Conduct of Business (COBS)

• Topic 01

  Conduct of Business (COBS)

  42 questions

A few questions from this unit, with the answer and a full explanation. The complete bank is available when you start practising.

1. What are the three categories of client under COBS 3?

   • A
     Retail client, professional client, and eligible counterparty (ECP)
     Correct answer
   • B
     Consumer, business client, and institutional client
   • C
     Advised client, non-advised client, and professional client
   • D
     Retail client, wholesale client, and sophisticated investor
   Explanation

   COBS 3 divides clients into three categories: (1) Retail client — any client who does not qualify as professional or eligible counterparty; this is the default highest-protection category; (2) Professional client — either per se professional clients (e.g. banks, investment firms, large corporates) or elective professionals (retail clients who have opted up); (3) Eligible counterparty (ECP) — investment firms, banks, governments, and central banks dealing for their own account; this category receives minimum protections. The categories determine which COBS protections apply.

2. A firm executes orders for retail clients but has not reviewed its best execution policy for two years. What is the regulatory consequence?

   • A
     The firm is in breach of COBS 11.2, which requires at minimum an annual review; the FCA could take supervisory or enforcement action and the firm would need to conduct an immediate review
     Correct answer
   • B
     There is no specific consequence unless a client complains about execution quality
   • C
     The firm must suspend execution services until the policy review is completed
   • D
     Failure to review the policy within two years triggers an automatic referral to the FOS
   Explanation

   COBS 11.2 requires firms executing client orders to review their best execution policy at least annually. Failure to conduct this annual review means the firm is in breach of the COBS rules. The FCA could identify this deficiency during supervision and could take action ranging from a requirement to remediate to formal enforcement, depending on whether client harm resulted. The firm should conduct an immediate review and assess whether its current policy remains effective.

3. An adviser is concerned that the suitability rules from COBS might apply to a mortgage they are arranging for a client. Are they correct?

   • A
     Yes — COBS suitability rules apply to all financial products recommended by FCA-authorised advisers
   • B
     No — mortgage conduct of business is governed by MCOB, not COBS; COBS does not apply to regulated mortgage contracts
     Correct answer
   • C
     Yes, but only for buy-to-let mortgages which are treated as investment products under COBS
   • D
     No — mortgage suitability is not regulated at all; only investment suitability is subject to FCA rules
   Explanation

   COBS specifically excludes mortgages from its scope. Regulated mortgage contracts are covered by MCOB (Mortgage and Home Finance: Conduct of Business Sourcebook), which has its own tailored rules for suitability, disclosure, and conduct. This is an important scope distinction — a firm that applies COBS rules to mortgage advice (or vice versa) would be applying the wrong regulatory framework. The sourcebooks are separate and parallel, each designed for its specific product type.