10.5 Regulated Advice Standards and Due Diligence on Products
Key Takeaways
FSMA section 19 is the general prohibition: a person carrying on a regulated activity in the UK must be authorised or exempt. Section 23 sets out the offence for contravention; the RAO defines activities such as advising on investments in article 53.
COBS 9 and COBS 9A have different suitability scopes. Pension-transfer, conversion and opt-out safeguards sit in COBS 19.1 and 19.1A; current COBS 9B governs targeted support, not pension conversion.
Abridged pension-transfer advice can conclude that transfer is unsuitable or that full advice is needed to decide. It cannot produce a positive transfer recommendation.
PROD 3 concerns product governance for financial instruments and structured deposits; PROD 4 concerns insurance products. Target-market review complements, but does not replace, individual suitability where that duty applies.
A non-advised transaction may still involve regulated arranging or dealing and require permission. Suitability-report and Ombudsman eligibility rules depend on the actual activity, client and complaint, not an advised/non-advised label.
10.5 Regulated Advice Standards and Product Due Diligence
Locate the activity before applying a conduct rule
FSMA section 22 links regulated activities to the Regulated Activities Order (RAO). Article 53 of the RAO specifies advising on investments: advice on the merits of investment decisions such as buying, selling, subscribing for or underwriting a particular investment, given to an investor or potential investor (or an agent) in the specified circumstances. The precise activity, exclusions and any applicable Handbook definition must be checked; regulated advice is not invariably identical to a Handbook personal recommendation. A factual product explanation or generic market information is different from advice on the merits of a particular transaction. Mortgage advice has its own RAO activity and conduct rules.
FSMA section 19 is the general prohibition: a person must not carry on a regulated activity in the UK unless authorised or exempt. Section 23 provides for an offence for contravening that prohibition. Agreements made through a contravention may be unenforceable against the other party under sections 26–28, subject to their terms and the court's powers; neither automatic recovery of every loss nor automatic voidness should be assumed. A firm must check its actual permissions and any exemption before advising, arranging or dealing.
| Interaction | Perimeter and conduct question |
|---|---|
| Personal recommendation | Identify the regulated activity and applicable suitability rule; record why the recommendation fits the client. |
| Information or execution without recommendation | Check other activities such as arranging or dealing, permission and disclosure duties; the absence of advice does not remove every rule. |
| Targeted support | Apply its distinct RAO and COBS 9B framework where in scope; it is not safeguarded-benefit transfer advice. |
Calling a sale “execution-only” does not determine its status if the interaction in substance gives a personal recommendation. Conversely, a genuinely non-advised sale does not automatically trigger an individual suitability assessment. Financial Ombudsman Service access depends on DISP jurisdiction and complainant eligibility, not simply whether advice was given.
Suitability: COBS 9 and COBS 9A
COBS 9 addresses suitability for personal recommendations and certain other transactions within its stated scope, broadly outside the MiFID and insurance-based investment-product cases covered by COBS 9A. The firm must gather the information needed by the applicable rule and take reasonable steps to ensure a recommendation is suitable. That includes the client's objectives, financial situation and relevant knowledge and experience. A suitability report is required for the transactions specified by the relevant report rule; it is not a universal document for every financial-service interaction. COBS 9A contains the separate suitability framework for investment advice and portfolio management within its MiFID-related and insurance-based investment-product scope. Always identify the product and service before selecting the chapter.
Safeguarded pension transfers: COBS 19.1 and 19.1A
COBS 19.1 adds rules and guidance for advice on safeguarded-benefit pension transfers, conversions and opt-outs. Its guidance says to start by assuming a transfer, conversion or opt-out is unsuitable and to depart from that position only where contemporary evidence clearly demonstrates the client's best interests. A pension transfer specialist must give or check the advice, subject to the stated guaranteed-annuity-rate exception. Where COBS 19.1.1C applies, the firm makes a personal recommendation and carries out the appropriate pension transfer analysis and transfer value comparator, subject to the stated exception, and obtains evidence that the client understands the risks. The COBS 9 suitability duties still apply where its scope requires them.
COBS 19.1A permits abridged advice within its limits. It may conclude either that a transfer or conversion is not suitable or that the firm cannot decide without full advice. It cannot recommend that the client transfer. A positive recommendation requires the full applicable advice process. Current COBS 9B is instead the framework for targeted support; it does not govern pension conversions, and targeted support is prohibited in relation to safeguarded benefits.
Product governance and individual due diligence
PROD 3 addresses manufacturers and distributors of financial instruments and structured deposits in its scope. PROD 4 addresses insurance products; its distributor provisions require arrangements to obtain manufacturer information and understand each product's characteristics and identified target market. A manufacturer identifies the market and distribution approach; a distributor checks the product and its distribution against that information and applicable customer-needs and value rules. These governance checks do not replace an individual suitability assessment when one is required.
For example, if a client with safeguarded pension benefits considers transferring to a personal pension, the firm first checks its permissions and specialist competence. It documents the client's objectives and alternatives, applies COBS 19.1 and the applicable suitability framework, and tests the proposed receiving arrangement against the client's circumstances. A receiving product's target-market classification alone cannot justify giving up safeguarded benefits. Likewise, the possibility of a complaint does not itself establish Financial Ombudsman jurisdiction; that is assessed under DISP 2.
Primary sources: FSMA sections 19, 22, 23 and 26–28, RAO article 53, FCA COBS 9, COBS 9A, COBS 9B, COBS 19.1 and 19.1A, PROD 3, PROD 4, and DISP 2.
Which provision specifies advising on investments as a regulated activity, subject to its statutory scope and exclusions?
FSMA section 21, which controls financial promotions
Article 53 of the Regulated Activities Order
FSMA section 22, which links to specified activities
FSMA section 23, which addresses contravention
Under COBS 19.1 guidance, where should a firm start when assessing a safeguarded-benefit pension transfer for a retail client?
Assume transfer is unsuitable; require contemporary evidence of the client’s best interests to depart from that position
Assume transfer is suitable once the client signs an informed-consent statement
Use the receiving product’s target market as the main test of whether the transfer is suitable
Treat an abridged assessment that cannot decide as a positive transfer recommendation
A firm distributes an insurance product that another firm manufactured. Which PROD 4.3 step should it take before selecting a distribution approach?
Set the product’s original target market without obtaining manufacturer information
Obtain manufacturer information and understand the product and identified target market
Use an individual suitability assessment instead of understanding the target market
Treat the manufacturer’s distribution plan as sufficient without examining the product
Sections you finish are checked off in the contents.