4. The FCA’s Conduct of Business and Client Assets Sourcebooks

Question 1

A firm categorises a professional client as a retail client to offer enhanced protection. Later, the client sues for losses claiming unsuitability. Was the re-categorisation compliant and does it shield the firm?

Answer 1

Re-categorising a client upwards (i.e. from professional to retail) is allowed, and provides additional protections. However, suitability still depends on compliance with COBS 9, and incorrect advice may still result in liability. (Section 2.3–2.4)

Question 2

Where do COBS rules apply based on firm location?

Answer 2

COBS applies to UK firms operating from UK establishments or serving UK clients.

Question 3

Do UK firms operating overseas have to comply with COBS?

Answer 3

Yes, unless an exemption applies. Some rules may only apply if the client is in the UK.

Question 4

What types of business activities are covered by COBS?

Answer 4

Designated investment business, long-term insurance, and some deposit-taking.

Question 5

Which COBS rules are disapplied for Eligible Counterparties (ECPs)?

Answer 5

COBS 2, 4, 6, 8A, 10, 11 (parts), 12 (parts), and 16 are disapplied.

Question 6

Do appointed representatives need to comply with COBS?

Answer 6

Yes. The principal firm is responsible for ensuring COBS compliance.

Question 7

What are the three types of client under COBS?

Answer 7

Retail Client, Professional Client, Eligible Counterparty (ECP).

Question 8

Which client type receives the most regulatory protection?

Answer 8

Retail Clients.

Question 9

Which client type receives the least protection under COBS?

Answer 9

Eligible Counterparties.

Question 10

Why is client categorisation important under COBS?

Answer 10

It determines the level of regulatory protection the client receives.

Question 11

What extra protections do retail clients receive?

Answer 11

More disclosure, suitability checks, and restrictions on promotions.

Question 12

What is the MiFID requirement for client categorisation?

Answer 12

MiFID standards must be followed unless services are clearly separated.

Question 13

What is required in client agreements for retail clients?

Answer 13

A written agreement must be provided before service provision.

Question 14

When can a firm rely on information from another firm?

Answer 14

When it is reasonable to do so, e.g., another MiFID firm.

Question 15

What is the main rule for client communications under COBS?

Answer 15

They must be fair, clear, and not misleading.

Question 16

What is the aim of financial promotion rules?

Answer 16

Ensure promotions are fair, clear, and not misleading.

Question 17

What are the record-keeping requirements under COBS?

Answer 17

Maintain records of communications, services, and transactions.

Question 18

What must be disclosed to clients before giving advice?

Answer 18

Firm status, independence, scope of service, and remuneration.

Question 19

What must a firm assess for suitability?

Answer 19

Client’s knowledge, experience, financial situation, and objectives.

Question 20

What are the rules on cost disclosure under COBS?

Answer 20

Firms must disclose aggregate costs pre-sale and post-sale.

Question 21

Why are cancellation rights required?

Answer 21

To give clients a cooling-off period to reconsider their decisions.

Question 22

What must firms do about conflicts of interest?

Answer 22

Identify, prevent or manage them; disclose if necessary.

Question 23

What is meant by ‘best execution’?

Answer 23

Firms must take all sufficient steps to get the best result when executing orders.

Question 24

What are the rules on personal account dealing?

Answer 24

Controls must prevent misuse of info, market abuse, or conflicts.

Question 25

What records must be kept on suitability?

Answer 25

Document assessments and client information relied upon.

Question 26

What is the purpose of the CASS rules?

Answer 26

To protect client assets through segregation and oversight.

Question 27

When must client money be reconciled?

Answer 27

Daily and monthly reconciliations are required.

Question 28

Why is client money segregated?

Answer 28

To protect client funds in firm insolvency or misuse cases.

Question 29

How long must records be kept under COBS?

Answer 29

5 years (MiFID) or 3 years (non-MiFID); records must be retrievable.

Question 30

Is COBS 2 disapplied when a firm deals with Eligible Counterparties (ECPs)?

Answer 30

Yes COBS 2 is about general conduct of business obligations, and it is disapplied for ECPs except for COBS 2.4 (inducements), which still applies.

Question 31

Is COBS 4 disapplied when a firm deals with Eligible Counterparties (ECPs)?

Answer 31

Yes COBS 4 relates to client communications and financial promotions. It is disapplied for ECPs, apart from certain provisions such as COBS 4.4 (compensation information) which remain in force.

Question 32

Is COBS 6.1 disapplied when a firm deals with Eligible Counterparties (ECPs)?

Answer 32

Yes – COBS 6.1 is about providing information to clients on the firm’s services, costs, and remuneration. These obligations are disapplied for ECPs.

Question 33

A firm communicates performance figures for a new fund to a professional client without explaining the assumptions behind them. Is this a COBS breach?

Answer 33

Yes – even for professional clients, communications must be fair, clear, and not misleading. COBS 4.2.1R applies to all client types. (Section 3.1)

Question 34

An adviser recommends a complex structured product to a retail client without explaining liquidity risks, arguing that the client meets appropriateness criteria. Is this compliant?

Answer 34

No – under COBS 10, the firm must ensure the client understands the nature and risks. Additionally, COBS 9.2 requires a suitability assessment if it’s advised business. (Sections 4.1 and 6.1)

Question 35

A discretionary manager rebalances a client’s portfolio monthly, but does not provide regular valuation updates. Is this compliant under COBS?

Answer 35

No – under COBS 16.3, firms must provide periodic statements including valuations at least quarterly, unless agreed otherwise. (Section 7.1)

Question 36

A firm holds client money in a pooled account but delays segregation for operational reasons. Is this consistent with CASS rules?

Answer 36

No – CASS 7 requires client money to be segregated promptly on receipt unless using the alternative approach. Delays without a compliant basis breach CASS requirements. (Section 8.3)

Question 37

A firm dealing with an ECP chooses not to send quarterly reports detailing portfolio performance, relying on their ECP classification. Could this be a regulatory issue?

Answer 37

No – COBS 16 (reporting to clients) is disapplied for ECPs, so the firm is not obliged to provide periodic reports under this rule .

Question 38

A bank trades on behalf of an ECP but fails to seek the best possible result for the execution of the order. Could this breach best execution duties under COBS 11.2?

Answer 38

No – COBS 11.2 (best execution) is disapplied for ECP business, provided the client was correctly categorised and the activity falls within the ECP business scope

Question 39

A firm dealing with an ECP offers a rebate for directing business its way but fails to disclose this benefit. The client later alleges a lack of transparency. Can the firm rely on the COBS 2 disapplication?

Answer 39

No – although most of COBS 2 is disapplied for ECPs, COBS 2.3 and COBS 2.4 (especially inducement rules) still apply. Undisclosed inducements may breach COBS 2.4. (COBS 2 partial disapplication)

Question 40

A firm sends promotional material to an ECP that references past performance but fails to include a warning that past performance is not a reliable guide to future results. Is this a compliance breach?

Answer 40

Yes – although most of COBS 4 is disapplied for ECPs, COBS 4.4 (presentation of past performance) remains applicable. Omitting the required warning may still breach COBS 4.4.1R. (COBS 4 partial disapplication)

Question 41

What is an Eligible Counterparty (ECP)?

Answer 41

Under the FCA Handbook (COBS 3.6), an Eligible Counterparty (ECP) is a specific category of client to whom the least regulatory protection is owed. A client can only be treated as an ECP when the firm is conducting certain investment services, such as execution, dealing on own account, or receiving and transmitting orders.

Question 42

Three Examples of Eligible Counterparties (ECPs)

Answer 42

An authorised investment firm Automatically eligible under COBS 3.6.2R as a regulated financial institution. A national government or central bank Treated as an ECP due to their sovereign nature and presumed sophistication. A large undertaking requesting ECP status A corporate client that meets quantitative thresholds (e.g. balance sheet > €20m, turnover > €40m) and is classified as a professional client, but opts in as an ECP.

Question 43

A UK-regulated investment firm executes trades for the Bank of England but fails to provide a breakdown of costs and charges under COBS 6.1. Has the firm breached its duty?

Answer 43

No – the Bank of England qualifies as an Eligible Counterparty (a national central bank), and COBS 6.1 disclosure obligations are disapplied in ECP business. (COBS 6.1 disapplication)

Question 44

A firm sends a trade confirmation to BlackRock (an authorised investment firm) without attaching a suitability report. Could this raise regulatory issues?

Answer 44

No – as an authorised investment firm, BlackRock is an Eligible Counterparty, and COBS 9 (suitability) and parts of COBS 16 (reporting) do not apply in ECP dealings. (COBS 16 disapplication)