COBS 18 Specialist Regimes

1. (1)

   This section applies to the MiFID, equivalent third country or optional exemption business carried on by a trustee firm.

2. (2)

   It does not apply to a trustee firm when acting as:

   1. (a)

      a depositary; or

   2. (b)R

      the trustee of a personal pension scheme or stakeholder pension scheme.

A firm that executes a customer order in the course of carrying out activities referred to in COBS 18.2.5 R must provide best execution.

The duty to provide best execution does not apply where:

1. (1)

   the firm has agreed with a professional client that it does not owe a duty of best execution to him; or

2. (2)

   the firm relies on another person to whom it passes a customer order for execution to provide best execution, but only if it has taken reasonable care to ensure that he will do so.

To provide best execution, a firm must:

1. (1)

   take reasonable care to ascertain the price which is the best available for the customer order in the relevant market at the time for transactions of the kind and size concerned; and

2. (2)

   execute the customer order at a price which is no less advantageous to the customer, unless the firm has taken reasonable steps to ensure that it would be in the customer's best interests not to do so.

Subject to COBS 18.5.1A R, this section applies to a firm which is:

1. (1)

   [deleted]

2. (2)

   [deleted]

3. (3)

   a small authorised UK AIFM; or

4. (4)

   a residual CIS operator.

5. (5)

   [deleted]

COBS 18.5.3 R (2) and COBS 18.5.5 R to COBS 18.5.18 E do not apply to a small authorised UK AIFM of an unauthorised AIF which is not a collective investment scheme.

Where COBS rules specified in the table in COBS 18.5.2 R apply to a firm carrying on scheme management activity or, for an AIFM, AIFM investment management functions, the following modifications apply:

1. (1)

   subject to (2), references to customer or client are to be construed as references to any fund for which the firm is acting or intends to act;

2. (2)

   in the case of a small authorised UK AIFM of an unauthorised AIF or a residual CIS operator, when a firm is required by the rules in COBS to provide information to, or obtain consent from, a customer or client, the firm must ensure that the information is provided to, or consent obtained from, an investor or a potential investor in the fund as the case may be; and

3. (3)

   references to the service of portfolio management in COBS 11.2 (Best execution for AIFMs and residual CIS operators) and 11.3 (Client order handling) are to be readas references to the management by a firm of financial instruments held for or within thefund.

4. (4)

   [deleted]

Subject to COBS 18.5.3CR, a firm must comply with COBS 18 Annex 1 (Research and inducements for collective portfolio managers) when executing orders, or placing orders with other entities for execution, that relate to financial instruments for, or on behalf of, the fund.

COBS 18 Annex 1 does not apply in relation to an AIF or CIS which in accordance with its core investment policy:

1. (1)

   does not generally invest in financial instruments that can be:

   1. (a)

      registered in a financial instruments account opened in the books of a depositary; or

   2. (b)

      physically delivered to the depositary; or

2. (2)

   generally invests in issuers or non-listed companies to potentially acquire control over such companies, either individually or jointly with other funds.

The best execution provisions in COBS 11.2 (Best execution for AIFMs and residual CIS operators) do not apply to a small authorised UK AIFM of an unauthorised AIF or a residual CIS operator of a fund whose fund documents include a statement that best execution does not apply in relation to the fund and in which:

1. (1)

   no investor is a retail client; or

2. (2)

   no current investor in the fund was a retail client when it invested in the fund.

A small authorised UK AIFM of an unauthorised AIF which is not a collective investment scheme must comply with COBS 16.3 (Periodic reporting) with references to managing investments to be construed as providing AIFM investment management functions.

A small authorised UK AIFM of an unauthorised AIF or a residual CIS operator must not accept a retail client as an investor in the fund unless it has taken reasonable steps to offer and, if requested, provide to the potential investor, fund documents which adequately describe how thefund is governed.

Where the fund is an unauthorised fund managed by a small authorised UK AIFM or a residual CIS operator and no current investor in the fund was a retail client when it invested in the fund, the fund documents must include a statement that:

1. (1)

   explains that if an investor is reclassified as a retail client subsequent to investing in the fund, then the firm may continue to treat all investors in the fund as though they were not retail clients;

2. (2)

   explains that if an investor is reclassified as a retail client subsequent to investing in the fund, then the modification of best execution (see COBS 18.5.4 R) will continue to apply to that fund; and

3. (3)

   explains that, in the event of such a reclassification, the firm will not be required to provide best execution in relation to the fund.

A small authorised UK AIFM of an unauthorised AIF or a residual CIS operator must, subject to the exceptions from the requirement to provide a periodic statement, provide to investors in the fund, promptly and at suitable intervals, a statement in a durable medium which contains adequate information on the value and composition of the portfolio of the fund at the beginning and end of the period of the statement.

1. (1)

   A small authorised UK AIFM of an unauthorised AIF or a residual CIS operator need not provide a periodic statement:

   1. (a)
      1. (i)

         to an investor in the fund who is a retail client ordinarily resident outside the United Kingdom; or

      2. (ii)

         to an investor in the fund who is a professional client; if the investor has so requested or the firm has taken reasonable steps to establish that the investor does not wish to receive it; or

   2. (b)

      if it would duplicate a statement to be provided by someone else.

2. (2)

   [deleted]

A small authorised UK AIFM of an unauthorised AIF or a residual CIS operator must make a copy of any periodic statement it has provided in accordance with the requirement to prepare and issue periodic statements to investors in the fund. The record must be retained for a minimum period of three years.

Subject to COBS 18.5A.2R, this section applies to a firm which is:

1. (1)

   a full-scope UK AIFM of:

   1. (a)

      a UK AIF; and

   2. (b)

      [deleted]

   3. (c)

      (c) a non-UK AIF.

2. (2)

   [deleted]

The adequate information provisions in COBS 18.5A.11R do not apply to a full-scope UK AIFM of:

1. (1)

   [deleted]

2. (2)

   an unauthorised AIF which is not a collective investment scheme.

Where COBS rules specified in the table in COBS 18.5A.3R apply to a firm carrying on AIFM investment management functions, references to customer or client are to be construed as references to any AIF for which the firm is acting or intends to act.

Subject to COBS 18.5A.7R, a firm must comply with COBS 18 Annex 1 (Research and inducements for collective portfolio managers) when executing orders, or placing orders with other entities for execution, that relate to financial instruments for, or on behalf of, the fund.

COBS 18 Annex 1 does not apply in relation to an AIF which in accordance with its core investment policy:

1. (1)

   does not generally invest in financial instruments that can be:

   1. (a)

      registered in a financial instruments account opened in the books of a depositary; or

   2. (b)

      physically delivered to the depositary; or

2. (2)

   generally invests in issuers or non-listed companies to potentially acquire control over such companies either individually or jointly with other funds.

Only the following provisions in COBS 11.2 apply:

1. (1)

   COBS 11.2.5G;

2. (2)

   COBS 11.2.17G;

3. (3)

   COBS 11.2.23AR;

4. (4)

   COBS 11.2.24R;

5. (5)

   COBS 11.2.25R(1) and COBS 11.2.26R, but only where an AIF itself has a governing body which can provide prior consent; and

6. (6)

   COBS 11.2.27R, but only regarding the obligation on an AIFM to notify the AIF of any material changes to its order execution arrangements or execution policy.

References to the service of portfolio management in COBS 11.2 (Best execution for AIFMs and residual CIS operators) are to be read as references to the management by a firm of financial instruments held for or within the AIF.

A full-scope UK AIFM that markets an unauthorised AIF to a retail client must, in addition to providing the information in FUND 3.2 (Investor information), take reasonable steps to offer and, if requested, provide to that potential investor information about the following items:

1. (1)

   regulator – the firm’s statutory status in accordance with GEN 4 Annex 1R (Statutory status disclosure);

2. (2)

   commencement – when and how the firm is appointed;

3. (3)

   accounting – the arrangements for accounting to the AIF or investors in the AIF for any transaction effected;

4. (4)

   termination method – how the appointment of the firm may be terminated;

5. (5)

   complaints procedure – how to complain to the firm and a statement that the investors in the AIF may subsequently complain directly to the Financial Ombudsman Service;

6. (6)

   compensation – whether or not compensation may be available from the compensation scheme should the firm be unable to meet its liabilities, and information about any other applicable compensation scheme; and for each applicable compensation scheme, the extent and level of cover and how further information can be obtained;

7. (7)

   exchange rates – if a liability of the AIF in one currency is to be matched by an asset in a different currency, or if the services to be provided to the firm for the AIF may relate to an investment denominated in a currency other than the currency in which the investments of the AIF are valued, a warning that a movement of exchange rates may have a separate effect, unfavourable or favourable, on the gain or loss otherwise made on the portfolio of the AIF;

8. (8)

   stabilised investments – if it is the case, that the firm will have the right under the AIF documents to effect transactions in investments, the prices of which may be the subject of stabilisation;

9. (9)

   research and inducements – how the firm intends to pay for research. For example, whether the firm proposes to pay for research directly or to use a research payment account;

10. (10)

    acting as principal – if it is the case, that the firm may act as principal in a transaction with the AIF;

11. (11)

    underwriting commitments – if it is the case, that the firm may for the account of the portfolio of the AIF underwrite or sub-underwrite any issue or offer for sale of securities, and:

    1. (a)

       whether there are any restrictions on the categories of securities which may be underwritten and, if so, what these restrictions are; and

    2. (b)

       whether there are any financial limits on the extent of the underwriting and, if so, what these limits are;

12. (12)

    investments in other funds – whether or not the AIF may invest in funds either managed or advised by the firm or by an associate of the firm or in a fund which is not a regulated collective investment scheme; and

13. (13)

    investments in securities underwritten by the firm – whether or not the portfolio of the AIF may contain securities of which any issue or offer for sale was underwritten, managed or arranged by the firm or by an associate of the firm during the preceding 12 months.

This section applies to a UCITS management company.

Where COBS rules specified in the table in COBS 18.5B.2R apply to a firm carrying on scheme management activities, the following modifications apply:

1. (1)

   subject to (2), references to customer or client are to be construed as references to any scheme in respect of which the firm is acting or intends to act; and

2. (2)

   references to the service of portfolio management in COBS 11.3 (Client order handling) are to be read as references to collective portfolio management.

A firm must comply with COBS 18 Annex 1 (Research and inducements for collective portfolio managers) when executing orders, or placing orders with other entities for execution, that relate to financial instruments for, or on behalf of, the fund.

This section applies to a firm when it carries on Lloyd's market activities.

Only COBS 3 (Client categorisation) and the financial promotion rules apply when a firm is carrying out Lloyd's market activities.

When a firm is carrying on Lloyd's market activities, any reference in COBS to the term:

1. (1)

   designated investment is to be taken to include the following specified investments:

   1. (a)

      the underwriting capacity of a Lloyd's syndicate;

   2. (b)

      membership of a Lloyd's syndicate; and

   3. (c)

      rights to or interests in the specified investments in (a) or (b);

2. (2)

   designated investment business is to be taken to include the following regulated activities:

   1. (a)

      advising on syndicate participation at Lloyd's;

   2. (b)

      managing the underwriting capacity of a Lloyd's syndicate as a managing agent at Lloyd's; and

   3. (c)

      agreeing to carry on the regulated activities in (a) or (b).

This section applies to UK ISPVs.

COBS 3 applies (subject to COBS 18.6A.3R) when a firm is carrying on insurance risk transformation and/or activities directly arising from insurance risk transformation.

When a firm is carrying on insurance risk transformation and/or activities directly arising from insurance risk transformation:

1. (1)

   The general definition of client in COBS 3.2.1R is modified as set out in COBS 18.6A.3R(2) below.

2. (2)

   Any reference to the term client is to be taken to include:

   1. (a)

      a person to whom the firm provides, intends to provide or has provided a service in the course of carrying on activities directly arising from insurance risk transformation (including the offer of investments issued by the firm); or

   2. (b)

      (in DISP only) a person who is holding or has held an investment issued by the firm.

3. (3)

   COBS 3.6.1R(2) does not apply. A client can be an eligible counterparty in relation to insurance risk transformation and activities directly arising from insurance risk transformation.

Before an investment issued by an ISPV is sold to a client (that is not an eligible counterparty), the ISPV must ensure that the client is informed that compensation will not be available from the FSCS if the ISPV cannot meet its liabilities.

A statement that compensation will not be available from the FSCS must be included in any brochure or other written communication by which an ISPV offers investments to clients.

This section applies to an OPS firm when it carries on OPS activity:

1. (1)

   from an establishment maintained by it in the United Kingdom; and

2. (2)

   which is not MiFID, equivalent third country or optional exemption business.

Where a COBS rule specified in this section applies to an OPS firm, the following modifications apply:

1. (1)

    a reference to:

   1. (a)

       “client” is to be construed as a reference to the occupational pension scheme or welfare trust, as the case may be, in respect of which the OPS firm is acting or intends to act, and with or for the benefit of whom the relevant business is to be carried on; and

   2. (b)

       “investment firm” is to be construed as a reference to an OPS firm; and

2. (2)

    if an OPS firm is required by a COBS rule specified in this section to provide information to, or obtain consent from, a client, that firm must ensure that the information is provided to, or consent obtained from, each of the trustees of the occupational pension scheme or welfare trust for whom that firm is acting.

3. (3)

    [deleted]

Except as specified in this section, the provisions of COBS do not apply to an OPS firm in relation to its OPS activity.

COBS 3 (Client categorisation) applies to an OPS firm but only for the purpose of determining the client categorisation of an occupational pension scheme or welfare trust.

Where a provision of COBS specified in Table 1 applies, a reference to “investment service” is to be construed as a reference to the relevant OPS activity falling within the scope of COBS 18.8A.5R.

In COBS 2.3.1R, a reference to “designated investment business” is to be construed as a reference to any OPS activity that does not fall within the scope of COBS 18.8A.5R.

The provisions in COBS 2.3B (Inducements and research) apply to an OPS firm with the following modifications:

1. (1)

   COBS 2.3B.1R does not apply;

2. (2)

   for the guidance in COBS 2.3B.2G substitute the following guidance:

   “(1) An OPS firm is prohibited from receiving inducements (other than acceptable minor non-monetary benefits) in relation to OPS activity falling within the scope of COBS 18.8A.5R. Compliance with COBS 2.3B (Inducements and research) allows such a firm to receive third party research (relating to OPS activity falling within the scope of COBS 18.8A.5R) without breaching the prohibition in COBS 2.3A.16R.

   (2) An OPS firm may receive third party research in relation to OPS activity falling within the scope of COBS 18.8A.7R without subjecting that research to an assessment under the inducement rule in COBS 2.3.1R if the research is acquired in accordance with COBS 2.3B as such research will not constitute an inducement.”;

3. (3)

   the reference in COBS 2.3B.3R to “COBS 2.3A.5R” should be construed as a reference to COBS 2.3.1R (Rule on inducements);

4. (4)

   in relation to an OPS firm carrying out OPS activity falling within the scope of COBS 18.8A.5R, for the guidance in COBS 2.3B.22G substitute:

   “An OPS firm should also consider whether the goods or services it is looking to receive are acceptable minor non-monetary benefits under COBS 2.3A.19R or COBS 2.3A.22G, which can be received without breaching the inducement rule in COBS 2.3A.16R(2).”;

5. (5)

   COBS 2.3B.22G does not apply to an OPS firm that is carrying on OPS activity falling within the scope of COBS 18.8A.7R; and

6. (6)

   a reference to “ancillary services” or “investment services” in COBS 2.3B.3R, COBS 2.3B.4R and COBS 2.3B.5R is to be construed as a reference to, as applicable, either:

   1. (a)

      OPS activity that falls within the scope of COBS 18.8A.5R; or

   2. (b)

      OPS activity that falls within the scope of COBS 18.8A.7R.

In COBS 9.2.7G for that part which states,

“…The firm should also bear in mind the client’s best interests rule and any other obligation it may have under the rules relating to appropriateness when providing the different service (see COBS 10, Appropriateness (for non-advised services)) and COBS 10A, Appropriateness (for non-advised services) (MiFID provisions)).”,

substitute,

“The firm should bear in mind any other obligation it may have under the rules relating to the different service being requested by the client.”.

1. (1)

   If an OPS firm makes a personal recommendation to a per se professional client the firm is entitled to assume that the client is able financially to bear any related investment risks consistent with the client’s investment objectives for the purposes of COBS 9.2.2R(1)(b).

2. (2)

   If an OPS firm makes a personal recommendation or manages investments for a professional client it is entitled to assume that, in relation to the products, transactions and services for which the professional client is so classified, the client has the necessary level of experience and knowledge for the purposes of COBS 9.2.2R(1)(c).

The provisions in COBS 11.2A (Best execution – MiFID provisions) apply:

1. (1)

   to an OPS firm when it carries on OPS activity which is executing an order for a client in relation to a financial instrument; and

2. (2)

   as modified by COBS 18.8A.15R.

1. (1)

    The reference to the inducement requirements in COBS 11.2A.19R is to be construed as a reference to, as applicable, the inducement requirements applying to an OPS firm pursuant to either:

   1. (a)

       COBS 18.8A.5R; or

   2. (b)

       COBS 18.8A.7R.

2. (2)

    The requirement in COBS 11.2A.34R to make public for each class of financial instruments:

   1. (a)

       the top five investment firms used by an OPS firm to execute client orders; and

   2. (b)

       information on the quality of execution obtained,

   applies in accordance with (3).

3. (3)

    The information to be made public under (2) must:

   1. (a)

       be published for the first time no later than 30 April 2019 and then annually no later than 30 April of each subsequent year; and

   2. (b)

       relate to the calendar year immediately preceding the year in which the information is being made public.

4. (4)

    In COBS 11.2A, a reference to:

   1. (a)

       “investment service” is to be construed as a reference to any OPS activity falling within the scope of COBS 18.8A.13R;

   2. (b)

       “portfolio management” in COBS 11.2A.34R is to be construed as a reference to OPS activity falling within the scope of COBS 18.8A.13R and which involves the OPS firm placing orders with other entities for execution that result from decisions by the OPS firm to deal in financial instruments on behalf of its client; and

   3. (c)

       “reception and transmission of orders” is to be construed as a reference to OPS activity falling within the scope of COBS 18.8A.13R and which involves the transmission of client orders to other entities for execution.

1. (1)

    The COBS provisions in COBS 11.3 (Client order handling) apply to an OPS firm, as modified by this rule.

2. (2)

    [deleted]

3. (3)

    A rule in COBS 11.3 which applies only to a UCITS management company or a management company does not apply to an OPS firm.

4. (4)

    A reference to “financial instrument” is to be construed as a reference to a designated investment (other than a P2P agreement).

The provisions in COBS 11.7 (Personal account dealing), other than COBS 11.7.2R(1), apply to an OPS firm.

1. (1)

   An OPS firm must retain its records relating to suitability for a minimum period of three years.

2. (2)

   The requirement in (1) does not apply if the client does not proceed with the recommendation.

The rules in COBS 18 Annex 2 (Record keeping: client orders and transactions) apply to an OPS firm.

1. (1)

   The financial promotion rules in COBS apply to an ICVC, except that COBS 4.13 (UCITS) applies only to an ICVC that is a UCITS scheme.

2. (2)

   COBS 14.2 (Providing product information to clients) applies to an ICVC that is a UCITS scheme.

3. (3)

   COBS 2.2B (SRD requirements) applies to an ICVC that is a UCITS scheme without a separate management company.

COBS applies to an authorised professional firm, except that its application in relation to non-mainstream regulated activities and financial promotion is modified as set out below.

COBS does not apply to an authorised professional firm with respect to its non-mainstream regulated activities, except that:

1. (1)

   the fair, clear and not misleading rule applies;

2. (2)

   the financial promotion rules apply as modified below;

3. (3)

   the rules in the following parts of COBS which implemented the IDD apply in relation to insurance distribution activities:

   1. (a)

      COBS 2.1.1R, COBS 2.2A and COBS 2.3A (Conduct of business obligations);

   2. (b)

      COBS 4 (Communicating with clients, including financial promotions);

   3. (c)

      COBS 6.1ZA (Information about the firm and compensation information (MiFID and insurance distribution provisions));

   4. (d)

      COBS 7 (Insurance distribution);

   5. (e)

      COBS 8 (Client agreements);

   6. (f)

      COBS 9 (Suitability (including basic advice) (other than MiFID and insurance-based investment products provisions)) and COBS 9A (Suitability (MiFID and insurance-based investment products provisions));

   7. (g)

      COBS 10A (Appropriateness (for non-advised services));

   8. (h)

      COBS 14.2 (Providing product information to clients); and

   9. (i)

      COBS 16A.2 (General client reporting and record keeping requirements),

   but only if the designated professional body of the firm does not have rules approved by the FCA under section 332(5) of the Act that implemented articles 1(4), 17, 18, 19, 20, 23, 24(1) to (4) and (6), 29, and 30 of the IDD and that apply to the firm;

4. (4)

   COBS 8.1.3 R (Client agreements) applies, except for the requirement to provide information on conflicts of interest; and

5. (5)

   COBS 5.2 (E-commerce) applies.

The financial promotion rules do not apply to an authorised professional firm in relation to the communication of a financial promotion if:

1. (1)

   the firm's main business is the practice of its profession (see IPRU(INV) 2.1.2R(3));

2. (2)

   the financial promotion is made for the purposes of and incidental to the promotion or provision by the firm of its professional services or its non-mainstream regulated activities; and

3. (3)

   the financial promotion is not communicated on behalf of another person who would not be able lawfully to communicate the financial promotion if he were acting in the course of business;

however, a firm may use the exemptions for promoting unregulated collective investment schemes in COBS 4 (Communicating with clients, including financial promotions) if it wishes.

This section applies to an operator of an electronic system in relation to lending, but only in relation to a person becoming a lender under a P2P agreement.

This section does not apply in relation to a current account agreement where:

1. (1)

   there is a possibility that the account holder may be allowed to overdraw on the current account without a pre-arranged overdraft or to exceed a pre-arranged overdraft limit; and

2. (2)

   if the account holder did so, this would be a P2P agreement (overrunning).

In the remainder of this section:

1. (1)

   references to a P2P agreement include non-P2P agreements included in a P2P portfolio;

2. (2)

   unless the context otherwise requires, references to “lender” also include a prospective lender;

3. (3)

   a firm is treated as having determined the price of a P2P agreement in cases other than where the lender and the borrower have entered into a genuine negotiation to determine the price of that P2P agreement; and

4. (4)

   references to repayment refer to repayment of capital or payment of interest or other charges (excluding any charge for non-compliance with a P2P agreement).

Where a firm determines the price of a P2P agreement, it must undertake a reasonable assessment of the credit risk of the borrower before the P2P agreement is made.

A firm must base its credit risk assessment on sufficient information:

1. (1)

   of which it is aware at the time the credit risk assessment is carried out;

2. (2)

   obtained, where appropriate, from the borrower, and, where necessary, any other relevant sources of information.

The firm must consider the risk that the borrower will not make one or more repayments under the P2P agreement by the due date.

1. (1)

   The extent and scope of the credit risk assessment, and the steps that the firm must take to satisfy the requirement that the assessment is a reasonable one and based on sufficient information, is dependent upon, and proportionate to, the individual circumstances of each case.

2. (2)

   The firm must consider:

   1. (a)

      the types of information to use in the credit risk assessment;

   2. (b)

      the content and level of detail of the information to use;

   3. (c)

      whether the information in the firm’s possession is sufficient;

   4. (d)

      whether and to what extent to obtain additional information from the borrower;

   5. (e)

      whether and to what extent to obtain information from any other sources;

   6. (f)

      whether and to what extent to verify the accuracy of the information that is used; and

   7. (g)

      the degree of evaluation and analysis of the information that is used,

   having regard to the factors listed in (3) where applicable to the agreement.

3. (3)

   The factors to which the firm must have regard when complying with (2) and deciding what steps are needed to make the credit risk assessment a reasonable one include each of the following where applicable to the agreement:

   1. (a)

      the type of credit;

   2. (b)

      the amount of the credit or the credit limit;

   3. (c)

      the duration (or likely duration) of the credit;

   4. (d)

      the frequency of the repayments;

   5. (e)

      the amount of the repayments;

   6. (f)

      the annual percentage rate of charge; and

   7. (g)

      any other costs, including any charge for non-compliance with the agreement, which will or may be payable by or on behalf of the borrower in connection with the agreement.

A firm must:

1. (1)

   establish, implement and maintain clear and effective policies and procedures:

   1. (a)

      to enable it to carry out credit risk assessments; and

   2. (b)

      setting out the principal factors it will take into account in carrying out credit risk assessments;

2. (2)

   set out in writing the policies and procedures in (1), and (other than in the case of a sole trader) have them approved by its governing body or senior personnel;

3. (3)

   assess and periodically review:

   1. (a)

      the effectiveness of the policies and procedures in (1); and

   2. (b)

      the firm’s compliance with those policies and procedures and with its obligations under COBS 18.12.5R to 18.12.8R;

4. (4)

   following the review in (3), take appropriate measures to address any deficiencies in the policies and procedures or in the firm’s compliance with its obligations;

5. (5)

   maintain a record of each transaction where a P2P agreement is entered into sufficient to demonstrate that:

   1. (a)

      a credit risk assessment was carried out where required; and

   2. (b)

      the credit risk assessment was reasonable and was undertaken in accordance with COBS 18.12.5R to 18.12.8R,

   and in each case to enable the FCA to monitor the firm’s compliance with its obligations under COBS 18.12.5R to 18.12.8R; and

6. (6)

   (other than in the case of a sole trader) establish, implement and maintain robust governance arrangements and internal control mechanisms designed to ensure the firm’s compliance with (1) to (5).

Where a firm determines the price of a P2P agreement it must ensure that the price is fair and appropriate.

To determine a fair and appropriate price for a P2P agreement the firm must at least ensure:

1. (1)

   the price is reflective of the risk profile of the loan; and

2. (2)

   the firm has taken into account:

   1. (a)

      the time value of money; and

   2. (b)

      the credit spread of the P2P agreement.

Where a firm selects which P2P agreements to facilitate for a lender, it must facilitate only those P2P agreements which are in line with the disclosures made pursuant to COBS 18.12.27R.

Where a firm is assembling or managing a P2P portfolio, it must ensure that it includes in that P2P portfolio only those P2P agreements it has determined with reasonable certainty will enable the lender to achieve the target rate.

Where a firm determines the price of a P2P agreement it must review the valuation of each P2P agreement in at least the following circumstances:

1. (1)

   when the P2P agreement is originated;

2. (2)

   where the firm considers that the borrower is unlikely to pay its obligations under the P2P agreement in full, without the firm enforcing any relevant security interest or taking other steps with analogous effect;

3. (3)

   following a default; and

4. (4)

   where the firm is facilitating an exit for a lender before the maturity date of the P2P agreement.

Where a firm that determines the price of P2P agreements is facilitating an exit for a lender before the maturity date of a P2P agreement, the firm must ensure that the price offered for exiting the P2P agreement is fair and appropriate.

1. (1)

   Where any of COBS 18.12.11R to 18.12.17R apply, a firm must have and use a risk management framework that is designed to achieve compliance with those rules.

2. (2)

   The firm’s risk management framework must at least:

   1. (a)

      be appropriate to the nature, scale and complexity of its business;

   2. (b)

      take into account any credit risk assessment, credit-worthiness assessment or assessment of affordability under MCOB;

   3. (c)

      categorise P2P agreements by their risk, taking into account the probability of default and the loss given default; and

   4. (d)

      set out the circumstances in which the firm will review the valuation of each P2P agreement.

3. (3)

   The firm must set out in writing the risk management framework, and have it approved by its governing body or senior personnel.

A firm with a risk management framework must:

1. (1)

   assess, monitor and periodically review the adequacy and effectiveness of the risk management framework, including by assessing outcomes against expectations;

2. (2)

   pursuant to (1), take appropriate measures to address any deficiencies in the risk management framework;

3. (3)

   maintain a record of each transaction where it has used the risk management framework to facilitate a P2P agreement sufficient to demonstrate that:

   1. (a)

      the price of the P2P agreement was fair and appropriate in line with the risk management framework;

   2. (b)

      where the firm selected which P2P agreements to facilitate for a lender, that its selection was in line with the risk management framework;

   3. (c)

      any inclusion in a P2P portfolio was in line with the risk management framework,

   and in each case to enable the FCA to monitor the firm’s compliance with its obligations regarding the risk management framework;

4. (4)

   establish, implement and maintain robust governance arrangements and internal control mechanisms designed to ensure the firm’s compliance with (1) to (3); and

5. (5)

   allocate to an approved person overall responsibility within the firm for the establishment and maintenance of an effective risk management framework and record that allocation.

Where a firm determines the price of P2P agreements in any financial year of the firm, it must publish an outcomes statement within four months of the end of each financial year.

A firm must ensure that each outcomes statement remains publicly available for at least 10 years from publication.

An outcomes statement must include, as applicable, for the financial year of the firm:

1. (1)

   the expected and actual default rate of all P2P agreements the firm has facilitated by risk category, by reference to the risk categories set out in the risk management framework, in line with the requirements in COBS 4.6 on past and future performance;

2. (2)

   a summary of the assumptions used in determining expected future default rates; and

3. (3)

   where the firm offered a target rate, the actual return achieved.

A firm must provide to a lender a description of its role in facilitating P2P agreements. That description must include:

1. (1)

   the nature and extent of due diligence the firm undertakes in respect of borrowers;

2. (2)

   a description of how loan risk is assessed, including a description of the criteria that must be met by the borrower before the firm considers the borrower eligible for a P2P agreement;

3. (3)

   whether the firm will play a role in determining the price of a P2P agreement and, if so, what role;

4. (4)

   where lenders do not have the choice to enter into specific P2P agreements, what role the firm will play in selecting P2P agreements for the lender;

5. (5)

   where a firm offers a P2P portfolio to lenders, what role it will play in assembling or managing that P2P portfolio;

6. (6)

   an explanation of the firm’s procedure for dealing with a loan in late payment or default;

7. (7)

   an explanation of how any tax liability for lenders arising from investment in P2P agreements will be calculated;

8. (8)

   whether the firm will play a role in facilitating a secondary market in P2P agreements and, if so, what role, including:

   1. (a)

      the procedure for a lender to access their money before the term of the P2P agreement has expired and the risk to their investment of doing so; and

   2. (b)

      whether the firm displays P2P agreements that lenders wish to exit and that other lenders may choose to enter into; or

   3. (c)

      whether the firm decides if the P2P agreement should be transferred to another lender without involving either lender in that decision.

A firm must provide confirmation to a lender that there is no recourse to the Financial Services Compensation Scheme.

Where a lender has the choice to enter into specific P2P agreements, a firm must provide the lender with at least the following information about each P2P agreement:

1. (1)

   where the firm determines the price of P2P agreements, the price of the P2P agreement;

2. (2)

   where not provided under (1), the annual percentage rate that will be paid by the borrower in respect of that P2P agreement, where applicable to that agreement;

3. (3)

   when the P2P agreement is due to mature;

4. (4)

   the frequency of the repayments to be made by the borrower;

5. (5)

   the amounts of the repayments to be made by the borrower;

6. (6)

   the total amount payable by the borrower;

7. (7)

   a fair description of the likely actual return, taking into account fees, default rates and taxation;

8. (8)

   where the firm determines the price of P2P agreements, details of the credit risk assessment, credit-worthiness assessment or assessment of affordability under MCOB carried out;

9. (9)

   whether the P2P agreement is backed by an asset (for example, secured against property developments) and if so, details of that asset;

10. (10)

    fees to be paid by the borrower or the lender, including any deduction from the interest to be paid by the borrower;

11. (11)

    where the firm determines the price of P2P agreements, the risk categorisation of that P2P agreement and an explanation of that risk categorisation, by reference to the risk categories set out in the risk management framework; and

12. (12)

    where any of the terms in respect of which information must be provided under sub-paragraphs (1) to (7) is set by auction, a description of the auction process and of how those terms will be determined.