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COBS 1 – Application and Purpose

PostedJune 24, 2025
UpdatedJune 24, 2025
ByAndy

Understanding who the Conduct of Business Sourcebook (COBS) applies to, when, and why.

1. Chapter Summary

COBS 1 sets out the foundations of the Conduct of Business Sourcebook. It defines who the rules apply to, under what circumstances, and how the rest of the COBS rules should be interpreted. It clarifies the FCA’s expectations, introduces territorial scope, explains how the sourcebook interacts with other regimes (like MiFID), and describes the legal status of different rule types (e.g. rules, guidance, evidential provisions). COBS 1 is essential reading for any regulated firm offering investment services or engaging with clients in the UK.

2. Applicability

COBS applies primarily to firms carrying out regulated investment activities, particularly those involving retail clients, professional clients, or eligible counterparties. However, COBS 1.1.1R–1.1.11G specify more nuanced rules of application:

  • COBS applies to firms with a Part 4A permission to carry out designated investment business or to communicate/publish financial promotions.
  • The chapter clarifies the territorial application, notably:
    • Where a UK MiFID investment firm operates abroad, COBS may still apply (1.1.1R).
    • For third-country firms (non-UK), application depends on the location and type of service (1.1.3G–1.1.6G).

MiFID carve-outs also appear throughout. Some chapters apply only to MiFID business; others apply whether or not the firm is within MiFID scope.

3. Key Rules and Their Meaning

COBS 1.1 – Application

  • COBS 1.1.1R confirms that COBS applies to firms with relevant permissions, as well as to unauthorised persons who communicate financial promotions under exemptions.
  • The scope of application depends on the client type and activity.
  • COBS 1.1.7G–1.1.10G cover special scenarios, such as appointed representatives and tied agents.

COBS 1.2 – Purpose

  • COBS 1.2.1G states the purpose of COBS: to protect consumers and ensure markets operate with integrity and transparency.
  • The chapter reiterates that COBS should be interpreted in a way that furthers the FCA’s operational objectives, including consumer protection and market confidence.

COBS 1.3 – Legal Status of Provisions

  • This section is critical in interpreting COBS:
    • Rules (R) are binding.
    • Guidance (G) is not binding but shows how the FCA interprets the rules.
    • Evidential provisions (E) support enforcement by showing behaviours likely to breach (or comply with) rules.
    • Notes and italicised text help explain application but are not part of the rules.

COBS 1.4 – Client Categorisation

  • Sets the foundation for categorising clients (retail, professional, eligible counterparty), which determines the level of protection.
  • Client classification affects which rules apply and how the firm must conduct itself.

COBS 1.5 – Cross-References and Glossary

  • Encourages users to reference the FCA Glossary and to read COBS in conjunction with other parts of the Handbook.
  • Interpretation may rely on definitions elsewhere (e.g. PERG, PRIN, SYSC).

4. FCA Interpretation and Regulatory Intent

Throughout COBS 1, the FCA uses guidance to promote flexibility of interpretation while making clear that consumer protection is paramount. The FCA expects firms to use professional judgment but remain within the spirit of the Handbook.

For example:

  • COBS 1.2.1G reflects the FCA’s intent that firms operate fairly and transparently, not just in letter, but in spirit.
  • COBS 1.3.2G reassures firms that the FCA’s guidance isn’t legally binding, but failure to follow it could be used as evidence in enforcement.

5. Practical Considerations for Firms

Firms should ensure:

  • Client categorisation processes are well documented.
  • Territorial scope rules are understood, especially if operating cross-border.
  • Policies and procedures reference the correct rule types (e.g. don’t rely solely on guidance where rules apply).
  • Appointed representatives or tied agents have clear lines of responsibility aligned with COBS 1.1.7G.

6. Related Handbook References

  • PRIN – Principles for Businesses (especially for high-level conduct standards).
  • SYSC – Systems and Controls Sourcebook (for organisational rules).
  • PERG – Perimeter Guidance (to determine if COBS applies).
  • COBS 2+ – Specific conduct rules by activity begin here (e.g. client relationships, inducements, suitability).

7. Regulatory Focus

COBS 1 is rarely the subject of standalone enforcement but is foundational. Misinterpretation of its scope or the legal status of guidance vs. rules could lead to broader failures in compliance. Client categorisation errors, in particular, have been a recurring issue in FCA enforcement.