COBS Sch 1 – Schedule 1: Categories of Specified Investments – Classification of Investments Under COBS
1. Chapter Summary
Schedule 1 in COBS sets out the categories of investments that are considered specified investments under the FCA Handbook. This classification is crucial because it determines which financial instruments fall within the scope of COBS rules governing conduct of business. By clearly defining the types of investments, this schedule helps firms understand when regulatory obligations such as client disclosures, suitability assessments, and appropriateness tests apply.
2. Applicability
This schedule applies to all firms regulated under the FCA that deal with or advise on investments classified as specified investments. It is relevant to both retail and professional clients but is especially significant for firms handling retail clients due to the detailed conduct requirements that attach to specified investments. It does not apply to instruments outside these categories.
3. Key Rules and Their Meaning
- COBS Sch 1.1.1 – Definition of Specified Investments Lists categories such as transferable securities, units in collective investment schemes, certain derivatives, warrants, and rights. Meaning: Firms must identify whether an instrument fits into these categories to determine the applicable conduct rules.
- COBS Sch 1.1.2 – Transferable Securities Defined broadly to include shares, bonds, and other negotiable securities. In practice: Advisers must treat these as specified investments subject to COBS obligations.
- COBS Sch 1.1.3 – Collective Investment Scheme Units Units or shares in collective investment schemes that meet certain criteria are included. Nuance: Different rules apply if the scheme is authorized or unauthorized.
- COBS Sch 1.1.4 – Derivatives and Options Covers contracts for differences (CFDs), futures, options, and other derivative contracts that are specified investments. Significance: These complex instruments trigger specific suitability and risk disclosure requirements.
4. Interpretation Notes / FCA Expectations
- The FCA expects firms to have robust processes to classify investments accurately against this schedule to avoid regulatory breaches.
- Firms should keep up-to-date with changes in the definition of specified investments as the regulatory landscape evolves.
- The FCA highlights the importance of clarity for clients on what type of investment they are dealing with, which impacts their protection level.
5. Practical Considerations for Firms
- Maintain detailed investment classification policies referencing Schedule 1 definitions.
- Train advisers and compliance teams to correctly identify specified investments.
- Use systems that flag products falling under these categories to trigger appropriate COBS rules.
- Ensure client disclosures and suitability assessments align with the specified investment classification.
- Keep accurate records of investment classifications and client communications.
6. Related Handbook References
- COBS 2 – Communications with Clients
- COBS 9 – Suitability and Appropriateness
- COBS 10 – Client Disclosure Requirements
- COBS 16 – Derivative and Structured Products Conduct Rules
- PRIN 2A – FCA Principles for Business
- SYSC 10 – Systems and Controls
7. Regulatory Focus / Enforcement Risk
- Misclassification of investments can lead to regulatory breaches, especially regarding client disclosures and suitability.
- The FCA has taken enforcement action where firms failed to correctly apply COBS rules due to misunderstanding investment categories.
- Derivatives and complex investment instruments attract higher scrutiny due to their risk profile.