COBS Conduct of Business Sourcebook

Part

COBS Conduct of Business Sourcebook

Printed on: 14/10/2024

Rulebook at: 23/07/2013

Chapters

COBS 1 Application
COBS 20 With-profits
COBS 21 Permitted Links

COBS 1

Application

COBS 1.1

The general application rule

01/11/2007

[Note: ESMA has issued guidelines under article 16(3) of the ESMA Regulation on certain aspects of the MiFID suitability requirements which also includes guidelines on conduct of business obligations. See http://www.esma.europa.eu/content/Guidelines-certain-aspects-MiFID-suitability-requirements.]

COBS 1.1.1

This sourcebook applies to a firm with respect to the following activities carried on from an establishment maintained by it, or its appointed representative, in the United Kingdom:

(1) [deleted]
(2) designated investment business;
(3) long-term insurance business in relation to life policies;

and activities connected with them.

01/04/2013

Modifications to the general application rule

COBS 1.1.2

The general application rule is modified in COBS 1 Annex 1 according to the activities of a firm (Part 1) and its location (Part 2).

01/04/2013

COBS 1.1.3

The general rule is also modified in the chapters to this sourcebook for particular purposes, including those relating to the type of firm, its activities or location, and for purposes relating to connected activities.

01/04/2013

Guidance

COBS 1.1.4

Guidance on the application provisions is in COBS 1 Annex 1 (Part 3).

01/04/2013

COBS 1 Annex 1

Application (see COBS 1.1.2R)

01/11/2007

Part 2: Where?

Modifications to the general application rule according to location

EEA territorial scope rule: compatibility with European law

1.1

(1)

The territorial scope of this sourcebook is modified to the extent necessary to be compatible with European law (see Part 3 for guidance on this).

(2)

This rule overrides every other rule in this sourcebook.

1.2

In addition to the EEA territorial scope rule, the effect of the Electronic Commerce Directive on territorial scope is applied in the fields covered by the 'derogations' in the Annex to that Directive other than the 'insurance derogation' in the fourth indent (see paragraph 7.3 of Part 3 for guidance on this).

[Note: article 3(3) of, and Annex to, the Electronic Commerce Directive]

Business with UK clients from overseas establishments

2.1

(1)

This sourcebook applies to a firm which carries on business with a client in the United Kingdom from an establishment overseas.

(2)

But the sourcebook does not apply to those activities if the office from which the activity is carried on were a separate person and the activity:

(a)

would fall within the overseas persons exclusions in article 72 of the Regulated Activities Order; or

(b)

would not be regarded as carried on in the United Kingdom.

2.2

One of the effects of the EEA territorial scope rule is to override the application of this sourcebook to the overseas establishments of EEA firms in a number of cases, including circumstances covered by MiFID, the Distance Marketing Directive or the Electronic Commerce Directive. See Part 3 for guidance on this.

Part 3: Guidance

The main extensions and restrictions to the general application rule

1.1

The general application rule is modified in Parts 1 and 2 of Annex 1 and in certain chapters of the Handbook. The modification may be an extension of this rule. For example, COBS 4 (Communicating with clients, including financial promotions) has extended the application of the rule.

1.2

The provisions of the Single Market Directives and other directives also extensively modify the general application rule, particularly in relation to territorial scope. However, for the majority of circumstances, the general application rule is likely to apply.

The Single Market Directives and other directives

2.1

This guidance provides a general overview only and is not comprehensive.

2.2

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 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)

the business it is performing is subject to the directive; and

(3)

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.

2.3

When considering a particular situation, a firm should also consider whether two or more directives apply.

22/07/2013

COBS 20

With-profits

COBS 20.1

Application

01/11/2007

COBS 20.1.1

This chapter applies to a firm carrying on with-profits business, except to the extent modified in the following rules.

01/04/2013

COBS 20.1.2

(1) The section on the process for reattribution (COBS 20.2.42 R to COBS 20.2.52 G):

(a) applies to a firm that is proposing to make a reattribution of its inherited estate;
(b) but not if, and to the extent that, it would require the firm to breach, or would prevent the firm from complying with, an order made by a court of competent jurisdiction.

(2) If a firm proposes to seek an order from a court of competent jurisdiction that would allow or require it to act in a way that is contrary to the rules on reattribution (COBS 20.2.42 R to COBS 20.2.52 G) (through, or because of, the exception in (1)(b)), the firm must:

(a) tell the appropriate regulator that that is what it proposes to do;
(b) seek the order at the earliest opportunity; and
(c) if it wishes to take a step that would be contrary to those rules in anticipation of such an order, secure a waiver before it does so.

01/04/2013

COBS 20.1.3A

For an EEA insurer the rules and guidance on treating with-profits policyholders fairly (COBS 20.2.33 G to COBS 20.2.35 G and COBS 20.2.53 R to COBS 20.2.54 R) apply only in so far as responsibility for the matter in question has not been reserved to the firm's Home State regulator by an EU instrument.

01/04/2013

COBS 20.1.5

This chapter does not apply to with-profits business that consists of effecting or carrying out Holloway sickness policies.

01/04/2013

COBS 20.2

Treating with-profits policyholders fairly

01/11/2007

COBS 20.2.17C

A firm must not make a distribution from a with-profits fund, unless the whole of the cost of that distribution can be met without eliminating the regulatory surplus in that with-profits fund.

01/04/2013

COBS 20.2.18

A realistic basis life firm must not make a distribution from a with-profits fund to any person who is not a with-profits policyholder, unless the whole of the cost of that distribution (including the cost of any obligations that will or may arise from the decision to make a distribution) can be met from the excess of the realistic value of assets over the realistic value of liabilities in that with-profits fund.

01/04/2013

COBS 20.2.19

A distribution to a person who is not a with-profits policyholder includes a transfer of assets out of a with-profits fund that is not made to satisfy a liability of that fund.

01/04/2013

Contingent loans and other forms of support for the with-profits fund

COBS 20.2.33

(1) If a firm, or a connected person, provides support to a with-profits fund (for example, by a contingent loan), no reliance should be placed on that support when the firm assesses the with-profits fund's financial position unless there are clear and unambiguous criteria governing any repayment obligations to the support provider.
(2) The degree of reliance placed on that support should depend on the subordination of the support to the fair treatment of with-profits policyholders and clarification of what fair treatment means in various circumstances. For a realistic basis life firm this would normally be evidenced by the liability for such support being capable, under stress, of a progressively lower valuation in the future policy-related liabilities.

01/04/2013

COBS 20.2.34

Where assets from outside a with-profits fund are made available to support that fund (and there is no ambiguity in the criteria governing any repayment obligations to the support provider), a firm should manage the fund disregarding the liability to repay those assets, at least in so far as that is necessary for its policyholders to be treated fairly.

01/04/2013

Other rules and guidance on the conduct of with-profits business

COBS 20.2.35A

When a firm determines its investment strategy, and the acceptable level of risk within that strategy, it should take into account:

(1) the extent of the guarantee in its with-profits policies; and
(2) the amount of capital support available.

01/04/2013

Process for reattribution of inherited estates: Policyholder advocate: appointment and role

COBS 20.2.42A

A firm that is seeking to make a reattribution of its inherited estate must first discuss with the PRA:

(1) its projections for capital required to support existing business, which must include an assessment of:

(a) the firm's future risk appetite for the with-profits fund and other relevant business; and
(b) how much of the margin for prudence can be identified as excessive and removed from the projected capital requirements; and

(2) its projections for capital required to support future new business, which must include an assessment of:

(a) new business volumes
(b) product terms; and
(c) pricing margins.

01/04/2013

Process for reattribution of inherited estates: Reattribution expert

COBS 20.2.47

Where a firm is not otherwise required to appoint an independent expert, it must:

(1) appoint a reattribution expert to undertake an objective assessment of its reattribution proposals, who must be:

(a) nominated or approved by the appropriate regulator before he is appointed; and
(b) free from any conflicts of interest that may, or may appear to, undermine his independence or the quality of his report;

(2) ensure that the reattribution expert's terms of appointment allow him to communicate freely and in confidence with the appropriate regulator; and
(3) require the reattribution expert to prepare a report which must be available to the appropriate regulator, the policyholder advocate and the court (if it is relevant to any court proceedings).

01/04/2013

COBS 20.2.48

A reattribution expert's report should comply with the applicable rules on expert evidence. The scope and content of the report should be substantially similar to that of the report required of an independent expert under SUP 18.2 (Insurance business transfers), as if (where appropriate) a reference to:

(1) the 'scheme report' was a reference to the 'reattribution expert's report';
(2) the 'independent expert' was a reference to the 'reattribution expert'; and
(3) the 'scheme' was a reference to the proposal for a 'reattribution'.

01/04/2013

Ceasing to effect new contracts of insurance in a with-profits fund

COBS 20.2.53

A firm must:

(1) inform the appropriate regulator and its with-profits policyholders within 28 days; and
(2) submit a run-off plan to the appropriate regulator as soon as reasonably practicable and, in any event, within three months;

of first ceasing to effect new contracts of insurance in a with-profits fund.

01/04/2013

COBS 20.2.54

A firm will be taken to have ceased to effect new contracts of insurance in a with-profits fund:

(1) when any decision by the governing body to cease to effect new contracts of insurance takes effect; or
(2) where no such decision is made, when the firm is no longer:

(a) actively seeking to effect new contracts of insurance in that fund; or
(b) effecting new contracts of insurance in that fund, except by increment; or

(3) if the firm:

(i) is no longer effecting a material volume of with-profits policies (other than by reinsurance), into the with-profits fund; or
(ii) is ceding by way of reinsurance most or all of the new with-profits policies which it continues to effect; and

(b) cannot demonstrate that it will treat with-profits policyholders fairly if it does not cease to effect new contracts of insurance.

01/04/2013

COBS 21

Permitted Links

COBS 21.1

Application

01/11/2007

COBS 21.1.1

The rules in this section apply on an ongoing basis to linked long-term contracts that are effected by:

(1) insurers other than EEA insurers; and
(2) EEA insurers in the United Kingdom.

01/04/2013

COBS 21.1.2

The rules in this section do not apply to:

(1) contracts that were effected before 1 July 1994, and under which linked benefits were permitted to be determined before that date;
(2) contracts effected by an insurer that are linked long-term contracts only because the policyholder is eligible to participate in any established surplus;
(3) contracts effected by an EEA insurer that are linked long-term contracts only because the policyholder is eligible to participate in an excess of assets representing the whole or a particular part of the long-term insurance fund over the liabilities, or a particular part of the liabilities, of the insurer as determined by the law of the EEA state in which the head office of the insurer is situated;
(4) [deleted]
(5) contracts effected before 30 June 1995, to the extent that they provide for benefits to be determined by reference to a collective investment scheme that was a listed security immediately before 1 July 1994; and
(6) contracts linked to permitted units that were effected before 1 February 1992, except to the extent that they relate to acts or omissions on or after that date.

01/04/2013

COBS 21.2

Principles for firms engaged in linked long-term insurance business

01/11/2007

COBS 21.2.1

A firm must ensure that the values of its permitted links are determined fairly and accurately.

01/04/2013

COBS 21.2.2

A firm must ensure that its linked assets:

(1) are capable of being realised in time for it to meet its obligations to linked policyholders; and
(2) are matched with its linked liabilities as required by the close matching rules.

01/04/2013

COBS 21.2.3

A firm must ensure that there is no reasonably foreseeable risk that the aggregate value of any of its linked funds will become negative.

01/04/2013

COBS 21.2.5

A firm must ensure that its systems and controls and other resources are appropriate for the risks associated with its linked assets and linked liabilities.

01/04/2013

COBS 21.2.6

(1) A firm must ensure when selecting linked assets that there is no reasonably foreseeable risk of a conflict of interest with its linked policyholders.
(2) If a conflict does arise, the firm must take reasonable steps to ensure that the interests of the linked policyholders are safeguarded.

01/04/2013

COBS 21.2.7

In applying the rules in this section, a firm must consider the economic effect of its permitted links and linked assets ahead of their legal form.

01/04/2013

COBS 21.2.8

A firm must notify the appropriate regulator in writing as soon as it becomes aware of any failure to meet the requirements of this section.

01/04/2013

COBS 21.3

Rules for firms engaged in linked long-term insurance business

01/11/2007

COBS 21.3.5

(1) Except in the case specified in (2), a firm which proposes to undertake linked long-term insurance business, which is linked to the average earnings index and used for the purposes of orders made by the Department for Work and Pensions under section 148 of the Social Security Administration Act 1992, must notify the appropriate regulator in writing of its intention to do so in good time before effecting any such business for the first time, or if there is a material change in the volume of such business, and explain how the risks associated with this business will be safely managed.
(2) These requirements do not apply in respect of liabilities for which a limited revaluation premium has been paid to the Department for Work and Pensions so that the liability for revaluation, while still linked to orders made under section 148 of the Social Security Administration Act 1992, is limited to 5%.

01/04/2013

- Legal Cutover
PS1/13 - Regulatory Reform: amendments to the Prudential Regulation Authority Handbook	https://www.bankofengland.co.uk/prudential-regulation/publication/2013/regulatory-reform-amendments-to-the-pra-handbook
- Handbook Administration Instrument #1 2013	https://www.bankofengland.co.uk/prudential-regulation/publication/2014/pra-administration-instruments

Prudential Regulation Authority Rulebook