners M&G Investments Metropolitan Police Friendly Society Natixis Commodity Markets Ltd O Melveny & Myers LLP Prudential Redburn Partners LLP Royal Bank of Scotland Santander Asset Management Scottish Widows SIFA Skandia Life Standard Life Assurance Ltd Threadneedle Asset Management Towers Perrin 2 Annex 1

83 Union of Finance Staff Valentina Bincovscaia Wesleyan Assurance Society CP07/16 Association of British Insurers Capital Group plc, The Clifford Chance LLP Financial Services Consumer Panel International Financial Data Services Investment Management Association Joint trade associations (Association of Foreign Banks, British Bankers Association, Futures and Options Association, International Capital Market Association, International Swaps and Derivatives Association, London Investment Banking Association, Securities Industry and Financial Market Association.) London Stock Exchange Prudential RBC Dexia Investor Services Reuters Limited MiFID Permissions and Notifications Guide Update (including consultation on measures applicable to incoming firms from late implementing EEA states) Joint trade associations (Association of Foreign Banks, British Bankers Association, Futures and Options Association, International Capital Market Association, International Swaps and Derivatives Association, London Investment Banking Association, Securities Industry and Financial Market Association.) Annex 1 3

84 4 Annex 1

85 Annex 2 Handbook text Annex 2 1

86 FSA 2007/58 MiFID (DEFERRED MATTERS AND CONSEQUENTIAL AMENDMENTS) INSTRUMENT 2007 Powers exercised A. The Financial Services Authority makes this instrument in the exercise of the powers listed in Schedule 4 to the General Provisions (Powers exercised). B. The rule-making powers referred to above are specified for the purpose of section 153(2) (Rule-making instruments) of the Act. Commencement C. This instrument comes into force as follows: (1) Part 2 of Annex S (SUP) comes into force on 5 November 2007; (2) the remainder of the instrument comes into force on 1 November Amendments to the Handbook D. The modules of the FSA's Handbook of rules and guidance listed in column (1) below are amended in accordance with the Annexes to this instrument listed in column (2) below. (1) (2) Changes to several Handbook modules Glossary of definitions Principles for Businesses (PRIN) Senior Management Arrangements, Systems and Controls (SYSC) Threshold Conditions (COND) Statements of Principle and Code of Practice for Approved Persons (APER) The Fit and Proper Test for Approved Persons (FIT) General Provisions (GEN) Fees manual (FEES) Prudential sourcebook for Insurers (INSPRU) Interim Prudential sourcebook: Insurers (IPRU(INS)) Interim Prudential sourcebook: Investment Businesses (IPRU(INV)) Conduct of Business sourcebook (COBS) Insurance: Conduct of Business sourcebook (ICOB) Annex A Annex B Annex C Annex D Annex E Annex F Annex G Annex H Annex I Annex J Annex K Annex L Annex M Annex N

87 Mortgages and Home Finance: Conduct of Business sourcebook (MCOB) Client Assets sourcebook (CASS) Market Conduct sourcebook (MAR) Training and Competence sourcebook (TC) Supervision manual (SUP) Collective Investment Schemes sourcebook (COLL) Credit Unions sourcebook (CRED) Electronic Money sourcebook (ELM) Professional Firms sourcebook (PROF) Listing Rules sourcebook (LR) Prospectus Rules sourcebook (PR) Perimeter Guidance manual (PERG) Annex O Annex P Annex Q Annex R Annex S Annex T Annex U Annex V Annex W Annex X Annex Y Annex Z Notes E. In this instrument the notes (indicated by Note: ) are included for the convenience of readers but do not form part of the legislative text. Citation F. This instrument may be cited as the MiFID (Deferred Matters and Consequential Amendments) Instrument By order of the Board 25 October 2007 Amended by Addendum 25 October

88 Annex A Amendments to the Handbook, the Handbook Guides and the Regulatory Guides In this Annex, the word or phrase in column (1) is replaced in each place where it occurs by the word or phrase in column (2), except where indicated in column (3) or unless the context requires otherwise. (1) (2) (3) alternative trading system multilateral trading facility client agreement client agreement SUP G SUP 6 Annex 4.2G core investment service DGD distance means DMD ICD IMD intermediate customer Investment Services Directive investment services and activities Deposit Guarantee Directive distance means Distance Marketing Directive Investor Compensation Directive Insurance Mediation Directive professional client MiFID Glossary definition of "ISD investment firm" SYSC App 1.1.2G(2) Glossary definition of "market counterparty" Glossary definition of "private customer" Glossary definition of "ISD" SUP G(1)(d) SUP ISD MiFID Glossary definition of "ISD investment firm" SYSC App 1.1.2G(2) BIPRU TP 6.12 MAR 1 Annex 1.1.5EU(3) MAR 1 Annex 1.1.6G MAR 2.3.5EU(4) 3

89 SUP R SUP R SUP R SUP R SUP AR SUP R (Note 3) DTR TP1 Para 10, 11 ISD instrument financial instrument COLL 6.9.9R ISD investment firm MiFID investment firm SUP R SUP A SUP key facts scheme key features market counterparty means of distance communication outgoing electronic commerce communication non-core investment service providing basic advice on a stakeholder product key features scheme a key features document eligible counterparty means of distance communication Outgoing electronic commerce communication ancillary service giving basic advice on a stakeholder product Glossary definition of "intermediate customer" Glossary definition of "private customer" SYSC App 1.1.2G(2) private customer retail client Glossary definition of "intermediate customer" Glossary definition of "market counterparty" Retail customer Revenue allocated CTF consumer HMRC allocated CTF 4

90 Annex B Amendments to the Glossary of definitions In this Annex, underlining indicates new text and striking through indicates deleted text, unless otherwise stated. G Guidance on the Glossary of definitions 3. Each sourcebook or manual has a reference code of two or more letters, usually a contraction or abbreviation of its title (for example, GEN stands for the General Provisions and COB COBS for the Conduct of Business sourcebook). Insert the following new definitions in the appropriate alphabetical position. The text is not underlined. alternative projection appropriate charges information contracting out comparison (in COBS) a projection calculated on the basis described in paragraph 1.5R of the projection rules (COBS 13 Annex 2R), rather than in accordance with the remainder of those rules. (in COBS) information about charges which is calculated and presented in accordance with the charges rules in COBS R and COBS 13 Annex 3. a description of: (a) (b) the benefits that minimum contributions would secure if a retail client did not contract out of the State Second Pension; and the material differences between the anticipated position if a retail client remains contracted into the State Second Pension and the anticipated position if that client contracts out; which is calculated to the client s state retirement age using the lower and higher rates of return and aggregate contributions for the current and the next two tax years. deductions plan generic projection (in COBS) a plan that describes the deductions from asset share that a firm expects to make for the cost of guarantees and the use of capital (COBS R). (in COBS) a projection which reflects the terms of a contract which is representative of the type of business normally undertaken by the firm, or the type of business it is promoting, rather than the terms of a particular 5

91 contract with, or that will be offered to, a particular client. higher rate of return intermediate rate of return Lloyd's complaint procedures Lloyd's complaint rules lower rate of return personal projection PPFM guidance table PPFM issues table (in COBS) the higher rate of return described in paragraph 2.3 of the projection rules (COBS 13 Annex 2). (in COBS) the intermediate rate of return described in paragraph 2.3 of the projection rules (COBS 13 Annex 2). the procedures maintained by the Society under DISP 1.7.1R. DISP 1.7. (in COBS) the lower rate of return described in paragraph 2.3 of the projection rules (COBS 13 Annex 2). a projection that reflects the terms of a particular contract with, or to be offered to, a particular client. the table in COBS G (Guidance on with-profits principles and practices). The table in COBS R (Issues to be covered in PPFM). projection period (in COBS) the period covered by a standardised deterministic projection, which begins on the date the investment is reasonably expected to be made and ends on the projection date described in paragraph 2.1 of COBS 13 Annex 2. respondent security-based CTF senior personnel standardised deterministic projection statutory money purchase illustration (in DISP) a firm, licensee or VJ participant covered by the compulsory jurisdiction, consumer credit jurisdiction or voluntary jurisdiction of the Financial Ombudsman Service. a CTF, other than a stakeholder CTF, which is not limited to deposit based investment. those persons who effectively direct the business of the firm, which could include a firm s governing body and other persons who effectively direct the business of the firm. a projection which is either a generic projection or a personal projection produced in accordance with the assumptions contained in COBS 13 Annex 2. an annual illustration of the contributions made for the benefit of, and the potential benefits due to, a member of a personal pension scheme, which is prepared in accordance with the Personal Pension Schemes (Disclosure of Information) Regulations 1987 (SI 1987/1110). 6

92 TPF rules the rules and guidance in COBS R to COBS G and COBS R to COBS G. Amend the following definitions as shown. additional voluntary contribution adviser approved counterparty associate [deleted] an individual who is: a representative;, or an appointed representative or a tied agent. any of the following: (a) (c) an ISD a MiFID investment firm whose authorisation (as referred to in article 3 of the ISD 5 of MiFID) authorises it to carry on activities of the kind referred to in (b); or (d) in respect of a transaction involving a new issue of securities which are to be listed, the issuer or an ISD a MiFID investment firm acting on behalf of the issuer. (3) (a) (b) an appointed representative of A, or a tied agent of A, or of any affiliated company of A; (c) AVC branded fund capital resources gearing rules claims handling additional voluntary contribution a voluntary contribution arrangement paid by a member of an occupational pension scheme under the terms of the scheme or of a separate contract. [deleted] [deleted] [deleted] client (1) (a) every client is a customer or a market counterparty an eligible counterparty; 7

93 (b) (i) (ii) a client of an appointed representative of a firm with or for whom the appointed representative acts or intends to act in the course of business for which the firm has accepted responsibility under section 39 of the Act (Exemption of appointed representatives) or, where applicable, a client of a tied agent of a firm; (iv) if a person ("C1"), with or for whom the firm is conducting or intends to conduct designated investment business, is acting as agent for another person ("C2"), either C1 or C2 in accordance with COB 4.1.5R (Agent as client) the rule on agent as client COBS 2.4.3R; compensation scheme complaints reporting rules connected person the Financial Services Compensation Scheme established under section 213 of the Act (The compensation scheme) for compensating persons in cases where authorised persons and appointed representatives, or, where applicable, a tied agent of a firm, are unable, or are likely to be unable, to satisfy claims against them. DISP (3) (a) (b) (c) he is the partner, manager, employee, agent, appointed representative, or, where applicable, tied agent, banker, auditor, actuary or solicitor of: consumer (1) (2) (a) who uses, has used, or is or may be contemplating using, 8

94 any of the services provided by: (i) (ii) a person acting as an appointed representative, or, where applicable, a tied agent; or (b) control (1) (except for a common platform firm in (2)) (in relation to the acquisition, increase or reduction of control of a firm) the relationship between a person and the firm or other undertaking of which the person is a controller. (2) (for a common platform firm in SYSC 8 and SYSC 10) control as defined in Article 1 of the Seventh Council Directive 83/349/EEC (The Seventh Company Law Directive). deal on own account designated investment business (for the purposes of GENPRU and BIPRU) has the meaning in BIPRU R (Meaning of dealing on own account) which is in summary the service referred to in paragraph 2 point 3 of Schedule Section A to the Annex I to the ISD MiFID, subject to the adjustments in BIPRU R(2) and BIPRU R(3) (Implementation of Article 5(2) of the Capital Adequacy Directive). any of the following activities, specified in Part II of the Regulated Activities Order (Specified Activities), which is carried on by way of business: o. providing providing basic advice on a on a stakeholder product (article 52B). DGD DMD domestic ECA provider EEA ECA recipient electronic commerce activity provider eligible counterparty [deleted] [deleted] [deleted] [deleted] [deleted] (1) (for the purposes other than those set out in (2)) (in accordance with COBS 3.6.1R) a client that is either a per se eligible counterparty or an elective eligible counterparty. 9

95 (2) (for the purposes of PRIN, in relation to activities other than designated investment business) a client categorised as an eligible counterparty in accordance with PRIN 1 Ann 1R. eligible counterparty business the following services and activities carried on by a firm: (a) (b) (c) dealing on own account, execution of orders on behalf of clients or reception and transmission of orders; or any ancillary service directly related to a service or activity referred to in (a),; or arranging in relation to business which is not MiFID or equivalent third country firm business; but only to the extent that the service or activity is carried on with or for an eligible counterparty. employee (1) (for all purposes except those in (2)) an individual: (a) (b) whose services, under an arrangement between that person and a third party, are placed at the disposal and under the control of that person; but excluding an appointed representative or a tied agent of that person. (2) (for the purposes of: (a) COB 7.13 COBS 11.7 (Personal account dealing); (c) an individual: (i) (ii) who is: (A) (B) an appointed representative or, where applicable, a tied agent of the person referred to in (1); or employed or appointed by an appointed representative or, where applicable, a tied agent of that person, whether under a contract 10

96 of service or for services or otherwise, in connection with the business of the appointed representative or tied agent for which that person has accepted responsibility. excluded communication the following types of communication financial promotion (a firm may rely on more than one of the paragraphs in relation to the same financial promotion): (d) (e) a personal quotation or illustration form; or a "one-off" financial promotion that is not a cold call (iii) the financial promotion is not part of an organised marketing campaign.; or (f) a communication that is exempted by the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order field representative free standing additional voluntary contribution FSAVC gearing ICD IMD IMD minimum implementation provisions incoming an appointed representative of the firm or, where applicable, a tied agent, or an employee of the firm (or of its appointed representative or, where applicable, its tied agent), whose normal fixed place of business is not a business address of the firm which appears on the firm's stationery. [deleted] free-standing additional voluntary contribution an arrangement which allows a member of an occupational pension scheme to make AVCs to a private pension policy or pension contract, where the policy or contract is separate from, but associated with, an occupational pension scheme which is a registered pension scheme under Chapter 2 of Part 4 of the Finance Act [deleted] [deleted] [deleted] [deleted] [deleted] 11

97 electronic commerce communication incoming ECA provider a person, other than an exempt person or a person who has been given a waiver in accordance with article 8(1) of the E-Money Directive, who: (a) provides an electronic commerce activity, from an establishment in an EEA State other than the United Kingdom, with or for a UK an ECA recipient present in the United Kingdom; and initial margin intended retirement date intermediate customer [deleted] [deleted] (for the purposes only of COBS TP 1 (Transitional Provisions in relation to Client Categorisation)): (1) (except in COB 3) a client who is not a market counterparty and who is: (a) introducer an individual appointed by a firm, or by an appointed representative or, where applicable, a tied agent, to carry out in the course of designated investment business either or both of the following activities: (a) ISD instrument ISD investment firm Lloyd's market activities [deleted] [deleted] [delete existing definition and replace with the following text] (a) advising on syndicate participation at Lloyd's, including advising on a transaction in the capacity transfer market; (b) (c) (d) managing the underwriting capacity of a Lloyd's syndicate as a managing agent at Lloyd's; agreeing to carry on the regulated activities in (a) and (b); carrying on designated investment business which is not MiFID 12

98 business in relation to funds at Lloyd's; or (e) communicating or approving a financial promotion in relation to: (i) (ii) (iii) (iv) the underwriting capacity of a Lloyd's syndicate; or membership of a Lloyd's syndicate; or life policies written at Lloyd's; or any of the activities specified in (a) or (d). market counterparty (for the purposes only of COBS TP 1 (Transitional Provisions in relation to Client Categorisation)); (1) (except in COB 3) a client who is: (a) material interest (in COB COBS) (in relation to a transaction) any interest of a material nature, other than: (a) (b) goods or services which can reasonably be expected to assist in carrying on designated investment business with or for clients and which are provided or to be provided in compliance with COB R (Use of dealing commission to purchase goods or services) COBS R. outgoing ECA provider a firm which: (a) (b) provides an electronic commerce activity, from an establishment in the United Kingdom, with or for an EEA ECA recipient present in an EEA State other than the United Kingdom; and outgoing electronic commerce communication pension transfer [deleted] a transaction, resulting from the decision of a retail client who is an individual, to transfer benefits from: (f) a deferred annuity policy, where the eventual benefits depend on 13

99 investment performance in the period up to the intended retirement date date when those benefits will come into payment. periodic statement post-sale notice pre-sale notice a report which a firm is required to provide to a client under COBS (Periodic reporting). [deleted] [deleted] principal (1) in relation to a person: (a) (b) (if the person is an appointed representative or, where applicable, a tied agent) the authorised person who is party to a contract with the appointed representative, or who is responsible for the acts of the tied agent, resulting in him being exempt under section 39 of the Act (Exemption of appointed representatives appointed representatives). (2) private customer (for the purposes only of COBS TP 1 (Transitional Provisions in relation to Client Categorisation)): (1) (except in relation to COB 3, 4.2 and 6.4) subject to (h), a client who is not a market counterparty or an intermediate customer, including: (a) (e) a person to whom a firm provides basic advice on stakeholder products; gives basic advice; regulated activity in accordance with section 22 of the Act (The classes of activity and categories of investment)) any of the following activities specified in Part II of the Regulated Activities Order (Specified Activities): (gf) (gg) making arrangements with a view to a home purchase plan (article 25C(2)); operating a multilateral trading facility (article 25D); (oa) providing providing basic advice on on stakeholder products 14

100 (article 52B); which is carried on by way of business and relates to a specified investment applicable to that activity or, in the case of (l), (m), (n) and (o), is carried on in relation to property of any kind. regulated institution any of the following: (e) an ISD a MiFID investment firm whose authorisation (as referred to in article 3 of the ISD 5 of MiFID) authorises it to carry on activities of the kind referred to in (d). regulated market [delete existing definition and replace with the following] a multilateral system operated and/or managed by a market operator, which brings together or facilitates the bringing together of multiple third-party buying and selling interests in financial instruments in the system and in accordance with its non-discretionary rules in a way that results in a contract, in respect of the financial instruments admitted to trading under its rules and/or systems, and which is authorised and functions regularly and in accordance with the provisions of Title III of MiFID. [Note: article 4(1)(14) of MiFID] relevant security (1) (in MAR 2) when used with reference to the Buy-back and Stabilisation Regulation) (in accordance with Article 2(6) of the Buyback and Stabilisation Regulation) shares, debentures, government and public securities, warrants and certificates representing certain securities transferable securities which are admitted to trading on a regulated market or for which a request for admission to trading on a regulated market has been made, and which are the subject of a significant distribution. (2) (otherwise in MAR 2) shares, debentures, government and public securities, warrants and certificates representing certain securities transferable securities. (3) (in LR) has the same meaning as in section 80 of the Companies Act representative an individual who: (a) is appointed by a firm, or by an appointed representative of a firm, to carry on any of the following activities: (i) 15

101 (ii) providing providing basic advice on on stakeholder products; scheme (1) (except in COBS, CASS and SUP) a collective investment scheme. (2) (in COBS, CASS and SUP): (a) (b) (c) a regulated collective investment scheme; an investment trust where the relevant shares have been, or are to will be, acquired through an investment trust savings scheme savings scheme; an investment trust, where if: (i) (ii) the relevant shares are to will be held within an ISA or PEP which promotes one or more specific investment trusts in a wrapper or personal pension scheme; and the trust and the wrapper or personal pension scheme will be promoted together; (d) (in COB 10 COBS 19.5) in addition to (a), (b) and (c), an unregulated collective investment scheme. securitised derivative an option or contract for differences which, in either case, is listed under LR 19 of the listing rules (including such an option or contract for differences which is also a debenture). (See also COB 5.4.3AG for the treatment of a securitised derivative.) shortfall (1) (in relation to cancellation of an investment agreement) the amount a firm is entitled to charge a customer for the market loss in accordance with COB R to COB R (Shortfall; Exceptions to shortfall). COBS R. (2) statement of demands and needs surrender value [deleted] (b) where the contract is a pension contract personal pension scheme or stakeholder pension scheme, the amount payable on the transfer of the investor's accrued rights under that contract to another pension contract personal pension scheme or stakeholder pension scheme; 16

102 traded on transactionspecific advice [deleted] advice on investments: (a) given in connection with: dealing or arranging activities carried on by the firm that fall within MAR 3.1.2R(2)(a), (b) or (c); or (i) (ii) (iii) dealing in investments as principal; or dealing in investments as agent; or acting as an arranger; or transfer value analysis UK ECA recipient venture capital contact [deleted] [deleted] (when a firm carries on designated investment business regulated activities with or for a person in the course of or as a result of carrying on venture capital business) that person in connection with that designated investment business regulated activity if: 17

103 Annex C Amendments to the Principles for Businesses (PRIN) In this Annex, underlining indicates new text and striking through indicates deleted text, unless otherwise stated. Approach to client classification categorisation G Principles 6, 8 and 9 and parts of Principle 7, as qualified by PRIN 3.4.1R, apply only in relation to customers (that is, clients which are not eligible counterparties). The approach that a firm needs to take regarding classification categorisation of clients into customers and eligible counterparties will depend on whether the firm is carrying on designated investment business or other activities, as described in PRIN 1.2.3G and PRIN 1.2.4G. Delete the text of 1.2.3G and replace it with the text shown below, which is not underlined. Classification: designated investment business G (1) In relation to the carrying on of designated investment business, a firm's categorisation of a client under the COBS client categorisation chapter (COBS 3) will be applicable for the purposes of Principles 6, 7, 8 and 9. (2) The person to whom a firm gives basic advice will be a retail client for all purposes, including the purposes of Principles 6, 7, 8 and 9. (3) In relation to carrying on activities other than designated investment business (for example, general insurance business or accepting deposits) the firm may choose to comply with Principles 6, 7, 8 and 9 as if all its clients were customers. Alternatively, it may choose to distinguish between eligible counterparties and customers in complying with those Principles. If it chooses to make such a distinction, it must comply with PRIN 1 Ann 1R in determining whether that client is an eligible counterparty (see PRIN 3.4.2R). In doing so, the requirements in SYSC will apply, including the requirement to make and retain adequate records. (4) In relation to carrying on activities that fall within both (1) and (3) (for example, mixed designated investment business and accepting deposits), a firm's categorisation of a client under the COBS client categorisation chapter (COBS 3) will be applicable for the purposes of Principles 6, 7, 8 and 9. 18

104 Classification: other activities G In relation to the carrying on of activities other than designated investment business, for example general insurance business or accepting deposits, only COB R and COB G (Large intermediate customer classified as a market counterparty) and COB R (Client classified as a private customer) in COB 4.1 (Client classification) apply (see PRIN 3.4.2R). [deleted] G A firm is therefore not required to classify its clients (because COB 4.1.4R does not apply) and may choose to comply with Principles 6, 7, 8 and 9 as if all its clients were customers. Alternatively, it may choose to distinguish between eligible counterparties and customers in complying with those Principles. But, in that case, the firm would need to classify any client treated as an eligible counterparty. In doing this, the requirements in SYSC will apply, including the requirement to establish appropriate systems and controls and the requirement to make and retain adequate records. In classifying its eligible counterparties, it would be open to such a firm, although not obligatory, to permit professional clients to change to eligible counterparty status in accordance with COB R. It would also have to treat an eligible counterparty as a customer if the firm had chosen to treat the retail client in the circumstances set out in COB R. [deleted] G If the person with or for whom the firm is carrying on an activity is acting through an agent, the ability of the firm to treat the agent as its client under COB R COBS 2.4.3R (Agent as client) will not be available. For example, if a general insurer is effecting a general insurance contract through a general insurance broker who is acting as agent for a disclosed policyholder, the policyholder will be a client of the firm and the firm must comply with the Principles accordingly. After PRIN 1 insert the following new Annex. The text is not underlined. PRIN 1 Ann 1 R Non-designated investment business clients that a firm may treat as an eligible counterparty for the purposes of PRIN 1.1 A firm may categorise the following types of client as an eligible counterparty for the purposes of PRIN: (1) a properly constituted government (including a quasi-governmental body or a government agency) of any country or territory; (2) a central bank or other national monetary authority of any country or territory; (3) a supranational whose members are either countries or central banks or national monetary authorities; (4) a State investment body, or a body charged with, or intervening in, the 19

105 management of the public debt; (5) another firm, or an overseas financial services institution; (6) any associate of a firm (except an OPS firm), or of an overseas financial services institution, if the firm or institution consents; (7) a client when he is classified as an eligible counterparty in accordance with 1.2; or (8) a recognised investment exchange, designated investment exchange, regulated market or clearing house. 1.2 A firm may classify a client (other than another firm, regulated collective investment scheme, or an overseas financial services institution) as an eligible counterparty for the purposes of PRIN under 1.1(7) if: (1) the client at the time he is classified is one of the following: (a) (b) a body corporate (including a limited liability partnership) which has (or any of whose holding companies or subsidiaries has) called up share capital of at least 10 million (or its equivalent in any other currency at the relevant time); a body corporate that meets (or any of whose holding companies or subsidiaries meets) two of the following tests: (i) (ii) a balance sheet total of 12.5 million euros (or its equivalent in any other currency at the relevant time); a net turnover of 25 million euros (or its equivalent in any other currency at the relevant time); (iii) an average number of employees during the year of 250; (c) (d) (e) (f) a local authority or public authority; a partnership or unincorporated association which has net assets of at least 10 million (or its equivalent in any other currency at the relevant time) (and calculated, in the case of a limited partnership, without deducting loans owing to any of the partners); a trustee of a trust (other than an occupational pension scheme, SSAS, personal pension scheme or stakeholder pension scheme) with assets of at least 10 million (or its equivalent in any other currency), calculated by aggregating the value of the cash and designated investments forming part of the trust's assets, but before deducting its liabilities; a trustee of an occupational pension scheme or SSAS, or a trustee or operator of a personal pension scheme or stakeholder pension scheme 20

106 where the scheme has (or has had at any time during the previous two years): (i) (ii) at least 50 members; and assets under management of not less than 10 million (or its equivalent in any other currency at the relevant time); and (2) the firm has, before commencing business with the client on an eligible counterparty basis: (a) (b) (c) advised the client in writing that he is being categorised as an eligible counterparty for the purposes of PRIN; given a written warning to the client that he will lose protections under the regulatory system; for a client falling under (1)(a) or (b): (i) (ii) taken reasonable steps to ensure that the written notices required by (a) and (b) have been delivered to a person authorised to take such a decision for the client; and not been notified by the client that the client objects to being classified as an eligible counterparty; (d) for a client falling under (1)(c), (d), (e) or (f): (i) (ii) taken reasonable steps to ensure that the written notices required by (a) and (b) have been delivered to a person authorised to take such a decision for the client; and obtained the client's written consent or is otherwise able to demonstrate that consent has been given R PRIN applies to every firm, except that: (4) for a UCITS qualifier, only Principles Principles 1, 2, 3, 7 and 9 apply, and only with respect to the activities in PRIN 3.2.2R (Communication and approval of financial promotions).; (5) PRIN does not apply to an incoming ECA provider acting as such G SYSC App 1, COBS 1 Ann 1 and the territorial guidance in PERG 13.6 all contains contain guidance that is relevant to on the reservation of responsibility to a Home State regulator referred to in PRIN 3.1.1R(1). 21

107 3.1.3 G PRIN 3.1.1R(2) reflects article of the Banking Consolidation Directive which provides G ECO 1.1.6R has the effect that PRIN does not apply to an incoming ECA provider acting as such. [deleted] R For the purposes of PRIN, the following provisions of COB 4.1 (Client classification) also apply to a firm intending to carry on, or carrying on, activities other than designated investment business: For the purposes of PRIN, a firm intending to carry on, or carrying on, activities that do not involve designated investment business, may treat a client as an eligible counterparty in accordance with PRIN 1 Ann 1 R. (1) COB R and COB G (Large intermediate customer classified as a market counterparty); and (2) COB R (Client classified as a private customer) G (1) The whole of COB 4.1 (Client classification) COBS 3 (Client categorisation) applies to a firm intending to conduct, or conducting, designated investment business (other than providing giving basic advice on a stakeholder product,) and ancillary activities relating to designated investment business. Any client classifications categorisation established in relation to such business will be applicable for the purposes of Principles 6, 7, 8 and G (1)... (2) The person to whom a firm provides gives basic advice on a stakeholder product will be a retail client for all purposes including the purposes of Principles 6, 7, 8 and 9. (2)... Further information about these limitations is contained in Part 2 of COBS App 1 COBS 1 Ann 1. 22

108 PRIN TP 1 Transitional provisions There are no transitional provisions in PRIN. However: (1) [deleted] (2) [deleted] Material to which the transitional provision applies Transitional Provision Transitional Provision: dates in force Handbook provision: coming into force 1. PRIN 1 Ann 1 R 1.2(2) R A firm need not comply with PRIN 1 Ann 1R 1.2(2) in relation to an eligible counterparty if the client was correctly categorised as a market counterparty on 31 October 2007 and the firm complied with COB R(2) (Large intermediate customer classified as market counterparty). From 1 November 2007 indefinitely 1 November

109 Annex D Amendments to the Senior Management Arrangements, Systems and Controls sourcebook (SYSC) In this Annex, underlining indicates new text and striking through indicates deleted text, unless otherwise stated. 1.1 Application of SYSC 2 and SYSC 3 Who? R SYSC 2 and SYSC 3 apply to every firm except that: (5) for an authorised professional firm when carrying on nonmainstream regulated activities, SYSC 3.2.6AR to SYSC 3.2.6JG do not apply; and (6) for a common platform firm, SYSC 2 and SYSC 3 does not apply.; and (7) SYSC 2 and SYSC 3 do not apply to an incoming ECA provider acting as such G (1) Question 12 in SYSC G and SYSC App 1 contain contains guidance on SYSC R(1)(b) and (c). (4) Further guidance on which matters are reserved to a firm's Home state regulator can be found at SUP 13A Annex 2G R SYSC 2 and SYSC 3 apply with respect to activities carried on from an establishment maintained by the firm (or its appointed representative or, where applicable, its tied agent) in the United Kingdom unless another applicable rule which is relevant to the activity has a wider territorial scope, in which case SYSC 2 and SYSC 3 apply with that wider scope in relation to the activity described in that rule A G ECO 1.1.6R has the effect that SYSC does not apply to an incoming ECA provider acting as such. [deleted]... 24

110 2.1.6 G Question Answer 12 How does the requirement to allocate the functions in SYSC 2.1.3R apply to an incoming EEA firm or incoming Treaty firm? SYSC R(2) and SYSC 1.1.7R restrict the application of SYSC 2.1.3R for such a firm. Accordingly: (1) (2) Such a firm is required to allocate the function of oversight in SYSC 2.1.3R(2). However, the systems and controls that must be overseen are those relating to matters which the FSA, as Host State regulator, is entitled to regulate (there is guidance on this in SYSC App 1 SUP 13A Annex 2G). Those are primarily, but not exclusively, the systems and controls relating to the conduct of the firm's activities carried on from its UK branch. (3) G A firm has specific responsibilities regarding its appointed representatives or, where applicable, its tied agents (see SUP 12) G (1) A firm's governing body is likely to delegate many functions and tasks for the purpose of carrying out its business. When functions or tasks are delegated, either to employees or to appointed representatives or, where applicable, its tied agents, appropriate safeguards should be put in place R (1) A firm which carries on designated investment business with or for customers retail clients or professional clients must allocate to a director or senior manager the function of: (2) In SYSC 3.2.8R(1) "compliance" means compliance with the rules in: (a) COB COBS (Conduct of Business); 25

111 4.3.1 R A MiFID investment firm common platform firm, when allocating functions internally, must ensure that senior personnel and, where appropriate, the supervisory function, are responsible for ensuring that the firm complies with its obligations under MiFID the regulatory system. In particular, senior personnel and, where appropriate, the supervisory function must assess and periodically review the effectiveness of the policies, arrangements and procedures put in place to comply with the firm's obligations under MiFID the regulatory system and take appropriate measures to address any deficiencies. [Note: article 9(1) of the MiFID implementing Directive] R A MiFID investment firm common platform firm must G SYSC 2, which sets out how certain functions in a firm should be allocated, does not affect the collective responsibility of the senior personnel of a MiFID investment firm under this section. [deleted] R (1) (2) Information may also be withheld or not used by a common platform firm when this is required by an established arrangement maintained between different parts of the business (of any kind) in the same group. This provision does not affect any requirement to transmit or use information that may arise apart from the rules in COB or COBS R When any of the rules of COB, COBS or CASS R SYSC 11 does not apply to: (5) an incoming Treaty firm.; or (6) an incoming ECA provider acting as such R This section does not apply to: (4) an ICVC.; or (5) an incoming ECA provider acting as such G SYSC 13 does not apply to an incoming ECA provider acting as such G The following is a non-exhaustive list of rules and guidance in the Handbook that are relevant to a firm's management of operational risk: (1)... 26

112 (2) COB COBS contains rules and guidance that can relate to the management of operational risk; for example, COB 2 (Rules which apply to all firms conducting designated investment business), COB 3 (Financial promotion), COB 5 (Advising and selling), COB 7 (Dealing and managing) and COB 9 (Client assets) COBS 2 (Conduct of business obligations), COBS 4 (Communicating with clients, including financial promotions), COBS 6 (Information about the firm, its services and remuneration), COBS 7 (Insurance mediation), COBS 9 (Suitability (including basic advice)), COBS 11 (Dealing and managing), COBS 12 (Investment research), COBS 14 (Providing product information to clients) and COBS 19 (Pensions: supplementary provisions) G In this chapter, the following interpretations of risk management terms apply: (1) a firm's risk culture encompasses the general awareness, attitude and behaviour of its employees and appointed representatives or, where applicable, its tied agents, to risk and the management of risk within the organisation; R A firm should consult SYSC 3.2.2G to SYSC 3.2.5G for guidance on reporting lines and delegation of functions within a firm and SYSC G to SYSC G for guidance on the suitability of employees and appointed representatives or, where applicable, its tied agents. This section provides additional guidance on management of employees and other human resources in the context of operational risk G A firm should ensure the adequacy of its processes and systems to review external documentation prior to issue (including review by its compliance, legal and marketing departments or by appropriately qualified external advisers). In doing so, a firm should have regard to: (1) compliance with applicable regulatory and other requirements (such as COB 3 (Financial promotion)); A R This section does not apply to an incoming ECA provider acting as such G When determining the adequacy of its internal controls, a firm should consider both the potential risks that might hinder the achievement of the objectives listed in SYSC G, and the extent to which it needs to control these risks. More specifically, this should normally include consideration of: (1) (2) how the delegation or contracting of functions or activities to employees, appointed representatives or, where applicable, its tied agents or other third parties (for example outsourcing) is to be 27

113 monitored and controlled (see SYSC 3.2.3G to SYSC 3.2.4G, SYSC G to SYSC G and SYSC G; additional guidance on the management of outsourcing arrangements is also provided in SYSC 13.9); A G This section does not apply to an incoming ECA provider acting as such A G This section does not apply to an incoming ECA provider acting as such A G This section does not apply to an incoming ECA provider acting as such G (1) Firms are encouraged to consider adopting (and encouraged to invite their appointed representatives or, where applicable, their tied agents to consider adopting) appropriate internal procedures which will encourage workers with concerns to blow the whistle internally about matters which are relevant to the functions of the FSA. Delete SYSC Appendix 1. The text of this appendix is not shown struck through. SYSC Appendix 1: Matters reserved to a Home State regulator (see SYSC R (1)(b) and SYSC R (1)(c)) (SYSC App 1 [deleted] 28

114 Annex E Amendments to the Threshold Conditions sourcebook (COND) In this Annex, underlining indicates new text and striking through indicates deleted text. Competent and prudent management and exercise of due skill, care and diligence G In determining whether a firm will satisfy and continue to satisfy threshold condition threshold condition 5 in respect of having competent and prudent management and exercising due skill, care and diligence, relevant matters, as referred to in COND 2.5.4G(2), may include, but are not limited to whether: (1)... (4) those persons who perform controlled functions under certain arrangements entered into by the firm or its contractors (including appointed representatives or, where applicable, tied agents) act with due skill, care and diligence in carrying out their controlled function (see APER 4.2 (Statement of Principle 2) or managing the business for which they are responsible (see APER 4.7 (Statement of Principle 7)); 29

115 Annex F Amendments to the Statements of Principle and Code of Practice for Approved Persons (APER) In this Annex, underlining indicates new text and striking through indicates deleted text G The relevance of MiFID to the Statements of Principle will depend on the extent to which the corresponding requirement imposed on firms under MiFID is reserved to a Home State regulator or has been disapplied under MiFID (see APER 2.1.1AP and FIT 1.2.4AG. See also COBS App1 Part 3 1 Ann 1, Part 2, 1.1R (EEA territorial scope rule: compatibility with European law)) G In many cases the required standard will be set out in MAR 3 (Inter- Professional Conduct) and the Code of Market Conduct (MAR 1). Market codes and exchange rules will also be relevant. [deleted] E A factor to be taken into account in determining whether or not an approved person's conduct complies with this Statement of Principle (APER 2.1.2P) is whether he, or his firm, has complied with MAR 3 (Inter-Professional Conduct) or the Code of Market Conduct (MAR 1) or relevant market codes and exchange rules. 30

116 Annex G Amendments to The Fit and Proper test for Approved Persons (FIT) In this Annex, underlining indicates new text and striking through indicates deleted text G In determining a person's competence and capability, the FSA will have regard to matters including but not limited to: (1) whether the person satisfies the relevant requirements of the FSA's Ttraining and Ccompetence sourcebook (TC) requirements in relation to the controlled function the person performs or is intended to perform; (2) 31

117 Annex H Amendments to the General Provisions (GEN) In this Annex, underlining indicates new text and striking through indicates deleted text R (1) 2 Annex 1 G (2) For a UCITS qualifier, this chapter applies only with respect to the communication and approval of financial promotions to which COB 3 (Financial promotion) COBS 4 (Communicating with clients, including financial promotion) applies and to the maintenance of facilities to which COLL 9.4 (Facilities in the United Kingdom) and CIS 17.5 (Facilities in the United Kingdom) apply applies. 1. Benefits of designation Introduction 2. Under certain rules, firms may treat transactions effected on a designated investment exchange in the same way as transactions on RIEs (for example, see COB 5 Annex 1 E, CASS 2 and COB 7.11) G There are other pre-contract information requirements outside this chapter, including: (4) for electronic commerce activities by outgoing or domestic ECA providers, in ECO 2 (Outgoing ECA providers) and ECO 3 (Domestic (and non-eea) ECA providers) carried on from an establishment in the United Kingdom, incobs 5.2, ICOB 2.6A and MCOB 2.7A; and 32

118 4 Annex 1 G Note 5 = Any firm listed in this table is permitted to add words to the relevant required disclosure statement but only if the firm has taken reasonable steps to satisfy itself that the presentation of its statutory status will, as a consequence, remain clear, fair and not misleading fair, clear and not misleading. For example, an authorised professional firm may wish to make it clear that it is also regulated by its professional body G This chapter contains: (1) guidance for firms and appointed representatives or tied agents on the circumstances in which the FSA permits firms and their appointed representatives or tied agents to reproduce the FSA logo; G GEN 5 Annex 1G is a general licence, which sets out the circumstances in which the FSA permits firms and their appointed representatives or tied agents to reproduce the FSA and keyfacts logos. A firm, or an appointed representative or tied agent need not apply for an individual licence if it uses or reproduces the logos in accordance with the general licence G The FSA has no policy to allow use of the logos by a firm, or appointed representative or tied agent other than as set out in GEN 5 Annex 1G. If, however, a firm, or appointed representative or tied agent wishes to use or reproduce either of the logos other than in accordance with the general licence, it may apply to the FSA for an individual licence, giving full reasons why it considers the FSA should grant the licence. 5 Annex 1 G Licence for use of the FSA and keyfacts logos by authorised firms and appointed representatives or tied agents Application 1.1 The FSA grants this licence to firms, and appointed representatives and tied agents. Permission to use the FSA logo 3.1 A firm, and its appointed representatives and tied agents are permitted to use the FSA logo: 33

119 Permission to use the keyfacts logo 3A.1 A firm, and its appointed representatives and tied agents are permitted to use the keyfacts logo as and when it is required or permitted to be used by the rules. 3A.2 The following are examples of places where the rules require or permit the keyfacts logo to be used: (1) In COB COBS: (a) (b) in an initial disclosure document initial disclosure document or combined initial disclosure document combined initial disclosure document (COB 4.3.9R COBS 6.3); and in a fees and commission statement menu (COB R COBS 6.3). Further conditions on the use of the FSA and keyfacts logos 5.1 The permissions in paragraphs 3.1 and 3A.1 are also subject to the conditions that any material, whether produced on paper or electronically, on which the FSA or keyfacts logos are displayed does not: (1) in any way imply that the FSA is endorsing the firm or its appointed representatives, tied agents or products, services or communications (see also GEN 1.2.2R(1)); or (2) misrepresent the firm's or its appointed representative's or tied agent's relationship with the FSA or present false information about the FSA; or Use of the FSA logo by appointed representatives 6.1 Firms and appointed representatives or, where applicable, tied agents are reminded that an appointed representative or tied agent is not a firm. Therefore, the permission in paragraph 3.1 does not extend to a statement made by an appointed representative or tied agent about its own status. However, the effect of paragraph 3.1 is that an appointed representative or tied agent is permitted to reproduce the FSA logo as part of a statement about the authorisation or regulation by the FSA of the appointed representative's or tied agent's principal, provided the other 34

120 conditions of paragraph 3.1 and those of paragraphs 4.1 and 5.1 are met. TP 1.1 Table: (1) Transitional Provisions applying across the Handbook (3) The more specific transitional provisions relating to record keeping and notification rules override the general transitional provisions. Both the general and the more specific transitional provisions do not apply if the context requires otherwise and are subject to any more specific transitional provision elsewhere in the Handbook relating to the matter. For example, COB contains transitional provisions relating to various matters which are limited in duration and which override these transitional provisions in relation to those matters. TP 1.2 (1) (2) Material to which the transitional provision applies (3) (4) Transitional provision (5) Transitional provision: dates in force (6) Handbook provision: coming into force (2) [deleted] (6) [deleted] In the appropriate numerical position in Schedule 4 (Powers exercised) insert the text shown underlined below: The following powers and related provisions in or under the Act have been exercised by the FSA to make the rules in GEN: Section 158A (Guidance on outsourcing by investment firms and credit institutions) 35

121 Annex I Amendments to the Fees manual (FEES) In this Annex, underlining indicates new text and striking through indicates deleted text R A firm which is exempt under DISP 1.1.7R R is also exempt from FEES 5.1 to FEES A R A firm will only be exempt from FEES 5.7 for any given financial year if it met the conditions in DISP 1.1.7R R on 31 March of the immediately preceding financial year. 36

122 Annex J Amendments to the Prudential sourcebook for Insurers (INSPRU) In this Annex, underlining indicates new text and striking through indicates deleted text G SUP 4 (Actuaries) sets out the role and responsibilities of the actuarial function and of the with-profits actuary. (1) (2) As part of his duties under SUP G, the with-profits actuary must advise the firm's governing body on the discretion exercised by the firm. In the context of the calculation of the with-profits insurance capital component, the with-profits actuary must also advise the firm's governing body as to whether the methods and assumptions (including the allowance for management actions) used for that calculation are consistent with the firm's Principles and Practices of Financial Management (PPFM - see COB 6.10 COBS 20.3) and with its regulatory duty to treat its customers fairly G In this section, any reference to the Principles and Practices of Financial Management (PPFM) is a reference to the requirements in COB 6.10 COBS 20.3 (Principles and Practices of Financial Management) for firms to establish, maintain and record the principles and practices of financial management according to which the business of its with-profits funds is conducted G Where a firm merges separate funds for different types of business, it will need to ensure that the merger will not result in policyholders being treated unfairly. When considering merging the funds, the firm should consider the impact on its PPFM (see COB 6.10 COBS 20.3) and on its obligations to notify the FSA (see SUP 15.3). In particular, a firm would need to consider how any inherited estate would be managed and how the fund would be run in future, such that policyholders are treated fairly. 37

123 Annex K Amendments to the Interim Prudential sourcebook for Insurers (IPRU(INS)) In this Annex, underlining indicates new text and striking through indicates deleted text. 9.6 (6) There must be deposited with every revenue account and balance sheet of an insurer any statement or report on the affairs of the insurer made or submitted: (a) (b) to the insurer's with-profits policyholders under COB G, COB R COBS G, COBS R or SUP AR(4), Appendix Subject to 3, if the insurer carries on long-term insurance business, the certificate required by rule 9.34(1) must also state that - (a) (c) the with-profits fund has been managed in accordance with the Principles and Practices of Financial Management, as established, maintained and recorded under COB 6.10 COBS 20.3; and 38

124 Annex L Amendments to the Interim Prudential sourcebook for Investment Businesses (IPRU(INV)) In this Annex, underlining indicates new text and striking through indicates deleted text. IPRU(INV) Chapter 3 Appendix 1- Glossary of Terms for IPRU(INV) 3: arranger means a firm - (a) (ii) whose sole investment business consists of activities within the following articles of the Regulated Activities Order - article 25(1) (arranging deals in investments); (iv) article (advising on investments); associate in relation to a person ("A"), means (b) (c) an appointed representative or where applicable, a tied agent of A or of any undertaking in the same group as A; and client means any person with or for whom a firm conducts or intends to conduct designated investment business or any other regulated activity; and: (a) (b) every client is a customer or a an market counterparty eligible counterparty; "client" includes: (iv) if a person ( C1 ), with or for whom the firm is conducting or intends to conduct designated investment business, is acting as agent for another person ( C2 ), either C1 or C2 in accordance with COB 4.1.5R COBS 2.4.3R (Agent as client); intermediate [deleted] 39

125 customer market counterparty private customer [deleted] [deleted] supervisory authority [deleted] Chapter 5: FINANCIAL RESOURCES (2) R The financial resources requirement for a firm which is not an exempt CAD firm is an own funds requirement determined in accordance with paragraph (a) of rule 5.2.3(3) if for a firm which: (i) (ii) (a) is an exempt CAD firm which is also an operator of a collective investment scheme and that scheme only invests in venture capital investments for non-retail clients; or is not an exempt CAD firm if: IPRU(INV) Chapter 5 Appendix 1- Glossary of Terms for Chapter 5: best execution in relation to the effecting of a transaction, means the effecting of that transaction in compliance with COB 7.5 COBS controller (as defined in section 422 of the Act (Controller) in relation to a firm or other undertaking ("A") means a person who: (a) (e) is entitled to exercise, or control control the exercise of, 10% or more of the voting power in A; or (f) 40

126 non-private - retail customer client means an intermediate customer a professional client or an eligible counterparty. Chapter 9: Financial resources requirements for an exempt CAD firm R An exempt CAD firm that carries on any regulated activity other than MiFID business must also have and maintain at all times financial resources calculated in accordance with the chapter of IPRU(INV) to which the firm is otherwise subject (Chapters 3 or 5) at least equal to the requirements set out in the relevant chapter (except that if the only designated investment business an exempt CAD firm is carrying on in addition to investment services and activities is making arrangements with a view to transactions in investments (article 25(2) Regulated Activities Order) and/or agreeing to carry on that regulated activity it only needs to comply with requirements set out in this chapter and not chapters 3 or 5) R The policy of professional indemnity insurance must incorporate terms which make provision for: (1) cover in respect of claims for which an exempt CAD firm may be liable as a result of the conduct of itself, its employees and its appointed representatives or where applicable, its tied agent (acting within the scope of their appointment); (7) G The cover provided by the policy should be wide enough to include the liability of the firm, its appointed representatives, or where applicable, its tied agent, employees and its agents for breaches of the firm's duty of skill and care, fiduciary duty, duty to look after documents or assets, fraud, and breaches of obligations imposed by or under the Act (or the Financial Services Act 1986 if relevant). If the firm operates outside the UK then the policy should cover other regulatory requirements imposed under the laws of other countries in which the firm operates. APPENDIX 13 (1) Defined terms for Chapter 13 adviser an individual who is: (a) 41

127 (c) an appointed representative or where applicable, tied agent. client (a) (b) "client" includes: (ii) a client of an appointed representative or where applicable, tied agent of a firm with or for whom the appointed representative or where applicable, tied agent, acts or intends to act, in the course of business for which the firm has accepted responsibility under section 39 of the Act (Exemption of appointed representatives); (iv) if a person ( C1 ), with or for whom the firm is conducting or intends to conduct designated investment business, is acting as agent for another person ( C2 ), either C1 or C2 in accordance with COB 4.1.5R COBS 2.4.3R (Agent as client); connected person in relation to a person, (a) (d) its employee (whether under a contract of service or a contract for services) or an employee of its appointed representative or where applicable, tied agent; contract for differences (a) (c) a derivative instrument for the transfer of credit risk to which article 85(3) of the Regulated Activities Order applies 42

128 customer (1) (except in COB 3 COBS 4) a client who is not a an market counterparty eligible counterparty. (2) (in COB 3 COBS 4) a person in (1) or a person who would be such a person if he was were a client. financial adviser an individual appointed by an independent intermediary or by its appointed representative or where applicable, tied agent to provide any or all of the following services: intermediate customer private customer properly secured [deleted] [deleted] fully secured by a first charge in favour of the firm on land and buildings, or on a readily realisable investment where the firm has in its possession or under its control control a document of title or a document evidencing title to that investment; representative (in relation to designated investment business) an individual appointed by a provider firm or by an appointed representative or where applicable, tied agent of that firm, to carry out either or both of the following activities: 43

129 Annex M Amendments to the Conduct of Business sourcebook (COBS) In this Annex, underlining indicates new text and striking through indicates deleted text, unless otherwise stated R The general application rule is modified in Annex 1 according to the activities of a firm (Part 1), and its location (Part 2) and certain temporary provisions (Part 2A). COBS 1 Annex 1: Application (see COBS 1.1.2R) Part 1: what? Modifications to the general application rule according to activities 1. Eligible counterparty business 1.1 R The COBS provisions shown below do not apply to eligible counterparty business that is MIFID or equivalent third country business Transactions concluded on an MTF 3.1 R The COBS provisions in paragraph 1.1R and COBS 11.4 (client limit orders) do not apply to transactions concluded under the rules governing an MTF between members or participants of the MTF (where the transactions are MIFID or equivalent third country business). However, the member or participant must comply with those provisions in respect of its clients if, acting on its clients behalf, it is executing their orders on a MTF. [Note: article 14(3) of MiFID] 4. Transactions concluded on a regulated market 4.1 R In relation to transactions concluded on a regulated market (where the transactions are MiFID or equivalent third country business), members and participants of the regulated market are not required to apply to each other the COBS provisions in paragraph 1.1R and COBS 11.4 (client limit orders). However, the member or participant must comply with those provisions in respect of its clients if, acting on its clients behalf, it is executing their orders on a regulated market. [Note: article 42(4) of MiFID] 44

130 6 Use of third party processors in life insurance mediation activities 6.1 R If a firm (or its appointed representative or, where applicable, its tied agent) outsources insurance mediation activities to a third party processor: (1) the firm must accept responsibility for the acts and omissions of that third party processor conducting those outsourced activities; and (2) any COBS rule requiring the third party processor's identity to be disclosed to clients must be applied as a requirement to disclose the firm's identity; unless the third party processor is advising on investments. Part 2A: temporary provisions to be removed on making the Policy Statement for the conduct of business regime: non-mifid deferred matters [Delete the heading (above) and the contents of this Part] Part 3: Guidance 1. The main extensions and restrictions to the general application rule 1.1 G The general application rule is modified in Parts 1 to 2Aand 2 of Annex 1 and in certain chapters of the Handbook. The modification may be an extension of this rule. For example, COBS 4 (Communications to clients) and COBS 5 (Financial promotion) have extended the application of the rule. 2. The Single Market Directives and other directives 2.2 G When considering the impact of a directive on the territorial application of a rule, a firm will first need to consider whether the relevant situation involves a non-uk element. The EEA territorial scope rule is unlikely to apply if a UK firm firm is doing business in a UK establishment for a client located in the United Kingdom in relation to a United Kingdom product. However, if there is a non-uk element, the firm should consider whether: (1) it is subject to the directive, (in general, directives only apply to UK firms and EEA firms, but the implementing provisions may not treat non-eea firms more favourably than EEA firms); (2) whether the business it is performing is subject to the directive; and (3) whether the particular rule is within the scope of the directive. If the answer to all three questions is yes, the EEA territorial scope rule may change the effect of the general application rule. 45

131 4 Insurance Mediation Directive: effect on territorial scope 4.2 G In the FSA's view, the responsibility for these minimum requirements rests with the Home State, but a Host State is entitled to impose additional requirements within the Directive's scope in the 'general good'. Accordingly, the general rules on territorial scope are modified so that: (1) for a UK firm providing passported activities through a branch in another EEA State under the Directive, whether through a branch or cross-border services, the rules implementing the Directive's minimum requirements apply but the territorial scope of the additional rules within the Directive's scope do not is not modified; (2) for an EEA firm providing passported activities under the Directive in the United Kingdom, the rules implementing the Directive's minimum requirements do not apply, but the additional rules within the Directive's scope do apply have their unmodified territorial scope unless the Home State imposes measures of like effect. (See recital 19 and article 12(5) of the Insurance Mediation Directive) 6. Distance Marketing Directive: effect on territorial scope 6.4 G Conversely, the territorial scope of the relevant rules in this sourcebook will is modified as necessary so that they do not apply to a firm conducting business within the Directive's scope from an establishment in another EEA state if the firm is a national of the United Kingdom or of any other EEA state. 7. Electronic Commerce Directive: effect on territorial scope 7.2 G A key element of the Directive is the ability of a person from one EEA state to carry on an electronic commerce activity freely into another EEA state. Accordingly, the territorial application of the rules in this sourcebook is modified so that they apply at least to a firm carrying on an electronic commerce activity from an establishment in the United Kingdom with or for a person in the United Kingdom or another EEA state. Conversely, a firm that is a national of the UK or another EEA State, carrying on an electronic commerce activity from an establishment in another EEA State with or for a person in the United Kingdom, need not comply with the rules in this sourcebook. (See article 3(1) and (2) of the Electronic Commerce Directive) 7.3 G 46

132 7.4 G In the FSA's view, the Directive's effect on the territorial scope of this sourcebook (including the use of the 'insurance derogation'): (1) is in line with the Distance Marketing Directive; and (2) overrides that of any other Directive discussed in this section Annex to the extent that it is incompatible. 8. Investor Compensation Directive 8.1 G (2) In the FSA's view, these matters are a Home State responsibility although a Host State may continue to apply its own rules in the 'general good'. Accordingly, these rules apply to the establishments of a UK MiFID investment firm in the United Kingdom and another EEA State but also apply in accordance with the general application rule their standard territorial scope to an EEA MiFID investment firm providing services in the UK whether through a branch or cross-border services unless its Home State applies rules of like effect. 9. UCITS Directive: effect on territorial scope 9.2 G Accordingly, the territorial scope of this sourcebook is modified so that: (1) the rules relating to the distribution of a simplified prospectus apply to the management company (operator) of a UCITS whose Home State is the United Kingdom when marketing in other EEA States; (2) those rules do not apply to a management company of a UCITS whose Home State is another EEA State when marketing in the United Kingdom; other rules, such as the financial promotion rules and the information gathering and suitability rules (see COBS 9 Suitability (including basic advice)) continue to apply without modification of this territorial scope G The fact that a fee, commission or non-monetary benefit is paid or provided to or by an appointed representative or, where applicable, by a tied agent, does not prevent the application of the rule on inducements R In relation to MiFID or equivalent third country business, a A firm must: 47

133 Per se professional clients R Each of the following is a per se professional client unless and to the extent it is an eligible counterparty or is given a different categorisation under this chapter: (3) in relation to business that is not MiFID or equivalent third country business, a large undertaking meeting either any of the following conditions: (a) (b) a body corporate (including a limited liability partnership) which has (or any of whose holding companies or subsidiaries has) (or has had at any time during the previous two years) called up share capital or net assets of at least 105 million (or its equivalent in any other currency at the relevant time); a an large undertaking that meets (or any of whose holding companies or subsidiaries meets) two of the following tests: (i) a balance sheet total of EUR 12,500,000; (ii) a net turnover of EUR 25,000,000; (iii) an average number of employees during the year of 250; (c) (d) (e) a partnership or unincorporated association which has (or has had at any time during the previous two years) net assets of at least 5 million (or its equivalent in any other currency at the relevant time) and calculated in the case of a limited partnership without deducting loans owing to any of the partners; a trustee of a trust (other than an occupational pension scheme, SSAS, personal pension scheme or stakeholder pension scheme) which has (or has had at any time during the previous two years) assets of at least 10 million (or its equivalent in any other currency at the relevant time) calculated by aggregating the value of the cash and designated investments forming part of the trust's assets, but before deducting its liabilities; a trustee of an occupational pension scheme or SSAS, or a trustee or operator of a personal pension scheme or stakeholder pension scheme where the scheme has (or has had at any time during the previous two years): (i) at least 50 members; and (ii) assets under management of at least 10 million (or its equivalent in any other currency at the relevant time); 48

134 (f) a local authority or public authority A R In relation to MiFID or equivalent third country business a local authority or a public authority is not likely to be a regional government for the purposes of COBS 3.2.5R(4). In the FSA's opinion, a local authority may be a per se professional client for those purposes if it meets the test for large undertakings in COBS 3.2.5R(2). 3.6 Eligible counterparties R (1) (2) In relation to MiFID or equivalent third country business, a A client can only be an eligible counterparty in relation to eligible counterparty business (PRIN 1 Ann 1 is an exception to this) R A firm may treat a client as an elective eligible counterparty if: (1) the client is an undertaking and: (a) is a per se professional client (except for a client that is only a per se professional client because it is an institutional investor under COBS 3.5.2R(5)) and, in relation to business other than MiFID or equivalent third country business;: or (i) (ii) is a body corporate (including a limited liability partnership) which has (or any of whose holding companies or subsidiaries has) called up share capital of at least 10 million (or its equivalent in any other currency at the relevant time); or meets the criteria in the rule on meeting two quantitative tests (COBS 3.5.2R(3)(b)); or (b) [Note: article 24(3) and the second paragraph of article 24(4) of MiFID and article 50(1) of the MiFID implementing Directive] 4 Communicating with clients, including financial promotions 4.1 Application Who? What? G (1) (2) This chapter does not apply in relation to communicating with an eligible counterparty other than the section on compensation 49

135 information (see COBS 4.4) but elements of the requirements in PRIN may apply R Approving a financial promotion without communicating it is not MiFID or equivalent third country business. Communicating a financial promotion to a person other than a client or a potential client client is also not MiFID or equivalent third country business. Further guidance on what amounts to MiFID business may be found in PERG Fair, clear and not misleading communications The fair, clear and not misleading rule G (1) (2) COBS 4.2.1R(2)(b) does not limit the application of the fair, clear and not misleading rule under COBS 4.2.1R(2)(a). So, for example, a communication in relation to designated investment business that is both a communication to a professional client and a financial promotion, will still be subject to the fair, clear and not misleading rule. The reasonable steps defence to an action for damages R If, in relation to a particular communication or financial promotion, a firm takes reasonable steps to ensure it complies with the fair, clear and not misleading rule, a contravention of that rule does not give rise to a right of action under section 150 of the Act. 4.6 Past, simulated past and future performance Application R (1) Subject to (2) and (3), this section applies to a firm in relation to: (a) (b) in the case of MiFID or equivalent third country business, in relation to all information addressed to, or disseminated in such a way that it is likely to be received by, a retail client the provision of information in relation to its designated investment business; and in relation to approving or communicating a financial promotion. the communication or approval of a financial promotion; where such information or financial promotion is addressed to, or disseminated in such a way that it is likely to be received by, a retail client R (1) A firm that communicates to a client a projection for a packaged product must ensure that the projection complies with the projections rules in COBS 13.4, COBS 13.5 and COBS 13 Annex 2, which is not 50

136 a financial instrument. (2) A firm must not communicate a projection for a highly volatile product to a client unless the product is a financial instrument. 4.7 Direct offer financial promotions G (1) (2) A firm communicating or approving a direct offer financial promotion may also be subject to the rules on providing product information in COBS 14.2, including the exceptions in COBS R to R G In order to enable a client to make an informed assessment of a relevant investment or relevant business, a firm may wish to include in a direct offer financial promotion: (1) ; and (2). ; and (3) (in relation to a promotion for a packaged product that is not a financial instrument) a key features illustration, in which a generic projection may generally be used G COLL R requires an authorised fund manager to ensure that its financial promotions, which contain an invitation to purchase the units in a UCITS scheme, indicate that a simplified prospectus and a full prospectus exist, and the places where they may be obtained by the public or how the public may have access to them. 4.8 Cold calls and other promotions that are not in writing Application R This section applies to a firm in relation to a financial promotion that is not in writing, but it does not apply: (1) (3) if the financial promotion is a non-retail communication; (34) (45) 4.9 Financial promotions with an overseas element Application 51

137 4.9.1 R (3) This section does not apply to a communication by a firm other than in relation to its MiFID or equivalent third country business: (d) (de) (ef) if it is a non-retail communication; 4.11 Record keeping: financial promotion R (1) (4) This rule does not apply in relation to a communication that is made by a firm in relation to its MiFID or equivalent third country business: (a) (b) (c) to the extent that the communication is a third party prospectus; or if it is image advertising.; if it is a non-retail communication. (5) This rule does not apply in relation to a communication that is not made by a firm other than in relation to MiFID or equivalent third country business: (a) (b) (c) (d) (de) (ef) if it is a non-retail communication; After 4.11 insert 4.12 which is a new section and is not underlined Unregulated collective investment schemes R (1) A firm may communicate an invitation or inducement to participate in an unregulated collective investment scheme without breaching the restriction on promotion in section 238 of the Act if the promotion falls within an exemption in the table in (4), as explained further in 52

138 the Notes. (2) Where the left-hand column in the table in (4) refers to promotion to a category of person, this means that the invitation or inducement: (a) is made only to recipients who the firm has taken reasonable steps to establish are persons in that category; or (b) is directed at recipients in a way that may reasonably be regarded as designed to reduce, so far as possible, the risk of participation in the collective investment scheme by persons who are not in that category. (3) A firm may rely on more than one exemption in relation to the same invitation or inducement. (4) Promotion to: Promotion of an unregulated collective investment scheme which is: Category 1 person (1)a person who is already a participant in an unregulated collective investment scheme; or (2) A person who has been, in the last 30 months, a participant in an unregulated collective investment scheme. A. that collective investment scheme; or B. any other collective investment scheme whose underlying property and risk profile are both 'substantially similar' (see Note 1) to those of that collective investment scheme; or C. a collective investment scheme which is intended to absorb or take over the assets of that collective investment scheme; or D. a collective investment scheme, units in which are being offered by its operator as an alternative to cash on the liquidation of that collective investment scheme. Category 2 person (1) A person: That collective investment scheme (a) for whom the firm has taken reasonable steps to ensure that investment in the collective investment scheme is suitable; and 53

139 (b) who is an 'established' or 'newly accepted' client of the firm or of a person in the same group as the firm (see Notes 2 & 3). Category 3 person A person who is eligible to participate in a scheme constituted under: Any such collective investment scheme (1) the Church Funds Investment Measure 1958; (2) section 24 of the Charities Act 1993; or (3) section 25 of the Charities Act (Northern Ireland) Category 4 person An eligible employee, that is, a person who is: (1) an officer; (2) an employee; (3) a former officer or employee; or (4) a member of the immediate family of any of (1) - (3), of an employer which is (or is in the same group as) the firm, or which has accepted responsibility for the activities of the firm in carrying out the designated investment business in question. 1. A collective investment scheme the instrument constituting which: A. restricts the property of the scheme, apart from cash and near cash, to: (1) (where the employer is a company) shares in and debentures of company or any other connected company (see Note 4); (2) (in any case), any property, provided that the scheme takes the form of: (i) a limited partnership, under the terms of which the employer (or connected company) will be the unlimited partner and the eligible employees will be some or all of the limited partners; or (ii) a trust which the firm reasonably believes not to contain any risk that any eligible employee may be liable to make any further payments 54

140 (other than charges) for investment transactions earlier entered into, which the eligible employee was not aware of at the time he entered into them; and B. (in a case falling within A(1) above) restricts participation in the scheme to eligible employees, the employer and any connected company. 2. Any collective investment scheme provided that the participation of eligible employees is to facilitate their co-investment: (i) with one or more companies in the same group as their employer (which may include the employer); or (ii) with one or more clients of such a company. Category 5 person A person admitted to membership of the Society of Lloyd's or any person by law entitled or bound to administer his affairs. Category 6 person An exempt person (other than a person exempted only by section 39 of the Act (Exemption of appointed representatives)) if the financial promotion relates to a regulated activity in respect of which the person is exempt from the general prohibition. Category 7 person An eligible counterparty or a professional client. A scheme in the form of a limited partnership which is established for the sole purpose of underwriting insurance business at Lloyd's. Any collective investment scheme. Any collective investment scheme in relation to which the client is categorised as a professional client or eligible counterparty (see Note 5). 55

141 Category 8 person A person: Any collective investment scheme covered by the assessment. (1) in relation to whom the firm has undertaken an adequate assessment of his expertise, experience and knowledge and that assessment gives reasonable assurance, in light of the nature of the transactions or services envisaged, that the person is capable of making his own investment decisions and understanding the risks involved; (2) to whom the firm has given a clear written warning that this will enable the firm to promote unregulated collective investment schemes to the client; and (3) who has stated in writing, in a document separate from the contract, that he is aware of the fact the firm can promote certain unregulated collective investment schemes to him. The following Notes explain certain words and phrases used in the table above. Note 1 The property of a collective investment scheme is 'substantially similar' to that of another collective investment scheme if in both cases the objective is to invest in the same one of the following sectors: (a) (b) (c) (d) (e) (f) on-exchange derivatives or warrants; on-exchange (or quoted) securities; the property market (whether in security of property companies or in property itself); collectable items of a particular description (such as works of art, antique vehicles, etc); artistic productions (such as films, television, opera, theatre or music); unlisted investments (including unlisted debt securities). The risk profile of a scheme will be substantially similar to that of 56

142 another scheme only if there is such similarity in relation to both liquidity and volatility. Note 2 Note 3 A person is an 'established client' of another person if he has been and remains an actual client of that person in relation to designated investment business done with or through that other person. A person is a 'newly accepted' client of a firm if: (a) (b) a written agreement relating to designated investment business exists between the client and the firm (or, if the client is normally resident outside the United Kingdom, an oral or written agreement); and that agreement has been obtained without any contravention of section 238 or 240 of the Act, or of any rule in COBS applying to the firm or (as far as the firm is reasonably aware) any other authorised person. Note 4 A company is 'connected' with another company if: (a) they are in the same group; or (b) one company is entitled either alone or with another company in the same group, to exercise or control the exercise of a majority of the voting rights attributable to the share capital, which are exercisable in all circumstances at any general meeting of the other company or of its holding company. Note 5 Firms may use the client categorisation regime that applies to business other than MiFID or equivalent third country business. [This is the case even if the firm will be within the scope of MiFID when it makes the promotion.] G Guidance on the regulatory system as it applies to unregulated collective investment schemes appears at PERG Distance communications 5.1 The distance marketing disclosure rules Application R This section applies to a firm that carries on any distance marketing activity from an establishment in the UK, with or for a consumer in the United Kingdom or another EEA State. 5.2 E-commerce Application 57

143 5.2.1 R This section applies to a firm that is carrying on an electronic commerce activity provider from an establishment in the United Kingdom, with or for a person in the United Kingdom or another EEA State Information about the electronic commerce activity providerfirm and its products or services R A firm must provide a retail client with the following general information, if relevant: (8) (a) in the case of a common platform firm or a third country investment firm, a description, which may be provided in summary form, of the conflicts of interest policy; (b) R (1) (4) A firm within (1) that holds client designated investments or client money for a professional client must provide that client with the information in paragraphs (1)( e d) and (2)(a) and(b) G (1) A firm will satisfy the requirements as to timing in the rules referred to in COBS 6.3.3G(4) and (5) if its representative provides information to the client on first making contact with the client R (1) (2) The menu is unlikely to be fair, clear and not misleading if a firm uses it for a service other than personal recommendations. (2) (a) Paragraph (1) does not apply if, in relation to a life policy or a pension contract: (i) (ii) the maximum amounts or rates already disclosed to the client only apply to products of the example term or age of client given in the menu or payment information other payment information or to products with shorter terms; and 58

144 COBS 6 Annex 1G: Initial disclosure document described in COBS G(1) The Financial Services Authority (FSA) The FSA is the independent watchdog that regulates financial services. This document is designed by the FSA to be given to consumers considering taking advice on buying certain financial products. Use this information to decide if our services are right for you. 2. Whose products do we offer? [Note 4] [Note 7] We [can] [Note 8] only offer products from a limited number of companies. Ask us for a list of the companies and products we offer. [Note 11] [These include our own product(s) but our recommendation will be made following an analysis of our entire range of products.] [Note 9] Ask us for a list of the companies and whose products we offer. [Note 11] In COBS 6 Annex 2, delete this image [Note 2] about our services about our services [Note 1] [Note 3] [123 Any Street Some Town ST21 7QB] and replace it with this one: about our services about our services [Note 1] [Note 3] [123 Any Street Some Town 59

145 ST21 7QB] [Note 2]] COBS 6 Annex 2: 1. The Financial Services Authority (FSA) The FSA is the independent watchdog that regulates financial services. This document is designed by the FSA to be given to consumers considering taking advice on buying certain financial products. Use this information to decide if our services are right for you. 4 What will you have to pay us for our services? You will receive a key features facts illustration when considering a particular [lifetime] [mortgage] [home reversion plan] [equity release product], which will tell you about any fees relating to it. [Note 13] 8 Are we covered by the Financial Services Compensation Scheme (FSCS)? [Note 27] [Note 43] [Note 44] [question: why are these sections blank?] COBS 6 Annex 3G (Menu described in COBS 6.3) Table 2 - Commission if you invest a lump sum [Notes 12-17] Exampl Products e term or age Comparison of costs Our maximum Market average Example based on 10,000 lump sum This shows the maximum costs of our sales and advice for a lump sum investment of 10,000 ignoring any changes in fund value 60

146 Savings and investments Collective investments (eg unit trusts) Investment bond Any [Note 18] [Note 20] [Note 21] Any [Note 18] [Note 20] [Note 21] Saving for retirement Personal and Stakeholder Any [Note 18] [Note 20] [Note 21] pensions At retirement Annuities Any [Note 18] [Note 20] [Note 21] Income drawdown Any [Note 18] [Note 20] [Note 21] Personal Pension Schemes Not all types of personal pension scheme are included in the information above about commissions. Instead only the more common types are included, and schemes such as SIPPs are not. Before we start advising you, we will inform you of how much we could be paid if we do recommend one of these products to you. You can also ask us about commission we might receive on underlying investments we recommend you hold within a SIPP if not contained in the information above. [Note 19] At retirement Annuities Any [Note 18] [Note 20] [Note 21] Income drawdown Any [Note 18] [Note 20] [Note 21] Reliance on information R A firm is entitled Insufficient information R If a firm R A firm must retain its records relating to suitability for a minimum of the following periods: (2) if relating to a life policy, pension contract personal pension scheme or stakeholder pension scheme, five years; 9 Annex 2G Sales processes for stakeholder products 61

147 Stakeholder pensions [intentionally blank]a firm may provide a copy of the table setting out initial monthly pension amounts, found within the FSA's "Stakeholder pension decision tree" factsheet, in accordance with COBS 13 Annex 2 1.8R, but in doing so should also provide and explain the caveats and assumptions behind the table. A firm should make it clear that the decision on how much to invest is the retail client's responsibility and that he should get further advice if has any concerns R G G G G Reliance on information Use of existing information Knowledge and experience Increasing the client's understanding No duty to communicate firm's assessment of knowledge and experience G A service should be considered to be provided at the initiative of a client (see COBS R(1)(ba)) 11 Dealing and managing 11.1 Application General application R This chapter other than the section on personal account dealing (COBS 11.7) applies in relation to a firm:. (1) MiFID business carried on by a MiFID investment firm: or (2) equivalent business of a third country investment firm. 62

148 R In this chapter, provisions marked EU apply to a third country investment firm firm which is not a MiFID investment firm as if they were rules. Disapplication of best execution for non-financial spreads R The section on best execution (COBS 11.2) does not apply to a firm when: (1) executing orders: or (2) placing orders with other entities for execution: or (3) transmitting orders to other entities for execution; in relation to a spread-bet which is not a financial instrument, where the firm has not made a personal recommendation in relation to that spread-bet. Purpose G The purpose of this chapter is to implement the provisions of : (1) MiFID relating to set out specific requirements relating to the production and dissemination of investment research and nonindependent research; and (2) implementing the provisions of the Market Abuse Directive relating to the disclosures to be made in, and about, research recommendations. Application: Who? R This chapter applies in relation to a firm. (1) MiFID business carried on by a MiFID investment firm; and [deleted] (2) COBS 12.4 applies to all firms. [deleted] R A firm must have in place arrangements designed to ensure that the following conditions are satisfied: (3) the firm itself, financial analysts, and other relevant persons involved in the production of investment research must not accept inducements from those with a material interest in the subject matter of the investment research; [Note: article 25(2)(c) of the MiFID implementing Directive] 63

149 R A firm firm which produces or disseminates non-independent research nonindependent research must ensure that it: 13 Preparing product information 13.1 The obligation to prepare product information R A firm must prepare: Exceptions (1) a key features document for each packaged product, cash-deposit ISA and cash-deposit CTF it produces,; and (2) a key features illustration for each packaged product it produces; in good time before that document has those documents have to be provided R A firm is not required to prepare: (3) [intentionally blank] a key features illustration, if it includes the information from the key features illustration in a key features document; or R A key features document and a key features illustration must also: (1) (if it is a key features document) be produced and presented to at least the same quality and standard as the sales or marketing material used to promote the relevant product; (2) (if it is a key features document) display the firm s brand at least as prominently as any other ; (3) (if it is a key features document or a key features illustration which does not form an integral part of the key features document) include the keyfacts logo in a prominent position at the top of the document; and (4) (if it is a key features document or a key features illustration which does not form an integral part of the key features document) include the following statement in a prominent position: The Financial Services Authority is the independent financial services regulator. It requires us, [provider name], to give you this important information to help you to decide whether our [product name] is right for you. You should read this document carefully so that you understand what you are buying, and then keep it safe for future 64

150 reference G The Consolidated Life Directive information can be included in a key features document, a key features illustration or any other document R A key features document must: (2) explain: (d) (for a CTF) that stakeholder CTFs, cash-deposit CTFs and share CTFs security-based CTFs are available and which type the firm is offering; and [The text in this section is all new and not underlined] 13.4 Contents of a key features illustration R A key features illustration must include appropriate charges information and, if it is a packaged product which is not a financial instrument: Exceptions (1) must include a standardised deterministic projection; (2) the projection and charges information must be consistent with each other; (3) it may also include alternative projections except that the most prominent projection must be a standardised deterministic projection R A key features illustration must not include a generic projection unless: (1) there are reasonable grounds for believing that that projection will be sufficient to enable a retail client to make an informed decision about whether to invest; or (2) it is a direct offer financial promotion G A generic projection is unlikely to be sufficient to enable a retail client to make an informed decision about whether to invest if the premium or investment returns on the product will be materially affected by the personal characteristics of the investor R There is no requirement to include a projection in a key features illustration: 65

151 (1) for a single premium life policy bought as a pure investment product, a product with benefits that do not depend on future investment returns or any other product if it is reasonable to believe that a retail client will not need one to be able to make an informed decision about whether to invest; or (2) if the product is: (a) (b) a SIPP from which no income withdrawals are being taken; or a life policy that will be held in a CTF or sold with basic advice (unless the policy is a stakeholder pension scheme) G Although there may be no obligation to include a projection in a key features illustration, where a firm chooses to include one, the projection must follow the appropriate requirements, as outlined in this section, or for financial instruments under COBS [The text in this section is all new and not underlined] 13.5 Preparing product information: other projections Projections for in-force products R A firm that communicates a projection for an in-force packaged product which is not a financial instrument: (1) must include a standardised deterministic projection; (2) may also include an alternative projection except that the most prominent projection must be a standardised deterministic projection; and must follow the projection rules in COBS 13 Annex 2. Projections: other situations R A firm that communicates a projection for a packaged product which is not a financial instrument, (1) for which a key feature illustration is not required to be provided; and (2) which is not an in-force packaged product; must ensure that such a projection is either a standardised deterministic projection or an alternative projection in accordance with COBS 13 Annex 2. Exceptions to the projection rules: projections for more than one product 66

152 R A firm that communicates a projection of benefits for a packaged product which is not a financial instrument, as part of a combined projection where other benefits being projected include those for a financial instrument or structured deposit, is not required to comply with the projection rules in COBS 13.4, 13.5 and COBS 13 Annex 2 to the extent that it complies with the future performance rule (COBS 4.6.7R) G The general requirement that communications be fair, clear and not misleading will nevertheless mean that a firm that elects to comply with the future performance rule in COBS 4.6.7R will need to explain how the combined projection differs from other information that has been or could be provided to the client, including a projection provided under the projection rules in COBS 13.4, 13.5 and COBS 13 Annex 2. [The text in this section is all new and not underlined] COBS 13 Annex 2: Projections This annex belongs to COBS R(1) (Contents of a key features illustration), R (Projections for in-force products) and (Projections: other situations). Projections 1 Calculating standardised deterministic projections 1.1 R A standardised deterministic projection must: (1) include a projection of benefits at the lower, intermediate and higher rates of return; (2) be rounded down; and (3) show no more than three significant figures. Calculating projections: additional requirements for a pension scheme 1.2 R (1) A standardised deterministic projection within a key features illustration for a personal pension scheme or stakeholder pension scheme must include or be accompanied by information explaining the impact of inflation on those benefits. (2) Where a firm chooses to provide that information required in (1) in the form of one or more projections of benefits, it must include a projection in real terms, so long as it is either: (a) calculated using: (i) (ii) the appropriate intermediate rate of return; the intermediate rate of price inflation, in accordance with COBS 13 Annex 2 2.5R; and 67

153 (iii) an annuity calculated in accordance with COBS 13 Annex 2 3.1R; or (b) consistent with the statutory money purchase illustration assumptions, with any material differences between the assumptions used and those otherwise required for accompanying standardised deterministic projections explained. 1.3 R (1) If a generic projection is prepared for a stakeholder pension scheme or personal pension scheme, sufficient separate projections, covering a range of different contractual periods and contributions, must be included for a retail client to be able to make an informed decision about whether to invest. (2) A projection prepared on that basis may omit benefits in nominal terms and only show a range of figures at the intermediate rate of return, of benefits in real terms. 1.4 G A firm will provide sufficient separate projections if it prepares a table that shows projections in real terms for a variety of periods to maturity and a variety of contribution levels, taking into account the charges and other material terms that apply to the stakeholder pension scheme or personal pension scheme. Such a table could be laid out like a specimen benefits table (see COBS 13 Annex 2 1.8). Calculating an alternative projection 1.5 R An alternative projection must: (1) (if the alternative projection is not a stochastic projection) not exceed the higher rate of return; (2) (if the alternative projection is not a stochastic projection), use assumptions consistent with the assumptions which apply to standardised deterministic projections in this Annex, unless the reasons for any inconsistency are: (a) (b) reasonable; explained to a retail client, with enough information for the retail client to be able to understand the difference between the alternative projection and any standardised deterministic projection being provided; and (3) (if the alternative projection is a stochastic projection) only be used if: (a) there are reasonable grounds for believing that a retail client will be able to understand it; 68

154 (b) (c) it is based on a reasonable number of simulations and assumptions which are reasonable and supported by objective data; and the alternative projection is accompanied by enough information for the retail client to be able to understand the difference between the alternative projection and any standardised deterministic projection being provided. 1.6 G An alternative projection may be used either as part of a key features illustration or separately. However, it must not detract from any standardised deterministic projection required by COBS R or R. Exceptions 1.7 R A projection: (1) for a product that will mature in six months or less; or (2) prepared in order to determine the maximum level of contributions permitted to be made to a personal pension scheme, may be prepared and presented on any reasonable basis but only if, in the case of (2), the assumptions used to calculate the projection and contributions are disclosed with the relevant projection. 1.8 R In the case of a stakeholder pension scheme, the specimen benefits table, contained within the FSA's "Stakeholder pension decision tree" factsheet and headed "Pension TableHow much should I save towards a pension?" which sets out initial monthly pension amounts, may be used instead of a standardised deterministic projection but only if it is accompanied by an explanation of the caveats and assumptions behind the table. 1.9 R The rules in this Annex do not apply to a projection which is consistent with the statutory money purchase illustration requirements R A standardised deterministic projection for existing business may omit the projection at the intermediate rate of return. 2 Assumptions to follow when calculating projections. Assumptions: projection date 2.1 R A standardised deterministic projection must be calculated to the projection date described below: Product (1) A contract which is a whole life assurance the premiums under which are regular premiums Projection date The anniversary of the commencement date: (a) which first falls after the seventyfifth birthday of the life assured; or (b) (if there is more than one life 69

155 assured) the anniversary of the commencement date which falls after the seventy fifth birthday of: (i) (if benefits are payable on the first death) the oldest life assured; or (ii) (in all other cases) the youngest life assured; subject to a minimum projection date of ten years. (2) A contract that is not in (1): (a) where the relevant marketing refers to a surrender value or an option to take benefits before they would otherwise be paid; or (b) that is open-ended, or linked to one or more lives, which is not a personal pension scheme or stakeholder pension scheme (3) A contract that is not in (1) or (2) and has a specified maturity date (4) A contract that is not in (1) or (2) or (3) An appropriate date which highlights the features of the product The maturity date specified in the contract The tenth anniversary of the commencement date Assumptions: contributions 2.2 R A standardised deterministic projection must: (1) take account of all contributions due during the projection period; (2) be calculated on the basis that contributions are accumulated, net of charges, at the appropriate rate of return compounded on an annual basis; (3) (if it includes assumptions about contribution increases in line with an index) be based on an assumption that contribution increases are consistent with any assumptions regarding that index in this annex; and (4) deduct from contributions any rider benefits or extra premium which may be charged for an increased underwriting risk. Assumptions: rates of return 2.3 R A standardised deterministic projection must be calculated using the following rates of return: 70

156 Nominal rates Lower rate Intermediate rate Higher rate tax-exempt business held in a wrapper or by a friendly society personal pension schemes, stakeholder pension schemes and investment-linked annuities 5% 7% 9% Exception all other products 4% 6% 8% 2.4 R A standardised deterministic projection: (1) must be calculated using lower rates of return, if the rates described in this section overstate the investment potential of the product; (2) may be calculated using a lower rate of return if a retail client requests it. Assumptions: inflation 2.5 R If inflation is taken into account, the standardised deterministic projection must be calculated using the following rates: Lower rate Intermediate rate Higher rate Price inflation 0.50% 2.50% 4.50% Earnings inflation 2% 4% 6% Assumptions: charges 2.6 R The charges allowed for in a standardised deterministic projection: (1) must properly reflect: (a) (b) (c) all of the charges, expenses and deductions a client will, or may be expected to, pay; the tax relief available to the firm in respect of so much of the firm s gross expenses as can properly be attributed to the contract; and the fact that certain charges will be fully or partially off-set, but only to the extent that the firm can show that the off-set funds will be available when the relevant charges arise; and (2) must not include the firm s dealing costs incurred on the underlying 71

157 portfolio. 2.7 G (1) Development and capital costs should normally be written off in the year in which they are incurred. However, some costs (for example, exceptional new business expenses) may be amortised and previous years costs may then be brought into account. (2) If it is reasonable to assume that higher expenses will be incurred in the future, appropriate allowances should be made, and any inflation assumptions should be consistent with those prescribed in these rules. (3) Expenses should be apportioned appropriately between products so that scales of expenses can be calculated and applied. (4) Where appropriate, mortality and morbidity should be allowed for on a best estimate basis. The basis for annuities should allow for future improvements in mortality. (5) A projection should not assume that charges will fall over time to a rate that is lower than the rate currently being charged on the relevant product (or, if there is no such charge, on a similar product). (6) A projection of surrender value, cash-in value or transfer value should take into account any specific current surrender value basis and penalties which may be applied. Additional requirements: with-profits policies 2.8 R (1) A standardised deterministic projection for a with-profits policy must properly reflect the deductions from asset share which a firm expects to make in accordance with its deductions plan. (2) A standardised deterministic projection for a with-profits policy where bonus rates apply must assume that the bonus rates supported by the relevant premium and rate of return apply throughout the term of the contract. Additional requirements: unsecured and alternatively secured pensions 2.9 R (1) A standardised deterministic projection for an unsecured or alternatively secured pension must be based on the requirements contained in (2) to the extent that they impose additional or conflicting requirements to the balance of the rules in this section. (2) A standardised deterministic projection for an unsecured or alternatively secured pension must be based on an assumption that the current gilt-index yield will continue to apply throughout the relevant term and include: (a) the maximum initial income specified in the tables published by the Government Actuaries Department for an unsecured or alternatively secured pension (as the case may be); 72

158 (b) (c) (d) (e) (f) the assumed level of income; for a short-term annuity, where subsequent short-term annuities are assumed, a statement reflecting that fact; (under the heading What the benefits might be ), the amount of income and the projected value of the fund at each fifth anniversary for the lower, intermediate and higher rates of return; the projected open market values and the amounts of annuity at age 75 or the date at which it is reasonably assumed that an annuity will be purchased (which, for an alternatively secured pension, must be after ten years); and the amount of annuity that could be secured using an immediate annuity rate available in the market. 3 How to calculate a projection for a future annuity 3.1 R A projection for a future annuity must: (1) be calculated by rounding all factors to three decimal places before applying them to the relevant retirement fund; (2) be based on the mortality tables PMA92 and PFA92, using the medium cohort projection based on year of birth mortality rates; (3) (for a protected rights annuity) be calculated on a unisex basis so the policyholder has female mortality and the spouse has male mortality; (4) (for an annuity where two lives are concerned): (a) (b) reflect the age difference between the two lives; or be based on the assumption that the male life is three years older than the female (if the genders differ) or the two lives have the same age (if the genders are the same); (5) include an expenses allowance of 4%; (6) be based on the following rates of return as appropriate: Lower rate Intermediate rate Higher rate Level or fixed rate of increase annuities RPI or LPI linked annuities Y+1.5% Y+3.5% Y+5.5% Y-1% Y Y+1% where: 73

159 Y is 0.5*(ILG0 + ILG5) 0.5 rounded to the nearest 0.2%, with an exact 0.1% rounded down; and ILG0 and ILG5 are the real yield on the FTSE Actuaries Government Securities Index-linked Real Yields over 5 years, assuming 0% and 5% inflation respectively, updated every 6 April to use the ILG0 and ILG5 which applied on or, if necessary, the business day immediately before, the preceding 15 February; and (7) (in the case of a future annuity with less than one years to maturity) be calculated using annuity rates that are no more favourable than the firm s relevant current immediate annuity rate or (if there is no such rate) the relevant immediate annuity rate available in the market; and (8) be assumed to be payable monthly in advance with a guaranteed period of 5 years, unless it is unreasonable to do so. 3.2 R A projection for a future annuity: (1) must be calculated using lower rates of return, if the rates described in this section overstate the investment potential of the product; (2) may be calculated using a lower rate of return if a retail client requests it. 4 How to calculate a projection for an appropriate personal pension 4.1 R (If a client is considering whether to contract out), a projection for an appropriate personal pension must include or be accompanied by (1) a contracting out comparison providing a description of: (a) (b) the benefits that minimum contributions would secure if a retail client did not contract out of the State Second Pension; and the material differences between the anticipated position if a retail client remains contracted into the State Second Pension and the anticipated position if that client contracts out; which is calculated to the client s state retirement age using the lower and higher rates of return in 4.2R and aggregate contributions for the current and the next two tax years. (2) an explanation that the figures in the comparison are intended to illustrate: (a) (b) the amount of pension the client might get compared with the benefit to be given up under the State Second Pension; and what might happen if the lower and higher rates of return 74

160 were achieved each year. 4.2 R This table belongs to 4.1 R Pre- and post-vesting real rates of return for contracting out comparisons. Lower rate Higher rate 1% 3% 5 How to present a projection 5.1 R A standardised deterministic projection must be accompanied by: (1) appropriate risk warnings, including warnings about volatility, the relationship between figures in real terms and those in nominal terms, and the degree to which any figures can be relied upon; and (2) a statement: (a) (b) (c) (d) (e) that projection rates are standardised or an explanation that projection rates that are lower than the standard rates have been used and why; that charges may vary; of the contributions that have been assumed; that increases in contributions have been assumed (if that is the case), together with sufficient information for a retail client to be able to understand the nature and magnitude of the assumed increases; and of the sum of any actual premiums charged for any rider benefits or increased underwriting risks (where these have been charged). Additional requirements: pension schemes and products linked to other products 5.2 R A standardised deterministic projection for a product where the benefits illustrated depend on a link to a separate product must include an appropriate description of the material factors that might influence the returns available overall and any restrictions assumed in providing an illustration of benefits in relation to that separate product. 75

161 [The text in this section is all new and not underlined] COBS 13 Annex 3: Charges This annex belongs to COBS R (Contents of a key features illustration) Charges 1 Appropriate charges information 1.1 R Appropriate charges information comprises: (1) a description of the nature and amount of the charges a client will or may be expected to bear; (2) an effect of charges table; and (3) reduction in yield information. 1.2 R Where a firm does not include a projection within its key features illustration the charges information can be on a generic basis. Exceptions 1.3 R An effect of charges table and reduction in yield information are not required for: (1) a life policy without a surrender value, but an appropriate warning must be included to make it clear that the policy has no cash-in value at any time; (2) a SIPP; (3) a stakeholder pension scheme, if the following is included instead: There is an annual charge of y% of the value of the funds you accumulate. If your fund is valued at 500 throughout the year, this means we deduct [ 500 x y/100] that year. If your fund is valued at 7500 throughout the year, we will deduct [ 7500 x y/100] that year. (4) a stakeholder product that is not a stakeholder pension scheme, or a product that will be held in a CTF where the relevant product and the CTF levy their charges annually, if the following is included instead: There is an annual charge of y% of the value of the funds you accumulate. If your fund is valued at 250 throughout the year, this means we deduct [ 250 x y/100] that year. If your fund is valued at 500 throughout the year, this means we deduct [ 500 x y/100] that year. [After ten years these deductions reduce to [ 250 x r/100] and [ 500 x r/100] respectively.] 76

162 where (in the case of (3) and (4)) y is the annual charge and r is the reduced annual charge (if any). 1.4 R Reduction in yield information is not required for a without profits life policy with guaranteed benefits (except on surrender or variation), a life policy with a term not exceeding five years or a life policy that will be held in a CTF. 2 Effect of charges table 2.1 R Each effect of charges table must be accompanied by, or refer to: (1) a statement that all relevant guarantees have been taken into account (if there are any); (2) a warning that one effect of the charges referred to is that a retail client could get back less than they invest (if that is the case); and (3) the rate of return used to calculate the figures in the table. 2.2 R The effect of charges table: (1) for a life policy, personal pension scheme or stakeholder pension scheme must be in the following form: Note 1A Note 2 Note 3 Note 4 Note 5 Note 6 At end of year Total paid in to date Withdrawals Total actual deductions to date Effect of deductions to date What you might get back (2) for any other packaged product must be in the following form: Note 1B Note 2 Note 3 Note 5 Note 6 At end of year Investment to date Income Effect of deductions to date What you might get back 1 77

163 5 10 (3) must be completed in accordance with the following notes: 1A 1B (a) This column must include the first five years, every subsequent fifth year and the final year of the projection period. (b) Figures may be shown for every subsequent tenth year rather than subsequent fifth year where the projection period exceeds 25 years, or for whole of life policies. (c) For whole of life policies, should the projected fund reach zero before the end of the projection period this must be highlighted. (d) For an alternatively secured pension figures must be included for each year for a term of ten years. (e) If there is discontinuity in the trend of surrender values, the appropriate intervening years must also be included. (f) Figures for a longer term may be shown. (a) This column must include the first year, the fifth year and every subsequent fifth year of the projection period. (b) For an alternatively secured pension figures must be included for each year for a term of ten years. (c) Figures for a longer term may be shown. 2 This column must show the cumulative contributions paid to the end of each relevant year. 3 This column must show the cumulative withdrawals taken or income paid to the end of each relevant year (if any). The column may be omitted if withdrawals or income are not anticipated or allowed. 4 This column is optional. If it is retained, it must show the total actual deductions to the end of each relevant year calculated using the following method: (a) apply the intermediate rate of return for the relevant product to the figure in the effect of deductions to date column for the previous year; (b) subtract from this figure the figure in the effect of deductions to date column for the year being shown; and (c) add the resulting figure to the figure in the total actual deductions to date column for the previous year (if any). 78

164 5 This column may be deleted if the product is a without profits life policy with benefits that are guaranteed except on surrender or variation, a life policy with a term not exceeding five years, or a life policy that will be held in a CTF. If this column is not deleted, the effect of deductions to date figure must be calculated by taking the accumulated value of the fund without reference to charges and then subtracting from this figure the figure in the what you might get back column for the same year. 6 This column must show standardised deterministic projection of the surrender value, cash-in value or transfer value, calculated in accordance with the rules in COBS 13 Annex 2 (Projections) at the appropriate intermediate rate of return to the end of each relevant year. Exception 2.3 R An effect of charges table may be amended, but only if and to the extent that that is necessary to properly reflect the nature and effect of the charges inherent in a particular product. 2.4 G The effect of 2.3R is that, for example, the column labels and explanatory text may be adjusted to reflect the nature of the contract. For instance: 3 Reduction in yield The column titled What you might get back might be replaced with What the transfer value might be for personal pensions, or Open market value for income withdrawals or short-term annuities. The withdrawals column may be called Total income taken for income withdrawals or short-term annuities. The table may be titled What effect will the deductions have? for income withdrawals or short-term annuities. 3.1 R Reduction in yield ( A ) is B less C where: (1) 'B' is the intermediate rate of return for the relevant product; and (2) 'C' is determined by: (a) (b) carrying out a standardised deterministic projection to the projection date, using B ; and then calculating the annual rate of return ( C ) (rounded to the nearest tenth of 1 %) required to achieve the same projection value if charges are left out of account. 3.2 R A firm must present reduction in yield as A%, as part of a statement which explains that charges and expenses have the effect of reducing your anticipated returns from B% to C%, or in some other appropriate way. 79

165 3.3 R If contributions will be invested in more than one fund in a single designated investment or made by an initial lump sum payment that is followed by regular contributions, the reduction in yield must be: (1) calculated separately for each fund or for the single contribution and the regular contributions (as the case may be); and (2) presented: (a) (b) on a fund by fund, or single contribution and regular contribution, basis, together with a statement which explains the nature and effect of a reduction in yield, the reason for the inclusion of more than one reduction in yield figure and the reason for the differences between them; or (if the reduction in yield results are so similar that one figure could reasonably be regarded as representative of the others), as a single figure together with a statement which explains the nature and effect of a reduction in yield, and that the reduction in yield figure given is representative of the reduction in yield figures for each of the funds or for the single and regular contributions (as the case may be); or (c ) through a single figure combining the separate figures for each fund or contribution in a proportionate manner, with an appropriate description. 3.4 R Where a firm is calculating reduction in yield information, it must: (1) disregard charges related to mortality and morbidity risks; or (2) (where the requirement in (1) produces figures that are misleading) include a statement with the reduction in yield information that it has been calculated taking into account charges related to mortality and morbidity risk R A firm that sells: (1) a packaged product to a retail client, must provide a key features document and a key features illustration to that client (unless the packaged product is a unit in a simplified prospectus scheme or an EEA simplified prospectus scheme); (5) a unit in a simplified prospectus scheme to a client, must offer the scheme s current simplified prospectus to that client. In addition, if the client is a retail client present in the EEA, the firm must provide the simplified prospectus to the client together with: 80

166 (b) information about the three types of CTF that are generally available (stakeholder CTFs, cash-deposit CTFs and share CTFssecurity-based CTFs), and the type of CTF the firm is offering (if the units will, or may, be held in a CTF); Exception to the provision rules: key features documents and simplified prospectuses R A firm is not required to provide: (2) a key features document or key features illustration, if another person is required to provide the distance marketing information by the rules of another EEA State; Exception: key features illustrations R [intentionally blank] A firm is not required to provide a key features illustration for a product if the information that would have been included in that illustration is included in the key features document provided to the client. Exception to the provision rules: key features documents and key features illustrations R A firm is not required to provide a key features document or a key features illustration for: (1) a key features scheme if it provides a simplified prospectus instead; (2) a life policy that is not a reinsurance contract if: (a) (b) the firm is operating from an establishment in another EEA State and the sale is by distance contract; or the client is habitually resident outside the United Kingdom and the sale is not by distance contract. (3) a traded life policy. [Note: in respect of (2), articles 4(1) and 16 of the Distance Marketing Directive and article 36 of the Consolidated Life Directive] Exception to the provision rules: key features documents and key features illustrations 81

167 R A firm is not required to provide a key features document or a key features illustration,if: (1) the client is buying or investing in response to a direct offer financial promotion without receiving a personal recommendation to buy or invest; and (2) the firm provides materially the same information in some other way. Exception to the provision rules: key features documents, key features illustrations and simplified prospectuses R A firm is not required to provide a key features document, a key features illustration or a simplified prospectus for a key features scheme or simplified prospectus scheme if: (1) the client is habitually resident outside the EEA and not present in the EEA when the relevant application is signed; or (2) the purchase is by a discretionary investment manager on behalf of a retail client; or (3) the sale is arranged or personally recommended by an investment manager and the client has agreed that a key features document or simplified prospectus is not required; or (4) a retail client is purchasing a holding in a scheme in which the client already has a holding, or the client is switching from one class of shares or units to another in the same scheme, and the relevant document has already been provided to that client. [Note: articles 1, 33(1), and 44 of the UCITS directive] G This chapter does not act to cancel distance contracts entered into by an appointed representative, or where applicable, by a tied agent, as principal such as a distance contract to provide advisory services, but the Distance Marketing Regulations (regulations 9 to 13, see regulation 4(3)) may have this effect. Long term care insurance R At 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) provide the retail client with a table based on the format of COBS 13 Annex 3 2.2R containing at least the current fund value and projected future policy values (as in column "What you might get back"); (2) where it is the case, inform the retail client of the possibility that future policy values may be insufficient to fulfil the original purpose of the contract; and 82

168 (3) inform the retail client 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. Income withdrawals R At intervals no longer than 12 months from the date of an election by a retail client to make income withdrawals, the relevant product provider must: (1) provide the retail client with such information required by COBS 13 Annex 2 2.9R as will enable the retail client to review the election; and (2) inform the retail client how to obtain advice on investments in respect of his income withdrawals, and that it would be in his best interests to do so. Insert the following text into COBS 18. All text, apart from some headings, is new and not underlined. 18 Specialist Regimes Energy market activity and oil market activity non-mifid business R Only the COBS provisions in the table apply to energy market activity or oil market activity carried on by a firm which is not: (1) MiFID or equivalent third country business; or (2) energy market activity or oil market activity set out in COBS R. COBS Description 1 Application Acting honestly, fairly and professionally 2.4 Agent as client and reliance on others 3 Client categorisation 4 Communication to clients including financial promotions, but only in relation to communicating or approving a financial promotion 5.2 E-commerce 83

169 12 Investment research 16.2 Occasional reporting Energy market activity and oil market activity dealings with or through authorised persons R Only the COBS provisions in the table apply to energy market activity or oil market activity carried on by a firm which is not MiFID or equivalent third country business but which, if the firm were not authorised, would not be a regulated activity because of article 16 of the Regulated Activities Order (Dealing in contractually based investments) or article 22 of the Regulated Activities Order (Deals with or through authorised persons etc.). COBS Description 1 Application 2.4 Agent as client and reliance on others 4.12 Unregulated collective investment schemes 5.2 E-commerce Other non-mifid business related to commodity or exotic derivative instruments R COBS applies as set out in the table to firms in respect of activities referred to in the general application rule related to: (1) commodity futures; or (2) commodity options; or (3) contracts for differences related to an underlying commodity; or (4) other futures or contracts for differences which are not related to commodities, financial instruments or cash; which is not MiFID or equivalent third country business and energy market activity or oil market activity. Application of COBS to other non-mifid business related to commodity derivative instruments All of COBS applies, except COBS R to COBS E applies instead of COBS 11.2 (Best execution) Best execution for other non-mifid business related to commodity and exotic derivative instruments R A firm that executes a customer order in the course of carrying out activities referred to in COBS R must provide best execution. 84

170 Exceptions to best execution R The duty to provide best execution does not apply where: (1) the firm has agreed with a professional client that it does not owe a duty of best execution to him; or (2) the firm relies on another person to whom it passes a customer order for execution to provide best execution, but only if it has taken reasonable care to ensure that he will do so. Providing best execution R To provide best execution, a firm must: (1) take reasonable care to ascertain the price which is the best available for the customer order in the relevant market at the time for transactions of the kind and size concerned; and (2) execute the customer order at a price which is no less advantageous to the customer, unless the firm has taken reasonable steps to ensure that it would be in the customer's best interests not to do so E (1) In order to take reasonable care to ascertain the price which is the best available, a firm: (a) (b) (c) (d) should disregard any charges and commission made by it or its agents that are disclosed to the customer under COBS 6.1.9R (Information about costs and associated charges); need not have access to competing exchanges, or to all, or a minimum number of, available price sources; but if a firm can access prices displayed by different exchanges and trading platforms and make a direct and immediate comparison, it should execute the customer order at the best price available to the firm on such exchanges or trading platforms, if this is in the best interests of the customer; should pass on to the customer the price at which it executes the transaction to meet the customer order; and should not take a mark-up or mark-down from the price at which it executes the customer order. (2) Compliance with (1) may be relied on as tending to establish compliance with the requirement to take reasonable care to ascertain the price which is the best available for the customer order (see COBS (1)R) (3) Contravention of (1) may be relied on as tending to establish contravention of the requirement to take reasonable care to ascertain 85

171 the price which is the best available for the customer order (see COBS (1)R) 18.3 Corporate finance business Corporate finance business non-mifid business R Only the provisions of COBS in the table apply to corporate finance business carried on by a firm which is not MiFID or equivalent third country business. COBS Description 1 Application Acting honestly, fairly and professionally 2.3 Inducements 2.4 Agent as client and reliance on others 3 Client categorisation 4 Communication to clients including financial promotions, except COBS 4.5 COBS The information and other requirements of the Distance Marketing Directive, but only in relation to distance contracts concluded with consumers 5.2 E-commerce 11.7 Personal account dealing 12 Investment research 15 Cancellation, but only in relation to distance contracts concluded with consumers G COBS 15 (Cancellation) is likely to be of limited application to corporate finance business. Distance contracts concluded with consumers in the course of corporate finance business will be exempt from COBS 15 if the price of the financial service is dependent on fluctuations in the financial market outside the firm's control Operators of collective investment schemes Application 86

172 R This section applies to a firm which is an operator of a collective investment scheme. Application or modification of general COBS rules for operators R An operator when it is carrying on scheme management activity: (1) must comply with the COBS rules specified in the table, as modified by this section; and (2) need not comply with any other rule in COBS. Table: Application of conduct of business rules Application of conduct of business rules Chapter, section or rule Description Modifications 1 Application Acting honestly, fairly and professionally 2.3 Inducements 2.4 Agent as client and reliance on others Fair, clear and not misleading communications 5.2 E-Commerce 11.2 Best execution In the case of an unregulated collective investment scheme, COBS R (Modification of best execution) applies instead of COBS 11.2 in the circumstances set out in COBS R Client order handling 11.5 Record keeping: client orders and decisions to deal 11.6 Use of dealing commission 87

173 18.5 Operators of collective investment schemes General modifications R The COBS rules specified in the table in COBS R apply to an operator when it is carrying on scheme management activity with the following modifications: (1) subject to (2), references to customer or client are to be construed as references to any scheme in respect of which the operator is acting or intends to act, and with or for the benefit of which the relevant activity is to be carried on; (2) in the case of an unregulated collective investment scheme, when an operator is required by the rules in COBS to provide information to, or obtain consent from, a customer or client, the operator must ensure that the information is provided to, or consent obtained from, a participant or a potential participant in the scheme as the case may be; and (3) references to the service of portfolio management in COBS 11.2 and 11.3 are to be construed as references to the management by an operator of financial instruments held for or within the scheme of which it is the operator. Modification of best execution for operators of unregulated collective investment schemes R The best execution provisions applying to an operator of a collective investment scheme do not apply in relation to an unregulated collective investment scheme whose scheme documents include a statement that best execution does not apply in relation to the scheme and in which: (1) no participant is a retail client; or (2) no current participant in the scheme was a retail client on joining the scheme as a participant. Scheme documents for an unregulated collective investment scheme R An operator of an unregulated collective investment scheme must not accept a retail client as a participant in the scheme unless it has taken reasonable steps to offer and, if requested, provide to the potential participant scheme documents which adequately describe how the operation of the scheme is governed. Format and content of scheme documents G An operator's scheme documents may consist of any number of documents provided that it is clear that collectively they constitute the scheme documents and provided the use of several documents in no way diminishes the significance of any of the statements which are required to be given to the 88

174 potential participant G The scheme documents of an unregulated collective investment scheme (if they exist) should make it clear that if a participant is reclassified as a retail client, this reclassification will not affect certain scheme management activities of the operator of the scheme. In particular, despite such a reclassification, the operator will not be required to comply with the best execution provisions applying to an operator of a collective investment scheme. It should be noted that there is no requirement that scheme documents must be produced for an unregulated collective investment scheme R Where the scheme is an unregulated collective investment scheme and no current participant in the scheme was a retail client on joining the scheme as a participant, the scheme documents must include a statement that: (1) explains that if a participant is reclassified as a retail client subsequent to joining the scheme as a participant, then the operator may continue to treat all participants in the scheme as though they were not retail clients; (2) explains that if a participant is reclassified as a retail client subsequent to joining the scheme as a participant, then the modification of best execution (see COBS R) will continue to apply to that scheme; and (3) explains that, in the event of such a reclassification, the operator will not be required to provide best execution in relation to the scheme G The operator will still have to comply with other COBS provisions as a result of the reclassification of a participant as a retail client, for example, the requirement to provide periodic statements to participants who are retail clients in an unregulated collective investment scheme (see the rule on periodic statements for an unregulated collective investment scheme (COBS R). Adequate information E (1) In order to provide adequate information to describe how the operation of the scheme is governed, an operator of an unregulated collective investment scheme should include in the scheme documents a provision about each of the items of relevant information set out in the following table (Content of scheme documents). (2) Compliance with (1) may be relied on as tending to establish compliance with COBS R. (3) Contravention of (1) may be relied on as tending to establish contravention of COBS R. Table: Content of scheme documents Content of scheme documents 89

175 The scheme documents should include provision about: (1) Regulator The firm statutory status in accordance with GEN 4 Annex 1 (Statutory status disclosure); (2) Services the nature of the services that the operator will provide in relation to the scheme; (3) Payments for services details of any payment for services payable by the scheme or from the property of the scheme or participants in the scheme to the operator, including where appropriate: (a) (b) (c) (d) the basis of calculation; how it is to be paid and collected; how frequently it is to be paid; and whether or not any other payment is receivable by the operator (or to its knowledge by any of its associates) in connection with any transactions effected by the operator with or for the scheme, in addition to or in lieu of any fees; (4) Commencement when and how the operator is appointed; (5) Accounting the arrangements for accounting to the scheme or participants in the scheme for any transaction effected; (6) Termination method how the appointment of the operator may be terminated; (7) Complaints procedure how to complain to the operator and a statement that the participants in the scheme may subsequently complain direct to the Financial Ombudsman Service; (8) Compensation whether or not compensation may be available from the compensation scheme should the operator be unable to meet its liabilities, and information about any other applicable compensation scheme; and, for each applicable scheme, the extent and level of cover and how further information can be obtained; (9) Investment objectives 90

176 the investment objectives for the portfolio of the scheme; (10) Restrictions (a) any restrictions on: (i) (ii) (iii) the types of investments or property which may be included in the portfolio of the scheme; the markets on which investments or property may be acquired for the portfolio of the scheme; the amount or value of any one investment or asset, or on the proportion of the portfolio of the scheme which any one investment or asset or any particular kind of investment or asset may constitute; or (b) that there are no such restrictions; (11) Holding scheme assets (a) if it is the case, that the operator will: (i) (ii) hold money on behalf of the scheme or be the custodian of investments or other property of the scheme; or arrange for some other person to act in either capacity and, if so, whether that person is an associate of the operator identifying that person and describing the nature of any association; and (b) in either case: (i) (ii) (iii) (iv) (v) how any money is to be deposited; the arrangements for recording and separately identifying registrable investments of the scheme and, where the registered holder is the operator's own nominee, that the operator will be responsible for the acts and omissions of that person; the extent to which the operator accepts liability for any loss of the investment of the scheme; the extent to which the operator or any other person mentioned in (11)(a)(ii), may hold a lien or security interest over investments of the scheme; where investments of the scheme will be registered collectively in the same name, a statement that the entitlements of the scheme may not be identifiable by separate certificates or other physical documents of title, and that, should the operator default, any shortfall in 91

177 investments of the scheme registered in that name may be shared proportionately among all schemes and any other customers of the operator whose investments are so registered; (vi) (vii) (viii) (ix) whether or not investments or other property of the scheme can be lent to, or deposited by way of collateral with, a third party and whether or not money can be borrowed on behalf of the scheme against the security of those investments or property and, if so, the terms upon which they may be lent or deposited; the arrangements for accounting to the scheme for investments of the scheme, for income received (including any interest on money and any income earned by lending investments or other property) of the scheme, and for rights conferred in respect of investments or other property of the scheme; the arrangements for determining the exercise of any voting rights conferred by investments of the scheme; and where investments of the scheme may be held by an eligible custodian outside the United Kingdom, a general statement that different settlement, legal and regulatory requirements, and different practices relating to the segregation of those investments, may apply; (12) Clients' money outside the United Kingdom if it is the case, that the operator may hold the money of the scheme in a client bank account outside the United Kingdom; (13) Exchange rates if a liability of the scheme in one currency is to be matched by an asset in a different currency, or if the services to be provided to the operator for the scheme may relate to an investment denominated in a currency other than the currency in which the investments of the scheme are valued, a warning that a movement of exchange rates may have a separate effect, unfavourable or favourable, on the gain or loss otherwise made on the investments of the scheme; (14) Stabilised investments if it is the case, that the operator is to have the right under the scheme documents to effect transactions in investments the prices of which may be the subject of stabilisation; (15) Conflict of interest and material interest if it is the case, that the operator is to have the right under the agreement or instrument constituting the scheme to effect transactions on behalf of the scheme in which the operator has directly or 92

178 indirectly a material interest (except for an interest arising solely from the participation of the operator as agent for the scheme), or a relationship of any description with another party which may involve a conflict with the operator's duty to the scheme, together with a disclosure of the nature of the interest or relationship; (16) Use of dealing commission if the operator receives goods or services in addition to the execution of its customer orders in accordance with the section on the use of dealing commission, the prior disclosure required by the rule on prior disclosure (see COBS R); (17) Acting as principal if it is the case, that the operator may act as principal in a transaction with the scheme; (18) Stock lending if it is the case, that the operator may undertake stock lending activity with or for the scheme specifying the type of assets of the scheme to be lent, the type and value of relevant collateral from the borrower and the method and amount of payment due to the scheme in respect of the lending; (19) Transactions involving contingent liability investments (a) (b) (c) if it is the case, that the agreement or instrument constituting the scheme allows the operator to effect transactions involving contingent liability investments for the account of the portfolio of the scheme; if applicable, whether there are any limits on the amount to be committed by way of margin and, if so, what those limits are; and if applicable, that the operator has the authority to effect transactions involving contingent liability investments otherwise than under the rules of a recognised investment exchange or designated investment exchange and in a contract traded thereon; (20) Periodic statements (a) (b) the frequency of any periodic statement (this should not be less than once every 12 months) except where a periodic statement is not required (see COBS R); and whether those statements will include some measure of performance, and, if so, what the basis of that measurement will be; (21) Valuation 93

179 the bases on which assets comprised in the portfolio of the scheme are to be valued; (22) Borrowings if it is the case, that the operator may supplement the funds in the portfolio of the scheme and, if it may do so: (a) (b) (c) the circumstances in which the operator may do so; whether there are any limits on the extent to which the operator may do so and, if so, what those limits are; and any circumstances in which such limits may be exceeded; (23) Underwriting commitments if it is the case, that the operator may for the account of the portfolio of the scheme underwrite or sub-underwrite any issue or offer for sale of securities, and: (a) (b) whether there are any restrictions on the categories of securities which may be underwritten and, if so, what these restrictions are; and whether there are any financial limits on the extent of the underwriting and, if so, what these limits are; (24) Investments in other collective investment schemes whether or not the portfolio may contain units in a collective investment scheme either operated or advised by the operator or by an associate of the operator or in a collective investment scheme which is not a regulated collective investment scheme; (25) Investments in securities underwritten by the operator whether or not the portfolio may contain securities of which any issue or offer for sale was underwritten, managed or arranged by the operator or by an associate of the operator during the preceding 12 months. Periodic statements for an unregulated collective investments scheme R An operator of an unregulated collective investment scheme must, subject to the exceptions from the requirement to provide a periodic statement, provide to participants in the scheme, promptly and at suitable intervals, a statement in a durable medium which contains adequate information on the value and composition of the portfolio of the scheme at the beginning and end of the period of the statement. Promptness, suitable intervals and adequate information E (1) An operator should act in accordance with the provisions in the right hand column of the periodic statements table (see COBS E) to 94

180 fulfil the requirement to prepare and issue periodic statements indicated in the left hand column against these provisions. (2) Compliance with (1) may be relied on as tending to establish compliance with the requirement to prepare and issue periodic statements. (3) Contravention of (1) may be relied on as tending to establish contravention of the requirement to prepare and issue periodic statements. Exceptions from the requirement to provide a periodic statement R (1) An operator of an unregulated collective investment scheme need not provide a periodic statement: (a) (i) to a participant in the scheme who is a retail client ordinarily resident outside the United Kingdom; or (ii) to a participant in the scheme who is a professional client; if the participant has so requested or the operator has taken reasonable steps to establish that the participant does not wish to receive it; or (b) if it would duplicate a statement to be provided by someone else. (2) For a firm acting as an outgoing ECA provider, the exemption for retail client participants ordinarily resident outside the United Kingdom applies only to a participant in the scheme who is a retail client ordinarily resident outside the EEA. Record keeping requirements R An operator of an unregulated collective investment scheme must make a copy of any periodic statement it has provided in accordance with the requirement to prepare and issue periodic statements to participants in the scheme. The record must be retained for a minimum period of three years E Table: Periodic statements This table belongs to COBS E. Periodic statements Suitable intervals (1) A periodic statement should be provided at least: (a) six-monthly; or (b) once in any other period, not exceeding 12 months, which has been mutually agreed 95

181 between the operator and the participant in the scheme. Adequate information (2) (a) A periodic statement should contain: (i) (A) The information set out in the table of general contents of a periodic statement; (B) where the portfolio of the scheme includes uncovered open positions in contingent liability investments, the additional information in the table listing the contents of a periodic statement (see COBS E) in respect of contingent liability investments; or (ii) such information as a participant who is a retail client ordinarily resident outside the United Kingdom, or a professional client, has on his own initiative agreed with the operator as adequate. (b) For a firm acting as an outgoing ECA provider, the words 'United Kingdom' is replaced by 'EEA' G Examples of uncovered open positions include: (1) selling a call option on an investment not held in the portfolio; (2) unsettled sales of call options on currency in amounts greater than the portfolio's holding of that currency in cash or in readily realisable investments denominated in that currency; and (3) transactions having the effect of selling an index to an amount greater than the portfolio's holdings of investments included in that index E Table: General contents of a periodic statement This table belongs to COBS E. General contents of periodic statements 1 Contents and value (a) As at the beginning of the account period, the total value of the portfolio of the scheme, being either: (i) the value of the assets comprised in the portfolio on the date as at which the statement provided for the immediately 96

182 preceding period of account is made up; or (ii) in the case of the first periodic statement, the value of the assets comprised in the portfolio on the date on which the operator assumed responsibility for the management of the portfolio. (b) As at the end of the account period: (i) (ii) the number, description and value of each investment held on behalf of the scheme; the amount of cash held on behalf of the scheme; and (iii) the total value of the portfolio of the scheme. 2 Basis of valuation A statement of the basis on which the value of each investment has been calculated and, if applicable, a statement that the basis for valuing a particular investment has changed since the previous periodic statement. Where any investments are shown in a currency other than the usual one used for valuation of the portfolio of the scheme, the relevant currency exchange rates must be shown. 3 Details of any assets loaned or charged (a) (b) A summary of those investments (if any) which were, at the closing date, loaned to any third party and those investments (if any) that were at that date charged to secure borrowings made on behalf of the portfolio of the scheme; and the aggregate of any interest payments made and income received during the account period in respect of loans or borrowings made during the period. 4 Transactions and changes in composition Except in the case of a portfolio which aims to track the performance of an external index: (a) (b) (c) a statement that summarises the transactions entered into for the portfolio of the scheme during the period; and the aggregate of money and a summary of all investments transferred into and out of the portfolio of the scheme during the period; and the aggregate of any interest payments, dividends and other benefits received by the operator for the portfolio of the scheme during that period. 5 Charges and remuneration 97

183 If not previously advised in writing, a statement for the account period: (a) (b) of the aggregate charges of the operator and its associates; and of any remuneration received by the operator or its associates or both from a third party in respect of the transactions entered into, or any other services provided, for the portfolio of the scheme. 6 Movement in value of portfolio A statement of the difference between the value of the portfolio at the closing date and its value at the starting date of the account period, having regard at least, during the account period, to the following: (a) (b) (c) (d) the aggregate of assets received from participants of the scheme and added to the portfolio of the scheme; the aggregate of the value of assets transferred, or of amounts paid, to the scheme; the aggregate income received on behalf of the scheme in respect of the portfolio; and the aggregate of realised and unrealised profits or gains and losses attributable to the assets comprised in the portfolio of the scheme. Notes: For the purposes of Item 1, where the scheme is a property enterprise trust, it will be sufficient for the periodic statement to disclose the number of properties held in successive valuation bands where this is appropriate to the size and composition of the scheme, rather than the value of each asset in the portfolio. The valuation bands of over 10m, 5-10m, 2.5-5m, 1-2.5m and under 1m would be appropriate, unless an operator could show that different bands were justifiable in the circumstances. The statement to be provided under Item 6 is not intended to be an indicator of the performance of the portfolio of the scheme. An operator may wish to distinguish capital and income, and thereby provide more information than referred to in this table. If the statement includes some measure of performance, the basis of measurement should be stated E Table: Contents of a periodic statement in respect of contingent liability investments This table belongs to COBS E. Contents of a periodic statement in respect of contingent liability investments (1) Changes in value The aggregate of money transferred into and out of the portfolio of the scheme during the account period. 98

184 (2) Open positions In relation to each open position in the portfolio of the scheme at the end of the account period, the unrealised profit or loss to the portfolio of the scheme (before deducting or adding any commission which would be payable on closing out). (3) Closed positions In relation to each transaction effected during the account period to close out a position of the scheme, the resulting profit or loss to the portfolio of the scheme after deducting or adding any commission. (Instead of the specific detail required by Items 2 or 3, the statement may show the net profit or loss in respect of the overall position of the scheme in each contract) (4) Aggregate of contents The aggregate of each of the following in, or relating to, the portfolio of the scheme at the close of business on the valuation date: (a) (b) (c) (d) cash; collateral value; management fees; and commissions attributable to transactions during the period or a statement that this information has been separately disclosed in writing on earlier statements or confirmations to the participant. (5) Option account valuations In respect of each open option comprising the portfolio of the scheme on the valuation date: (a) (b) (c) (d) the share, future, index or other investment or asset involved; (unless the valuation statement follows the statement for the period in which the option was opened) the trade price and date for the opening transaction; the market price of the contract; and the exercise price of the contract. Options account valuations may show an average trade price and market price in respect of an option series where a number of contracts within the same series have been purchased on behalf of the scheme. 99

185 18.6 Lloyd's Application R This section applies to a firm when it carries on Lloyd's market activities. COBS rules that apply to Lloyd's market activities R Only COBS 3 (Client categorisation) and the financial promotion rules apply when a firm is carrying out Lloyd's market activities G Firms are reminded that syndicate business plans may be used in ways that bring them within the definition of a financial promotion. Definitions and modifications R When a firm is carrying on Lloyd's market activities, any reference in COBS to the term: (1) designated investment is to be taken to include the following specified investments: (a) (b) (c) the underwriting capacity of a Lloyd's syndicate; membership of a Lloyd's syndicate; and rights to or interests in the specified investments in (a) or (b); (2) designated investment business is to be taken to include the following regulated activities: (a) (b) (c) advising on syndicate participation at Lloyd's; managing the underwriting capacity of a Lloyd's syndicate as a managing agent at Lloyd's; and agreeing to carry on the regulated activities in (a) or (b). The Principles and Lloyd's market activities G Whilst COBS has limited application to Lloyd's market activities, firms conducting Lloyd's market activities are reminded that they are required to comply with the Principles Depositaries R Only the COBS provisions in the table apply to a depositary when acting as such, when carrying on business which is not MiFID or equivalent third country business: 100

186 COBS Description 2.1 Acting honestly, fairly and professionally 2.3 Inducements, except COBS 2.3.1R(2)(b) and COBS 2.3.2R 4 Communication to clients including financial promotions, but only in relation to communicating or approving a financial promotion 11.7 Personal account dealing 18.8 OPS firms non scope business R COBS applies to an OPS firm when it carries on business which is not MiFID or equivalent third country business, with the following modifications: (1) references to client are to be taken to be references to the OPS or welfare trust, as the case may be, in respect of which the OPS firm is acting or intends to act, and with or for the benefit of whom the relevant business is to be carried on; (2) if an OPS firm is required by any COBS rule to provide information to, or obtain consent from, a client, that firm must ensure that the information is provided to, or consent obtained from, each of the trustees of the OPS or welfare trust for whom that firm is acting; and (3) COBS is modified by the addition of the rules in the table below: Additional COBS rules applicable to an OPS firm COBS R (4) Description If an OPS firm carries on OPS activity for an OPS trustee who is a professional client and who is habitually resident in the United Kingdom, it may rely upon the exceptions in COBS R(2) or COBS R(1) only if it provides a periodic statement to the professional client containing the information required by COBS R R Where an OPS firm conducts OPS activity and is obliged to provide a periodic statement, the periodic statement must contain the information in the table below. Information to be included in a periodic statement provided by an OPS firm conducting OPS activity (1) Investment objectives A statement of any investment objectives governing the mandate of the portfolio of the occupational pension scheme as at the 101

187 closing and starting date of the periodic statement. (2) Details of any asset loaned or charged (a) a summary of any investments that were, at the closing date, lent to a third party and any investments that were at that date charged to secure borrowings made on behalf of the portfolio; and (b) the aggregate of any interest payments made and income received during the account period in respect of loans or borrowings made during that period and a comparison with the previous period. (3) Transactions and changes in composition (a) a summary of the transactions entered into for the portfolio during the period and a comparison with the previous period; (b) the aggregate of money and a summary of all investments transferred into and out of the portfolio during the period; and (c) the aggregate of any interest payments, dividends and other benefits received by the firm for the portfolio during that period and a comparison with the previous period. (4) Charges and remuneration If not previously advised in writing, a statement for the period of account: (a) of the aggregate charges of the firm and its associates; and (b) of any remuneration received by the firm or its associates or both from a third party in respect of the transactions entered into, or any other services provided, for the portfolio. (5) Movement in value of portfolio A statement of the difference between the value of the portfolio at the closing date of the period of account and its value at the starting date, having regard, during the period of account, to: (a) the aggregate of assets received from the occupational pension scheme and added to the portfolio; (b) the aggregate of the value of assets transferred, or of amounts paid, to the client; (c) the aggregate income received on behalf of the client in respect of the portfolio; and (d) the aggregate of realised and unrealised profits or gains and losses attributable to the assets comprised in the portfolio R COBS 8 (Client agreements) does not apply to an OPS firm, where the OPS firm is carrying on designated investment business as part of its OPS activity 102

188 in relation to an occupational pension scheme of which it is a trustee ICVCs R Only the financial promotion rules in COBS apply to an ICVC G Firms should note that the operator of an ICVC when it is undertaking scheme management activity will be subject to COBS R UCITS qualifiers and service companies R The COBS provisions in the table apply to a UCITS qualifier and a service company: COBS Description 4 Communications to clients, but only in relation to communicating or approving a financial promotion 5.2 E-Commerce 12.4 Investment Research recommendations: required disclosures Authorised professional firms R COBS applies to an authorised professional firm, except that its application in relation to non-mainstream regulated activities and financial promotion is modified as set out below R COBS does not apply to an authorised professional firm with respect to its non-mainstream regulated activities, except that: (1) the fair, clear and not misleading rule applies; (2) the financial promotion rules apply as modified below; (3) COBS 7 (Insurance mediation) applies but only if the designated professional body of the firm does not have rules approved by the FSA under section 332(5) of the Act that implement articles 12 and 13 of the Insurance Mediation Directive and that apply to the firm; and (4) COBS 8.1.3R (Client agreements) applies, except for the requirement to provide information on conflicts of interest R The financial promotion rules do not apply to an authorised professional firm in relation to the communication of a financial promotion if: 103

189 (1) the firm's main business is the practice of its profession (see IPRU(INV) 2.1.2R(3)); (2) the financial promotion is made for the purposes of and incidental to the promotion or provision by the firm of its professional services or its non-mainstream regulated activities; and (3) the financial promotion is not communicated on behalf of another person who would not be able lawfully to communicate the financial promotion if he were acting in the course of business; however, a firm may use the exemptions for promoting unregulated collective investment schemes in COBS 4 (Communicating with clients, including financial promotions) if it wishes G The rules on approving financial promotions continue to apply. 19 Pensions supplementary provisions R When a firm compares the benefits likely to be paid under a defined benefits pension scheme with the benefits afforded by a personal pension scheme or stakeholder pension scheme (COBS R(1)), it must: (1) assume that: (a) the annuity interest rate is the intermediate rate of return appropriate for a level or fixed rate of increase annuity ([cross-reference to follow later]in COBS 13 Annex 2 3.1R(6)) or the rate for annuities in payment (if less) (b) the retail prices index is 2.5% (c) the average earnings index and the rate for section 21 orders is 4.0% (2) (d) the pre-retirement limited price indexation revaluation is 2.5% (e) the post-retirement limited price increases at 2.5% (f) the index linked pensions rate is the intermediate rate of return in [cross-reference to follow later]cobs 13 Annex 2 3.1R(6)) for annuities linked to the retail prices index; or use more cautious assumptions; 104

190 19.2 Personal pensions, FSAVCs, and AVCs Financial promotions R A financial promotion for an AVC or a FSAVC should contain a prominent warning that, as an alternative: (1) (for AVC promotions) FSAVCs are available; (2) (for FSAVC promotions) an AVC arrangement exists, and that details can be obtained from the scheme administrator (if that is the case) Product disclosure to members of occupational pension schemes R (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 scheme or simplified prospectus scheme to or for the trustees of an occupational pension scheme for an AVC, it must give the trustees sufficient information to pass to the relevant member for that member to be able to make informed comparisons between the AVC and any alternative personal pension schemes and stakeholder pension schemes availablethe payment of an AVC contribution by a member of an occupational pension scheme to be secured by a packaged product purchased by the scheme trustees, it must give the trustees sufficient information to pass to the relevant member for that member to be able to make informed comparisons between the AVC and any alternative personal pension schemes and stakeholder pension schemes available. (2) COBS TP 1: Transitional Provisions relating to Client Categorisation (1) (2) (3) (4) (5) (6) Material to which the transitional provision applies Transitional provision Transitional provision: dates in force Handbook provisions: coming into force 1.1 COBS 3 G (6) COBS TP 3.9 contains transitional categorisation provisions in relation to From 1 November 2007 indefinitely 1 November

191 clients of a firm that are taken on between 1 November 2007 and 30 June 2008 in relation to business that is not MiFID or equivalent third country business. 1.9 COBS 3 R (1) A new client that could have been correctly categorised as an intermediate customer under the rules in force on 31 October 2007: (a) may be treated as an elective professional client if it could have been categorised as an expert private customer that had been categorised as an intermediate customer in accordance with COB 4.1.9R on the basis of its experience and understanding; or (b) otherwise may be treated as a per se professional client, subject to (3) below. From 1 November 2007 to 30 June November 2007 (2) A firm may categorise as an eligible counterparty or a per se professional client any new client that could have been correctly categorised as an market counterparty under the rules in force on 31 October 2007, provided that the firm may only treat the client as an eligible counterparty for the purposes of eligible counterparty business. (3) Clients categorised under COBS TP 3.9 must be dealt with in 106

192 accordance with the relevant procedures and notifications in COBS 3. COBS TP 2: Other Transitional Provisions (1) (2) Material to which the transitional provision applies (3) (4) Transitional provision 2.-1 COBS 4 R A firm communicating other than in relation to MiFID business is not required to comply with the financial promotion rules in relation to any financial promotion that: (1) is in writing and was designed to be communicated for longer than three months in similar form; (2) was subject to, and complied with, the relevant rules in COB 3 that were in force on or before 31 October 2007 (or was exempt from them); and (3) continues to be fair, clear and not misleading. (5) Transitional provision: dates in force 1 November 2007 to 31 October 2008 (6) Handbook provisions: coming into force 1 November A COBS 11.2 R COBS 11.2 (Best execution) does not apply to an order from an ISA manager when acting as such which is not a MiFID investment firm or a third country investment firm for the purchase of or sale of units in a regulated collective investment From 1 November 2007 to 31 October November

193 scheme from or to the operator of that scheme. 2.4B COBS 11.2 R COBS 11.2 (Best execution) does not apply to a client order for the purchase of or sale of units in a regulated collective investment scheme directly from or to the operator of that scheme. From 1 November 2007 to 31 October November C COBS 12.2 and COBS 12.3 R COB 7.16, as it was in force on 31 October 2007, continues to apply to a firm which is not a MiFID investment firm or a third country investment firm which prepares investment research for publication or distribution to its clients, or that publishes or distributes investment research to its clients unless the firm decides to comply with COBS 12.2 and 12.3 sooner than 1 May From 1 November 2007 to 30 April November D COBS 12.2 and COBS 12.3 G The effect of TP 2.4CR is that for a firm which is not a MiFID investment firm or third country investment firm carrying on the activities set out in the transitional rule TP 2.4CR COB 7.16 will continue to apply until 1 May 2008, unless the firm decides to comply with COBS 12.2 and 12.3 sooner than 1 May From 1 May 2008 a firm to which TP 2.4CR applies must comply with the investment research provisions in COBS 12.2 and From 1 November 2007 to 30 April November E COBS 12.2 and COBS 12.3 R If a firm carrying out the activities set out in TP 2.4CR decides to comply From 1 November 2007 to 30 April November

194 with COBS 12.2 and 12.3 sooner than 1 May 2008: (1) it must make a record of the date of the decision and the date from which it is to be effective; and (2) from the effective date it must comply with COBS 12.2 and COBS 13 R (1) A firm is not required to prepare a key features document, a key features illustration or the Consolidated Life Directive information document for a product if: (1a) the rules would have required the firm to prepare key features for the product if they were still in force; and (2b) the firm prepares key features in accordance with the rules as if they were still in force. (2) A firm is not required to prepare a standardised deterministic projection or an alternative projection for a product in accordance with COBS R or R if the firm prepares its projections for life policies, key features schemes, simplified prospectus schemes and stakeholder pension schemes in accordance with the rules as if they were still in force. (3) For these purposes of this rule, the rules are the rules on product disclosure and the customer s right to cancel or withdraw (COB 6) that were in force on 31 From 1 November 2007 until 31 October November

195 October COBS 14.1 and COB 14.2 R A firm is not required to provide a key features document, a key features illustration or the Consolidated Life Directive information document for a product if: From 1 November 2007 until 31 October November 2007 (1) 2.8 A COBS 18 R COB, as it was in force on 31 October 2007, continues to apply to the following activities and firms in relation to business which is not MiFID or equivalent third country business and COBS does not apply during the transitional period unless the firm decides to comply with COBS sooner than 1 May 2008: From 1 November 2007 to 30 April November 2007 (1) Energy market activity and oil market activity; (2) activities referred to in the general application rule related to: (a) commodity futures; (b) commodity options; (c) contracts for differences related to an underlying commodity; or (d) other futures or contracts for differences which are not related to commodities, financial instruments or cash, 110

196 which is not energy market activity or oil market activity; (3) corporate finance business; (4) a firm which is an operator of a collective investment scheme; (5) Lloyd's market activities; (6) depositaries; (7) OPS firms 2.8B COBS 18 G The effect of TP 2.8AR is that for firms carrying on the activities set out in the transitional rule TP 2.8AR COB will continue to apply until 1 May 2008, unless the firm decides to comply with COBS sooner than 1 May From 1 May 2008 a firm to which TP 2.8AR applies must comply with COBS as set out in COBS C COBS 18 R If a firm carrying out the activities set out in TP 2.8AR decides to comply with COBS sooner than 1 May 2008: (1) it must make a record of the date of the decision and the date from which it is to be effective; and (2) subject to TP 2.8AR, from the effective date it must comply with COBS as set out in the relevant parts of COBS 18. From 1 November 2007 to 30 April 2008 From 1 November 2007 to 30 April November November D COBS 18 G In accordance with transitional rules TP 2.8AR and TP 2.8CR, the following provisions of COB will continue to apply to a firm carrying out the activities set out in From 1 November 2007 to 30 April November

197 TP 2.8AR that decides to comply with COBS before 1 May 2008: (1) COB 2.4 (Chinese walls); (2) COB 5.10 (Corporate finance business issues); and (3) COB 7.1 (Conflicts of interest and material interest) 2.8E COBS 18 R A decision by a firm carrying out activities set out in TP 2.8AR to comply with COBS before 1 May 2008 must be made in relation to all the COBS provisions applicable to it. The firm may not 'cherry pick' COBS R COB 2.4 (Chinese walls) and COB 7.1 (Conflicts of interest) as they were in force on 31 October 2007 continue to apply to designated investment business carried on by a firm which is not MiFID or equivalent third country business COBS R COB 5.10 (Corporate finance business issues) as it was in force on 31 October 2007 continues to apply to corporate finance business carried on by a firm which is not MiFID or equivalent third country business. From 1 November 2007 to 30 April 2008 From 1 November 2007 indefinitely From 1 November 2007 indefinitely 1 November November November

198 Annex N Amendments to the Insurance: Conduct of Business sourcebook (ICOB) In this Annex, underlining indicates new text and striking through indicates deleted text, unless otherwise stated G ICOB applies to every firm as specified in accordance with the rules in the remainder of this chapter G (2) ICOB implements, in part, provisions in a number of EC directives, including: R ICOB does not apply to a service company, except for: (1) ICOB 1.4 (Application in respect of electronic commerce activities and communications); [deleted] R Pure protection contracts: election to apply COB COBS rules Incoming e-commerce activities R The territorial scope of this sourcebook is modified by ECO in relation to electronic commerce activities and electronic commerce communications. This sourcebook does not apply to an incoming ECA provider acting as such, except that the rules on financial promotion continue to apply for incoming electronic commerce activities carried on by an insurer unless its country of origin applies rules of like effect G ICOB 1.4 contains guidance on how this sourcebook is modified by ECO. [deleted] R (3) Notwithstanding the other rules in this section, the only provisions in ICOB that apply to an incoming EEA firm carrying on passported activities under the IMD in the United Kingdom are: (a) ICOB R (Electronic commerce activities and communications) and ICOB 3 (Financial promotion) 113

199 Delete 1.4 in its entirety. The deleted text is not shown struck through. 1.4 [deleted] 1 Annex 2G Summary of Handbook provisions for insurance intermediaries Module Application Business Standards Market conduct, MAR Does not apply to a firm when doing either (1) or (2). However, certain chapters of MAR will apply if: (a) the insurance intermediary also engages in behaviour in relation to qualifying investments traded on prescribed markets - then MAR 1 applies; (b) the insurance intermediary undertakes or is concerned with offers of securities that may involve price stabilising activity - then MAR 2 applies; (c) the insurance intermediary carries on inter-professional business - then MAR 3 applies; (d) the insurance intermediary carries on designated investment business - then MAR 4 applies. Conduct of Business sourcebook, COB COBS Does not apply to an insurance intermediary when doing (1) or (2) unless it opts to provide key features a key features document instead of a policy summary (see ICOB 5.5.4R). However, COB COBS may apply to an insurance intermediary if it also carries on any other regulated activity or communicates or approves a financial promotion not relating to non-investment insurance contracts or qualifying credit. 114

200 Specialist Sourcebooks Electronic Commerce Directive, ECO Applies to an insurance intermediary doing (1) or (2). After ICOB 2.6 insert the following new section. The inserted text is not underlined. 2.6A E-Commerce Application 2.6A.1 R This section applies to a firm carrying on an electronic commerce activity from an establishment in the United Kingdom with or for a person in the United Kingdom or another EEA State. Information about the firm and its products or services 2.6A.2 R A firm must make at least the following information easily, directly and permanently accessible to the recipients of the information society services it provides: (1) its name; (2) the geographic address at which it is established; (3) the details of the firm, including its address, which allow it to be contacted rapidly and communicated with in a direct and effective manner; (4) an appropriate statutory status disclosure statement (GEN 4 Annex 1R), together with a statement which explains that it is on the FSA register and includes its FSA register number; (5) if it is a professional firm, or a person regulated by the equivalent of a designated professional body in another EEA State: 115

201 (a) (b) (c) the name of the professional body (including any designated professional body) or similar institution with which it is registered; the professional title and the EEA State where it was granted; a reference to the applicable professional rules in the EEA State of establishment and the means to access them; and (6) where the firm undertakes an activity that is subject to VAT, its VAT number. [Note: article 5(1) of the E-Commerce Directive] 2.6A.3 R If a firm refers to price, it must do so clearly and unambiguously, indicating whether the price is inclusive of tax and delivery costs. [Note: article 5(2) of the E-Commerce Directive] 2.6A.4 R A firm must ensure that commercial communications which are part of, or constitute, an information society service, comply with the following conditions: (1) the commercial communication must be clearly identifiable as such; (2) the person on whose behalf the commercial communication is made must be clearly identifiable; (3) promotional offers must be clearly identifiable as such, and the conditions that must be met to qualify for them must be easily accessible and presented clearly and unambiguously; and (4) promotional competitions or games must be clearly identifiable as such, and the conditions for participation must be easily accessible and presented clearly and unambiguously. [Note: article 6 of the E-Commerce Directive] 2.6A.5 R An unsolicited commercial communication sent by by a firm established in the United Kingdom must be identifiable clearly and unambiguously as an unsolicited commercial communication as soon as it is received by the recipient. [Note: article 7(1) of the E-Commerce Directive] Requirements relating to the placing and receipt of orders 2.6A.6 R A firm must (except when otherwise agreed by parties who are not consumers): (1) give an ECA recipient at least the following information, clearly, comprehensibly and unambiguously, and before the order is placed by 116

202 the recipient of the service: (a) (b) (c) (d) the different technical steps to follow to conclude the contract; whether or not the concluded contract will be filed by the firm and whether it will be accessible; the technical means for identifying and correcting input errors before the placing of the order; and the languages offered for the conclusion of the contract; (2) indicate any relevant codes of conduct to which it subscribes and information on how those codes can be consulted electronically; (3) (when an ECA recipient places an order through technological means), acknowledge the receipt of the recipient s order without undue delay and by electronic means (an order and an acknowledgement of receipt are deemed to be received when the parties to whom they are addressed are able to access them); and (4) make available to an ECA recipient, appropriate, effective and accessible technical means allowing the recipient to identify and correct input errors before the placing of an order. [Note: articles 10(1) and (2) and 11(1) and (2) of the E-Commerce Directive] 2.6A.7 R Contractual terms and conditions provided by a firm to an ECA recipient must be made available in a way that allows the recipient to store and reproduce them. [Note: article 10(3) of the E-Commerce Directive] Exception: contract concluded by 2.6A.8 R The requirements relating to the placing and receipt of orders do not apply to contracts concluded exclusively by exchange of or by equivalent individual communications. [Note: article 10(4) and 11(3) of the E-Commerce Directive] R This chapter applies to a firm only in relation to the communication, or approval, of a non-investment financial promotion to: (1) the communication of a non-investment financial promotion to a person inside in the United Kingdom; and (2) the approval of a non-investment financial promotion for 117

203 3.4.2 G communication to a person inside the United Kingdom; (if the financial promotion is an electronic commerce communication made from an establishment in the United Kingdom) a person in an EEA State other than the United Kingdom. subject to ICOB 3.4.3R (Exceptions to territorial scope). (2) The exemptions in ICOB 3.3.6R (Application: what?; Exemptions) also incorporate some territorial elements. In particular, the exemption for financial promotions originating outside the United Kingdom (section 21(3) of the Act (Restrictions on financial promotion)) (see ICOB 3.3.6R(2)) and PERG G (Financial promotions to overseas recipients (article 12)), the exemptions for overseas communicators (see ICOB 3.3.6R(3)) and the exemption for incoming electronic commerce communications made from an establishment in an EEA State other than the United Kingdom to an ECA recipient in the United Kingdom (see PERG G (Incoming electronic commerce communication (article 20B))). (3) In the context of the provision of an electronic commerce activity to an EEA ECA recipient, the scope of ICOB 3 is extended by ECO 2.2.3R (Financial promotion.) This means that ICOB 3 will apply for communications to EEA ECA recipients. [deleted] Extensions to territorial scope R The Notwithstanding ICOB 3.4.1R, the following parts of this chapter apply without any territorial limitation if a firm approves a non-investment financial promotion: (1) ICOB 3.1 to ICOB 3.6 (Application, Purpose and General); and (2) ICOB 3.8.1R(1) (Non-investment financial promotions: clear, fair and not misleading: comparisons). ICOB 4 Annex 1 ICOB 4 Annex 2 Initial disclosure document ("IDD") Combined initial disclosure document ("CIDD") [deleted - see COB 4 Annex 5 COBS 6 Annex 2G] R A firm may provide key features that meet the requirements of COB 6 COBS 13 and 14 on the content of the key features, instead of a policy summary, except that a firm is not required to include the title "key features of the [name of product]". The key features must include the information 118

204 required in ICOB 5.5.5R(6), (10) and (13) (cross-references from significant or unusual exclusions or limitations to related sections of the policy document, a telephone number or address for notification of claims and the key facts logo), in addition to that required by COB 6 COBS 13 and 14, but this rule does not require a firm to meet the requirements of COB R or COB R. 119

205 Annex O Amendments to the Mortgages and Home Finance: Conduct of Business sourcebook (MCOB) In this Annex, underlining indicates new text and striking through indicates deleted text, except where otherwise indicated. Electronic commerce activities and communications R The territorial scope of this sourcebook is modified by ECO in relation to electronic commerce activities and electronic commerce communications. This sourcebook does not apply to an incoming ECA provider acting as such. Related investment advice G Firms are reminded that they should follow the relevant rules in COB 5 COBS 6 and COB 6 COBS 13 relating to advice and disclosure on investments if they are advising the customer on an investment such as an annuity associated with an equity release transaction or an ISA used as a repayment vehicle. After MCOB 2.7 insert the following new section. The text is not underlined. 2.7A E-Commerce Application 2.7A.1 R This section applies to a firm carrying on an electronic commerce activity from an establishment in the United Kingdom, with or for a person in the United Kingdom or another EEA state, in relation to a home finance transaction. Information about the firm and its products or services 2.7A.2 R A firm must make at least the following information easily, directly and permanently accessible to the recipients of the information society services it provides: (1) its name; (2) the geographic address at which it is established; (3) the details of the firm, including its address, which allow it to be contacted rapidly and communicated with in a direct and effective manner; 120

206 (4) an appropriate statutory status disclosure statement (GEN 4 Annex 1R), together with a statement which explains that it is on the FSA register and includes its FSA register number; (5) if it is a professional firm, or a person regulated by the equivalent of a designated professional body in another EEA State: (a) (b) (c) the name of the professional body (including any designated professional body) or similar institution with which it is registered; the professional title and the EEA State where the professional title was granted; a reference to the applicable professional rules in the EEA State of establishment and the means to access them; and (6) where the firm undertakes an activity that is subject to VAT, its VAT number. [Note: article 5(1) of the E-Commerce Directive] 2.7A.3 R If a firm refers to price, it must do so clearly and unambiguously, indicating whether the price is inclusive of tax and delivery costs. [Note: article 5(2) of the E-Commerce Directive] 2.7A.4 R A firm must ensure that commercial communications which are part of, or constitute, an information society service, comply with the following conditions: (1) the commercial communication must be clearly identifiable as such; (2) the person on whose behalf the commercial communication is made must be clearly identifiable; (3) promotional offers must be clearly identifiable as such, and the conditions that must be met to qualify for them must be easily accessible and presented clearly and unambiguously; and (4) promotional competitions or games must be clearly identifiable as such, and the conditions for participation must be easily accessible and presented clearly and unambiguously. [Note: article 6 of the E-Commerce Directive] 2.7A.5 R An unsolicited commercial communication sent by by a firm established in the United Kingdom must be identifiable clearly and unambiguously as an unsolicited commercial communication as soon as it is received by the recipient. [Note: article 7(1) of the E-Commerce Directive] 121

207 Requirements relating to the placing and receipt of orders 2.7A.6 R A firm must (except when otherwise agreed by parties who are not consumers): (1) give an ECA recipient at least the following information, clearly, comprehensibly and unambiguously, and before the order is placed by the recipient of the service: (a) (b) (c) (d) the different technical steps to follow to conclude the contract; whether or not the concluded contract will be filed by the firm and whether it will be accessible; the technical means for identifying and correcting input errors before the placing of the order; and the languages offered for the conclusion of the contract; (2) indicate any relevant codes of conduct to which it subscribes and information on how those codes can be consulted electronically; (3) (when an ECA recipient places an order through technological means), acknowledge the receipt of the recipient s order without undue delay and by electronic means (an order and an acknowledgement of receipt are deemed to be received when the parties to whom they are addressed are able to access them); and (4) make available to an ECA recipient, appropriate, effective and accessible technical means allowing the recipient to identify and correct input errors before the placing of an order. [Note: articles 10(1) and (2) and 11(1) and (2) of the E-Commerce Directive] 2.7A.7 R Contractual terms and conditions provided by a firm to an ECA recipient must be made available in a way that allows the recipient to store and reproduce them. [Note: article 10(3) of the E-Commerce Directive] Exception: contract concluded by 2.7A.8 R The requirements relating to the placing and receipt of orders do not apply to contracts concluded exclusively by exchange of or by equivalent individual communications. [Note: article 10(4) and 11(3) of the E-Commerce Directive] 122

208 3.3.1 R This chapter applies to a firm only in relation to: (1) the communication of a financial promotion to a person inside in the United Kingdom; (2) the communication of an unsolicited real time financial promotion of qualifying credit or of a home reversion plan, unless: it is made from a place, and for the purposes of a business which is only carried on, outside the United Kingdom; (a) (b) it is made from a place outside the United Kingdom; it is made for the purposes of a business which is carried on outside the United Kingdom and which is not carried on in the United Kingdom; and G (1) (3) the approval of a non-real time financial promotion of qualifying credit or a home reversion plan for communication to a person inside the United Kingdom; and subject to MCOB 3.3.3R (Exceptions to territorial scope: rules without territorial limitation) and MCOB 3.3.5R (Exceptions to territorial scope: distance contracts). (4) the communication or approval for communication of a financial promotion that is an electronic commerce communication to a person in an EEA state other than in the United Kingdom. (2) The exemptions in MCOB 3.2.5R (Application: what?; Exemptions) also incorporate some territorial elements. In particular, the exemption for financial promotions originating outside the United Kingdom (section 21(3) of the Act (Restrictions on financial promotion)) (see MCOB 3.2.5R(4)), and the exemptions for overseas communicators (see MCOB 3.2.5R(4)) and the exemption for incoming electronic commerce communications made from an establishment in an EEA State other than the United Kingdom to an ECA recipient in the United Kingdom (see PERG G (Incoming electronic commerce communication (article 20B)). (3) In the context of the provision of an electronic commerce activity to an EEA ECA recipient, the scope of MCOB is extended by ECO 2.2.3R (Financial promotion). This means that MCOB 3 will apply for communications to EEA ECA recipients. [deleted] 4 Annex 1 Initial disclosure document ("IDD") 123

209 4 Annex 2 Combined initial disclosure document ('CIDD') [deleted - see COB 4 Annex 5R COBS 6 Annex 2G] R Where all or part of the regulated mortgage contract to which the illustration relates is an interest-only mortgage: (3) if the illustration includes a quotation for the payments that would need to be made into the repayment vehicle by the customer:... (d) the illustration must refer the customer to the individual product disclosure documentation required by the Conduct of Business sourcebook (COBS). 8 Annex 1 Initial disclosure document ("IDD") 8 Annex 2 Combined initial disclosure document ("CIDD") [deleted] 124

210 Annex P Amendments to the Client Assets sourcebook (CASS) In this Annex, underlining indicates new text and striking through indicates deleted text R CASS does not apply to an incoming ECA provider acting as such. Appointed representatives and tied agents G (1) Although CASS does not apply directly to a firm's appointed representatives, a firm will always be responsible for the acts and omissions of its appointed representatives in carrying on business for which the firm has accepted responsibility (section 39(3) of the Act). In determining whether a firm has complied with any provision of CASS, anything done or omitted by a firm's appointed representative (when acting as such) will be treated as having been done or omitted by the firm (section 39(4) of the Act). Equally, CASS does not apply directly to tied agents. A MiFID investment firm will be fully and unconditionally responsible for the acts and omission of the tied agents that it appoints. (2) Firms should also refer to SUP 12 (Appointed representatives), which sets out requirements which apply to firms using appointed representatives and tied agents R In relation to a trustee firm which is not a depositary, when acting as such, and which falls within COB R(1): G (1) CASS does not apply to a trustee firm which is not a depositary or the trustee of a personal pension scheme or stakeholder pension scheme, except for the MiFID custody chapter, the MiFID client money chapter and the mandate rules; and. (2) iin the MiFID custody chapter, the MiFID client money chapter and the mandate rules, 'client' means 'trustee', 'trust', 'trust instrument' or 'beneficiary', as appropriate. Application to electronic media and E-Commerce Modification of CASS resulting from the E-Commerce Directive G The application of CASS may be modified by ECO (as a result of the E- Commerce Directive implementation). These modifications will only apply to a firm which carries on electronic commerce activity. Firms should consult ECO for details. [deleted] 125

211 2.1.9 R The custody rules do not apply to: (4) a MiFID investment firm or a third country investment firm that has opted to act in accordance with the MiFID custody chapter in respect of designated investments that it safeguards and administers which are subject to the opt-in to the MiFID custody chapter A G Firms that safeguard and administer designated investments including financial instruments and that are subject to both sets of custody rules, should refer to CASS R (Opt-in to the MiFID custody rules) which contains a provisions enabling these firms firms to opt to comply solely with the MiFID custody chapter. This is also relevant to the equivalent business of a third country investment firm R Before a firm provides safe custody services to a client, unless CASS 2.3.5R applies, the firm must notify the client as to the appropriate terms and conditions which apply to this service, including, where applicable, those covering: (3) the circumstances in which the firm may realise a safe custody investment held as collateral to meet the client's liabilities (see COB 7.8) (Realisation of a private customer's assets CASS 2.3.2AR).; 2.3.2A R A firm must not realise a retail client's assets unless it is legally entitled to do so and it has either: (1) set out in a client agreement provided to the retail client: (a) (b) (c) the action it may take to realise any assets of the retail client; the circumstances in which it may do so; and each asset (if relevant) or type or class of asset over which it may exercise the right; or (2) give the retail client notice (oral or written) of its intention to exercise its rights at least three business days before it does so R A firm may include the information required by CASS R in any statement provided by the firm to the client in accordance with COB 8.2 (Periodic statements), the rules on periodic reporting in COBS 16.3, or by other separate documents, as long as they are prepared in relation to the same date and delivered to the client within a reasonable period of one another. Stock lending 126

212 2.5.4 R A firm must not undertake or otherwise engage in stock lending activity with or for a customer unless: E [deleted] (1) the firm has obtained the consent of the customer; and (2) the stock lending activity is subject to appropriate terms and conditions, which includes a provision that, in the case of a retail client, the firm may undertake stock lending with or for the retail client (if that is the case), specifying the assets to be lent, the type and value of the relevant collateral from the borrower and the method and amount of payment due to the retail client in respect of the lending R This chapter does not apply with respect to: (4) money held by depositaries which are regulated by COB 11 to which chapter 11 (Trustee and depositary activities) of COB applied, or would have applied, on 31 October 2007; or (6) client money held by a firm which: (a) (b) receives or holds client money in relation to designated investment business other than MiFID business; but which in relation to such client money elects to act in accordance with the MiFID client money chapter under the opt-in to that chapter (CASS 7.1.3R(1)) C G Firms that hold client money in the course of, or in connection with, designated investment business that is not MiFID business and also in the course of, or in connection with, MiFID business (and are therefore subject to the non-directive client money chapter and the MiFID client money chapter), should refer to CASS 7.1.3R(1) (Opt-in to the MiFID client money rules) which contains a provisions enabling these firms to opt to comply solely with the MiFID client money chapter. This is also relevant to the equivalent business of a third country investment firm G When a firm realises client collateral to meet liabilities of that client, it should do so in accordance with the relevant terms and conditions and other requirements (see CASS 2.3.2R to CASS 2.3.6R), and for a retail client, in accordance with COB 7.8 (Realisation of a private customer's assets) G Firms which carry on designated investment business which may, for example, involve them handling client money in respect of life assurance business should refer to the non-directive client money chapter which includes provisions enabling firms to elect to comply solely with that chapter or with the insurance client money chapter in respect of that 127

213 business. Firms that also carry on MiFID business MiFID or equivalent third country business may elect to comply solely with the MiFID client money chapter with respect of client money in respect of which the nondirective client money chapter or the insurance client money chapter apply. Application R This chapter (the custody rules) applies to: (1) a MiFID investment firm: (1) (a) when it holds financial instruments belonging to a client in the course of its MiFID business; or (2) (b) that opts to comply with the custody rules under this chapter in accordance with CASS R(1) (Opt-in to the MiFID custody rules).; and (2) a third country investment firm that opts to comply with the custody rules under this chapter in accordance with CASS R(2) (Opt-in to the MiFID client money rules). Opt-in to the MiFID custody rules R (1) A firm that holds financial instruments to which this chapter applies and assets in respect of which the non-directive custody chapter applies, may elect to comply with the provisions of this chapter in respect of all assets so held and if it does so, this chapter applies as if all such assets were financial instruments that the firm receives and holds in the course of, or in connection with, its MiFID business. (1A) A third country investment firm that holds designated investments belonging to a client in the course of its equivalent business may elect to comply with the provisions of this chapter in respect of the assets it holds to which the non-directive custody chapter applies. If it does so, this chapter applies as if all such assets were assets that the firm receives and holds in the course of, or in connection with, MiFID business G A firm (other than a third country investment firm) that is only subject to the non-directive custody chapter may not choose to comply with this chapter A G The information requirements concerning the safeguarding of financial instruments belonging to a client (see COBS 6.1.7R) apply to a firm that has elected to comply with this chapter with respect of all assets to which the election applies. Application 128

214 7.1.1 R This chapter (the client money rules) applies to: R (1) a MiFID investment firm: (1) (a) that holds client money; or (2) (b) that opts to comply with this chapter in accordance with CASS 7.1.3R(1) (Opt-in to the MiFID client money rules); and (2) a third country investment firm that opts to comply with this chapter in accordance with CASS 7.1.3R(2) (Opt-in to the MiFID client money rules); unless otherwise specified in this section. Opt-in to the MiFID client money rules (1A) A third country investment firm that receives or holds money from, for or on behalf of a client in the course of, or in connection with, its equivalent business of a third country investment firm may elect to comply with the provisions of this chapter in respect of the money it holds to which the non-directive client money chapter or the insurance client money chapter applies. If it does so, this chapter applies as if all such money were money that the firm receives and holds in the course of, or in connection with, MiFID business G The opt-in to the client money rules in this chapter does not apply in respect of money that a firm holds outside of the scope of the non-directive client money chapter or the insurance client money chapter, such as money falling within the scope of the opt-out for non-imd designated investment business non-imd designated investment business (see CASS R) R A firm (other than a third country investment firm) that is only subject to the non-directive client money chapter or the insurance client money chapter may not opt to comply with this chapter A G The information requirements concerning the safeguarding of client money (see COBS 6.1.7R) apply to a firm that has elected to comply with this chapter with respect of all client money to which the election applies. Appointed representatives, tied agents, field representatives and other agents G (1) Pursuant to the MiFID client money segregation requirements, a firm operating the normal approach should establish and maintain procedures to ensure that client money received by its appointed representatives, tied agents, field representatives or other agents is: 129

215 G The firm should ensure that its appointed representatives, tied agents, field representatives or other agents keeps client money separately identifiable from any other money (including that of the firm) until the client money is paid into a client bank account or sent to the firm G A firm that operates a number of small branches, but holds or accounts for all client money centrally, may treat those small branches in the same way as appointed representatives and tied agents. Commodity Futures Trading Commission Part 30 exemption order G United States (US) legislation restricts the ability of non-us firms to trade on behalf of US customers on non-us futures and options exchanges. The relevant US regulator (the CFTC) operates an exemption system for firms authorised by the FSA. The FSA sponsors the application from a firm for exemption from Part 30 of the General Regulations under the US Commodity Exchange Act in line with this system. The application forms and associated information can be found on the FSA website in the "Forms" section G A firm with a Part 30 exemption order undertakes to the CFTC that it will refuse to allow any US customer to opt not to have his money treated as client money if it is held or received in respect of transactions on non-us exchanges, unless that US customer is an "eligible contract participant" as defined in section 1a(12) of the Commodity Exchange Act, 7 U.S.C. The MiFID client money chapter does not have the option of allowing the firm or the client to choose whether money belonging to the client is subject to the client money rules R A firm must not reduce the amount of, or cancel a letter of credit issued under, an LME bond arrangement where this will cause the firm to be in breach of its Part 30 exemption order R A firm must notify the FSA immediately it arranges the issue of an individual letter of credit under an LME bond arrangement. 7 Annex 1 12 In determining the client money requirement under paragraph 6, a firm: (3) need not include client money in the form of client entitlements which are not required to be segregated (see CASS G) nor include client money forwarded to the 130

216 firm by its appointed representatives, tied agents, field representatives and other agents, but not received (see CASS G); 17A. A firm with a Part 30 exemption order which also operates an LME bond arrangement for the benefit of US-resident investors, should exclude the client equity balances for transactions undertaken on the London Metal Exchange on behalf of those US-resident investors from the calculation of the margined transaction requirement. TP1.1 (1) (2) Material to which the transitional provision applies (3) (4) Transitional provision (5) Transitional provision: dates in force (6) Handbook provision: coming into force 1 CASS 2 to CASS 4 R COB TP 1 to COB TP 4 apply to provisions in CASS in the same way as they did to the equivalent provisions included in COB 9 before 1 January [deleted] Indefinite 1 January A If a waiver granted before 1 January 2004 refers to a provision in COB 9 it will continue to be effective in relation to the equivalent provision in CASS. [deleted] CASS Sch 1.3 Handbook reference Subject of record Contents of record When record must be made Retention period CASS Record of Record of Date of the 5 years (from 131

217 7.1.3R(23) election to comply with the MiFID client money chapter election to comply with the MiFID client money chapter, including the date from which the election is to be effective election the date the firm ceases to use the election) 132

218 Annex Q Amendments to the Market Conduct sourcebook (MAR) In this Annex, underlining indicates new text and striking through indicates deleted text E In the opinion of the FSA, the following factors are to be taken into account in determining whether or not a person's behaviour is dutiful execution of an order on behalf of another, and are indications that it is: (1) whether the person has complied with the applicable provisions of COB COBS or MAR 3, or their equivalents in the relevant jurisdiction; or G There are no rules which permit or require a person to behave in a way which amounts to market abuse. Some rules contain a provision to the effect that behaviour conforming with that rule does not amount to market abuse: (1) COB 2.4.4R (1) (Chinese walls) (see COB 2.4.4R(4)) the control of information rule (SYSC R (1) (see SYSC R(4))); and Trade data monitors G The FSA considers that a firm will satisfy its obligations under MAR EU if: (1) in assessing the arrangements, the firm follows the guidelines published on the FSA's website at /mifid/documents/index.shtml; and A trade data monitor is a provider of such arrangements which has been assessed by the FSA or an external auditor as having the capability to provide services and facilities to firms in accordance with the guidelines published on the FSA s website at ments/index.shtml. [The amendment to MAR G is based on amendments made in FSA 2007/54 which have not yet come into force.] 133

219 Annex R Amendments to the Training and Competence sourcebook (TC) In this Annex, underlining indicates new text R (1) A firm must not assess (2) A firm may assess an employee who is subject to, but has not satisfied, an appropriate examination requirement as competent to the extent that: (a) (b) (c) that employee works in a branch in an EEA State other than the United Kingdom; the employee is engaging in MiFID business; and there is no appropriate examination or equivalent in that EEA State. 134

220 Annex S Amendments to the Supervision manual (SUP) In this Annex, underlining indicates new text and striking through indicates deleted text, unless otherwise stated. Part 1: Comes into force on 1 November G The Act requires the FSA to "maintain arrangements designed to enable it to determine whether persons on whom requirements are imposed by or under this Act, or by any directly applicable Community regulation made under MiFID, are complying with them" (paragraph 6(1) of Schedule 1 to the Act) R Note 2A = For this purpose, designated investment business does not include either or both: (a) (b) (i) (ii) having regard to article 4(4) of the Regulated Activities Order (Specified activities: general: core investment services by investment firms) G In complying with SUP 3.6.1R, a firm should take reasonable steps to ensure that each of its appointed representatives or, where applicable, tied agents gives the firm's auditor the same rights of access to the books, accounts and vouchers of the appointed representative or tied agent and entitlement to information and explanations from the appointed representative's or tied agent's officers as are given in respect of the firm by section 341 of the Act (see also SUP R(3)) A R An actuary appointed to perform the with-profits actuary function must: (4) in respect of each financial year, make a written report addressed to the relevant classes of the firm's with-profits policyholders, to accompany the firm's annual report under COB R COBS R, as to whether, in his opinion and based on the information and explanations provided to him by the firm, and taking into account where relevant the rules and guidance in COB 6.12 COBS 20, the annual report and the discretion exercised by the firm in respect of the period covered by the 135

221 report may be regarded as taking, or having taken, the interests of the relevant classes of the firm's with-profits policyholders into account in a reasonable and proportionate manner; 5.3.9A G [deleted] G In providing reasonable assistance under SUP 5.5.9R, a firm should take reasonable steps to ensure that, when reasonably required by the skilled person, each of its appointed representatives or, where applicable, tied agents waives any duty of confidentiality and provides reasonable assistance as though SUP 5.5.1R (3) and SUP 5.5.9R applied directly to the appointed representative or tied agent G (1) (a) make an application to the FSA for an internal transfer of an approved person, Form E (Internal transfer), or make an application to the FSA for an individual to perform additional controlled functions, the relevant Form A (Application); see SUP D to SUP G; G In deciding whether to cancel a firm's Part IV permission, the FSA will take into account all relevant factors in relation to business carried on under that permission, including whether: (3) the firm has ceased to hold or control custody assets in accordance with instructions received from clients (including instructions set out in an agreement entered into in accordance with CASS 2.3.2R (Custody: client agreement)) and COBS R (Information concerning safeguarding of designated investments belonging to clients and client money); 6 Annex 4.2 G 2 A firm must also cease to hold or control control custody assets in accordance with instructions received from clients (including instructions set out in an agreement entered into in accordance with CASS 2.3.2R (Custody: client agreement) and COBS R (Information concerning safeguarding of designated investments belonging to clients and client money) G This chapter explains how the regime for the waiver or modification waiver of rules works B G If an incoming EEA firm carries on designated investment business which consists of both MiFID business only, the EEA investment business oversight function and the compliance oversight function will not apply to that firm. and other regulated activities, SUP R(1) and (2) will apply to that firm, but 136

222 only in relation to that part of the business that is not MiFID business C G If an incoming EEA firm carries on designated investment business which consists of both MiFID business and other regulated activities, the EEA investment business oversight function and the compliance oversight function (SUP R(1) and (2)) will apply to that firm, but only in relation to that part of the business which is not MiFID business R The descriptions of the following controlled functions apply to an appointed representative of a firm, except an introducer appointed representative, as they apply to a firm: (1) the governing functions subject to SUP AR and except for a tied agent of an EEA MiFID investment firm; and R (1) (2) If a firm is a long-term insurer, the non-executive director function is also the function of acting in the capacity of an individual (other than an individual performing the director function or the non-executive director function under (1)) who, as a member of a committee having the purpose of a With-profits Committee with-profits committee (see COB G (1)), has responsibility in relation to governance arrangements for with-profits business under COB 6.11 (Reporting to with-profits policyholders on compliance with PPFM)COBS 20.3 (Principles and Practices of Financial Management) A G In requiring someone to apportion responsibility, a common platform firm should not apply for that person or persons to be approved to perform the apportionment and oversight function (see SUP R, SYSC 2.1.3R and SYSC 1.1.3R(5)) A R The customer function is the function of: (5) dealing, as principal or as agent, and arranging (bringing about) deals in investments other than a non-investment insurance contract with or for, or in connection with customers where the dealing or arranging deals is governed by COB 7 COBS 11 (Dealing and managing); G Approved persons forms the relevant Form A SUP 10 Ann 4D Application to perform controlled functions under the approved persons regime G Forms B, C, D and E can only be submitted in respect of an approved person by the firm that submitted an approved person's original application (that is, 137

223 the relevant Form A) G Copies of Forms A, B, C, D and E may be obtained from the FSA website or from the Individuals, CIS and Mutuals and Policy Department. To contact the Individuals, CIS and Mutuals and Policy Department for general enquiries: (1) telephone ; or (2) fax ; or (3) write to: Individuals, CIS and Mutuals and Policy Department The Financial Services Authority 25 The North Colonnade Canary Wharf LONDON E14 5HS; or (4) [email protected] D An application by a firm for the FSA 's approval under section 59 of the Act (Approval for particular arrangements) must be made by completing the Form A which relates to the particular type of firm, that is, a UK firm, overseas firm or incoming EEA firm G The relevant Form A must be used to apply for an individual to perform further controlled functions for a firm for which he already performs a controlled function as an approved person (see SUP D). It is not mandatory to complete all parts of the form. See the notes attached relevant to the each form for full details G In certain circumstances, when the FSA already has the information it would usually require, a shortened version of the relevant Form A may be completed. See the notes attached relevant to the each form for full details R (1) R (2) (c) section 5 of the relevant Form A in SUP 10 Annex 4 (Application to perform controlled functions under approved persons regime); (1) If, in relation to a firm which has completed the relevant Form A (SUP 10 Annex 4), any of the details in section 3.01 (Arrangements and controlled functions) are to change, the firm must notify the FSA 138

224 (2) on Form D. (3) Paragraphs (1) and (2) also apply to a firm in respect of an approved person, to whom the grandfathering arrangements applied as if the firm had completed a the relevant Form A for that person G If the firm or its advisers have further questions, they should contact the FSA's Individuals, CIS and Mutuals and Policy Department (see SUP G). SUP 10 Annex 1 Frequently asked questions G Question Answer Requirements of the regime 8 The firm should contact the Individuals, CIS and Mutuals and Policy Department. See SUP G. 10 Before the firm submits the relevant Form A, it must verify the information contained in it. As part of this verification, the Form provides for the candidate to confirm the accuracy of the information given by the firm so far as it relates to him. 11A (see section Question 5.01a of the relevant Form A (Application to perform controlled functions under the approved persons regime)) These can either be ordered through the Individuals, CIS and Mutuals and Policy Department or obtained from the FSA website at There is no charge for an application form D If a relevant controllers form, or an Application to perform controlled functions under the approved persons regime (the relevant Form A in SUP

225 G (1) Annex 4) in respect of... (a) (h) providing providing basic advice on on stakeholder products (article 52B of the Regulated Activities Order); G (1) (2) (a) (d) advising on investments, providing providing basic advice on on stakeholder products, advising on a home finance transaction or other activity that might reasonably lead a customer to believe that he had received basic advice or advice on investments or on home finance transactions or that the introducer appointed representative is permitted to provide give basic advice or give advice on investments personal recommendations on investments or on home finance transactions G If an introducer appointed representative is an individual in business on his own, then he will also be an introducer (see SUP G). This has certain implications in COBS (see COB 5 (Advising and selling)) G (1) (2) the fitness and propriety (including good character and competence) and financial standing of the controllers, directors, partners, proprietors and managers of the person; firms seeking guidance on the information which they should take reasonable steps to obtain and verify should refer to FIT and the questions in the relevant Form A (Application to perform controlled functions under the approved person regime) in SUP 10 Ann E G (1) Under the relevant Advising and Selling chapters of COB provisions in COBS, ICOB and MCOB, the customer will receive details of how to complain to the appointed representative and, when a product is purchased, details of the complaints procedure for the product provider, insurer or home finance provider G (1) (2) 140

226 (a) (g) provides provides basic advice on on stakeholder products. Notification of appointment of an appointed representative R [delete current rule and replace with the following, which is not underlined] (1) This rule applies to a firm which intends to appoint: (a) (b) an appointed representative to carry on insurance mediation activities; or a tied agent. (2) This rule also applies to a firm which has appointed an appointed representative. (3) A firm in (1) must complete and submit the form in SUP 12 Ann 3 before the appointment. (4) A firm in (2) must complete and submit the form in SUP 12 Ann 3 within ten business days after the commencement of activities R To contact the Individuals, CIS and Mutuals and Policy Department: (1) telephone ; fax ; or (2) write to: Individuals, CIS and Mutuals and Policy Department, The Financial Services Authority, 25 The North Colonnade, Canary Wharf, LONDON E14 5HS; or (3) [email protected] 141

227 SUP 12 Annex 3R Appointed representative appointment form Add an Aappointed Rrepresentative or tied agent Fform Notification under SUP R (i.e. the form in SUP 12 Ann 3) Firm name (i.e. the principal firm) ("Tthe Ffirm") NOTES This form should be used to notify the FSA of a new appointed representative to the firm or tied agent. It is the form required by SUP R which is set out in SUP 12 Ann 3. For the purposes of this form, references to appointed representative include tied agent unless the context otherwise requires. Personal Details Section A 1 Contact Nname for this form (this is not necessarily the same person making the declaration at the end of the form) * 2 Contact's Ddetails: a Pposition in the firm * b Ddaytime telephone number * c E address 142

228 d Iindividual reference number (IRN), if applicable New Appointed Representative Details Section B 8 Legal status of the appointed representative * Private Llimited Ccompany Public Llimited Ccompany Partnership Limited Ppartnership Limited Lliability Ppartnership Unincorporated Aassociation Sole Ttrader Other, please specify below 9 Date of commencement of agreement with your firm appointment (if an appointed representative carrying on insurance mediation activities) or commencement of activities (if any other kind of appointed representative or tied agent) * / / Will the appointed representative undertake designated investment business activities? * Is the application in respect of: (1) an appointed representative who will carry on insurance mediation activities; or (2) a tied agent? Declaration and signature Section C Warning 143

229 Knowingly or recklessly giving the FSA information, which is false or misleading in a material particular, may SUP R requires an authorised person to take reasonable steps to ensure the accuracy and completeness of information given to the FSA and to notify the FSA immediately if materially inaccurate information has been provided. Contravention of these requirements may lead to disciplinary sanctions or other enforcement action by the FSA. It should not be assumed that information is known to the FSA merely because it is in the public domain or has previously been disclosed to the FSA or another regulatory body. If you are not sure whether a piece of information is relevant, please include it anyway. Knowingly or recklessly giving the FSA information, which is false or misleading in a material particular, may be a criminal offence (sections 398 and 400 of the Financial Services and Markets Act 2000). SUP R requires an authorised person to take reasonable steps to ensure the accuracy and completeness of information given to the FSA and to notify the FSA immediately if materially inaccurate information has been provided. Contravention of these requirements may lead to disciplinary sanctions or other enforcement action by the FSA. It should not be assumed that information is known to the FSA merely because it is in the public domain or has previously been disclosed to the FSA or another regulatory body. If you are not sure whether a piece of information is relevant, please include it anyway. Data Protection Declaration Signature Name of signatory Date / / Name of signatory Position in firm Individual Registration Number (if applicable) Signature 144

230 SUP 12 Annex 4 Appointed representative notification form Appointed Rrepresentative or tied agent - Cchange Ddetails Notification under SUP R (i.e. the form in SUP 12 Ann 4) Firm name (i.e. the principal firm) ("Tthe Ffirm") NOTES This form should be used to change the details of an existing appointed representative or tied agent. It is the form required by SUP R which is set out in SUP 12 Ann 4. For the purposes of this form, references to 'appointed representative' include 'tied agent' unless the context otherwise requires. Personal Details Section A 1 Contact Name for this form (this is not necessarily the same person making the declaration at the end of the form) * 2 Contact's Ddetails: a Pposition in the firm * 145

231 b Ddaytime telephone number * c E address d Iindividual reference number (IRN), if applicable Change Details of an Existing Appointed Representative Section B What is this Appointed Representative's Firm Reference Number? (If not known, this can be found on the FSA Register on our website at What is this Appointed Representative's Firm Reference Number? (If not known, this can be found on the FSA Register on our website at a. 3a a. Do you wish to change the legal status of the appointed representative? If Yes, What is the new legal status of the appointed representative? Private Llimited Ccompany Public Llimited Ccompany Partnership Limited Ppartnership Limited Lliability Ppartnership Unincorporated Aassociation Sole Ttrader Other, please specify below Yes No N/A 3c b. Has the name change been approved by Companies House? 146

232 Note that N.B. if the appointed representative is a UK registered company or LLP, the name of the appointed representative can only be changed if the change has already been approved by Companies House. 5 If Yes, please provide details below. If you wish to amend a trading name please delete this name enter the name to be deleted in the box on the left and add the new one below: in the box on the right. Please detail the trading name(s) to be deleted below: Please detail the trading name(s) to be deleted below: Please detail the trading name(s) to be deleted below: Please detail the trading name(s) to be added below: 11 Does the appointed representative undertake insurance mediation? Do you wish to change this? Please provide details below: Yes No Do you wish to change the details of the Main 12 Yes No 15 Is the change in respect of an appointed representative who is carrying on insurance mediation activities or a tied agent? If so please provide details below: 147

233 16 Please enter the date on which these changes take effect: * / / Declaration and signatures Section C Warning Knowingly or recklessly giving the FSA information, which is false or misleading in a material particular, may SUP R requires an authorised person to take reasonable steps to ensure the accuracy and completeness of information given to the FSA and to notify the FSA immediately if materially inaccurate information has been provided. Contravention of these requirements may lead to disciplinary sanctions or other enforcement action by the FSA. It should not be assumed that information is known to the FSA merely because it is in the public domain or has previously been disclosed to the FSA or another regulatory body. If you are not sure whether a piece of information is relevant, please include it anyway. Knowingly or recklessly giving the FSA information, which is false or misleading in a material particular, may be a criminal offence (sections 398 and 400 of the Financial Services and Markets Act 2000). SUP R requires an authorised person to take reasonable steps to ensure the accuracy and completeness of information given to the FSA and to notify the FSA immediately if materially inaccurate information has been provided. Contravention of these requirements may lead to disciplinary sanctions or other enforcement action by the FSA. It should not be assumed that information is known to the FSA merely because it is in the public domain or has previously been disclosed to the FSA or another regulatory body. If you are not sure whether a piece of information is relevant, please include it anyway. Data Protection Declaration Signature Name of signatory Date / / Name of signatory Position in firm Individual Reference Number (if applicable) Signature

234 13A.4.3A G Guidance on the matters that are reserved to a firm's Home State regulator is located in SUP 13A Annex 2G. 13A.6.1 G (1) SUP 13A Annex 1G summarises how the Handbook applies to incoming EEA firms. (2) SUP 13A Annex 2G summarises the matters that are reserved to a firm's Home State regulator. 13A.6.5 G SUP 13A Annex 1G does not apply to incoming ECA providers acting as such. Such persons should refer to ECO for information on how the Handbook applies to them. After SUP 13A.8, insert the following new section. All text is new and is not underlined. 13A.9 The precautionary measure rule for incoming EEA firms Application 13A.9.1 R (1) The precautionary measure rule (SUP 13A.9.2R) applies to an incoming EEA firm which: (a) (b) is authorised by a home state regulator with respect to its MiFID business; or has a top-up permission which covers MiFID business; but which is not subject to provisions adopted by the Home State which transpose, in full, MiFID or the MiFID implementing Directive. (2) The precautionary measure rule applies: (a) (b) with respect to the regulated activities carried on by the firm in the United Kingdom; and to the extent that the firm is not subject to provisions which are comparable to provisions transposing MiFID or the MiFID implementing Directive. (3) This section (SUP 13A.9) is effective from 1 November 2007 until 31 October The precautionary measure rule 13A.9.2 R (1) A firm must comply with standards which are comparable to those required by the provisions of MiFID and the MiFID implementing Directive specified in rows (1) and (4) of the table in SUP 13A.9.3R. (2) An MTF must also comply with standards in row (2). (3) The following firms must also comply with standards in row (3): 149

235 (a) (b) a systematic internaliser; a firm, which, either on its own account or on behalf of clients, concludes transactions in shares admitted to trading on a regulated market outside a regulated market or MTF (see MAR 7.1.2R). 13A.9.3 R Table: MiFID provisions for incoming EEA firms Articles of MiFID or the MiFID implementing directive 1 Articles 13(3) and (6), 18 to 22 and 24 and Annex II of MiFID 2 Articles 12, 14, 26, 29 and 30 of MiFID 3 Articles 27 and 28 of MiFID 4 All related Articles of MiFID and the MiFID implementing Directive 13A.9.4 E (1) A firm should comply with the provisions of the Handbook which transpose the provisions of MiFID and the MiFID implementing Directive referred to in SUP 13A.9.3R (even if they are expressed not to apply to an incoming EEA firm). (2) Compliance with (1) may be relied upon as tending to establish compliance with the precautionary measure rule. 13A.9.5 G (1) The purpose of the precautionary measure rule is to ensure that an incoming EEA firm is subject to the standards of MiFID and the MiFID implementing Directive to the extent that the Home State has not transposed MiFID or the MiFID implementing Directive by 1 November It is to fill a gap. (2) The rule is made in the light of the duty of the United Kingdom under Article 62 of MiFID to adopt precautionary measures to protect investors. (3) The rule will be effective for 12 months only; it reflects the scope of the Regulated Activities Order (including, for example, the overseas persons exclusion); and it allows for the possibility of a partial transposition by the Home State. (4) An indication of the Handbook provisions which transpose MiFID and the MiFID implementing Directive can be found in the websites and For the purposes of the precautionary measure rule, the principal provisions are the rules in COBS (including in particular those relating to inducements in COBS 2.3) and the conflicts and record keeping provisions in SYSC. 150

236 (5) The provisions applying to an incoming EEA firm are set out in SUP 13A Annex 1G. The effect of SUP 13A.9.4E(1) is that some of the provisions which are expressed as not applying may need to be applied by a firm in order to meet a MiFID standard. SUP 13A Annex 1 G Application of the Handbook to Incoming EEA Firms 1. The table below summarises the application of the Handbook to an incoming EEA firm. Where the table indicates that a particular module of the Handbook may apply, its application in relation to any particular activity is dependent on the detailed application provisions in that module. The table does not apply to incoming ECA providers. These should refer to COBS 1 Ann 1 Part 3 section 7 ECO 1 for guidance on how the Handbook COBS applies to them. 2. In some cases, the application of the Handbook depends on whether responsibility for a matter is reserved under a European Community instrument to the incoming EEA firm's Home State regulator. Guidance on the reservation of responsibility is contained in SYSC App 1 SUP 13A Ann 2 (Matters reserved to a Home State regulator). Guidance on the territorial application of MiFID is contained in PERG 13.6 and 13.7 and SUP 13A Anex 2G. 3. (1) Module of Handbook (2) Potential application to an incoming EEA firm with respect to activities carried on from an establishment of the firm (or its appointed representative) in the United Kingdom (3) Potential application to an incoming EEA firm with respect to activities carried on other than from an establishment of the firm (or its appointed representative) in the United Kingdom PRIN SYSC SYSC 1 contains The common platform requirements in SYSC 4-10 apply as set out in SYSC 1.3.1R and SYSC 1.3.1BG. SYSC 1.3.1BG states that whilst the common platform requirements do not generally apply to incoming EEA firms, EEA MiFID investment firms must comply with the common platform record-keeping requirements in relation to a branch in the United Kingdom. SYSC 9 applies to activities carried on from an establishment in the United Kingdom, The common platform requirements in SYSC 4-10 apply as set out in SYSC 1.3.1R and SYSC 1.3.1BG. SYSC 9 does not apply. 151

237 unless another applicable rule which is relevant to the activity has a wider territorial scope, in which case the common platform record-keeping requirements apply with that wider scope in relation to the activity described in that rule (SYSC AR). SYSC 11 applies to an incoming EEA firm which: (1) is a full BCD credit institution; and (2) has a branch in the United Kingdom (SYSC R(3)). SYSC 12 does not apply (SYSC R). SYSC 13 does not apply (SYSC G). SYSC 14 does not apply (SYSC R). SYSC 15 does not apply (SYSC G). SYSC 16 does not apply (SYSC G). SYSC 17 does not apply (SYSC G). SYSC 18 applies. SYSC do not apply. SYSC 18 applies. FIT FIT applies to a firm wishing to establish a branch in the United Kingdom or to apply for a top-up permission in respect of any application that it makes for the approval of a person to perform a controlled function (FIT 1.1). See under SUP 10 below as to whether such approval is required. FIT applies in a limited way in relation to an incoming MiFID investment firm (see FIT 1.2.4AG). Does not apply. GEN GEN applies... GEN 4 does not apply in relation to MiFID or equivalent third country business (see GEN 4.1.1R). GEN 4 does not apply if the firm has permission only for crossborder services and does not carry on regulated activities in the United Kingdom (see GEN 4.1.1R). Otherwise, as column (2). COB [deleted] [deleted] COBS Guidance on the territorial application of COBS is contained in COBS 1 Ann 1 Part 3. Guidance on the territorial application of COBS is contained 152

238 ICOB As column (3) plus, in the case of a distance contract with a retail customer consumer, unless the firm s Home State imposes measures which implement or correspond to obligations of the DMD Distance Marketing Directive: (1) in COBS 1 Ann 1 Part 3. Only the following provisions of ICOB apply: (4) ICOB R(4) to (15) and (22), but only in respect of non-investment insurance contracts which are pure protection contracts where the habitual residence of the customer, other than an EEA ECA recipient present in an EEA State other than the United Kingdom, is in the United Kingdom; (5) ICOB 6 (Cancellation), but only in respect of noninvestment insurance contracts which are pure protection contracts where the habitual residence of the customer, other than an EEA ECA recipient present in an EEA State other than the United Kingdom, is in the United Kingdom.; (6) unless the firm s Home State regulator has implemented articles 12 and 13 of the IMD Insurance Mediation Directive for those activities: (a) MAR MAR 1 MAR 1 MAR 3 (Inter-professional conduct) Applies (MAR 3.1.4R). MAR 3 (Inter-professional conduct) Does not apply MAR 3.1.4R. 153

239 SUP SUP 1 SUP 1 [Delete the entry for SUP 17 and replace it with the following] SUP 17 (Transaction reporting) Applies to UK branches of incoming EEA firms which are MiFID investment firms in respect of reportable transactions executed in the course of services provided, whether within in the United Kingdom and outside. (SUP G and SUP AG) SUP 17 (Transaction reporting) Does not apply (SUP R(2)(a)). Applies as appropriate to incoming EEA firms which are MiFID investment firms in respect of reportable transactions. (SUP R and SUP R). DISP ECO [deleted] Applies (DISP 1.1.1G) and applies in a limited way in relation to MiFID business. [deleted] Does not apply (DISP 1.1.1G). [deleted] In the following Annex all text is new and is not underlined. SUP 13A Annex 2G: Matters reserved to a Home State regulator Introduction 1. The application of certain provisions in the Handbook to an incoming EEA firm or incoming Treaty firm depends on whether responsibility for the matter in question is reserved to the firm's Home State regulator. This annex contains guidance designed to assist such firms in understanding the application of those provisions. This annex is not concerned with the FSA's rights to take enforcement action against an incoming EEA firm or an incoming Treaty firm, which are covered in the Enforcement Guide (EG), or with the position of a firm with a top-up permission. Requirements in the interest of the general good 2. The Single Market Directives, and the Treaty (as interpreted by the European Court of Justice) adopt broadly similar approaches to reserving responsibility to the Home State regulator. To summarise, the FSA, as Host State regulator, is entitled to impose requirements with respect to activities carried on within the United Kingdom if these can be justified in the interests of the "general good" and are imposed in a non-discriminatory way. This general proposition is subject to the following in relation to activities passported under the Single Market Directives: (1) the Single Market Directives expressly reserve responsibility for the prudential supervision of a MiFID investment firm, BCD credit institution, UCITS management company or passporting insurance undertaking to the firm's Home 154

240 State regulator. The Insurance Mediation Directive reaches the same position without expressly referring to the concept of prudential supervision. Accordingly, the FSA, as Host State regulator, is entitled to regulate only the conduct of the firm's business within the United Kingdom; (2) there is no "general good" provision in MiFID. Rather, MiFID states exactly what the Host State regulator regulates (see paragraphs 8-10); (3) for a BCD credit institution, the FSA, as Host State regulator, is jointly responsible with the Home State regulator under article 41 of the Banking Consolidation Directive for supervision of the liquidity of a branch in the United Kingdom; (4) for a MiFID investment firm including a BCD credit institution which is a MiFID investment firm), the protection of clients' money and clients' assets is reserved to the Home State regulator under MiFID; and (5) responsibility for participation in compensation schemes for BCD credit institutions and MiFID investment firm is reserved in most cases to the Home State regulator under the Deposit Guarantee Directive and the Investor Compensation Directive. 3. It is necessary to refer to the case law of the European Court of Justice to interpret the concept of the "general good". To summarise, to satisfy the general good test, Host State rules must come within a field which has not been harmonised at a Community level, satisfy the general requirements that they pursue an objective of the general good, be nondiscriminatory, be objectively necessary, be proportionate to the objective pursued and not already be safeguarded by rules to which the firm is subject in its Home State. Application of SYSC 2 and SYSC 3 4. SYSC 2 and SYSC 3 do not apply to a UK MiFID investment firm. They only apply to an EEA MiFID investment firm on a limited basis. This is explained more fully in PERG 13.7 Q. 70 (systems and controls). See paragraph 8 below for a discussion of how the common platform requirements apply to an EEA MiFID investment firm. The FSA considers that it is entitled, in the interests of the general good, to impose the requirements in SYSC 2.1.3R to SYSC 2.2.3G (in relation to the allocation of the function in SYSC 2.1.3R (2)) and SYSC 3 on an incoming EEA firm and an incoming Treaty firm; but only in so far as they relate to those categories of matter responsibility for which is not reserved to the firm's Home State regulator. 5. Should the FSA become aware of anything relating to an incoming EEA firm or incoming Treaty firm (whether or not relevant to a matter for which responsibility is reserved to the Home State regulator), the FSA may disclose it to the Home State regulator in accordance with any applicable directive and the applicable restrictions in Part XXIII of the Act (Public Record, Disclosure of Information and Co-operation). 6. This Annex represents the FSA's views, but a firm is also advised to consult the relevant European Community instrument and, where necessary, seek legal advice. The views of the European Commission in the banking and insurance sectors are contained in two Commission Interpretative Communications (Nos. 97/C209/04 and C(1999)5046). 155

241 7. Examples of how the FSA considers that SYSC 3 will apply in practice to an incoming EEA firm are as follows: (1) The Prudential Standards part of the Handbook (with the exception of INSPRU R on the payment of financial penalties and the Interim Prudential sourcebook (insurers) (IPRU (INS)) (rules 3.6 and 3.7) do not apply to an insurer which is an incoming EEA firm. Similarly, SYSC 3 does not require such a firm: (a) (b) to establish systems and controls in relation to financial resources (SYSC 3.1.1R); or to establish systems and controls for compliance with that Prudential Standards part of the Handbook (SYSC 3.2.6R); or (c) to make and retain records in relation to financial resources (SYSC R). (2) The Conduct of Business sourcebook (COBS) applies to an incoming EEA firm. Similarly, SYSC 3 does require such a firm: (a) (b) (c) to establish systems and controls in relation to those aspects of the conduct of its business covered by applicable sections of COBS (SYSC 3.1.1R); to establish systems and controls for compliance with the applicable sections of COBS (SYSC 3.2.6R); and to make and retain records in relation to those aspects of the conduct of its business (SYSC R). See also Question 12 in SYSC 2.1.6G for guidance on the application of SYSC 2.1.3R (2) Application of the common platform requirements in SYSC 8. Whilst the common platform requirements (located in SYSC 4-10) do not generally apply to incoming EEA firms, EEA MiFID investment firms must comply with the common platform record-keeping requirements in relation to a branch in the United Kingdom. Requirements under MiFID 9. Article 31(1) of MiFID prohibits Member States from imposing additional requirements on a MiFID investment firm in relation to matters covered by MiFID if the firm is providing services on a cross-border basis. Such firms will be supervised by their Home State regulator. 10. Article 32 of MiFID requires the FSA as the Host State regulator to apply certain obligations to an incoming EEA firm with an establishment in the UK. In summary, these are Articles: (1) 19 (conduct of business obligations); (2) 21 (execution of orders on terms most favourable to the client); 156

242 (3) 22 (client order handling); (4) 25 (upholding the integrity of markets, reporting transactions and maintaining records); (5) 27 (making public firm quotes); and (6) 28 (post-trade disclosure). The remaining obligations under MiFID are reserved to the Home State regulator. 11. MiFID is more highly harmonising than other Single Market Directives. Article 4 of the MiFID implementing Directive permits Member States to impose additional requirements only where certain tests are met. The FSA has made certain requirements that fall within the scope of Article 4. These requirements apply to an EEA MiFID investment firm with an establishment in the United Kingdom as they apply to a UK MiFID investment firm. 12. Further guidance on the territorial application of the Handbook can be found at PERG 13.6 and G Firms are reminded that:, (1) unless expressly stated otherwise, where a rule or guidance includes a reference to a firm this includes all UK and overseas branches and representative offices of that firm, whether or not those branches or offices carry on any regulated activities; and. (2) ECO 1.1.6R has the effect that this chapter does not apply to an incoming ECA provider acting as such R This chapter does not apply to an incoming ECA provider acting as such R (1) A firm must notify the FSA of: (a) (c) (d) (e) the bringing of a prosecution for, or a conviction of, any offence under the Act; or a breach of a directly applicable provision in the MiFID Regulation; or a breach of any requirement in regulation 4C(3) (or any successor provision) of the Financial Services and Markets Act 2000 (Markets in Financial Instruments) Regulations 2007; by (or as regards (c) against) the firm or any of its directors, officers, employees, approved persons, or appointed representatives, or, where applicable, tied agents. 157

243 (2) A G SUP R(1)(e) relates to the standard requirement in the permission of those firms which fall outside MiFID because of the Treasury s implementation of Article 3 of MiFID. Guidance on how the Treasury has exercised the Article 3 exemption for the United Kingdom is given in Q48 and the following questions and answers in PERG 13.5 (Exemptions from MiFID) G SUP R applies also in relation to rules outside this chapter, and even if they are not notification rules. Examples of rules and chapters to which SUP R is relevant, are: (1) (5) any notification rule (see Schedule 2 which contains a consolidated summary of such rules); and, (6) DISP 1.5 (Record keeping and reporting) 1.9 (Complaints record rule); and (7) DISP 1.10 (Complaints reporting rule). 158

244 SUP 15 Ann 2R Form F Application number (for FSA use only) Form F Changes in notified persons FSA Handbook Reference: SUP 15 Annex 2R Employment history for past 5 years Section 4 Note: ALL gaps must be accounted for 4.01 Employment details (1) a Period (mm/yyyy) From / To / h Is / was employer an appointed representative/tied agent Yes No If yes, of which firm? 4.02 Employment details (2) a Period (mm/yyyy) From / To / h Is / was employer an appointed representative/tied agent Yes No If yes, of which firm? 4.03 Employment details (3) a Period (mm/yyyy) From / To / h Is / was employer an appointed representative/tied agent Yes No If yes, of which firm? 159

245 4.04 Employment details (4) a Period (mm/yyyy) From / To / h Is / was employer an appointed representative/tied agent Yes No If yes, of which firm? 4.05 Employment details (5) a Period (mm/yyyy) From / To / h Is / was employer an appointed representative/tied agent Yes No If yes, of which firm? G [deleted] G [deleted] D G The RMAR comprises sections relating both to financial reporting and other sections (e.g. Training and Competence and COBS data) R A persistency report or data report must report on a life policy or stakeholder pension if: (1) (3) the person who sold it or who was responsible for its promotion was, in so doing, subject to rules in COBS or (before commencement) conduct of business rules made by a previous regulator R A persistency or data report must not report on any of the following: G (1) (1) a life policy or stakeholder pension that was cancelled from inception whether or not this was as a result of service of a notice under COB 6.7 (Cancellation and withdrawal) the rules on cancellation (COBS 15); (3) [deleted] 160

246 SUP App SUP App App G G G SUP App 2.15 applies to an insurer carrying on with-profits business, but only if COB R COBS R (Ceasing to effect new contracts of insurance in a with-profits fund) also applies. The run-off plan required by COB R(2) COBS R should include the information described in SUP App G to SUP App G in respect of the relevant with-profits fund. A firm's run-off plan should include: (1) (7) details of any new deductions to be made from the firm's surrender payments, together with an explanation as to how those deductions are consistent with: (a) (b) COB R to COB R COBS G to COBS R (Amounts payable under with-profits policies: Surrender payments); App App 3.9 App G G (9) details of the information that the firm gives to its with-profits policyholders about their open market options when its pension policies vest right (if any) to use the proceeds of a personal pension scheme, stakeholder pension scheme, FSAVC, retirement annuity contract or pension buy-out contract to purchase an annuity on the open market when the relevant contracts or schemes vest or mature and any changes that will be made to that information as a result of the closure; [deleted] Mapping of MiFID, Banking Consolidation Directive, UCITS Directive and Insurance Mediation Directive to the Regulated Activities Order Activities set out in Annex I of the BCD Table 1: BCD activities Part II RAO Activities Part III RAO Investments Note 1. The BCD activity of trading for account of customers does not extend 161

247 to the regulated activity of making arrangements with a view to transactions in investments under article 25(2) of the Regulated Activities Order unless the arrangements bring about or would bring about particular transactions. Note 2 1: The services and activities provided for in Sections A and B of Annex I of MiFID when referring to the financial instruments provided for in Section C of Annex I of that Directive are subject to mutual recognition according to the BCD from 1 November Please refer to See the table at SUP App 3.9.5G below for mapping of MiFID investment services and activities. For further details relating to this residual category, please see the "Banking Consolidation Directive" section of the passporting forms entitled "Notification of intention to establish a branch in another EEA State" and "Notification of intention to provide cross border services in another EEA State". App G Services set out in Annex I to MiFID Table 2: MiFID investment services and activities Part II RAO Investments Part III RAO Investments 1. Reception and transmission of orders in relation to one or more financial instruments Article 25 (see Note 1) Article 76-81, 83-85, Portfolio management Article 37 (14, 21, 25 see Note 1 2) Article 76-81, 83-85, 89 Note 1. The MiFID service of receiving and transmitting orders does not extend to the regulated activity of making arrangements with a view to transactions in investments under article 25(2) of the Regulated Activities Order unless the arrangements bring about or would bring about particular transactions. This is the case, whether or not the bringing about arises or would arise as a result of the person who makes the arrangements receiving and transmitting orders in relation to particular transactions or in any other way. Note 1. A firm may also carry on these other activities when it is managing investments. Sch 2.2 G 162

248 Handbook reference Matter to be notified Contents of notification Trigger event Time allowed SUP D Approved persons the relevant Form A Application to perform controlled functions under the approved persons regime (see SUP 10 Annex 4) SUP R Notifications - breaches of rules and other requirements in or under the Act (1) information about any circumstances relevant to the breach or offence; (2) identification of the rule or requirement or offence; and (3) information about any steps which a firm or other person has taken or intends to take to rectify or remedy the breach or prevent any futurefuture potential occurrence. Becoming aware, or having information which reasonably suggests, that any of the following matters has occurred, may have occurred or may occur in the foreseeable future as regards the firm, any of its directors, officers, employees, approved persons, or appointed representatives, or tied agents: (a) Immedi ately SUP 16.8 Reporting - persistency reports from insurers Persistency report. The report must report on every life policy which was promoted subject to rules in COB or COBS, or conduct of business rules made by a previous regulator, is not a life policy of a type listed in SUP Annually By 30 April each year 163

249 R or SUP R, and which: (1) 164

250 Part 2: Comes into force on 5 November Transaction Reporting A G In line with guidance from CESR, the FSA acknowledges that, from a practical point of view, it would be burdensome for branches of investment firms to be obliged to report their transactions to two competent authorities. Therefore, all transactions executed by branches may be reported to the competent authority of the Host State, if the investment firm elects to do so. In these cases transaction reports should follow the rules of the competent authority to which the report is made. However, where an investment firm chooses to report to two competent authorities, this choice will not be challenged by the FSA. Where? R This chapter applies in respect of transactions executed in the United Kingdom. This chapter applies in respect of transactions which are to be reported to the FSA. Transactions made through trade matching or reporting systems Approved reporting mechanisms, regulated markets or MTFs R A firm is relieved of its obligation to make a transaction report report if the transaction is instead reported directly to the FSA by a trade matching or reporting system approved by the FSA an approved reporting mechanism, or by a regulated market or MTF through whose systems the transaction was completed. [Note: article 25(5) of MiFID) A G The regulated markets and MTFs that report transactions undertaken on their systems to the FSA are listed on the FSA's website at: s/index.shtml. Compliance by trade matching or reporting systems approved reporting mechanisms or MTFs with the provisions of this Chapter R (1) The operator of a trade matching or reporting system approved by the FSA an approved reporting mechanism, or the operator of an MTF or a market operator through whose systems a reportable transaction is to be completed and which has, pursuant to SUP R, agreed to make transaction reports reports to the FSA on behalf of a firm, must: (1) (a) make reports to the FSA in respect of each transaction to which 165

251 the agreement relates; (2) (b) ensure such reports conform with the requirements of this chapter (both as to time limits for making reports and as to content) as if it were the transacting firm contain the reporting fields specified in SUP 17 Ann 1, where applicable; and (3) (c) ensure that, once received from the reporting firm, such reports are submitted to the FSA within the time limit for making reports. (2) The obligations of the operator under this Rrule do not affect the liability of the reporting firm for ensuring the accuracy of the information contained in the transaction report that it submits to the operator G A firm that proposes reporting to the FSA either directly or through a third party that is an approved reporting mechanism, should notify the FSA of its intention to do so, in order for the FSA to be able in particular to verify that the firm's or third party's technical arrangements for the submission of reports are consistent and compatible with the FSA's arrangements. [deleted] G The approved trade matching and reporting systems that have been approved by the FSAapproved reporting mechanisms are [-Note: These systems will be listed following the approval of a trade matching or trade reporting system.]listed on the FSA's website at: 166

252 SUP 17 Ann 1 EU SUP 17 Ann 1 EU: Minimum content of a transaction report Table 1: List of fields for reporting purposes [Note: This table includes information required under MiFID Article 25(4) and contains additional FSA requirements permitted under Articles 13(3) and (4) of the MiFID Regulation] Where appropriate, firms Firms should complete these fields in the formats described, or these formats must be contained in the fields that their approved reporting mechanism will use when sending a transaction report to the FSA on behalf of a firm. Field Identifier Description EU G 1. Reporting Firm Identification A unique code to identify the firm which executed the transaction. This code should be the FSA reference number of the firm or the Swiss Bank Identifier Code (BIC). This code should be the FSA reference number of the firm or the Swift Bank Identifier Code (BIC). EU 2. Trading Day The trading day on which the transaction was executed. EU 3. Trading Time The time at which the transaction was executed, reported in the local time of the competent authority to which the transaction will be reported and the basis in which the transaction is reported expressed as Coordinated Universal Time (UTC) +/- hours London local time. The time should be specified in hours, minutes and seconds (hhmmss). Where it is not possible to input seconds, '00' may be entered in this field. G The time should be specified in hours, minutes and seconds (hhmmss). Where it is not possible to input seconds, '00' may be entered in this field. EU 4. Buy/Sell Indicator Identifies whether the transaction was a buy or sell from the perspective of the reporting MiFID investment firm or, in the case of a report to a client, of the client. EU 5. Trading Capacity Identifies whether the firm executed the transaction 167

253 - on its own account (either on its own behalf or on behalf of a client) (that is as principal); - for the account and on behalf of a client (that is as agent); - in an agency cross capacity; (that is where the firm has acted as agent for both the selling and the buying counterparties) where the firm has and chosen to submit a the single report made to the FSA represents representing both of these transactions); G Where a firm has executed a transaction in an agency cross capacity, it may submit two reports rather than a single report, in which case this field should indicate that the firm is acting on behalf of a client. EU - in a principal cross capacity (that is where the firm has acted simultaneously for two counterparties as principal in a single product at the same price and quantity) where the firm and the has chosen to submit a single report made to the FSA represents representing both of these transactions). G Where a firm has executed a transaction in a principal cross capacity, and prefers to submit two reports rather than a single report, this field should indicate that the firm is acting on its own account. EU G 6. Instrument Identification This shall consist inof: - an ISO 6166 ISIN a unique code, decided by the FSA, identifying the financial instrument which is the subject of the transaction.; The unique code should be an ISO 6166 ISIN. This code must always be used for, but is not limited to, reporting transactions in warrants. EU - or, where if a the financial instrument in question which does not have a unique identification code, the report must include the name of the instrument or, in the case of is an over the counter a derivative contract is the subject of the transaction, the name of the underlying financial instrument and, the characteristics of the financial instrument in a separate description field derivative. G The FSA considers that where the financial instrument in question (which includes derivatives) is admitted to trading on a market where the ISO 6166 ISIN is not the industry method of identification, it will be sufficient to 168

254 insert in this field the code assigned to the instrument by that market. EU - or, in the case of an OTC derivative, the characteristics of the OTC derivative. G Where an OTC derivative is the subject of the transaction a full description of the OTC derivative should be provided. EU G 7. Instrument code type The code type used to report the instrument. Where the subject of the transaction is a financial instrument admitted to trading on a market this field should indicate whether that financial instrument has been identified using an ISO 6166 ISIN or, where the ISIN is not the industry method of identification for that market, a code assigned to that financial instrument by that market. EU G 78. Underlying Instrument Identification The instrument identification applicable to the security that is the underlying asset in a derivative contract as well as the transferable security included within article 4(1)(18(c)) of MiFID. An ISO 6166 ISIN should be used. This field is not mandatory when the transaction is in a financial instrument and an ISO 6166 ISIN has been provided. Where the financial instrument is an over the counter derivative this field will only be mandatory where the underlying is single equity or single debt. This field is only mandatory when the transaction involves an OTC derivative and the underlying is a single equity or single debt financial instrument admitted to trading on a regulated market or prescribed market. EU G 9. Underlying instrument identification code type The code type used to report the underlying instrument. Firms do not need to complete this field since the FSA already has access to this information. EU 810. Instrument Type The harmonised classification of the financial instrument that is the subject of the transaction. This field is not mandatory when the transaction is in a financial instrument and an ISO 6166 ISIN has been provided. This field will be mandatory where the financial instrument 169

255 is an over the counter derivative and must be used to indicate the instrument type of the underlying financial instrument, e.g. equity, bond, index, or other. G This field is only mandatory when the transaction involves an OTC derivative or a financial instrument admitted to trading on a market where the ISIN is not the industry method of identification. This field must be used to indicate the instrument type of the underlying financial instrument, e.g. equity, bond, index, or other. EU 911. Maturity Date The maturity date of a bond or other form of securitized debt, or the exercise date / maturity date of a derivative contract. This field is not mandatory when the transaction is in a financial instrument and an ISO 6166 ISIN has been provided. This field will be mandatory where the financial instrument is an over the counter derivative where applicable. G This field is only mandatory when the transaction involves an OTC derivative or a financial instrument admitted to trading on a market where the ISIN is not the industry method of identification. EU G Derivative Type The harmonised description of the derivative type. This field is not mandatory when the transaction is in a financial instrument and an ISO 6166 ISIN has been provided. This field will be mandatory where the financial instrument is an over the counter derivative, where applicable, and must indicate the derivative type, e.g. option, future, contract for difference, warrant, spreadbet, credit default swap or other swap. This field is only mandatory when the transaction involves an OTC derivative or a financial instrument admitted to trading on a market where the ISIN is not the industry method of identification, and must indicate the derivative type, e.g. option, future, contract for difference, warrant, spreadbet, credit default swap or other swap. EU Put/Call Specification whether an option or any other financial instrument is a put or call. This field is not mandatory when the transaction is in a financial instrument and an ISO 6166 ISIN has been provided. This field will be mandatory where the financial instrument is an over the counter derivative. G This field is only mandatory when (i) the transaction 170

256 involves an OTC derivative or a financial instrument admitted to trading on a market where the ISIN is not the industry method of identification; and (ii) the derivative type is option or warrant. EU Strike Price The strike price of an option or other financial instrument. This field is not mandatory when the transaction is in a financial instrument and an ISO 6166 ISIN has been provided. This field will be mandatory where the financial instrument is an over the counter derivative. G This field is only mandatory when (i) the transaction involves an OTC derivative or a financial instrument admitted to trading on a market where the ISIN is not the industry method of identification; and (ii) the derivative type is option or warrant. EU G Price Multiplier The number of units of the financial instrument in question which are contained in a trading lot; for example, the number of derivatives or securities represented by one contract. This field is not mandatory when the transaction is in a financial instrument and an ISO 6166 ISIN has been provided. This field will be mandatory where the financial instrument is an over the counter derivative. This field is only mandatory where the transaction involves an OTC derivative. EU Unit Price The price per security or derivative contract excluding commission and (where relevant) accrued interest. In the case of a debt instrument, the price may be expressed either in terms of currency or as a percentage. EU G Price Notation The currency in which the price is expressed. If, in the case of a bond or other form of securitized debt, the price is expressed as a percentage, that percentage shall be included. The ISO 4217 currency code must be used. The major currency must be used (e.g. pounds rather than pence). If the price is expressed as a percentage of nominal value then the ISO 4217 currency code of the nominal value must be used. The ISO 4217 currency code must be used. The major currency must be used (e.g. pounds rather than pence). If the price is expressed as a percentage of nominal value then the 171

257 ISO 4217 currency code of the nominal value must be used. EU Quantity The number of units of the financial instruments, the nominal value of bonds, or the number of derivative contracts included in the transaction. EU G 19. Quantity notation An indication as to whether the quantity is the number of units of financial instruments, the nominal value of bonds, or the number of derivative contracts. Firms do not need to complete this field since the FSA already has access to this information. EU Counterparty Identification of the counterparty to the transaction. That identification shall consist in of: where an FSA reference number or a Swift Bank Identification Code (BIC) exists one of these codes must be used, or in the case that a firm has neither an FSA reference code or a BIC, a unique internal code allocated by the reporting firm must be used and that unique internal code must be used consistently across all instrument types and platforms for that counterparty.; - where the counterparty is a MiFID investment firm, a unique code for that firm, to be determined by the FSA; or - where the counterparty is a regulated market or MTF or an entity acting as its central counterparty, the unique harmonised identification code for that market, MTF or entity acting as central counterparty, as specified in the list published by the competent authority of the home Member State of that entity in accordance with Article 13(2). G The FSA has determined that where an FSA reference number or a Swift Bank Identification Code (BIC) exists for the counterparty, one of these codes must be used, or in the case that a counterparty has neither an FSA reference number or a BIC, a unique internal code allocated by the reporting firm must be used and that unique internal code must be used consistently across all instrument types and platforms for that counterparty. EU Venue Identification Identification of the venue where the transaction was executed. That identification shall consist in: - where the venue is a trading venue or an MTF the four 172

258 character Swift Market Identifier Code ISO must be used. : its unique harmonised identification code, G Where the venue is a regulated market, prescribed market or an MTF (or, where appropriate, an equivalent venue outside the EEA), the four character Swift Market Identifier Code ISO must be used. However, where the venue has been identified as a systematic internaliser, a Swift Bank Identification Code (BIC) should be used. EU - If where the transaction is made off market or over the counter the subject of the transaction is an OTC derivative then this must should be made clear. EU Transaction Reference Number A unique identification number for the transaction provided by the MiFID investment firm or a third party reporting on its behalf. EU Cancellation Flag An indication as to whether the transaction was cancelled. EU G Customer/Client Identification This field contains the identification of the client or customer on whose behalf the reporting firm was acting. and should be completed as follows: For agency transactions a customer/client identifier is required to identify the client on whose behalf the transaction has been conducted. Where an FSA reference number or, a Swift Bank Identification Code (BIC) exists one of these codes must be used, or in the case that a firm has neither an FSA reference number or a BIC, a unique internal code allocated by the reporting firm must be used and that unique internal code must be used consistently across all instrument types and platforms for that counterparty. For agency transactions a customer/client identifier is required to identify the client on whose behalf the transaction has been conducted. Where an FSA reference number or a Swift Bank Identification Code (BIC) exists, one of these codes must be used or, in the case that a customer/client has neither an FSA reference number or a BIC, a unique internal code allocated by the reporting firm must be used and that unique internal code must be used consistently across all instrument types and platforms for that counterparty. 173

259 EU Any other fields Any other mandatory fields required by the reporting system. 174

260 Annex T Amendments to the Collective Investment Schemes sourcebook (COLL) In this Annex, underlining indicates new text and striking through indicates deleted text, unless otherwise stated A R This sourcebook does not apply to an incoming ECA provider acting as such R Table: contents of the prospectus This table belongs to COLL 4.2.2R (Publishing the prospectus). Investment objectives and policy 3 The following particulars of the investment objectives and policy of the authorised fund: (o) information concerning the historical performance of the scheme presented in accordance with COB R (Specific non-real time financial promotions: past performance) COBS 4.6.2R (the rules on past performance); Contents of the simplified prospectus R This table belongs to the rule on production and publication of a simplified prospectus (COLL 4.6.2R and COLL 4.6.6R) Contents of simplified prospectus (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 175

261 those to be paid from the scheme's or the sub-fund's assets, including: Notes: 5. [Intentionally left blank] Details of entry and exit commissions relating to the scheme and details of the scheme's other possible expenses or fees, must be presented in the simplified prospectus in the form required by COLL 4.6.9R (Charges and reduction in yield). [Intentionally blank] Charges and reduction in yield R (1) [Intentionally blank] In disclosing the information required by paragraph 14 of COLL 4.6.8R (Table: Contents of the simplified prospectus), a firm must include an effect of charges table and a reduction in yield figure prepared in accordance with the rules in sections 2 (Effect of charges table) and 3 (Reduction in yield) of COBS 13 Annex 3. (2) [Intentionally blank] This rule does not apply to a simplified prospectus for units in a simplified prospectus scheme that will be marketed and sold in another EEA State or exclusively to those who are not retail clients. (3) Note (5) to paragraph (14) of COLL 4.6.8R, and COLL cease to have effect on 30 June 2009, unless remade R An authorised fund manager must ensure that its financial promotions which contain an invitation to purchase units in a UCITS scheme indicate that a simplified prospectus and a full prospectus exist, and the places where they may be obtained by the public or how the public may have access to them. Use of the "keyfacts" logo within a simplified prospectus R A simplified prospectus may include the "keyfacts" logo if: (1) the "keyfacts" logo is situated in a prominent position at the top of the document; and (2) The document also contains the following statement in a prominent position: 176

262 The Financial Services Authority is the independent financial services regulator. It requires us, [provider name], to give you this important information to help you to decide whether our [product name] is right for you. You should read this document carefully so that you understand what you are buying, and then keep it safe for future reference. Conflicts of interest: guidance G (1) The effect of COBS TP 2.12R is that COB 7.1 (Conflict of interest and material interest) (as it was in force on 31 October 2007) continues to appliesy for scheme management activity and contains rules on the fair treatment of customers where a firm has a conflict of interest in relation to a transaction. COLL R(1) provides rules for specific circumstances where COB 7.1 would not be appropriate for an authorised fund. (2) Payments out of scheme property: guidance G (1) (2) An authorised fund manager should consider COB 5.6.3R (Charges to a private customer) in determining whether a payment to an affected person is unfair because of its amount or because it confers a disproportionate benefit on the affected person. (3) Prohibition on promotional payments R (1) (2) Paragraph (1) shall does not apply to the costs of an authorised fund incurs preparing and printing the simplified prospectus, or key features document or key features illustration of the authorised fund, provided the prospectus states, in accordance with COLL 4.2.5R(13) and (14) (Table: contents of the prospectus), that these costs are properly payable to the authorised fund manager from scheme property. Qualified investor schemes: eligible investors R (1) The authorised fund manager of a qualified investor scheme must take reasonable care to ensure that ownership of units in that scheme is only recorded in the register for the categories of person to whom it can be promoted under COB 3 Annex 5 (Permitted promotion of unregulated collective investment schemes and qualified investor schemes) a person that falls into one or more of the categories set out 177

263 (2) in COLL 8 Annex 1R (Qualified Investor Scheme: eligible investors). Qualified investor schemes - explanation G (1) Qualified investor schemes are authorised funds which may only be sold or marketed to sophisticated investors. Therefore, the authorised fund manager must take reasonable care to ensure that subscription in relation to the units of this type of scheme should only be in relation to the client types set out in COB 3 Annex 5 COLL 8 Annex 1R. COB R (Promotion of qualified investor schemes) also restricts promotion of qualified investor schemes to the categories of person set out in COB 3 Annex 5. (2) Insert COLL 8 Annex 1R as follows. The text is new and not underlined. COLL 8 Annex 1R This Annex belongs to COLL 8.1.3R (Qualified Investor Schemes: eligible investors). Qualified investor schemes: eligible investors For the purposes of the rule on qualified investor schemes: eligible investors (COLL 8.1.3R) a firm must only record ownership of units in the register of a qualified investor scheme in accordance with the following table: Issue or transfer of units to: Category 1 person A person: (1) who is already a participant in an unregulated collective investment scheme or a qualified investor scheme; or (2) who has been, in the last 30 months, a participant in an unregulated collective investment scheme or a qualified investor scheme. Issue or transfer of units (see Note 1) in a qualified investor scheme which is: (1) that collective investment scheme; or (2) any other collective investment scheme whose underlying property and risk profile are both 'substantially similar' (see Note 2) to those of that collective investment scheme; or (3) a collective investment scheme which is intended to absorb or take over the assets of that collective investment scheme; or (4) a collective investment scheme, units in which are being offered by its operator as an alternative to cash on the liquidation of that collective 178

264 investment scheme. Category 2 person that collective investment scheme. A person: (1) for whom the authorised fund manager or an associate has taken reasonable steps to ensure that investment in the collective investment scheme is suitable; and (2) who is an 'established' or 'newly accepted' client of the authorised fund manager or of an associate (see Notes 3 & 4). Category 3 person any such collective investment scheme A person who is eligible to participate in a scheme constituted under: (1) the Church Funds Investment Measure 1958; (2) section 24 of the Charities Act 1993; or (3) section 25 of the Charities Act (Northern Ireland) Category 4 person An eligible employee, that is, a person who is: (1) an officer; (2) an employee; (3) a former officer or employee; or (4) a member of the immediate family of any of (1)-(3); of an employer which is (or is in the same group as) the firm, or which has accepted responsibility (1) A collective investment scheme of which the instrument constituting the scheme: (a) restricts the scheme property, apart from cash and near cash, to: (i) (where the employer is a company) shares in and debentures of the company or any other connected company (see Note 5); (ii) (in any case), any property, provided that the scheme takes the form of a trust which the firm reasonably believes not to contain any risk that any eligible employee may be liable to make any further payments (other than charges) for investment transactions earlier entered into, which the eligible employee was not aware of at the time 179

265 for the activities of the firm in carrying out the designated investment business in question. he entered into them; and (b) (in a case falling within A(1) above) restricts participation in the scheme to eligible employees, the employer and any connected company. (2) Any collective investment scheme provided that the participation of eligible employees is to facilitate their co-investment: (a) with one or more companies in the same group as their employer (which may include the employer); and/or (b) with one or more clients of such a company. Category 5 person Any collective investment scheme. An exempt person (other than a person exempted only by section 39 of the Act (Exemption of appointed representatives)) if the issue or transfer of units relates to a regulated activity in respect of which the person is exempt from the general prohibition. Category 6 person An eligible counterparty or a professional client. Category 7 person A person: Any collective investment scheme in relation to which the client is categorised as a professional client or eligible counterparty. Any collective investment scheme covered by the assessment. (1) in relation to whom the authorised fund manager or an associate has undertaken an adequate assessment of his expertise, experience and knowledge and that assessment gives reasonable assurance, in light of the nature of the transactions or services envisaged, that the person is capable of making his own investment decisions and understanding the risks involved; 180

266 (2) to whom the authorised fund manager or an associate has given a clear written warning of the protections he may lose; and (3) who has stated in writing, in a separate document from the contract, that he is aware of the consequences of losing such protections. The following Notes explain certain words and phrases used in the table above. Note 1 Issue or transfer of units to a category of person includes any nominee company acting for such a person. Note 2 The risk profile of a scheme will be substantially similar to that of another scheme only if there is such similarity in relation to both liquidity and volatility. Note 3 A person is an 'established client' of another person if he has been and remains an actual client of that person in relation to designated investment business done with or through that other person. Note 4 A person is a 'newly accepted' client of a firm if: (1) a written agreement relating to designated investment business exists between the client and the firm (or, if the client is normally resident outside the United Kingdom, an oral or written agreement); and (2) that agreement has been obtained without any contravention of any rule in COBS applying to the firm or (as far as the firm is reasonably aware) any other authorised person. Note 5 A company is 'connected' with another company if: (1) they are in the same group; or (2) one company is entitled either alone or with another company in the same group, to exercise or control the exercise of a majority of the voting rights attributable to the share capital, which are exercisable in all circumstances at any general meeting of the other company or of its holding company. 181

267 Annex U Amendments to the Credit Unions sourcebook (CRED) In this Annex, underlining indicates new text and striking through indicates deleted text G For example, the third paragraph of the second section of the first chapter in the Conduct of Business sourcebook, if it were a rule, would be COBS 1.2.3GR. If there were two further sub-paragraphs, it would be COBS 1.2.3R(1)(a) G SUP R gives guidance on forms and procedures relating to approved persons. [deleted] Conduct of business G The Conduct of Business sourcebook (COBS) sets out rules and guidance for firms G (1) The rules and guidance set out in COBS mainly apply to designated investment businesses and, as stated in COB G (2), have limited application to deposits. (2) The only parts of COBS that set out rules and guidance on deposits, other than for a cash deposit ISA or cash deposit CTF, are those relating to the financial promotion rules in COB 3 and those relating to distance contracts for accepting deposits in COBS (General provisions related to distance Distance contracts), and COBS (Cancellation) and withdrawal), COB (Entering into a distance contract for accepting deposits) Electronic commerce activities G The E-Commerce Directive sourcebook (ECO) COBS 5.2 (E-Commerce) contains rules and guidance applicable to a credit union which carries on an electronic commerce activity; that is, a credit union which accepts deposits, or carries on certain other activities, by way of an information society service. An information society service is, generally speaking and subject to certain exclusions, a service that: (1) is normally provided for remuneration; (2) is provided at a distance; (3) is so provided by means of electronic equipment for the processing (including digital compression) and storage of data; and (4) is so provided at the individual request of a recipient of the service G In particular, a credit union which carries on an electronic commerce 182

268 activity needs to be aware of the minimum information requirements in ECO 3.2 (Minimum information requirements). [deleted] CTF providers G A credit union which acts as a CTF provider needs to be aware of the requirements relating to CTFs in COBS, in particular COBS Chapters 3, 4, 5, 6 and 8, and 9 Annex 1, 10, 13, 14 and G Where a financial promotion relates to a deposit (other than a cash deposit ISA or cash deposit CTF) only certain parts of COB 3 the financial promotion rules apply. These are COB 3.1COB 3.5 and COB R to COB G and COB 3.14 COBS 4.2.1R, COBS 4.5.2R, COBS 4.5.7R, COBS 4.6.2R, COBS 4.6.6R, COBS 4.6.7R, COBS 4.7.1R, COBS R, COBS R, COBS R and COBS R G In addition to the limited application of COB 3 the financial promotion rules, a number of exemptions from the rules and guidance on financial promotions are listed in COB R. Some exemptions are particularly relevant to credit unions namely exemptions (2), (4) and (5) within the defined term excluded communication are relevant. In particular, paragraphs (a) and (e) of the definition provide further limitations on the application of the financial promotion rules in relation to credit unions: (1) Exemption (2a): A financial promotion which can lawfully be communicated by an unauthorised communicator without approval. A financial promotion that would benefit from an exemption in the Financial Promotion Order if it were communicated by an unauthorised person, or which originates outside the United Kingdom and is not capable of having an effect in the United Kingdom. (2) Exemption ( 4 e): A "one off" non-real time financial promotion or a "one off" solicited real time financial promotion that is not a cold call. (3) [deleted] G Despite the limited application of COBS to deposits and the exemptions mentioned in CRED G, COB G(1) reminds firms that financial promotions (including those which are exempt) may be subject to more general rules including Principle 7 (Communications with clients) and SYSC 3 (Systems and controls) and the fair, clear and not misleading rule COB R (Clear, fair and not misleading communication)) G The requirement on a firm under COBS 3.8.4R(1) 4.2.1R(1) is that it should be able to show that it has taken reasonable steps to must ensure that a nonreal time financial promotion is fair, clear, fair and not misleading. This is supported by an evidential provision COB E) further detailed rules including COBS 4.5.2R: 183

269 (1) [delete and replace with the following] A firm must ensure that information for a retail client: (a) (b) (c) (d) includes the name of the firm; is accurate and in particular does not emphasise any potential benefits of relevant business or a relevant investment without also giving a fair and prominent indication of any relevant risks; is sufficient for, and presented in a way that is likely to be understood by, the average member of the group to whom it is directed, or by whom it is likely to be received; and does not disguise, diminish or obscure important items, statements or warnings. (2) [deleted] G Those parts of COBS that relate to distance contracts for accepting deposits will have limited application to a credit union. This is because the DMD Distance Marketing Directive only applies where there is "an organised distance sales or service-provision scheme run by the supplier" (Article 2(a)). A one-off transaction dealt with by distance means in order to deal with a particular contingency or emergency will not fall under the COBS provisions G For those credit unions to which the provisions in COBS will apply, the provisions which are of particular relevance concern the distance communications general provisions (COBS 2.6 5), pre-contract information (COBS , 13 and 14), cancellation rights (COBS ) and the financial promotion financial promotion rules (discussed at CRED 11.2). If the credit union provides cash deposit ISAs or cash deposit CTFs further rules may apply. Pre-contract disclosure requirements G COBS sets out the basic requirement that applies before a credit union enters into a distance contract for accepting deposits or, G The required information is the contractual terms and conditions and the other information set out in COBS App 1 5 Ann 1R, Exemptions G The exemptions referred to in CRED G are set out in COB R to COB R COBS 5.1. They are relevant: (1) where the contract is concluded by telephone and the retail customer consumer gives explicit consent to receiving a more limited range of 184

270 information. COBS R (1) R sets out the information to be provided in such cases. Full information has to be provided, in a durable medium, immediately after conclusion of the distance contract (COBS R (2) R); (2) in this case full information must also be provided in a durable medium immediately after conclusion of the distance contract (COBS R R); (3) where there is an initial service agreement and the contract is in relation to a successive or separate operation of the same nature under that agreement, or there is no initial service agreement and the contract is in relation to a successive or separate operation of the same nature and is being performed no more than one year from the date of performance of the last operation (COBS R 5.1.8R, 5.1.9R and COBS R to COB R; and see COB G) G The other provisions in COB which relate to the disclosure requirements and are of relevance to credit unions entering into a distance contract for accepting deposits are in COB 2.6 (General provisions related to distance contarcts). [deleted] G The right to cancel has to be exercised within 14 days of the day of the conclusion of the contract or the day on which he received the contractual terms and conditions, if later (COBS R) G The only exemptions from the right to cancel are when: (3) the credit union has an initial service agreement with the retail customer consumer and the contract is in relation to a successive operation or separate operation of the same nature under that agreement (see COBS G (3) R) G The effects of cancellation are set out in COBS R to COB R 15.4 (Effects of cancellation) G If there are other ancillary distance contracts related to the first, those ancillary contracts may also be cancelled automatically when a retail customer consumer exercises a right to cancel (see COBS ) G This guidance is not a substitute for, and should be read in conjunction with, the requirements contained in the relevant parts of COBS The Act requires the FSA to "maintain arrangements designed to enable it to determine whether persons on whom requirements are imposed by or under this Act are complying with them" (paragraph 6(1) of Schedule 1 to the Act). 185

271 G DISP 2.6 sets out the activities which come under the jurisdiction of the Financial Ombudsman Service, as follows:... (5) the provision of ancillary banking services.; (6) consumer credit activities; or activities ancillary to them (see DISP 2.6.2R). Appendix 1 Contents of the Handbook 1.1 This is the table referred to in CRED 2.2.2G Table Sourcebook or manual Reference code Business standards Conduct of business COBS Specialist Sourcebooks E-commerce Directive ECO 186

272 Annex V Amendments to the Electronic Money sourcebook (ELM) In this Annex, underlining indicates new text and striking through indicates deleted text G (1) ELM 1.4A sets out certain minimum requirements under the Distance Marketing Directive in respect of a customer's cancellation rights. These rules are supplemented by the requirements in COBS R 15.2 (Exercising the The right to cancel);, COBS R 15.3 (Cancellation notices served out of time Notice of exercise) and COBS R to COB R 15.4 (Effects of cancellation) which all apply to e-money firms. (2) As set out in ELM 6.8, COBS R 15 applies to e-money firms as if references to 'issuing accepting deposits' and 'deposits' were references to 'issuing e-money' and 'e-money' respectively. 1.4A.1 R A retail customer consumer has a right to cancel a distance contract the making or performance of which by the firm constitutes, or is part of, issuing e-money unless: (2) the firm has an initial service agreement with the customer consumer and the contract is in relation to a successive operation or separate operation of the same nature under that agreement (see COBS R 15 Annex R), in which case the right to cancel applies only to the initial agreement. 1.4A.2 R The right to cancel referred to in ELM 1.4A.1R starts on the later of: (2) the day on which the retail customer consumer receives the contractual terms and conditions and other information required by ELM 6.8 (Information);, and lasts for 14 calendar days. Failure to give information on cancellation rights 1.4A.3 R If a firm does not give a retail customer consumer notice of his cancellation rights in accordance with ELM 6.8.2AR and COBS R G, the contract remains cancellable and the retail customer can cancel the agreement at any time consumer is not liable for any shortfall. 1.4A.4 R A retail customer consumer may, without giving any reason, cancel the contract by serving notice upon the firm, before expiry of the relevant cancellation period, in accordance with the instructions for exercising that right provided to the customer consumer in accordance with ELM 6.8.2AR, and COBS R R and COBS R. 187

273 1.4A.5 R The following rules also apply as if issuing e-money were accepting deposits: COBS R R (Record keeping);, COBS R R (Cancellation notices served out of time Notice of exercise) and COBS R to COB R 15.4 (Effects of cancellation) G Table Application of other parts of the Handbook to ELMIs Block Module Application Business standards Conduct of Business sourcebook (COBS) The effect of : (1) ELM 6.8.2AR is that COBS (General provisions in relation to Distance contracts) applies to a firm issuing e- money; (2) ELM 1.4A.5R is that COBS R R, COBS R R and COBS R to COB R 15.4 apply; and (3) [deleted] Specialist sourcebooks other than ELM E-Commerce Directive sourcebook (ECO) Otherwise, COBS does not apply to an ELMI when issuing e-money and. As explained in PERG 3, the rules in COBS about financial promotions do not usually apply to e-money, but may do so in certain situations. Applies to every ELMI that carries on electronic commerce activities. Also applies to every ELMI in relation to a financial promotion which is an outgoing electronic commerce communication A R COBS (General provisions related to distance contracts The distance marketing disclosure rules) and COB R (Entering into a distance 188

274 contract for accepting deposits) applies apply to a firm issuing e-money as if references to 'accepting deposits' and 'deposits' were references to 'issuing e-money' and 'e-money' respectively. Additional rules for e-commerce GR [deleted] A firm carrying on an electronic commerce activity from an establishment in the United Kingdom with or for a person in the United Kingdom or another EEA state, in relation to e-money, must also comply with the e-commerce rules (COBS 5.2). 189

275 Annex W Amendments to the Professional Firms sourcebook (PROF) In this Annex, underlining indicates new text and striking through indicates deleted text A R This sourcebook does not apply to an incoming ECA provider acting as such G COBS COB 1.2.1R(4) provides that COBS does not apply to an authorised professional firm with respect to its non-mainstream regulated activities, except for: (1) COB 2.1 (Clear, fair and not misleading communication), COB 3 (Financial promotion) and COB 4.2.1R to COB 4.2.6G, COB 4.2.9R and COB E (Content of terms of business); and the fair, clear and not misleading rule; (1A) the financial promotion rules, but only in limited circumstances; (2) (where these are insurance mediation activities) COBS 7 (Insurance mediation) the IMD implementation provisions and COB R to COB R as if they also applied to a firm carrying out the activities in COB R(1)(a)-(c) with or on behalf of private customers, unless;: (a) (b) (c) the designated professional body of the firm has made rules which implement some or all of articles 12 and 13 of the Insurance Mediation Directive IMD; those rules have been approved by the FSA under section 332(5) of the Act; and the firm is subject to the rules in the form in which they were approved; in which case they are disapplied to the extent that articles 12 and 13 of the IMD are implemented by the rules of the designated professional body. (3) COB 1.2.1AG provides that the effect of COB 1.2.1R(4)(d) is that if the relevant designated professional body of an authorised professional firm does not make rules implementing articles 12 and 13 of the IMD applicable to authorised professional firms, those firms will need to comply with the IMD implementation provisions and COB R to COB R as if they also applied to a firm carrying out the activities in COB (1)(a)-(c) with or on behalf of private customers. COBS 8.1.3R (Client agreements), except for the requirement to provide information on conflicts of interest. 190

276 5.3.6 G DISP 1.1.5R (3) provides that DISP 1 (Treating complainants fairly) does not apply only applies to an authorised professional firm in so far as its non mainstream regulated activities mainstream regulated activities are concerned G CASS 1.2.4R provides that with the exception of CASS 1 and the insurance client money chapter, CASS 2, CASS 3 and CASS 4 does not apply to authorised professional firms when carrying on non-mainstream regulated activities. CASS 1.2.5R further provides that if the non-mainstream regulated activities are insurance mediation activity, CASS 5 (the insurance client money chapter) does not apply to an authorised professional firm, if the firm's designated professional body has rules applicable to the firm which implement the IMD Insurance Mediation Directive and which are in the form approved by the FSA under section 332(5) of the Act R (1) In addition to those provisions of the Distance Marketing Regulations which apply directly (see COB G (3)), an authorised professional firm must, with respect to its non-mainstream regulated activities, comply with regulations 7 to 11 and 15 of the Distance Marketing Regulations. 191

277 Annex X Amendments to the Listing Rules (LR) In this Annex, underlining indicates new text and striking through indicates deleted text. LR Appendix 1 Relevant definitions 1.1 Relevant definitions COBS the Conduct of Business Ssourcebook, from 1 November employee an individual: (a) (b) but excluding an appointed representative or, where applicable, a tied agent of that person. regulated market [delete existing definition and replace with the following:] a multilateral system operated and/or managed by a market operator, which brings together or facilitates the bringing together of multiple third-party buying and selling interests in financial instruments in the system and in accordance with its non-discretionary rules in a way that results in a contract, in respect of the financial instruments admitted to trading under its rules and/or systems, and which is authorised and functions regularly and in accordance with the provisions of Title III of MiFID. transferable security (as defined in section 102A of the Act) anything which is a transferable security for the purposes of the investment services directive MiFID, other than money-market instruments for the purposes of that directive which have a maturity of less than 12 months. 192

278 Annex Y Amendments to the Prospectus Rules (PR) In this Annex, underlining indicates new text and striking through indicates deleted text. PR Appendix 1 Relevant definitions 1.1 Investment Services Directive ISD MiFID [deleted] [deleted] The European Parliament and Council Directive on markets in financial instruments (No. 2004/39/EC). See also MiFID Regulation and MiFID implementing Directive. regulated market transferable security [delete existing definition and replace with the following] a multilateral system operated and/or managed by a market operator, which brings together or facilitates the bringing together of multiple third-party buying and selling interests in financial instruments in the system and in accordance with its non-discretionary rules in a way that results in a contract, in respect of the financial instruments admitted to trading under its rules and/or systems, and which is authorised and functions regularly and in accordance with the provisions of Title III of MiFID. (as defined in section 102A of the Act) anything which is a transferable security for the purposes of the investment services directive MiFID, other than money-market instruments for the purposes of that directive which have a maturity of less than 12 months. 193

279 Annex Z Amendments to the Perimeter Guidance manual (PERG) In this Annex, underlining indicates new text and striking through indicates deleted text, unless otherwise stated G (1) (5) The fifth case, inserted by the ECD Regulations is, in effect, where an electronic commerce activity is carried on, from an establishment in the United Kingdom, in another EEA State. The ECO includes rules and guidance that apply to ECA providers based in the United Kingdom G In broad terms debentures under the scheme. They do not apply to the activities of a person who is neither such a company nor such a trustee (for example, a third party administration service provider) G (1) G [deleted] 2.11 What to do now? (2) The Regulated Activities Order was amended falling under the Insurance Directives (see PERG 2.8.3G). However, services provided off-line in the United Kingdom (that is, other than as an electronic commerce activity) by such a firm which amount to regulated activities still require authorisation. ECO provides includes guidance and sets out rules that are relevant to both incoming and outgoing ECA providers. Incoming ECA providers have also to comply with any authorisation requirements in the country of origin of the services G As part of its application for Part IV permission, an applicant may wish to apply for certain limitations (details of which are given in the application pack) G An example of limitations which may be applied for or imposed include a limit on the types of client that a firm may deal with including: (1) retail (investment); (2) professional; (3) eligible counterparty; These limitations correspond to the Glossary terms retail client, professional 194

280 client and eligible counterparty. E-Commerce Directive G The E-Commerce Directive removes. Further guidance is contained in the FSA's E-Commerce Directive sourcebook (ECO) G The E-Commerce Directive removes... Further guidance is contained in ECO G The purpose of these exemptions the mere conduit to make the communication. Neither does it apply where the financial promotion is an outgoing electronic commerce communication that is, or will be, communicated from an establishment in the United Kingdom to a person in an EEA State other than the United Kingdom. A person G Article 20B gives effect to the provisions of the E-Commerce Directive by exempting incoming electronic commerce communications made from an establishment in an EEA State other than the United Kingdom to an ECA recipient in the United Kingdom. However, article 20B does not apply to the following communications: G [deleted] 13.4 Financial Instruments Q34. Are there any other derivatives subject to MiFID regulation? There is a miscellaneous category of derivatives in C10, which is supplemented by articles 38 and 39 of the MiFID Regulation. These relate to: climatic variables; freight rates; emission allowances; inflation rates or other official economic statistics; 13.6 Q58. How do we know whether we are an exempt CAD firm and what does this mean in practice?... You will be subject to the relevant ongoing requirements in the Interim Prudential Sourcebook for Investment Businesses relating to securities and futures firms and personal investment firms and securities and futures firms, as appropriate (see IPRU(INV) 13.1A.6R 13.1A.13R and IPRU(INV) 9.2.8R 9.2.9R). If you are an exempt CAD firm which has opted into MiFID legislation (see Q52), you will need to consider whether you are subject to the audit requirements of 195

281 companies legislation (see Part VII of the Companies Act 1985 and Part 16 of the Companies Act 2006). You can benefit from the auditing exemption for small companies in companies legislation if you fulfil the conditions of regulation 4C(3) of the Financial Services and Markets Act 2000 (Markets in Financial Instruments Regulations) In other words, if you continue to meet the conditions of the article 3 MiFID exemption (notwithstanding that you are an exempt CAD firm), you can benefit from the auditing exemption for small companies, as provided for in companies legislation. For further details, see The Markets in Financial Instruments Directive (Consequential Amendments) Regulations 2007 (SI 2007/2932). The same regulations also contain a transitional regime which has the effect of exempting exempt CAD firms from statutory audit requirements in relation to a financial year beginning before 1 November 2007 and ending on or after that date, where the exempt CAD firm was not an ISD investment firm. After PERG 13.6 insert the following new section. The text is not underlined. The territorial application of MiFID 13.7 Q67. What is the territorial application of MiFID? If a firm is established in one Member State, and carries on all its investment business in that state, that state has responsibility for the entire financial services regulation of the firm. If, however, the firm provides investment services or activities in another Member State, or establishes a branch in another Member State, the questions arise Whose rules apply? and Which regulator has responsibility for enforcing them?. The general principle is that prudential regulation is the responsibility of the Home State but conduct of business regulation is the responsibility of the Host State. A Host State may also impose requirements relating to matters that fall outside of the scope of the directive - for example, market abuse, anti-money laundering controls and the conditions for cold calling. We have added further guidance in PERG on the ability of a Host State to impose conduct of business requirements (see Q67). Q68. What is prudential regulation and conduct of business regulation in this context? Prudential regulation relates primarily to the capital adequacy of a firm and its systems and controls. In general terms, this means every aspect of a firm s activities relating to financial services except those areas where the firm is concerned with a client. So provisions, for example, relating to communicating with clients, client agreements, best execution and order handling are seen as conduct of business requirements and are not prudential. 196

282 Q69. What does this mean for my firm? MiFID is about the regulation of markets in financial instruments it is not about setting capital standards. It does, however, contain provisions about systems and controls and conduct of business. It also contains other market specific provisions which allocate the responsibilities between the home and host Member States. If a firm establishes a branch in another Member State, the competent authority of the State where the branch is located has responsibility for the services and activities provided by the branch within that territory. As article 32(7) of MiFID provides, that authority has responsibility for ensuring compliance with the rules referred to in column 1 of the table below. The location of those rules is set out in column 3. Subject matter 1 Conduct of business obligations to clients Location COBS generally but see Notes 1 and 2 2 Best execution COBS 11.2 (Best execution) 3 Client order handling COBS 11 (Dealing and managing) 4 Market integrity, transaction reporting and maintaining records 5 Making public firm quotes (transparency) SUP 17 (Transaction reporting) MAR 6 (Systematic internalisers) 6 Post-trade disclosure MAR 7 (Disclosure of information on certain trades undertaken outside a regulated market or MTF) Notes: 1. Further guidance on the territorial scope of COBS is given in COBS 1 Annex 1, Part 3 and in SUP 13A Annex The MiFID conduct of business rules in article 19 are implemented in: (a) (b) (c) (d) (e) COBS 2.1 (Acting honestly, fairly and professionally) COBS 2.2 (Information disclosure before providing services) COBS 4.2 (Fair, clear and not misleading communications) COBS 4.3 (Financial promotions to be identifiable as such) COBS 8.1 (Client agreements: designated investment business) 197

283 (f) (g) (h) COBS 9.2 (Assessing suitability) COBS 10.2 (Assessing appropriateness: the obligations) COBS 10.3 (Warning the client) (i) COBS 10.4 (Assessing appropriateness: when it need not be done), and (j) COBS 16 (Reporting information to clients). Q70. How are the high level standards, like the Principles, affected by MiFID? The position is summarised in the table below. Subject matter 1 The Principles References PRIN 3.1.6R (Who?) Summary A firm is not subject to the Principles to the extent that it would be contrary to MiFID (and the other Single Market Directives). 2 PRIN 4.1.2G (Where?) The territorial scope of some Principles has been extended and others narrowed according to the type of firm. 3 Systems and controls SYSC 1.1.1R(6) and SYSC 1.3.9R to SYSC R SYSC 1.1.1R(1)(a), SYSC 1.1.7R and SYSC AR A UK MiFID investment firm is a common platform firm. It is subject to the common platform requirements in SYSC 4 to SYSC 10 and is not subject to the requirements in SYSC 2 and 3. The common platform requirements generally apply in relation to activities conducted from an establishment in the United Kingdom or another EEA State. However, this is subject to some modification, for example in relation to requirements on record keeping and financial crime. Most of the common platform requirements also apply in a prudential context to the activities of a UK MiFID investment firm from an establishment outside the EEA. An EEA MiFID investment firm is not a common platform firm and is therefore not subject to the common platform requirements. However, it is subject to the common platform record keeping requirements. Some provisions in SYSC 2 and 3 will apply to the UK establishment of an EEA MiFID investment firm but only in respect of matters that are not reserved to the Home State 198

284 4 Approved persons 5 The threshold conditions SUP 10.1, APER 1.1.4G and APER 2.1.1AP COND 1.1.4G (Where?) regulator. This is particularly relevant to the provisions on systems and controls concerning financial crime and money laundering in SYSC 3. The territorial scope of some of the controlled functions under the approved persons regime and of the application of the Statements of Principle is modified as a result of MiFID. The guidance indicates that the threshold conditions apply in relation to all the regulated activities of a firm wherever they are carried on except, for example, in relation to incoming EEA firms in certain cases. MiFID has not affected this. Q71. What is the position in relation to record keeping in branches? The effect of article 13(9) of MiFID is also to shift the default position (of regulation by the Home State) to regulation by the Host State for the record-keeping requirements imposed on a branch (see SYSC AR). Q72. Will a branch need to report to the competent authority of the Member State where it is located? For some purposes, yes. Article 61 of MiFID gives a Host Member State the power to require reports for statistical purposes and to require branches to provide information necessary for monitoring compliance with the standards of the Host Member State (see SUP 16.7 (Financial reports)). These standards are the ones referred to in Article 32(7) as set out in Q69. PERG 13 Annex 3 Flow chart 2 CAD investment firms (excluding UCITS investment firms) Are we a BIPRU 50K firm, a BIPRU 125K firm or a BIPRU 730K firm? 199

285 Do you deal on own account in financial instruments? No Do you underwrite financial instruments on a firm commitment basis? Yes Yes No Do you operate a multilateral trading facility? Yes No Do you offer one or more of the following services (with or without investment advice personal recommendations) to your clients: - reception and transmission of orders - execution of client orders - portfolio management - place financial instruments without a firm commitment basis? (see Note) No Yes Does your Part IV permission allow you to hold client money or securities? Yes No You are a BIPRU 125K firm (see Q62 61). You are a BIPRU 50K firm (see Q61 60). You are a BIPRU 730K firm (see Q63 62). 200

286 ADDENDUM MIFID (DEFERRED MATTERS AND CONSEQUENTIAL AMENDMENTS) INSTRUMENT 2007 Amendments to the Mortgages and Home Finance: Conduct of Business sourcebook (MCOB) In Annex O to this instrument amend Chapter 2 of MCOB as follows: R Table This table belongs to MCOB 2.1.1R (1) Category of firm (2) Applicable section home purchase provider a firm that communicates or approves a financial promotion of qualifying credit or of a home reversion plan a firm that communicates or approves a financial promotion of a home purchase plan, MCOB 2.7A and MCOB 2.8.6G, MCOB 2.7A and MCOB 2.8 (except MCOB 2.8.6G), MCOB 2.7A and MCOB 2.8.6G Addendum 25 October

287 2 Annex 2

288 Annex 3 TDM Instrument from September Board and TDM Guidelines Annex 3 1

289 Annex 3 Part 1 GUIDELINES FOR INVESTMENT FIRMS USING TDMS Trade Data Monitors Introduction 1. Firms intending to use trade publication arrangements for post-trade reporting are under an obligation to verify that the systems: ensure that information to be published is reliable, monitored continuously for errors, and corrected as soon as errors are detected; facilitate the consolidation of data with similar data from other sources; and make the information available to the public on a non-discriminatory commercial basis at a reasonable cost. 2. The FSA considers that firms which use trade publication arrangements which ensure that they will meet the Guidelines set out below will fulfil the obligation described above. The FSA has developed a twin-track approach to assist firms to assess whether trade data providers enable firms to meet the Guidelines, either through: confirmation by the FSA that the arrangements enable the firm to meet the Guidelines; or confirmation by an external auditor that the arrangements enable the firm to meet the Guidelines. A trade data monitor (TDM) is a trade publication arrangement which has been confirmed as enabling the firm to meet the Guidelines Trade publication arrangements intending to seek confirmation from the FSA must demonstrate to the FSA that their systems and facilities can ensure that any firm who is their client will thereby comply with the Guidelines below. As part of this process, the trade publication arrangement should commission (if it has not already done so) a report by a reporting accountant qualified to act as auditor (or an equivalent arrangement as agreed with the FSA). This report should confirm to the FSA the extent to which, in the auditor's opinion, the trade publication arrangement concerned will enable the firm to meet the Guidelines. Firms intending to use a trade publication arrangement whose systems and controls have been assessed by the FSA should request sight of the FSA letter of confirmation to enable them to carry out their own assessment of the adequacy of the trade publication arrangement s services and facilities. Similarly, firms intending to use a trade publication arrangement whose systems and controls have been assessed by an auditor should request that the trade publication

290 arrangement commissions an auditor's report (if such a report does not already exist) confirming the extent of the trade publication arrangement s capacity to enable the firm to meet the Guidelines. This report should be made available by the trade publication arrangement to other firms to enable them to carry out their own assessment of the adequacy of the trade publication arrangement s services and facilities. It should be made available by the investment firm to the FSA, on request In the event that a TDM is considered by the FSA or by the external auditor responsible for the relevant report to have ceased to enable firms to meet their MiFID Level 2 Regulation Article 32 trade reporting obligations, the FSA, or the external auditor, reserves the right to withdraw the status of TDM from the data provider concerned. In order to help firms with their assessment, the FSA will supply a list of organisations that are holding themselves out as a TDM on its website at html. 8. These Guidelines may be amended from time to time to take account of factors such as advances in technology and changes in market practice. The Guidelines Security Firms should satisfy themselves that the TDM has appropriate measures in place to ensure that there is: certainty over which firms submit trade information; no corruption of data in the input process at the TDM; and no unauthorised access to the trade information during the input process at the TDM. Firms should satisfy themselves that there are controls over the facilities of the TDM service and individuals providing the service to ensure that the trade information is monitored securely and to prevent the misuse of the information. To that end, as a minimum, the following controls should be in place for providing the TDM service: the working environment is secure; the computer-based systems should incorporate: access controls; procedures for problem management and system changes; and arrangements to monitor system performance, availability and integrity. the working environment should be free of unauthorised surveillance; 2

291 individuals providing the TDM service should be under a duty to keep confidential any trade information to which they might have access; and if there is a breach of any security measure relating to the provision of a TDM service, the clients involved should be notified immediately and, if requested, a detailed report of the breach should be provided and any corrective steps taken. Dissemination Firms should ensure that the TDM: has arrangements in place for the trade information it receives to be disseminated to the market without delay or provided to a third party that can perform this function on its behalf; makes trade information available on a non-discriminatory commercial basis at a reasonable cost and in a manner which is easily accessible to other market participants; and facilitates the consolidation of data with similar data from other sources. The arrangements should make trade information public in a way which: is accessible by automated electronic means in a machine-readable way (ie is in a physical form that is designed to be read by a computer; is in a location on a computer storage device where that location is known in advance by the party wishing to access the data, and; is in a format that is known in advance by the party wishing to access the data); utilises technology that facilitates consolidation of the data and permits commercially viable usage; is accompanied by instructions outlining how users can access the information; and conforms to a consistent and structured format based on industry standards. Firms should ensure that the TDM which they are intending to use for their post-trade reporting obligations does not have in place, or intend to enter into, exclusive distribution arrangements. Identification of potentially erroneous information Firms should ensure that the TDM has in place appropriate systems and controls to identify on receipt (ie in real-time), information likely to be incorrect. Appropriate systems and controls are deemed to include various automated price and volume alerts. The firm should confirm whether, when establishing these alerts, the TDM has taken into account the following factors: the sector and the segment in which the security is traded; liquidity levels including historical trading levels; 3

292 appropriate price and volume benchmarks; and if needed, other parameters to be set manually according to the characteristics of the security. An appropriate benchmark would be the current real-time trading situation on a market where a particular share has considerable liquidity. Firms should satisfy themselves that a TDM ensures that its systems, controls and alerts are periodically reviewed and adjusted when deemed necessary. Firms may consider it desirable for a TDM to have facilities in place to inform the market of those trades it is reviewing as potentially incorrect. Correction of trade information Firms should ensure that the contractual terms agreed with a TDM contain information about correcting provisions for the correction of trade publications, including the respective obligations and responsibilities of the TDM and the firm in relation to correction. It would be desirable for a TDM to have the ability to amend a publication itself where the firm cannot do it for technical reasons. Monitoring Firms should satisfy themselves that a TDM has the capability to monitor its own systems and controls to ensure, with reasonable certainty, that the trades it monitors have been successfully disseminated for publication. Operational hours Firms should satisfy themselves that a TDM is capable of monitoring trade information through the normal trade publication hours of the investment firms submitting information to it. Resources Firms should satisfy themselves that a TDM has appropriate numbers of staff overseeing the TDM service who are competent to perform their duties. Firms should request that a TDM notifies its clients of the person with overall management responsibility for the TDM service and the person responsible for ensuring the service complies with these standards. Contact provisions Firms may consider it desirable for a TDM to provide: facilities for market participants to query the accuracy of the trade publications it monitors and disseminates; and 4

293 procedures for market participants to raise complaints regarding the TDM s service and activities. Recovery provisions Firms should satisfy themselves that a TDM can adequately provide for possible disruptions to its operations by having arrangements (including access to sufficient back-up facilities and where necessary spare capacity) to ensure that IT systems are resilient and not prone to failure and to ensure business continuity if a system or systems failed. Firms should confirm whether recovery provisions are reviewed regularly and are sufficient to ensure that there is minimum disruption to the continuous operation of a TDM service. Firms should ensure that, if a TDM s operations are disrupted, it will inform its clients without delay. Transparent Charges Firms should consider whether charges for a TDM service are clearly stated and indicate the activities covered so they can be readily compared with competing TDM services. Firms should check whether a TDM has a policy to provide information to clients regarding any proposed changes to those charges. Conflict of interest Firms should satisfy themselves that a TDM has appropriate arrangements for managing conflicts of interest. Outsourcing In the event that a TDM makes arrangements for certain functions to be performed on its behalf by third persons, the firm should require the TDM to demonstrate to its satisfaction that a person who performs a function on the TDM's behalf is fit, able and willing to perform that function. Continuing monitoring Firms should consider requesting that the TDM prepares on a yearly basis a statement confirming the extent to which it has continued to meet these Guidelines over the preceding period. This statement should comment on the appropriateness and effectiveness of its service and the monitoring of its systems and controls. Part 2 NOTE The amendments to MAR G that follow in the Trade Data Monitors (Instrument) 2007 have been amended further in the MiFID (Deferred Matters and Consequential Amendments) Instrument 2007 contained in Annex 2 to this Policy Statement. 5

294 TRADE DATA MONITORS (AMENDMENT) INSTRUMENT 2007 Powers exercised A. The Financial Services Authority makes this instrument in the exercise of the power in section 157(1) (Guidance) of the Financial Services and Markets Act Commencement B. This instrument comes into force on 1 November Amendments to the Handbook C. The Market Conduct sourcebook (MAR) is amended in accordance with the Annex to this instrument. Citation D. This instrument may be cited as the Trade Data Monitors (Amendment) Instrument By order of the Board 27 September

295 Amendments to the Market Conduct sourcebook (MAR) In this Annex, underlining indicates new text and striking through indicates deleted text. Trade Data Monitors G A trade data monitor is a provider of services and facilities for the verification of post-trade information as contemplated by this chapter and an approved trade data monitor is a provider which has been assessed by the FSA as having the capacity to provide services and facilities in accordance with the service criteria published on the FSA's web-site at The FSA will consider considers that use of an approved trade data monitor by a firm will satisfy a firm's its obligations under MAR EU, though the approved trade data monitor must continue to have the capacity to provide the services and facilities in accordance with the above service criteria at the time that the firm uses the approved trade data monitor. if: (1) in assessing the arrangements, the firm follows the guidelines published on the FSA's website at and (2) it has been confirmed that the arrangements will enable the firm to comply with the guidelines through either: (a) (b) a statement by the FSA; or a report by an external auditor to the provider of the arrangements which is made available to firms and, on request, to the FSA. A trade data monitor is a provider of such arrangements which has been assessed by the FSA or an external auditor as having the capability to provide services and facilities to firms in accordance with the guidelines published on the FSA s website at Use of an approved a trade data monitor does not affect a firm's obligations under MAR EU regarding the timing of the disclosure of post-trade information. 7

296 Annex 4 Amendments to Handbook Guides OMPS, EMPS and SERV Annex 4 1

297 Annex 4 AMENDMENTS TO THE HANDBOOK GUIDES In this Annex, underlining indicates new text and striking through indicates deleted text. Amendments to the Handbook Guide for Energy Market Participants (EMPS) G Applicability of parts of the Handbook to energy market participants This table belongs to EMPS G. Part of Handbook Applicability to energy market participants Business standards Prudential standards Interim Prudential sourcebooks (IPRU) General Prudential sourcebook (GENPRU) Chapter 3 (Financial resources for Securities and Futures Firms which are not MiFID investment firms or which are exempt BIPRU commodities firms) of IPRU(INV) applies, but with the following qualifications: (a) energy market participants whose main business consists of the generation, production, storage, distribution and/or transmission of energy may be granted a waiver waiver of Chapter 3 in the FSA's discretion: see EMPS 2. SUP 21; and (b) the concentrated risk requirements do not apply to an energy market participant if it is an exempt BIPRU commodities firm that applies the large exposure requirements in BIPRU 10 (Concentration risk): see IPRU(INV) 3-1B R, IPRU(INV) 3-1C G and IPRU(INV) 3-1D G. Except for provisions on capital requirements and the ICAAP rules, this applies to an energy market

298 participant if it is an exempt BIPRU commodities firm: see BIPRU TP 15.9G BIPRU TP 15.10G. Business standards Prudential sourcebook for Banks, Building Societies and Investment Firms (BIPRU) Conduct of Business sourcebook (COBS) Except for provisions on capital requirements and the ICAAP rules, this applies to an energy market participant if it is an exempt BIPRU commodities firm: see BIPRU TP 15.9G BIPRU TP 15.10G. Only some parts of COBS apply to energy market activity: see COBS 1.6.6R - COB R18.2. Regulatory processes Supervision manual (SUP) (a) in SUP 3 (Auditors), only some provisions apply if IPRU(INV) 3 (Financial resources for Securities and Futures Firms which are not MiFID investment firms or which are exempt BIPRU commodities firms) does not apply to an energy market participant (because it has been granted a waiver of that chapter as described in EMPS 2): see SUP 3.1.2R and SUP 3.2.4G; (c) SUP 16.7 (Financial reports): energy market participants whose main business consists of the generation, production, storage, distribution and/or transmission of energy may be granted a waiver of this section in the FSA's discretion: see EMPS 2 SUP 21; (d) SUP 17 (Transaction reporting): energy market participants which are not MiFID investment firms or third country investment firms may be granted a waiver of this section in the FSA's discretion: see EMPS 2 SUP 21; and

299 Redress Dispute resolution: Complaints sourcebook (DISP) However, a firm which does not, and notifies the FSA under DISP R that it does not, conduct business with eligible complainants (persons eligible to have a complaint considered under the Financial Ombudsman Service, as defined in DISP 2.4) will be exempt from the rules on complaint handling procedures for firms treating complainants fairly (DISP 1.2 to DISP ) and from the Financial Ombudsman Funding rules (FEES 5.1 to FEES 5.7). Specialist sourcebooks Collective Investment Schemes sourcebook (CIS) (COLL) E-Commerce Directive sourcebook (ECO) CIS COLL will ordinarily apply to an energy market participant that carries on regulated activities in relation to an energy collective investment scheme. This applies to an energy market participant which is an electronic commerce activity provider.... Amendments to the Handbook Guide for Oil Market Participants (OMPS) G Table Applicability of parts of the Handbook to oil market participants This table belongs to OMPS G. Part of Handbook Applicability to oil market participants

300 Business standards Prudential standards Business standards Regulatory processes Interim Prudential sourcebooks (IPRU) General Prudential sourcebook (GENPRU) Prudential sourcebook for Banks, Building Societies and Investment Firms (BIPRU) Conduct of Business sourcebook (COBS) Chapter 3 (Financial resources for Securities and Futures Firms which are not MiFID investment firms or which are exempt BIPRU commodities firms)) of IPRU(INV) only applies, with the following qualifications: (a) to an oil market participant only if it is a member of a recognised investment exchange or a designated investment exchange which is, under the rules of that exchange, entitled to trade with other members: see IPRU(INV) 3-1A.; and (b) the concentrated risk requirements do not apply to an oil market participant if it is an exempt BIPRU commodities firm that applies the large exposure requirements in BIPRU 10 (Concentration risk): see IPRU(INV) 3-1B R, IPRU(INV) 3-1C G and IPRU(INV) 3-1D G. Except for provisions on capital requirements and the ICAAP rules, this applies to an oil market participant if it is an exempt BIPRU commodities firm: see BIPRU TP 15.9G BIPRU TP 15.10G. Except for provisions on capital requirements and the ICAAP rules, this applies to an oil market participant if it is an exempt BIPRU commodities firm: see BIPRU TP 15.9G BIPRU TP 15.10G. Only some parts of COBS apply to oil market activity: see COBS R COB R 18.2.

301 Supervision manual (SUP) (a) in SUP 3 (Auditors), only some provisions apply if IPRU(INV) 3 (Financial Resources for Securities and Futures Firms which are not MiFID investment firms or which are exempt BIPRU commodities firms) does not apply to an oil market participant: see SUP 3.1.2R and SUP 3.2.4G; (d) SUP 17 (Transaction reporting) does not apply to an oil market participant which is not a MiFID investment firm or a third country investment firm in relation to its oil market activity: see SUP R; and Redress Dispute resolution: Complaints sourcebook (DISP) However, a firm which does not, and notifies the FSA under DISP R that it does not, conduct business with eligible complainants (persons eligible to have a complaint considered under the Financial Ombudsman Service, as defined in DISP 2.4) will be exempt from the rules on complaint handling procedures for firms treating complainants fairly (DISP 1.2 to DISP ) and from the Financial Ombudsman Funding rules (FEES 5.1 to FEES 5.7). Specialist sourcebooks Collective Investment Schemes sourcebook (CIS) (COLL) E-Commerce Directive CIS COLL will ordinarily apply to an oil market participant that carries on regulated activities in relation to an oil collective investment scheme. This applies to an oil market participant which is an electronic

302 sourcebook (ECO) commerce activity provider. Amendments to the Handbook Guide for Service Companies (SERV) G Table Applicability of parts of the Handbook to service companies This table belongs to SERV G. Part of Handbook Applicability to service companies Business standards Prudential standards Business standards Interim Prudential sourcebooks (IPRU) Conduct of Business sourcebook (COBS) In the Interim Prudential sourcebook for investment business (IPRU(INV)), only Chapters 1 (Application and General) and 6 (Service Companies) apply: see COB 4.2 IPRU(INV) 1.2.4R. The other Interim Prudential sourcebooks do not apply. COB 1.9 (Application to electronic commerce activity providers) and COB 3 (Financial promotion rules), and any provision of COB incorporated by reference in COB 1.9 or COB 3, apply. COB 4.2 applies to a service company in relation to the operation of an ATS. The rest of COB does not apply: see COB R COB R (2) and COB R (2)A. Only some parts of COBS apply to service companies: see COBS The permission given to service companies service companies means that they must not approve financial promotions financial promotions on behalf of another person or specified class of person, or deal with private customers. If the firm communicates financial promotions to market counterparties eligible counterparties

303 and intermediate customers professional clients only, COB 3 the financial promotion rules will have only very limited application (see MCOB 3.2.4R and COB 3.2.5R). Market Conduct sourcebook (MAR) MAR 1 (Code of market conduct), MAR 2 (Price stabilising rules) and MAR 4 (Endorsement of the Takeover Code) apply to service companies. If a service company operates an ATS, then and MAR AG apply to the service company in relation to the operation of the ATS. Otherwise MAR 3 (Inter-Professional Conduct) does not apply to service companies: see MAR R. MAR 5 (Alternative Trading Systems Multilateral Trading Facilities), MAR 6 (Systematic Internalisers) and MAR 7 (Disclosure of information on certain trades undertaken outside a regulated market or MTF) applies to service companies that operate an ATS do not apply to service companies. Regulatory processes Supervision manual (SUP)... (d) SUP 13 (Exercise of passport rights by UK firms) does not apply because making arrangements with a view to transactions in investments is not a core investment service service companies do not conduct investment services and activities. Redress Dispute resolution: Complaints sourcebook (DISP) However, a firm which does not, and notifies the FSA under DISP R

304 that it does not, conduct business with eligible complainants (persons eligible to have a complaint considered under the Financial Ombudsman Service, as defined in DISP 2.4) will be exempt from the rules on complaint handling procedures for firms treating complainants fairly (DISP 1.2 to DISP ) and from the Financial Ombudsman Funding rules (DISP 5.2 FEES 5.1 to DISP 5.8 FEES 5.7). Specialist sourcebooks E-Commerce Directive sourcebook (ECO) Collective Investment Schemes sourcebook (CIS) (COLL) This applies to a service company which is an electronic commerce activity provider.

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306 PUB REF: The Financial Services Authority 25 The North Colonnade Canary Wharf London E14 5HS Telephone: +44 (0) Fax: +44 (0) Website: Registered as a Limited Company in England and Wales No Registered Office as above.