What are the FCA rules on communication (COBS 4)?

Under the strict rules of UK regulator (COBS 4), the Financial Conduct Authority (FCA), communications must be “clear, fair and not misleading”. Every marketing, communications and social media professional should know the rules, found in COBS 4, right down to the letter.  

Here’s a run-down of the basics of COBS 4 for retail customers:

1. Keep it simple and avoid jargon

Explaining financial concepts in an easy-to-understand way takes real expertise. And that’s exactly what’s needed in financial communications under COBS 4!

When it comes to retail investors, communications need to be especially clear and simple. 88% of Brits today do not feel confident with their financial literacy levels. And this rises with young people. Keep it simple, straightforward and steer clear of jargon.

2. If capital is at risk, make it clear

Firms have an obligation under COBS 4 to make it clear if the customer could lose money. In reality, this includes almost every type of financial service on the market – except perhaps savings accounts. 

Investment products like stocks and shares ISAs certainly put the client’s capital at risk. Make sure you explain to the customer exactly what they are getting in to. This is particularly true for younger investors. Alarmingly, recent studies found that four in ten did not view losing money as an investment risk.

3. Risks must have the same font size and language

Continuing on the theme of risk … There is even an added rule within COBS 4 that firms must “font size in the indication of relevant risks that is at least equal to the predominant font size used throughout the information provided, as well as a layout ensuring such indication is prominent”.

What’s more, the section on risks should have also have the “same language” that’s used for throughout the communication too. This means no complicated “disclaimer speak” or dense jargon. Customers should be able to read and understand the risks involved effortlessly.

4. Information must be up-to-date

This is a no-brainer! The investment landscape looks very different now to how it looked twenty years ago. Ensure that the tax rules, projections, risks and more are all up-to-date so customers can make informed choices.

5. Projections must be balanced

It goes without saying that market projections need to be balanced. After all, it’s one of the most important parts of being “clear, fair and not misleading” under COBS 4.

If you’re explaining how much return a customer might expect in five or ten years, opt for a balanced risk level, and at a reasonable market rate. For example, a market growth of around 5% or less is reasonable. Of course, you should also make it clear that this is not a guarantee. Past performance does not mean that it will happen again in the future!

6. Explain the fees

Firms must ensure that their fee structure is “clear – especially if it’s complex or takes more than one form of remuneration”. For many retail customers, the concept of basis points may be new, so be sure to explain in every-day terms how exactly they will be charged. Some firms have faced fierce sanctions over their wording of fees in recent years!

7. State if the product has not been created by your firm

Customers have the right to know who they’re dealing with. If the financial product or service will be delivered by another company, this needs to be clearly communicated under COBS 4.

8. Comparisons must be meaningful

There’s no point making a comparison if it can’t be meaningful. And it’s completely unfair to mislead customers with fake or wild comparisons. To adhere to COBS 4 guidance, comparisons must be clear and meaningful.

In practice this means, for example, comparing your fee structure against your true peers. Or showing the performance of your investment portfolios against the market. You couldn’t, for example, compare your portfolio specialising in debt, against an market benchmark for equity. 

9. Don’t use words like ‘protect’, ‘guarantee’ or ‘secure’ unless they are true

91% of Brits today confess that they do not understand how investing works. Help them to make informed decisions by avoiding words like “protect”, “guarantee” and “secure” if they are not true.

Sometimes for value-orientated portfolios it can be tricky to express how they work without using these words. But of course, you can talk about the strategy. If the portfolio was designed to withstand market pressures and shield wealth against turbulence, you may be able to say this. But you also need to explain that capital is nevertheless at risk.

10. Explain whether the firm is regulated, and by who

Customers have a right to know if they’ll be trusting their money with a regulated entity or not. The firm should also mention who they are regulated by.

They also should know if the product or service is covered by any schemes or regulators. For example, electronic money is not covered by compensation schemes and this should be clearly explained.

Eight-figure fines and more rules to follow for COBS 4

Although these rules may seem intuitive, several firms have already fallen short and found themselves slapped with eight-figure sanctions. In 2021, the FCA fined one banking group a staggering £90 million for “failing to ensure that the language contained within millions of home insurance renewals communications was clear, fair and not misleading”. The group offered customers “competitive prices” for renewals, based on “loyalty”. This was not sufficient information, and breached the FCA rules on communication.

But that’s not the only example. The problem has become so commonplace that the UK regulator has expressed concerns. “The FCA has seen evidence of practices that cause consumer harm”, reads a 2021 press release. “…Including firms providing information that is misleadingly present or difficult for customers to understand, hindering their ability to properly access that product or service”. In an attempt to salvage the situation and prevent further damage to customers, the regulator is introducing a higher level of protection, known as “Consumer Duty”. The FCA are also publishing further guidance on how financial services should communicate with vulnerable customers too.

Keep a close eye out for more guidelines or information around the upcoming rules.