Regulated Activities and the Conduct of Business Rules
What this domain tests
The boundary of authorisation and the day-to-day rules for dealing with clients: the Regulated Activities Order, client categorisation, financial promotions, suitability, best execution, inducements, complaints and the Treating Customers Fairly outcomes.
Regulated activities
Under FSMA s19, carrying on a regulated activity by way of business without authorisation is a criminal offence. The RAO 2001 requires two limbs: a specified activity (dealing, arranging deals, managing investments, advising on investments, safekeeping and administration, insurance distribution, home finance, accepting deposits) in relation to a specified investment. Exclusions exist for overseas persons, professional firms (the designated professional body route), trustees, employee share schemes, media and sale of goods. A Part 4A permission sets out which activities a firm may carry on; an appointed representative operates under its principal's permission, and the principal is responsible for it.
Client categorisation and core COBS rules
COBS 3 divides clients into retail, professional (per se or elective) and eligible counterparty; protections fall as you move up.
- Financial promotions must be fair, clear and not misleading (s21 FSMA; COBS 4). Unauthorised firms need FCA permission to approve promotions for others.
- Suitability (COBS 9) applies to advised and discretionary business; appropriateness (COBS 10) applies to non-advised sales of complex products.
- Best execution (COBS 11): all reasonable steps to obtain the best overall result.
- Inducements (COBS 2.3): must not impair the duty to act in the client's best interests, must be disclosed, and must enhance the service.
- TCF six outcomes: confidence in the market; products designed for identified needs; clear information before, during and after sale; suitable advice; performance consistent with expectations; no unreasonable post-sale barriers.
Complaints
DISP requires a final response within eight weeks; the client then has six months to go to the Financial Ombudsman Service, whose award limit is £430,000 (from 1 April 2024).
Worked example
An adviser recommends a fund paying a higher commission than a cheaper equivalent. Two breaches follow: the inducement conflicts with acting in the client's best interests (COBS 2.3), and the recommendation is not suitable because cost was not properly considered (COBS 9). Disclosure of the commission does not cure it - disclosure is the last resort, not a substitute for avoiding the conflict.
Traps that cost marks
- Applying suitability to an execution-only sale; the correct test is appropriateness.
- Thinking appointed representatives are separately authorised.
- Satisfying only one limb of the RAO test.
- Believing disclosure alone makes an inducement acceptable.