Providing basic advice on stakeholder products

Part

COB Conduct of Business

Chapter

Providing basic advice on stakeholder products

Printed on: 13/06/2024

Rulebook at: 01/01/2007

COB 5A

Providing
basic advice on stakeholder products

COB 5A.1

Providing basic advice on stakeholder products

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Application and Purpose

COB 5A.1.1

This chapter sets out what firms must do when providing basic advice on a stakeholder product. The rules in the chapter are designed to enable firms to provide simple, quick and limited advice to persons who may be interested in buying a stakeholder product. The rules assume that firms will provide basic advice to persons who have no practical knowledge of investing in stakeholder products or investments.

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COB 5A.2

Disclosure on making first contact: information about services

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COB 5A.2.1

(1) A firm must take reasonable steps to ensure that its representatives, on first making contact with a customer with a view to providing basic advice on a stakeholder product, provide, in a durable medium, an initial disclosure document that complies with COB 4.3.9R (1).
(2) A firm must take reasonable steps to ensure that its representatives explain the contents of the initial disclosure document at the time it is provided to the customer.
(3) The requirements in (1) and (2) do not apply:

(a) to the extent that the information has already been given to the customer on a previous occasion and it is still likely to be accurate and appropriate for the customer; or
(b) if COB 5A.2.6 R (initial contact by telephone) applies.

(4) A firm which is required by this rule to provide an initial disclosure document to a private customer may instead provide the customer with a combined initial disclosure document, that complies with COB 4.3.9R (2), if it has reasonable grounds to be satisfied that the services which it is likely to provide to the customer will, in addition to stakeholder products, relate to one or more of the following:

(a) regulated mortgage contracts ;
(b) regulated lifetime mortgage contracts;
(c) non-investment insurance contracts.

(5) A firm must, if requested to do by a customer, provide an explanation of the basis on which it has chosen to market the particular stakeholder products within the range on which basic advice will be given to a customer, including an explanation of why the firm has selected particular product providers.

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Smoothed Products

COB 5A.2.2

A firm must not provide basic advice on smoothed linked long term products.

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COB 5A.2.3

COB 5A.2.2 R does not prevent a firm from including smoothed linked long term products in regulated activity that does not involve the provision of basic advice.

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Providing a copy of the range of stakeholder products

COB 5A.2.4

A firm must take reasonable steps to ensure that its representatives provide a copy of the appropriate range of stakeholder products on the request of a customer having regard to the services it is providing or may provide to the customer.

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Terms of business and telephone sales

COB 5A.2.5

(1) A firm that, pursuant to COB 5A.2.1 R, provides a customer with an initial disclosure document containing information that a corresponding rule in COB 4.2 says must be included in terms of business, will satisfy the corresponding rule by providing that information in the initial disclosure document.
(2) Any information required by COB 4.2 which is not included in an initial disclosure document provided to a customer in compliance with COB 5A.2.1 R can be included at the end of the initial disclosure document provided to the customer or, if provided at the same time, by way of separate items of information.

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COB 5A.2.6

(1) Where a firm's initial contact with a customer (for a purpose set out in COB 5A.2.1 R) is by telephone, then the firm must provide the following information and satisfy the following requirements before proceeding further:

(a) the name of the firm and, if the call is initiated by or on behalf of a firm, the commercial purpose of the call;
(b) whether the firm will select from or deal with stakeholder products from a limited number of companies or from a single company;
(c) that the firm will provide the customer with only basic advice on stakeholder products and without full assessment of his needs and circumstances;
(d) that the information given under (a) to (c) will subsequently be confirmed in writing.

(2) A firm which complies with (1) will, subject to (3), satisfy the condition set out in item (1) of COB 4 Annex 1 R.
(3) If during the course of a telephone call a firm is to conclude a contract (for example for the provision of a mediation services or for the purchase or sale of a stakeholder product), it must satisfy the requirements in COB 4.2.5 R and COB 4 Annex 1 as well as comply with (1) and (2) above.

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COB 5A.2.7

If the first contact a firm has with a private customer with a view to providing basic advice on stakeholder products, is by telephone then the firm must send the customer an initial disclosure document as soon as is reasonably practicable following the conclusion of the call.

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COB 5A.3

Scope and range of advice on stakeholder products: general

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COB 5A.3.1

(1) A firm which provides a private customer with basic advice on a stakeholder product must take reasonable steps to ensure that the scope of the basic advice given to a private customer is based upon a selection of one of the following:

(a) a limited number of providers of stakeholder products; or
(b) a single provider of a stakeholder product.

(2) A firm which provides a customer with basic advice on a stakeholder product must do so only on the basis of a range of stakeholder products which includes no more than one of each of:

(a) a CIS stakeholder product or a linked-life stakeholder product; or
(b) a stakeholder pension; or
(c) a stakeholder CTF.

(3) A firm must take reasonable steps to ensure that any of its representatives which give basic advice on stakeholder products that offer a choice of funds, do not give advice on, or recommend, a particular fund for the customer.
(4) A firm must take reasonable steps to ensure that its representatives do not, while they are engaged in providing basic advice on stakeholder products, provide advice on products other than those within the range offered by the firm.
(5) A firm which has commenced the sales process for stakeholder products in respect of a particular customer may only depart from that process if:

(a) it has taken reasonable steps to ensure its representatives advise the customer that basic advice on stakeholder products within the range offered by the firm will not be provided during the period of departure; and
(b) it has taken reasonable steps to ensure its representatives do not provide basic advice during the period of departure.

(6) A firm must take reasonable steps to ensure that if its representatives return to the sales process for stakeholder products after the period of departure referred to in COB 5A.3.1R (5), they first advise the customer that the period of departure has ended and the sales process for stakeholder products has recommenced.

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COB 5A.3.2

(1) A firm can provide a customer with basic advice on a stakeholder product on the basis of a range of stakeholder products which includes more than one deposit-based stakeholder product.
(2) A firm can provide advice on a deposit-based stakeholder product during the period of departure referred to in COB 5A.3.1R (5).

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COB 5A.3.3

(1) A firm which provides basic advice on stakeholder products is required by COB 5A.3.1R (2) to do so, in relation to any particular customer, by reference to a range of stakeholder products which should include no more than one of each type of stakeholder product specified in COB 5A.3.1R (2). A firm may however operate with more than one such range.
(2) When a firm provides basic advice on a stakeholder product which is not produced by the firm, it is responsible for the advice given. By contrast, the producer is responsible for the relevant terms and conditions of the stakeholder product.

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Range of stakeholder products: appointed representatives

COB 5A.3.4

(1) A firm must maintain in writing and keep up to date a statement of:

(a) the scope of basic advice (within the meaning of COB 5A.3.1R (1)) which each of its appointed representatives is, through its contract with the firm, permitted to give; and including
(b) the range (or ranges) of stakeholder products on which each appointed representative advises.

(2) In applying the rules in COB to a firm in respect of its appointed representatives, references to a firm's scope or range of stakeholder products are to be taken as references to the scope (or scopes) and to the range (or ranges) of its appointed representatives.

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COB 5A.3.5

An appointed representative's range of stakeholder products should be defined by means of a list of the names or titles of each of the stakeholder products which it is permitted to sell.

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Range of stakeholder products: records

COB 5A.3.6

(1) A firm must make, and keep up to date, a record of its scope and range (or ranges) of stakeholder products.
(2) The record in (1) must be retained for six years from the date on which it was superseded by a more up-to-date record.
(3) The record for distribution to a customer must be the particular range of stakeholder products which is appropriate for the services provided to that customer and include details of:

(a) the identity of the firms within the range whose stakeholder products the firm may sell; and
(b) a list of the products the firm may sell.

(4) A firm must maintain a record of the particular range of stakeholder products on which its basic advice to each private customer is based and such a record must be kept for six years from the date on which the basic advice is given.

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Branding stakeholder products

COB 5A.3.7

If a firm provides basic advice on a stakeholder product produced by another person, it must not:

(1) hold itself out as the stakeholder product's producer;
(2) do or say anything which might reasonably lead a customer to be mistaken as to the identity of the product's producer.

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Staying within the range of advice of stakeholder products

COB 5A.3.8

(1) A firm must take reasonable steps to ensure that neither it nor any of its representatives provides basic advice on a stakeholder product unless the product is:

(a) within the firm's range (or ranges) of stakeholder products; and
(b) is within the particular range of stakeholder products on which the firm has indicated it will give basic advice to that customer.

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"Independence" - restriction on holding out

COB 5A.3.9

(1) A firm must not in providing basic advice on stakeholder products hold itself out as giving such basic advice on an independent basis.
(2) Notwithstanding (1) a firm may use its facilities and stationery which it may use for other business in respect of which it does hold itself out as acting or advising independently.

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Remuneration structure and referrals

COB 5A.3.10

A firm must take reasonable steps to ensure that none of its representatives:

(1) is likely to be influenced by the structure of his or her remuneration to give unsuitable basic advice on stakeholder products to a customer; and
(2) refers customers to another firm in circumstances which would amount to the provision of an inducement under COB 2.2.3 R (Prohibition of inducements).

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COB 5A.4

Providing basic advice on stakeholder products through scripted questions

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COB 5A.4.1

(1) A firm which provides basic advice on a stakeholder product must do so through a sales process which incorporates pre-scripted questions put to the customer.
(2) Unless excluded at the preliminary stage, a customer must be sent or given, in a durable medium, a copy of the completed scripted questions and answers.

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Suitability of stakeholder products

COB 5A.4.2

(1) A firm must only recommend that a customer acquire a stakeholder product if:

(a) it has taken reasonable steps to assess:

(i) the customer's answers to the scripted questions;
(ii) any other facts, circumstances or information disclosed by the customer during the sales process.

(b) it has, having due regard to the information in (a), reasonable grounds for believing that the stakeholder product is suitable for the customer:
(c) the firm reasonably believes that the customer understands the advice he has been given and the basis on which it was provided.

(2) The requirements in (1)(b) do not apply in the case of a deposit-based stakeholder product.

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COB 5A.4.3

COB 5A Annex 1 G contains guidance on the steps a firm could take to ensure it complies with the requirements in COB 5A.4.2R (1); it also includes guidance on providing advice on stakeholder pensions that will comply with COB 5A.4.5 R.

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COB 5A.4.4

A firm must not recommend or agree that a customer make contributions to an ISA in excess of the Inland Revenue's ISA limits.

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COB 5A.4.5

A firm must not, in the course of providing basic advice, advise a customer on the contribution levels to a stakeholder pension needed to achieve a specific income in retirement.

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Procedure on making a recommendation

COB 5A.4.6

On making a recommendation to acquire a stakeholder product a firm must, subject to COB 5A.4.7 R, COB 5A.4.8 R and COB 5A.4.9 R, take reasonable steps to ensure that prior to the conclusion of a contract with the customer the representative:

(1) explains to the customer, if necessary in summary form, the "aims", "risks" and "commitment" sections of the appropriate key features together with such other explanation of the product as will enable the customer to make an informed decision whether to accept the recommendation;
(2) provides the customer with a summary sheet, in a durable medium, setting out for each product recommended:

(a) the specific amounts that the customer wishes to pay into each product;
(b) the reasons for the recommendation, including any information provided by the customer on which the recommendation is based, including the customer's attitude to risk;

(3) informs the customer that in determining any subsequent complaint the Ombudsman may take into account the limited information on which the recommendation is based and that the recommendation is not tailored to take account of those aspects of a customer's financial needs and circumstances not covered by its sales process.

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COB 5A.4.7

COB 5A.4.6R (1) does not apply to a recommendation to acquire a deposit-based stakeholder product.

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COB 5A.4.8

A firm may provide the summary sheet required by COB 5A.4.6R (2) subsequent to the conclusion of the contract if requested to do so by the customer as long as it completes the steps in COB 5A.4.9R (1) and (2) prior to concluding a contract with the customer.

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COB 5A.4.9

A firm which concludes the sale of a stakeholder product by telephone must take reasonable steps to ensure that its representatives:

(1) read through the summary sheet required by COB 5A.4.6R (2);
(2) inform the customer that in determining any subsequent complaint the Ombudsman may take into account the limited information on which the recommendation is based and that the recommendation is not tailored to take account of those aspects of a customer's financial needs and circumstances not covered by its sales process;
(3) send the customer as soon as possible after that a copy of the firm's summary sheet, and the completed answers and questions, in a durable medium.

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Record of recommendations

COB 5A.4.10

A firm must keep in a durable medium a record of each recommendation to acquire a stakeholder product and the customer's summary sheet and such a record must be kept for not less than six years from the date of the recommendation.

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COB 5A Annex 1

Sales processes for stakeholder products

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This Annex forms part of COB 5A.4.3 G and gives guidance on the standards and requirements to which a firm may have regard in designing a sales process for stakeholder products which meets the requirements of COB 5A.4.2 R.

General Standards - all sales

A sales process for stakeholder products may allow the representative administering it to depart from scripted questions where this is desirable to enable the customer to better understand the points that need to be made provided this is compatible with the representative's competence and the degree of support offered by the firm's software and other systems. A software based system is more likely to provide an adaptable means of providing prompts and support for representatives which may accordingly support a more flexible sales process.

Questions, statements and warnings provided to a customer should be short, simple and couched in plain language that customers will understand. Questions should address one issue at a time.

The sales process should enable the customer to exit freely and without pressure at any stage and should make provision for the representative to terminate the process if at any stage it appears that there is no likelihood of any product being suitable for the customer (whether by reason of the affordability of products for the customer, the need to address other financial priorities (see below), the mis-match of risk or otherwise).

Where necessary the sales process should incorporate procedures to allow uncertainties in the customer's answers to be addressed before proceeding further and should generally reflect caution about proceeding further if clarification or further information cannot be obtained during the process (this would be likely to be the case for example if a customer were unable to confirm whether he or she was eligible for membership of an occupational pension scheme).

Preliminary - all sales

The following preliminary information and explanation should be given to the customer:

(a)

only basic advice will be given about stakeholder products;

(b)

stakeholder products are intended to provide a relatively simple and low-cost way of investing and saving;

(c)

the range of products on which the representative will give advice to that customer;

(d)

the customer will be asked a series of questions about his or her circumstances and needs and at the end of the procedure he or she may be recommended to acquire a stakeholder product;

(e)

that the assessment of whether a stakeholder product is suitable will be made without a detailed assessment of the customer's needs but will be based only upon the information disclosed during the questioning process; and

(f)

the customer's answers will be noted and that at the end of the process, if a recommendation to acquire a stakeholder product is made, the customer will be provided with a copy of the completed questionnaire.

Following 5, the customer should be asked if he or she wishes to proceed and, if not, the sales process should cease.

Affordability - all sales

If it appears that the customer will be likely to be unable to afford a stakeholder product, the sale should be terminated at that stage and the customer given an explanation together with a copy of the questions and answers completed to that point.

Financial Priorities and Debt - all sales

A customer should be assessed to ascertain other possible financial priorities such as the need for insurance protection for self or dependents, the need for access to liquid cash to meet an emergency, or, a need to reduce a level of existing debt and, if appropriate, the customer should be given an unambiguous warning about the desirability of meeting those other priorities before making payments to a stakeholder product.

A stronger warning about the desirability of addressing debt as a priority should be given if it appears that the customer is significantly indebted, and particularly where there is a strong indication that such debt commitments may render any new commitment unaffordable in the short-term. For this purpose a firm should consider using a threshold or indicator to decide whether a customer should be excluded on the basis of affordability. Examples may include where the customer has (a) annual unsecured debt repayments in excess of 20% of gross annual income or (b) four or more active forms of unsecured credit or (c) has consistently reached his overdraft limit. A firm should review its chosen indicator or threshold regularly to ensure that it reflects prevailing economic conditions and takes account of industry best practice.

10.

A firm should clearly explain the information it is seeking in respect of a customer's 'debt' and consider the use of a range of alternative words, such as 'loans', 'repayable student loans' 'borrowing' or 'other forms of credit', to ensure all relevant information is obtained. A firm may use a simple reckoner to assess customer debt but should be conscious of the nature of, and not give impression that they are providing anything more than, basic advice.

11.

After a firm has given either or both of the warnings mentioned in 8 and 9 above, the customer should be invited to consider whether the sales process should be terminated at that stage.

Saving and investment objectives - all sales (except establishing a stakeholder CTF)

12.

A customer's savings and investment objectives, including the period over which the customer wishes to save or invest, should be ascertained including whether:

(a)

early access to some or all of the amount saved or invested could be important;

(b)

the customer wishes to save or invest for retirement; or whether

(c)

the customer wants to accumulate a specific sum by a specific date.

13.

If the information obtained under 12 above indicates that the customer's objective:

(a)

is as described in 12 (c) then normally no CIS, linked life stakeholder product or topping up of a stakeholder CTF should be recommended; or

(b)

is to save or invest for the short term only or that early access to the whole accumulated sum may be important, then no CIS, linked life stakeholder product, stakeholder pension or topping up of a stakeholder CTF should normally be recommended.

Tolerance of risk - all sales

14.

If a customer is not, in any circumstances, willing to accept any risk of the capital value of an investment being reduced then normally no CIS, linked life stakeholder product, or stakeholder CTF should be recommended. However a firm may, if it is appropriate, explain the effect of inflation on long-term savings especially in relation to pensions and invite the customer to consider his attitude to risk in the light of that explanation.

15.

If a customer is willing to accept the risk of capital reduction in some circumstances but not others then, before any recommendation to acquire a CIS or linked life stakeholder product is made, the customer should be reminded of the other circumstances in which he or she is unwilling to accept risk to capital.

Stakeholder pensions

16.

A stakeholder pension should not be recommended and instead the customer should be advised to seek alternative or further advice if it appears that the customer:

(a)

has or will have access to an occupational pension scheme; or

(b)

is likely to view income in retirement from state benefits as sufficient; or

(c)

already has a pension to which he or she could make further contributions; or

(d)

wishes to retire within five years.

17.

In addition to providing the advice in 16, a firm may also want to advise the customer that there may be more beneficial courses of action than buying a stakeholder pension (for example joining an occupational pension scheme).

18.

A firm designing a sales process for use in the workplace may take account of the benefits offered by the employer. If a firm recommends a stakeholder pension on the basis of benefits provided by an employer then it should explain the basis of the recommendation to the customer and suggest that the customer seek advice if he or she has any concerns.

19.

A firm should design its processes with a view to addressing the risk that customers will fail to appreciate the significance of questions about their pension provision and should accordingly incorporate a range of questions and information designed to foster the customer's understanding of the issues and to elicit appropriate information.

20.

Customers should be told that a stakeholder pension is life-styled and what this means.

21.

A firm may provide a copy of the pension table specified in COB 6 Annex 1 R for the customer's reference 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 customer's responsibility and that he should get further advice if has any concerns.

Child Trust Funds

22.

A firm is reminded of its obligation to provide a customer with the information relating to stakeholder CTFs that is specified in COB 6.5.40 (7)(a), COB 6.5.40 (7)(b), COB 6.5.40 (7)(d) and COB 6.5.40 (7)(e).

ISAs

23.

It should be ascertained whether the customer has already opened an ISA (whether a "maxi" or "mini" version) and if so whether it would be appropriate for the customer to open a non-ISA version of the same product.

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COB Conduct of Business

Providing basic advice on stakeholder products

Providingbasic advice on stakeholder products

Providing basic advice on stakeholder products

Application and Purpose

Disclosure on making first contact: information about services

Smoothed Products

Providing a copy of the range of stakeholder products

Terms of business and telephone sales

Scope and range of advice on stakeholder products: general

Range of stakeholder products: appointed representatives

Range of stakeholder products: records

Branding stakeholder products

Staying within the range of advice of stakeholder products

"Independence" - restriction on holding out

Remuneration structure and referrals

Providing basic advice on stakeholder products through scripted questions

Suitability of stakeholder products

Procedure on making a recommendation

Record of recommendations

Sales processes for stakeholder products

Providing
basic advice on stakeholder products