• COBS 3. COBS 3. CORE RULES — INVESTMENT BUSINESS, ACCEPTING DEPOSITS, PROVIDING CREDIT AND PROVIDING TRUST SERVICES

    • COBS 3.1 COBS 3.1 Application

      • COBS 3.1.1

        This chapter applies to an Authorised Person which carries on or intends to carry on:

        (a) Investment Business;
        (b) Accepting Deposits;
        (c) Providing Credit; or
        (d) Providing Trust Services

        except where it is expressly provided otherwise.

    • COBS 3.2 COBS 3.2 Communication of Information and Marketing Material

      • General

        • COBS 3.2.1 COBS 3.2.1

          When communicating information to a Person in relation to a Specified Investment or Regulated Activity, an Authorised Person must take reasonable steps to ensure that the communication is clear, fair and not misleading.

          • Guidance

            A communication addressed to a Professional Client may not need to include the same information, or be presented in the same way, as a communication addressed to a Retail Client.

        • COBS 3.2.2

          An Authorised Person must not, in any form of communication with a Person, attempt to limit or avoid any duty or liability it may have to that Person or any other Person under the ADGM Founding Law or FSMR.

        • COBS 3.2.3

          Where a Rule requires information to be sent to a Client, the Authorised Person must provide that information directly to the Client and not to another Person, unless it is on the written instructions of the Client.

      • Marketing Material

        • COBS 3.2.4

          (a) An Authorised Person must ensure that any Marketing Material communicated to a Person contains the following information:
          (i) the name of the Authorised Person communicating the Marketing Material or, on whose behalf the Marketing Material is being communicated;
          (ii) the Authorised Person's regulatory status; and
          (iii) if the Marketing Material is intended only for Professional Clients or Market Counterparties, a clear statement to that effect and that no other Person should act upon it.
          (b) Marketing Material includes any invitation or inducement to Engage in Investment Activity.
          (c) An Authorised Person which communicates Marketing Material must:
          (i) ensure that the Marketing Material complies with the applicable Rules and any legislation administered by the Regulator; and
          (ii) not distribute such Marketing Material if it becomes aware that the Person offering to carry on the Regulated Activity or offering the Specified Investment to which the Material relates is in breach of the regulatory requirements that apply to that Person in relation to that Specified Investment or Regulated Activity.
          Amended on (3 February, 2020).

        • COBS 3.2.5

          An Authorised Person must take reasonable steps to ensure that:

          (a) any Marketing Material intended for Professional Clients or Market Counterparties is not sent or directed to any Persons who are not Professional Clients or Market Counterparties; and
          (b) no Person communicates or otherwise uses the Marketing Material on behalf of the Authorised Person in a manner that amounts to a breach of the requirements in this section.

      • Past Performance and Forecasts

        • COBS 3.2.6

          An Authorised Person must ensure that any information or representation relating to past performance, or any future forecast based on past performance or other assumptions, which is provided to or targeted at Retail Clients:

          (a) presents a fair, balanced and up-to-date view of the Specified Investments or Regulated Activities to which the information or representation relates;
          (b) identifies, in an easy to understand manner, the source of information from which the past performance is derived and any key facts and assumptions used in that context are drawn;
          (c) contains comparable data for each year and at least 5 years' data where available; and
          (d) contains a prominent warning that past performance is not necessarily a reliable indicator of future results.

    • COBS 3.3 COBS 3.3 Key Information and Client Agreement

      • COBS 3.3.1 Application

        The Rules in this section do not apply to an Authorised Person when it is:

        (a) carrying on a Regulated Activity where this involves provision of a service to a Client with, or for a Market Counterparty;
        (b) Accepting Deposits;
        (c) Providing Credit;
        (d) carrying on an activity of the kind described in section 67 of Chapter 14 of Schedule 1 of FSMR that constitutes marketing; or
        (e) a Fund Manager of a Fund Offering the Units of a Fund it manages.

      • COBS 3.3.2 Requirements

        (a) Subject to Rule 3.3.2(b), an Authorised Person must not carry on a Regulated Activity where this involves provision of a service to a Client unless:
        (i) there is a Client Agreement entered into between the Authorised Person and that Person containing the key information specified in Rule 12 which is entered into either between the Authorised Person and that Person or in accordance with the requirements in Rule 3.3.2(c); and
        (ii) before entering into the Client Agreement with the Person, the Authorised Person has provided to that Person the key information referred to in Rule 12 in good time to enable him to make an informed decision relating to the relevant Regulated Activity.
        (b) An Authorised Person may carry on a Regulated Activity where this involves provision of a service to a Client without having to comply with the requirement in Rule 3.3.2(a);
        (i) where it is, on reasonable grounds, impracticable to comply, in which case an Authorised Person carrying on the Regulated Activity must:
        (A) first explain to the Person why it is impracticable to comply; and
        (B) enter into a Client Agreement as soon as practicable thereafter.
        (ii) where the Client has expressly agreed to dispense with the requirement in regard to a personal investment vehicle.
        (c) An Authorised Person may rely on a Client Agreement executed other than by the Authorised Person in the following circumstances:
        (i) An Authorised Person which is a Branch may rely on a Client Agreement executed by its head office or any other branch of the same legal entity if:
        (A) the Client Agreement adequately and clearly applies to the Regulated Activities carried out the Branch; and
        (B) the Authorised Person ensures that the Client Agreement is available to the Regulator on request.
        (ii) an Authorised Person may rely on a Client Agreement executed by a member of its Group if:
        (A) it is carrying on a Regulated Activity where this involves provision of a service to a Client pursuant to Rule 2.6.4;
        (B) the Client Agreement clearly sets out the Regulated Activity carried on where this involves provision of a service to a Client by the Authorised Person and that the Client's rights in respect of the carrying on of the Regulated Activity are enforceable against the Authorised Person; and
        (C) the Authorised Person ensures that the Client Agreement is available to the Regulator on request.

      • COBS 3.3.3 Information

        (a) Rule 12 sets out the core information that must be included in every Client Agreement and additional disclosure for certain types of activities to which this chapter applies.
        (b) An Authorised Person may either provide a Person with a copy of the proposed Client Agreement, or give that information in a separate form. If there are any changes to the terms and conditions of the proposed agreement, the Authorised Person must ensure that the Client Agreement to be signed with the Person accurately incorporates those changes.
        (c) An Authorised Person may consider it is reasonably impracticable to provide the key information to a Person if that Person requests the Authorised Person to execute a Transaction on a time critical basis. Where an Authorised Person has explained why it is impracticable to comply with the requirement to enter into a Client Agreement orally, it must maintain records to demonstrate to the Regulator that it has provided that information to the Client.

      • COBS 3.3.4 Changes to the Client Agreement

        If the Client Agreement provided to a Retail Client allows an Authorised Person to amend the Client Agreement without the Client's prior written consent, the Authorised Person must give at least fourteen days' notice to the Client before carrying on a Regulated Activity where this involves provision of a service to a Client on any amended terms, unless it is impracticable to do so.

    • COBS 3.4 COBS 3.4 Suitability

      • COBS 3.4.1 Application

        The Rules in this section do not apply where the Authorised Person:

        (a) undertakes a Transaction with a Market Counterparty;
        (b) undertakes an Execution-Only Transaction;
        (c) undertakes the activities of Accepting Deposits or Providing Credit; or
        (d) carries on an activity of the kind described in section 67 of Chapter 14 of Schedule 1 of FSMR that constitutes marketing.

      • COBS 3.4.2 Suitability Assessment

        (a) Subject to Rule 3.4.2(b), an Authorised Person must not recommend to a Client a Specified Investment or the carrying on of a Regulated Activity where this involves provision of a service to a Client, or execute a Transaction on a discretionary basis for a Client, unless the Authorised Person has a reasonable basis for considering the recommendation or Transaction to be suitable for that particular Client. For this purpose, the Authorised Person must:
        (i) undertake an appropriate assessment of the particular Client's needs and objectives, and, financial situation, and also, to the extent relevant, risk tolerance, knowledge, experience and understanding of the risks involved; and
        (ii) take into account any other relevant requirements and circumstances of the Client of which the Authorised Person is, or ought reasonably to be aware.
        (b) An Authorised Person may, subject to Rule 3.4.2(c), limit the extent to which it will consider suitability when making a recommendation to, or undertaking a Transaction on a discretionary basis for or on behalf of, a Professional Client if, prior to carrying on that activity, the Authorised Person:
        (i) has given a written warning to the Professional Client in the form of a notice clearly stating either that the Authorised Person will not consider suitability, or will consider suitability only to the extent specified in the notice; and
        (ii) the Professional Client has given his express consent, after a proper opportunity to consider the warning, by signing that notice.
        (c) Where an Authorised Person is managing a Discretionary Portfolio Management Account for a Professional Client for more than 12 months, it must consider whether or not to ensure that the account remains suitable for the particular Professional Client every 12 months, having regard to the matters specified in Rule 3.4.2(a)(i) and 3.4.2(a)(ii).
        (d) An Authorised Person Providing Trust Services does not have to undertake an assessment of the factors such as risk tolerance, knowledge and experience of a Client when assessing the suitability of the service to a particular Client.
        (e) The extent to which an Authorised Person needs to carry out a suitability assessment for a Professional Client depends on its agreement with such a Client. The agreement may limit the suitability assessment to a specified extent, or may dispense with the suitability assessment completely. To the extent a limited suitability assessment is agreed upon, the Authorised Person must carry out the suitability assessment as agreed. Limitations may, for example, relate to the objectives of the Client or the product range in respect of which the recommendations are to be made.
        Amended on (3 February, 2020).

      • COBS 3.4.3

        An Authorised Person must take reasonable steps to ensure the information it holds about a Client is accurate, complete and up to date.

    • COBS 3.5 COBS 3.5 Conflicts of Interest

      • COBS 3.5.1 Fair Treatment

        An Authorised Person must take reasonable steps to ensure that conflicts of interest and potential conflicts of interest between itself and its Clients and between one Client and another Client are identified and then prevented or managed in accordance with this Rule 3.5.

      • COBS 3.5.2 Record of Conflicts

        An Authorised Person must keep and regularly update a record of the kinds of service or activity carried out by or on behalf of that Authorised Person in which a conflict of interest entailing a material risk of damage to the interests of one or more Clients has arisen or, in the case of an ongoing service or activity, may arise.

      • COBS 3.5.3 Managing Conflicts

        An Authorised Person must maintain and operate effective organisational and administrative arrangements with a view to taking all reasonable steps to prevent conflicts of interest from constituting or giving rise to a material risk of damage to the interests of its Clients, including establishing and maintaining effective information barriers to restrict the communication of relevant information.

      • COBS 3.5.4 Disclosure of Conflicts

        (a) If arrangements made by an Authorised Person under Rule 3.5.3 to manage conflicts of interest are not sufficient to ensure, with reasonable confidence, that risks of damage to the interests of a Client will be prevented, the Authorised Person must clearly disclose the general nature and/or sources of conflicts of interest to the Client before undertaking business for the Client.
        (b) The disclosure must:
        (i) be made in a durable medium; and
        (ii) include sufficient detail, taking into account the nature of the Client, to enable that Client to take an informed decision with respect to the service in the context of which the conflict of interest arises.

      • COBS 3.5.5 Conflicts Policy

        (a) An Authorised Person must establish, implement and maintain an effective conflicts of interest policy that is set out in writing and is appropriate to the size and organisation of the Authorised Person and the nature, scale and complexity of its business.
        (b) Where the Authorised Person is a member of a Group, the policy must also take into account any circumstances of which the Authorised Person is or should be aware, which may give rise to a conflict of interest arising as a result of the structure and business activities of other members of the Group.

      • COBS 3.5.6

        If an Authorised Person is unable to prevent or manage a conflict or potential conflict of interest, it must decline to act for that Client.

      • COBS 3.5.7 Attribution of Knowledge

        When a Rule applies to an Authorised Person that acts with knowledge, the Authorised Person will not be taken to act with knowledge for the purposes of that Rule as long as none of the relevant individuals involved for on behalf of the Authorised Person acts with that knowledge as a result of an information barrier arrangement.

      • COBS 3.5.8 Inducements

        (a) An Authorised Person must have systems and controls including policies and procedures to ensure that neither it, nor an Employee or Associate of it, offers, gives, solicits or accepts inducements such as commissions or other direct or indirect benefits where such inducements are reasonably likely to conflict with any duty that it owes to its Clients. In circumstances where an Authorised Person believes on reasonable grounds that the Client's interests are better served by a Person to whom the referral is to be made, any commission or other benefit which the Authorised Person or any of its Employees or Associates receives in respect of such a referral would not be a prohibited inducement under that Rule.
        (b) Subject to Rule 3.5.8(c), an Authorised Person must, before recommending a Specified Investment to, or Executing a Transaction for, a Retail Client, disclose to that Client any commission or other direct or indirect benefit which it, or any Associate or Employee of it, has received or may or will receive, in connection with or as a result of the Authorised Person making the recommendation or executing the Transaction.
        (c) An Authorised Person may provide the information required under Rule 3.5.8(b) in summary form, provided it informs the Client that more detailed information will be provided to the Client upon request and complies with such a request.

    • COBS 3.6 COBS 3.6 Soft Dollar Agreements

      • COBS 3.6.1

        An Authorised Person may accept goods and services under a Soft Dollar Agreement only if the goods and services are reasonably expected to:

        (a) assist in the provision of Investment Business services to the Authorised Person's Clients by means of:
        (i) specific advice on dealing in, or on the value of, any Investment;
        (ii) research or analysis about Investments generally; or
        (iii) use of computer or other information facilities to the extent that they are associated with specialist computer software or research services, or dedicated telephone lines;
        (b) provide custody services relating to Investments belonging to, or managed for, Clients;
        (c) provide services relating to portfolio valuation or performance measurement services; or
        (d) provide market price services.

      • COBS 3.6.2

        An Authorised Person must undertake a thorough assessment of the nature of the goods and services and the terms upon which they are to be provided under a Soft Dollar Agreement to ensure that the receipt of such goods and services provide commensurate value notifying in particular if any costs of such goods and services are to be passed through to Clients. Where the Client bears the cost of the goods and services, the disclosure obligation relating to costs and charges under Rule 3.3.2 will apply to such costs.

      • COBS 3.6.3

        An Authorised Person must not Deal in Investments as agent for a Client, either directly or indirectly, through any broker under a Soft Dollar Agreement, unless:

        (a) the agreement is a written agreement for the supply of goods or services described in Rule 3.6.1, which do not take the form of, or include, cash or any other direct financial benefit;
        (b) Transaction execution by the broker is consistent with any best execution obligations owed to the Client;
        (c) the Authorised Person has taken reasonable steps to ensure that the services provided by the broker are competitive, with no comparative price disadvantage, and take into account the interests of the Client;
        (d) for Transactions in which the broker acts as principal, the Authorised Person has taken reasonable steps to ensure that Commission paid under the agreement will be sufficient to cover the value of the goods or services to be received and the costs of execution; and
        (e) the Authorised Person makes adequate disclosure in accordance with Rules 3.6.4 and 3.6.5.

      • COBS 3.6.4

        Before an Authorised Person enters into a Transaction for or on behalf of a Retail Client, Professional Client or Market Counterparty, either directly or indirectly, with or through the agency of another Person, in relation to which there is a Soft Dollar Agreement which the Authorised Person has, or knows that another member of its Group has, with that other Person, it must disclose to its Client:

        (a) the existence of a Soft Dollar Agreement; and
        (b) the Authorised Person's or its Group's policy relating to Soft Dollar Agreements.

      • COBS 3.6.5

        If an Authorised Person or member of its Group has a Soft Dollar Agreement under which either the Authorised Person or member of its Group deals for a Client, the Authorised Person must provide that Client with the following information:

        (a) the percentage paid under Soft Dollar Agreements of the total Commission paid by or at the direction of:
        (i) the Authorised Person; and
        (ii) any other member of the Authorised Person's Group which is a party to those agreements;
        (b) the value, on a cost price basis, of the goods and services received by the Authorised Person under Soft Dollar Agreements, expressed as a percentage of the total Commission paid by or at the direction of:
        (i) the Authorised Person; or
        (ii) other members of the Authorised Person's Group;
        (c) a summary of the nature of the goods and services received by the Authorised Person under the Soft Dollar Agreements; and
        (d) the total Commission paid from the portfolio of that Client.

      • COBS 3.6.6

        The information in Rule 3.6.5 must be provided to that Client at least once a year, covering the period since the Authorised Person last reported to that Client.

    • COBS 3.7 COBS 3.7 Record Keeping

      • COBS 3.7.1

        An Authorised Person must, for a minimum of six years, maintain sufficient records in relation to each activity and function of the Authorised Person. These must include, where applicable, the following:

        (a) any Marketing Material issued by, or on behalf of, the Authorised Person;
        (b) any Financial Instruments provided to or Regulated Activities carried out for the benefit of a Client and each advice or recommendation made to a Client;
        (c) documents regarding Client classification under Rule 2;
        (d) a record of each Client Agreement including any subsequent amendments to it as agreed with the Client;
        (e) records relating to the suitability assessment undertaken by the Authorised Person to demonstrate compliance with these Rules;
        (f) records to demonstrate compliance with the requirements relating to inducements, including any disclosure made to Clients under that rule and if any goods and services are received by the Authorised Person under a Soft Dollar Agreement, the details relating to those agreements;
        (g) financial promotions under Schedule 2 of FSMR; and
        (h) any other disclosures made to Clients.

      • COBS 3.7.2

        For the purposes of Rule 3.7.1, the six year period commences:

        (a) in the case of the requirement in Rule 3.7.1(a), from the date on which the Marketing Material was last provided to a Person;
        (b) in the case of the requirement in Rule 3.7.1(b) to Rule 3.7.1(d), from the date the Client ceases to be a Client of the Authorised Person;
        (c) in the case of the requirement in Rule 3.7.1(e), from the date on which the relevant inducements were last received; and
        (d) in the case of the requirement in Rule 3.7.1(g), from the date on which the relevant financial promotion was made.