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FSA/PN109/2006
31 October 2006

The Financial Services Authority (FSA) today published its proposals for a radical simplification of the rules that firms must follow in carrying out investment business with customers.

The reform of the Conduct Of Business (COB) rules is a flagship project for the FSA in the move towards more principles-based regulation and away from detailed prescriptive rules. The FSA is aiming to remove around half the content of the old rulebook with the end result being a new conduct of business rule book - NEWCOB - which will be substantially shorter. This is being carried forward at the same time as implementing the relevant provisions of the Markets in Financial Instruments Directive (MiFID).

The FSA's Conduct of Business rules for investment business have been in operation since the FSA took on its regulatory responsibilities in December 2001. The rules cover, among other things financial promotions, how firms provide information and advice to clients, non-advised services, and dealing in and managing investments.

NEWCOB is strongly in favour of principles and high-level rules, except where detailed provisions are either required by European Union Directives, or are the only practicable way to achieve a desired regulatory outcome.

FSA Director of Retail Policy Dan Waters said:

"The move toward principles-based regulation means focusing on the outcomes that really matter rather than on procedural box-ticking. It also gives firms the flexibility to achieve those outcomes in the context of their particular business models. It is an approach that fits with the emphasis we place on senior management responsibility, a core FSA principle of good regulation.

"NEWCOB’s key messages will be easier to understand and so easier to comply with, thereby helping firms to treat their customers fairly in line with one of the FSA’s core principles. But more principles-based regulation will not involve relaxing the standards of behaviour we expect."

Alongside the intention to simplify COB on more principles-based lines, a significant driver for change is MiFID, which affects some UK investment firms. But NEWCOB will apply to all regulated firms and business coming under the FSA Conduct of Business regime, not just those firms and types of business which are covered by MiFID. In some areas, for example in respect of consumer-facing requirements, there may be benefits to consumers and the industry in having a consistent regime. We are therefore consulting on extending some MiFID standards to non-MiFID firms and business.

NEWCOB, including MIFID and non-MiFID driven changes, will replace COB from 1 November 2007, the same time as MiFID comes into general effect across the UK and the European Union.

Notes for editors

1. Details of the proposed NEWCOB are set out in CP06/19: 'Reforming Conduct of Business Regulation' and CP06/20: 'Financial promotion and other communications'. CP 06/19 also includes proposed amendments to other (non-COB) parts of the FSA Handbook, notably complaints handling, which are necessary for MiFID implementation. These papers represent the final parts of FSA consultation for implementation of MiFID. Earlier CPs published this year were CPs 06/9 'Organisational systems and controls - Common platform for firms', 06/14 'Implementing MiFID for Firms and Markets' and 06/15 'Reforming the Approved Persons Regime'.
2. The FSA's eleven Principles for Businesses sit at the head of the FSA Handbook of Rules and Guidance. They are a general statement of the fundamental obligations of firms under the regulation system. Principle 6 states that: "A firm must pay due regard to the interests of its customers and treat them fairly" while Principle 7 states that: "A firm must pay due regard to the information needs of its clients and communicate information to them in a way which is clear, fair and not misleading" – this covers Financial Promotions as well as other communications.
3. The FSA regulates the financial services industry and has four objectives under FSMA: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; and fighting financial crime.
4. The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal and improve its business capability and effectiveness.