COBS Sch 2 – Excluded Investments
1. Chapter Summary
Schedule 2 in COBS defines categories of investments that are excluded from the classification of specified investments under FCA rules. This distinction is important because excluded investments are not subject to the full range of COBS conduct requirements. Understanding these exclusions helps firms determine which financial instruments fall outside certain regulatory obligations, thereby clarifying compliance scope and client protections.
2. Applicability
This schedule applies to all FCA-regulated firms to identify investments that are outside the scope of specified investments. It primarily affects how firms apply conduct rules under COBS, particularly regarding disclosure, suitability, and client classification. It applies across client types but is especially relevant for firms dealing with instruments that may appear similar to specified investments but are excluded by definition.
3. Key Rules and Their Meaning
- COBS Sch 2.1.1 – General List of Excluded Investments Provides categories of investments that do not qualify as specified investments, such as certain deposits, contracts of insurance, and commercial instruments. Meaning: Firms need to recognize these as excluded to avoid misapplying COBS rules.
- COBS Sch 2.1.2 – Deposits and Similar Investments Includes deposits with banks or building societies, which are excluded from specified investment classification. In practice: These are regulated differently, typically under banking or payments regulation.
- COBS Sch 2.1.3 – Commercial Instruments Covers commercial bills, cheques, and similar instruments not treated as specified investments. Nuance: These are often used in commercial contexts rather than investment contexts.
- COBS Sch 2.1.4 – Contracts of Insurance Insurance contracts, including life assurance policies, are excluded here. Significance: These fall under insurance regulation rather than securities regulation.
- COBS Sch 2.1.5 – Rights Under Existing Contracts Certain rights, such as those arising from employment contracts, are excluded. Implication: These rights are not treated as investments for COBS purposes.
4. Interpretation Notes / FCA Expectations
- The FCA expects firms to carefully distinguish between specified and excluded investments to ensure correct regulatory treatment.
- Misclassification can lead to regulatory breaches or inadequate client protection.
- Firms should stay updated on changes in definitions and ensure staff are trained to identify exclusions correctly.
5. Practical Considerations for Firms
- Implement clear classification procedures differentiating excluded investments from specified ones.
- Document the basis for classification decisions in client files and compliance records.
- Ensure product governance teams assess new products for inclusion/exclusion status.
- Provide appropriate client communications clarifying the regulatory protections applicable to excluded investments.
6. Related Handbook References
- COBS Sch 1 – Specified Investments
- 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
- Enforcement actions have occurred where firms incorrectly applied COBS rules to excluded investments.
- Firms face risk when client protections are assumed but not required or when disclosures are inconsistent.
- The FCA scrutinizes firms’ product classification and client communication for accuracy.