COBS 2 – Treating Customers Fairly and Managing Conflicts of Interest

1. Chapter Summary

COBS 2 sets out the FCA’s expectations for firms to treat customers fairly and to manage conflicts of interest effectively in their regulated activities. It establishes the standards firms must follow to avoid disadvantaging customers through conflicts or unfair treatment, underpinning trust and integrity in financial markets. This chapter is critical in ensuring transparency, fairness, and ethical behaviour throughout the customer relationship lifecycle.

2. Applicability

COBS 2 applies primarily to firms conducting retail business and those carrying out activities involving clients, especially where conflicts of interest may arise. It applies to all firms within the FCA’s remit offering retail investment products or services, with particular emphasis on client-facing activities. There are some exceptions and carve-outs related to wholesale or MiFID business where other rules may take precedence.

3. Key Rules and Their Meaning

• COBS 2.1.1R – Treating Customers Fairly “A firm must pay due regard to the interests of its customers and treat them fairly.” This core principle requires firms to put customer interests at the heart of their business decisions and ensure fair outcomes. Practically, this means avoiding misleading actions, providing clear information, and ensuring advice or product suitability.
• COBS 2.2.1R – Conflicts of Interest Policy “A firm must establish, implement and maintain an effective conflicts of interest policy.” Firms must identify and manage situations where their interests (or those of their staff) could conflict with clients’ interests. This includes disclosure, avoidance, or mitigation measures to prevent harm to customers.
• COBS 2.3.1R – Disclosure of Conflicts “Where a conflict cannot be managed effectively, firms must disclose it clearly, comprehensively, and in a timely manner.” If conflicts cannot be avoided, transparent disclosure to clients is mandatory, allowing customers to make informed decisions.
• COBS 2.4.1R – Recording and Monitoring Conflicts Firms must keep detailed records of conflicts identified and how they are managed, demonstrating compliance and enabling ongoing oversight.

4. Interpretation Notes / FCA Expectations

• The FCA expects firms to take a proactive, risk-based approach in identifying conflicts rather than waiting for issues to arise.
• Disclosure is a last resort, not a substitute for effective conflict management.
• Firms should consider the customer perspective when assessing fairness, ensuring outcomes do not disadvantage clients.
• Guidance notes clarify that conflicts can be actual or potential and include relationships with connected parties or financial incentives that might bias advice.

5. Practical Considerations for Firms

• Develop and document comprehensive conflicts of interest policies, regularly reviewed and updated.
• Train staff to recognise and manage conflicts proactively.
• Maintain detailed conflict registers and audit trails to evidence compliance.
• Implement controls such as information barriers, remuneration adjustments, or independent oversight.
• Ensure customer communications, including disclosures, are clear, timely, and accessible.

6. Related Handbook References

• PRIN 2A – Principles for Businesses (particularly those relating to fair treatment and conflicts)
• SYSC – Systems and Controls, including conflict management systems
• COBS 9 – Client Categorisation (which affects the extent of protections)
• COBS 10 – Client Money and Assets (relevant for safeguarding duties)
• MIFIDPRU – For MiFID-related conduct and prudential rules

7. Regulatory Focus / Enforcement Risk

• Conflicts of interest are a common area of FCA enforcement; firms failing to manage or disclose conflicts properly often face regulatory action.
• The FCA pays particular attention to firms’ culture and governance around conflicts.
• Firms with complex or high-risk business models should expect heightened scrutiny on their conflict management frameworks.