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COBS Sch 5 – Client Compensation Rights

PostedJune 24, 2025
UpdatedJune 24, 2025
ByAndy

1. Chapter Summary

This chapter sets out the rights of clients to bring actions for damages against firms that breach the FCA’s conduct of business rules. It provides the legal framework allowing clients to seek compensation where firms have failed to comply with regulatory standards, thereby protecting investors and enhancing accountability within the financial services industry.

2. Applicability

Applies to clients of firms regulated under the FCA Conduct of Business sourcebook (COBS) who have suffered loss or damage due to a firm’s breach of regulatory obligations. This includes retail clients and certain professional clients but excludes eligible counterparties, consistent with the FCA’s client classification regime.

3. Key Rules and Their Meaning

  • COBS Sch 5.1R: A client may bring an action for damages against a firm where the firm breaches COBS rules and the client suffers loss as a result. Meaning: Clients have a statutory right to seek compensation for breaches, reinforcing firms’ obligation to comply with rules.
  • COBS Sch 5.2R: Damages may include compensation for losses directly attributable to the breach, including consequential losses. Meaning: Compensation can cover a broad range of damages, not just immediate financial loss.
  • COBS Sch 5.3R: The burden of proof lies with the client to demonstrate the breach and the resulting loss. Meaning: Clients must provide evidence that the firm’s regulatory breach caused their loss.
  • COBS Sch 5.4R: Certain defences may be available to firms, such as demonstrating compliance with the regulatory standard or that the breach did not cause the loss. Meaning: Firms can defend claims by proving they met their obligations or that losses arose independently.

4. Interpretation Notes / FCA Expectations

  • The FCA expects firms to maintain robust compliance frameworks to minimise breaches and resultant client claims.
  • The chapter underlines the FCA’s dual role: enforcing conduct rules and empowering clients to pursue private claims.
  • FCA guidance stresses clear client communication to reduce misunderstandings that could lead to disputes.

5. Practical Considerations for Firms

  • Implement comprehensive compliance and monitoring systems to avoid breaches of COBS rules.
  • Keep detailed records of client communications and transactions to provide evidence in case of disputes.
  • Ensure clear and transparent disclosures to clients about products and risks to mitigate claim risks.
  • Establish internal procedures for handling complaints promptly and effectively to resolve issues before escalation.

6. Related Handbook References

  • COBS 2 – General principles and standards of conduct
  • DISP – Complaints handling procedures
  • PRIN 2 – Principles for Businesses, including client interests and compliance
  • SYSC – Systems and controls obligations

7. Regulatory Focus / Enforcement Risk

  • This chapter represents a significant enforcement risk area because breaches exposing clients to losses can trigger compensation claims and FCA investigations.
  • Firms should prioritise preventing breaches in high-risk areas like suitability, disclosure, and client communications.
  • FCA often scrutinizes firms’ responsiveness to complaints and their mitigation efforts post-breach.