How-to guide: Understanding the rules of communications with clients, including financial promotions (UK)

Introduction

This guide will assist in-house counsel, private practice lawyers, and risk and compliance teams understand the Financial Conduct Authority’s (FCA) rules detailed in chapter 4 of the FCA’s Conduct of Business sourcebook (COBS 4). These cover client communications, including financial promotions made by authorised firms to clients.

This guide does not cover the financial promotion and other communication rules in the FCA sourcebooks relating to general insurance, consumer credit, banking, mortgage or home finance business, claims management, funeral plan contracts, or other specialist regimes.

This guide covers:

Scope of application
Form and content
The rules for presenting investment performance
Direct offer financial promotions
Cold calls and promotions with overseas elements
Adequate monitoring and oversight

This guide can be used in conjunction with the following How-to guides: Overview of the conduct of business rules – scope and application, Overview of the financial promotion regimeand Financial promotions and social media guidance, Checklist: Key checks for firms to consider when approving financial promotions, and Quick view: The financial promotion regime and marketing of cryptoassets.

Section 1 – Scope of application

1.1 Application of COBS 4

COBS 4 applies to firms authorised under Part 4A of the Financial Services and Markets Act 2000 (as amended) (FSMA) when a firm communicates with clients or communicates or approves certain financial promotions. COBS 4 require firms to assess the information needs of their customers and communicate in a way which is fair, clear and not misleading.

1.1.1 Scope

The general application provisions are set out in COBS 4.1 setting out how and in what way the rules apply according to the nature or type of communication (or financial promotion), the type of business the communication relates to (eg, is it MiFID or non-MiFID business), and to the category of client targeted eg, retail or professional (see COBS 3 for client categorisation).

Separate rules apply to financial promotions and communications of general insurance policies, banking, mortgages and home finance, claims management, consumer credit and funeral plan contracts and these are not covered in this guide. Firms communicating or approving financial promotions in these sectors should be aware of the rules in the sourcebooks that are relevant to their business. If in doubt seek specialist legal advice.

In addition, COBS 4 does not apply to:

a promotion of an unregulated collective investment scheme that would breach section 238(1) FSMA if made by an authorised person (firms may not communicate or approve such promotions);
the form or content of a key investor information document, an EEA key investor information document or a NURS-KII document (see COBS 4.1.7AR and COBS 4.1.7BG).

Generally, the rules apply where a firm:

communicates with clients in relation to its designated investment business;
communicates with a client in relation to its MiFID, equivalent third country or optional exemption business (see section 2.3 below); or
communicates or approves certain financial promotions.

COBS 4.1.7CR extends the application of this chapter to registered cryptoasset exchanges and custodian wallet providers not authorised under FSMA but registered by the FCA under the UK’s Money Laundering Regulations 2017. See Quick view: The financial promotion regime and marketing of cryptoassets.

The application of COBS 4 rules to deposits or long-term care insurance contracts is not considered in this guide.

1.1.2 Financial promotion rules

Broadly, the financial promotions rules in COBS 4 apply in relation to:

financial promotions communicated to persons inside the UK;
to cold calls made from the UK to a person outside the UK (unless it is made from a place outside the UK and for the purposes of a business carried on solely outside the UK); and
approval of a financial promotion for communication to a person inside the UK.

See COBS 4.1.8R (2) and COBS 4.1.10G. See also How-to guide: Overview of the financial promotion regime which provides details of the financial promotion restriction in section 21 FSMA.

Other regulations and guidelines may apply to advertisements in the UK which are outside the remit of financial regulation but may be caught by another regulator (eg, Advertising Standards Authority), and codes for broadcast and non-broadcast promotions (BCAP and CAP respectively).

Authorised firms should also be aware of the requirements underlined in the FCA Principles for Businesses, namely Principle 6 (Customers’ interests, ie, treating customers fairly ), 7 (communications with clients), and under the Consumer Duty – see Principle 12, PRIN 2A and FG22/5 for further information.

1.2 Excluded communications

Excluded communications are financial promotions which are outside the remit of some of the COBS 4 rules and include the following:

FPO exemptions communicated by an unauthorised person, or which originate outside the UK and are not capable of having an effect in the UK;
a financial promotion from outside the UK that is exempt under articles 30 to 33 of the FPO (in relation to overseas communications) if the office from which the communication was made was a separate unauthorised person. Note however COBS 4.9 has specific rules on overseas promotions (see section 5.3 below);
a financial promotion subject to or exempted from the Takeover Code;
a personal quotation or illustration forms (although other COBS provisions may apply (eg, requirement to provide suitable advice));
a ‘one-off’ financial promotion (that is not a cold call) exempt in part under the conditions of article 28(3) FPO; or
a communication that is exempted by the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001.

Section 2 – Form and content

COBS 4.2-4.4 sets out the detailed rules that apply to the form and content of communications and promotions.

2.1 The fair, clear and not misleading rule

All firms must ensure that communications and financial promotions are fair, clear and not misleading (taking into account the nature of the client) (COBS 4.2.1R). This is to ensure that clients understand the risks before they invest so that they are protected and not disadvantaged in their decision-making.

This rule applies to:

a communication by a firm to a customer in relation to designated investment business which is not MiFID business, equivalent third country or optional exemption business, other than a third-party prospectus;
a communication to an eligible counterparty that is in relation to MiFID or equivalent third-country business (other than a third-party prospectus), or insurance distribution;
a communication by the firm to a customer in relation to MiFID, equivalent third country or optional exemption business (other than a third-party prospectus); and
a financial promotion communicated by the firm which is not an excluded communication, a non-retail communication, or third-party prospectus;
a financial promotion approved by a firm.

Application of the fair, clear and not misleading rule should be appropriate and proportionate and firms should take the following into account:

the means of communication (ie, the marketing method (eg, by phone or social media));
the information covered in the communication (the type of products and/or services and their complexity);
the nature of the client and client business (ie, consider the client category and application of the rule) (COBS 4.2.2G).

Finalised non-handbook guidance on Cryptoasset Financial Promotions (FG23/3) (page 9) notes that firms should consider both the promotion’s substance and presentation, and sets out several factors that could be used when making the assessment.

2.1.1 Rules of communication and promotion

Specific guidance on the issues that firms should consider in relation to financial promotions is set out in COBS 4.2.4G and provides that promotions must:

disclose risk and make it clear if a client’s capital is at risk;
be transparent and give a balanced impression of the short- and long-term prospects of the investment;
clearly explain complex charging structures (such as performance fees) or where the investment or service pays the firm more than one remuneration element;
clarify what is regulated by the FCA, Prudential Regulation Authority (PRA) or both, and what is not;
clearly state if an offered product is not produced by the firm (eg, life insurance policy); and
only describe a feature of the product as guaranteed, protected or secure if that is a fair, clear and not misleading description of it, and the necessary information is presented with sufficient clarity and prominence (see COBS 4.2.5G).

2.2 Clearly identifiable as such

Firms must ensure financial promotions are clearly identifiable to clients as promotional content (COBS 4.3.1R(1)). It may be obvious on the face of it, or where it is not, the promotional nature of the material should be apparent, and firms can label the content as promotional material for the avoidance of doubt.

If the financial promotion relates to a firm’s MiFID, equivalent third country or optional exemption business, this rule does not apply to the extent the financial promotion is a third-party prospectus (COBS 4.3.1R(2)).

If the financial promotion relates to business that is not MiFID, or equivalent third country business, the rule generally applies to communicating or approving the financial promotion but does not apply to excluded communications, prospectus advertisements (to which article 22 of the Prospectus Regulation applies), image advertising and non-retail communications as set out in COBS 4.3.1R(3). On use of image advertising, see FG24/1 – Finalised guidance on financial promotions on social media and How-to guide: Financial promotions and social media guidance.

2.3 Compensation information

Firms must limit advertising references to customer compensation schemes to factual references to the scheme eg, UK Financial Services Compensation Scheme (FSCS). See COBS 4.4.1R.

Particular rules apply to issuers of electronic money to ensure that before they issue electronic money to a person, they communicate to that person on paper or in another durable medium that the compensation scheme does not apply to claims made in connection with issuing electronic money (COBS 4.4.3R).

2.4 Communicating with retail clients

The main COBS provisions in relation to retail client communications (covering information about a firm’s designated investment business and communication or approval of promotions) are set out in COBS 4.5. Separate provisions at COBS 4.5A apply when a firm communicates in relation to MiFID, equivalent third country or optional exemption business.

2.4.1 General rules

COBS 4.5.2R explains the general rules of communicating with retail clients in relation to business which is not MiFID business, equivalent third country or optional exemption business and COBS 4.5A.3UK sets out the general requirements for investment firms for MiFID, equivalent third country or optional exemption business. The provisions in COBS 4.5A extend to communications with professional clients and retail clients.

Generally, firms must ensure that information provided:

includes the firm’s name (and where the promotion was approved for communication, it also needs to include the date the financial promotion was approved (see COBS 4.5.2R(1));
is accurate and transparently discloses risks;
is likely to be understood by the average potential client to whom it is directed or who is likely to receive it – in other words, written in ‘plain English’;
does not disguise, diminish or obscure important items, statements or warnings;
represents risks in the same font and layout consistent with the rest of the information;
is consistently presented in the same language as other information and marketing materials that are provided to the client, unless the client has agreed to receive information in more than one language; and
is up to date and relevant to the means of communication used.

See also financial promotions on social media FG24/1 which provides helpful guidance on visibility and prominence of risk warnings more generally. Firms should tailor communications to their target audience, and COBS 4.5.4G provides practical guidance for firms.

2.4.2 Comparative information, tax treatment and consistent financial promotions

Comparative information

Where information presents comparisons (eg, about types of business or investments), the firm approving the promotion must ensure that it is meaningful and presented in a fair and balanced way (see COBS 4.5.6R and COBS 4.5A.7UK (which applies for MiFID business only)). This would include, for example, where a retail investment product is compared to a bank savings account. The promotion should contain enough information to enable prospective investors to make an informed decision. COBS 4.5A.7UK stipulates additional requirements such that the sources used for the information comparison must be specified and key facts and assumptions used must be included.

Tax treatment

Where any information communicated refers to a particular tax treatment, the promotion must state prominently that the tax treatment depends on the individual circumstances of each client and may be subject to future change (COBS 4.5.7R(1) and COBS 4.5A.8R).

Consistency

Firms must ensure that the content of the information contained in financial promotions aligns with (ie, does not contradict) any wider information the firm provides to retail clients:

for firms carrying on designated investment business – see COBS 4.5.8R(2);
for firms carrying on MiFID, optional exemption business or equivalent third country business – see COBS 4.5A.9.

Section 3 – The rules for presenting investment performance

The rules which firms must comply with when communicating or approving financial promotions include information about investment performance. The FCA takes the view that past performance information is not a reliable indicator of future returns, as figures can be manipulated, and there is a risk that retail clients may place undue reliance upon it. Firms should also have regard to the rules when communicating information about future performance. The rules on past, simulated past and future performance are set out in COBS 4.5A for MiFID and COBS 4.6 for non-MiFID business.

3.1 Past, simulated past and future performance (non-MiFID provisions)

3.1.1 Past performance

Where a financial promotion refers to past performance, it must include an adequate risk warning that past performance is not a reliable indicator of future results. Where a firm provides financial promotions to retail clients that contain an indication of the past performance of the firm, they must ensure that the information meets the following requirements (COBS 4.6.2R):

it is not the most prominent feature of the communication;
it is appropriate and covers at least the immediately preceding five years (or the whole of the product life if less) and must be based on complete 12-month periods;
it includes and must clearly state the reference period and source of information;
it contains a prominent risk warning that the figures refer to the past and that past performance is not a reliable indicator of future results, together with a warning that currency fluctuations may affect returns;
if the information is based on gross performance, the effect of commissions, fees or other charges must be disclosed; and
simulated past performance figures are allowed only if there is an actual past performance of one or more investments or financial indices which are the same as, substantially the same as, or underlie, the investment concerned and the actual past performance complies with the rules in COBS 4.6.6R.

3.1.2 Future performance

Where the information includes an indication of future performance, firms should ensure that information is based on reasonable assumptions and that projections are supported by up-to-date data. The information should be based on performance scenarios in different market conditions (both negative and positive) and reflect the nature and risks of the specific types of investments included. The future performance rule in COBS 4.6.7R is limited to future performance of, for example, relevant business or investments contained in financial promotions that relate to a financial instrument (or an index that relates exclusively to financial instruments) or a structured deposit. Firms should not provide information if they are unable to obtain the objective data needed to comply with the rule.

3.2 Past, simulated past and future performance (MiFID provisions)

COBS 4.5A covers past, simulated past and future performance requirements for MiFID, equivalent third country or optional exemption business. The provisions are largely the same as those noted at section 3.1 however the provisions in COBS 4.5A do not apply to third party prospectuses or image advertising. See also section 2.3.1 in relation to scope.

Section 4 – Direct offer financial promotions

The rules regulating direct offer financial promotions (DOFP) which relate to investment products (both relating to MiFID and non-MiFID business) are set out in COBS 4.7, and the types of communication that are not subject to DOFP rules are set out at COBS 4.7.2R.

DOFP are non-advised sales which specify the manner of response (eg, promotions with a ‘buy now’ button) or include a form by which a response may be made or accepted (eg, an application form). These types of investments are deemed risky, as they not only promote investments, but they also enable customers to respond within the promotion. Whether or not a promotion will amount to a DOFP will depend on the particular circumstances; however, the FCA view is that anything that promotes an investment and enables investors to put their money in that investment is likely to qualify.

In broad terms:

COBS 4.7.1AUK – COBS 4.7.1DG is relevant to a firm communicating DOFP in relation to its MiFID, equivalent third country or optional exemption business – this incorporates article 46(6) of the MiFID Org Regulation, and includes information requirements that are set out in COBS 6.1ZA and COBS 14.3A. Essentially this requires firms to detail prescribed information relevant to promotions including information about the firm and services, safeguarding investments and client money, financial instruments, their nature, risks, costs and associated charges.
COBS 4.7.1R-4.7.5Ais relevant to other firms communicating DOFP (that does not relate to the business noted in the bullet point above), and the rules have very similar guidance at COBS 4.7.4G which gives examples of supporting documentation that firms could provide to clients.

Additional requirements apply to promotions of warrants and derivatives (COBS 4.7.6R) and in particular restricted and non-mass market investments (COBS 4.12A and 4.12B), which are deemed ‘higher risk products’. We do not consider these in further detail in this guide; however, see PS 22/10: Strengthening our financial promotion rules for high-risk investments and firms approving financial promotions.

Section 5 – Cold calls and promotions with overseas elements

5.1 Cold calls

Cold calls are unsolicited communications made, for example, in the course of face-to-face visits or telephone-based meetings, where no FPO exemption applies, and where the client has not requested the information. The rules in COBS 4.8 aim to protect retail consumers.

In general, a firm must not make a cold call unless:

there is an existing relationship between the recipient and the firm such that the recipient envisages the call – the inclusion of this exception enables legitimate financial services firms to market to their existing customer base; or
it relates to a generally marketable packaged product which is not a higher volatility fund or a life policy with an actual or potential link to a higher volatility fund; or
it relates to a regulated activity carried out by either an authorised or exempt person and the only investments likely to be involved are readily realisable securities (excluding warrants) or generally marketable non-geared packaged products COBS 4.8.2R(3)).

5.2 Unwritten promotions

A firm must not communicate a non-written financial promotion to a person (whether or not it has been solicited) outside the firm’s premises unless the person communicating it:

only does so at an appropriate time of day;
identifies themselves and the firm at the start of the conversation and explains clearly the reason for their communication;
checks that the client wants to continue with the conversation and terminates it upon client request; and
if an appointment is arranged, a contact point is given.

See COBS 4.8.3R(1)-(3).

5.3 Promotions with overseas elements

COBS 4.9 contains provisions that apply to financial promotions with an overseas element subject to the exceptions set out in COBS 4.9.1R.

COBS 4.9.3R provides that the communication and approval of financial promotions relating to a particular investment or business of an overseas person can only be made if:

the financial promotion makes it clear which firm has approved or communicated it;
the promotion explains that the rules made by the FCA or the PRA under FSMA for the protection of retail clients do not apply (where relevant);
it explains the extent and level to which the FSCS will be available (where relevant);
the promotion explains the protections or compensation available under another system of regulation, if the firm communicating the promotion wishes to include this;
the firm has taken reasonable steps to satisfy itself that the overseas person will deal with retail clients in the UK in an honest and reliable way.

Section 6 – Adequate monitoring and oversight

6.1 Systems and controls

Firms that communicate or approve financial promotions should have systems and controls, policies and procedures in place to comply with the financial promotion rules in COBS 4. Where a firm approves a financial promotion, it is required to confirm that the promotion complies with the financial promotion rules. A firm is permitted to rely on another firm’s confirmation of compliance, subject to satisfying certain conditions (COBS 4.10.10R). This, however, does not apply in respect of MiFID, equivalent third country or optional exemption business.

Importantly, firms are prohibited from approving a financial promotion to be made in the course of a personal visit, telephone conversation or other interactive dialogue (COBS 4.10.4R).

Where necessary, promotions that are not meeting the requirements may need to be withdrawn. Firms making claims about the sustainability characteristics of their products and services will need to ensure those sustainability-related claims are fair, clear and not misleading, and proportionate to the sustainability profile of the product and service. The anti-greenwashing rule came into force on 31 May 2024. This is part of a package of measures finalised in November 2023. For background, see FG24/3 – Finalised non-handbook guidance on the Anti-Greenwashing Rule and PS23/16on Sustainability Disclosure Requirements (SDR) and investment labels.

Authorised firms now need to seek FCA permission to approve financial promotions of unauthorised firms (with some exemptions) and reporting and notification requirements apply. See How-to guide: Overview of the financial promotion regime, Checklist: Key checks for firms to consider when approving financial promotions. More generally, see also PS23/13 Introducing a gateway for firms who approve financial promotions and SUP 6A guidance on applying for approver permission.

6.2 Record-keeping

Records of financial promotions (communicated or approved) should be kept (COBS 4.11.1R(1))and COBS Sch 1. The retention periods vary depending on the type of promotion and are respectively three, five or six years, or indefinitely.

Additional resources

PS22/10 – Strengthening our financial promotion rules for high-risk investments and frims approving financial promotions
FG23/3 – Finalised non-handbook guidance on Cryptoasset Financial promotions
PS23/13 – Introducing a gateway for firms who approve financial promotions
PS23/16 – Sustainability Disclosure Requirements (SDR) and investment labels
FG24/1 – Finalised guidance on financial promotions on social media
FG24/3 – Finalised non-handbook guidance on the Anti-Greenwashing Rule
FCA’s Multi-firm review on financial promotions for high-risk investments

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Financial regulation