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  5. Point in time
    2007-08-06

COB 5.2 Know your customer

Application

COB 5.2.1R

This section applies to a firm that:

  1. (1)

    gives a personal recommendation concerning a designated investment to a private customer; or

  2. (2)

    acts as an investment manager for a private customer; or

  3. (3)

    arranges a pension opt-out or pension transfer from an occupational pension scheme for a private customer; or3

  4. (4)

    is not an insurer and makes a personal recommendation to take out a life policy to an intermediate customer or a market counterparty; or3

  5. (5)

    is not an insurer and is arranging (but not merely by introducing) a life policy;3

  6. (6)

    is not an insurer and arranges (but not merely by introducing) a life policy for an intermediate customer or a market counterparty3;4

But this section does not apply to a firm when providing basic advice on a stakeholder product.4

COB 5.2.2G

A firm that arranges an execution-only transaction for a private customer is not generally required to obtain any personal or financial information about that customer. However, the Insurance Mediation Directive requires that a statement of the demands and needs of a client is provided to the client, whether advice is given or not. This is required whatever the status of the client. Accordingly the demands and needs provisions in COB 5.2.12 R to COB 5.2.17 G apply to all circumstances relating to life policies.3

6
COB 5.2.3G

When a firm provides limited adviceon investments to a private customer, the firm should not treat any resulting transaction as an execution-only one.

Purpose

COB 5.2.4G

Principle 9 (Customers: relationships of trust) requires a firm to take reasonable care to ensure the suitability of its advice and discretionary decisions. To comply with this, a firm should obtain sufficient information about its private customer to enable it to meet its responsibility to give suitable advice. A firm acting as a discretionary investment manager for a private customer should also ensure that before acting in the exercise of discretion it has sufficient information about its private customer to enable it to act in a way which is suitable for that private customer.

Requirement to know your customer

COB 5.2.5R

Before a firm gives a personal recommendation concerning a designated investment to a private customer, or acts as an investment manager for a private customer, it must take reasonable steps to ensure that it is in possession of sufficient personal and financial information about that customer relevant to the services that the firm has agreed to provide.

COB 5.2.6G

A firm that advises a private customer, or exercises discretion for a private customer, on a continuing basis should keep its information about that customer under regular review. A firm that acts for a private customer on an occasional basis should undertake such a review whenever that customer seeks advice.

COB 5.2.7G

If a private customer declines to provide relevant personal and financial information, a firm should not proceed to provide the services described in COB 5.2.5 R without promptly advising that customer that the lack of such information may affect adversely the quality of the services which it can provide. The firm should consider sending written confirmation of that advice.

COB 5.2.8G

The information to be obtained and enquiries made to satisfy COB 5.2.5 R may vary significantly depending on the type of customer concerned. COB 5.2.11 G provides some guidance on the process of collecting personal and financial information.

Record keeping: personal and financial circumstances

COB 5.2.9R
5
  1. (1)

    Unless (2) applies, a firm must make and retain a record of a private customer's personal and financial circumstances that it has obtained in satisfying COB 5.2.5 R. The firm must retain the record for a minimum period after the information is obtained, as follows:5

    5
    1. (a)

      indefinitely for a record relating to a pension transfer, pension opt-out or free-standing additional voluntary contribution (FSAVC);5

    2. (b)

      six years for a record relating to a life policy, personal pension scheme7 or stakeholder pension scheme;5 or7

      7
    3. (c)

      three years in any other case.5

  2. (2)

    A firm need not retain the record where following a personal recommendation to a private customer in connection with a designated investment, the private customer does not proceed with the recommendation or any part of it.15

    5
  3. (3) 5

Record keeping: execution-only pension opt-outs and pension transfers

COB 5.2.10R

When a firm arranges a pension opt-out or pension transfer from an OPS for a private customer as an execution-only transaction, the firm must make and retain indefinitely a clear record to evidence that no advice on investments was supplied to the private customer.2

COB 5.2.11G

Guidance on the collection of information about a private customer.

This table belongs to COB 5.2.8 G.

Guidance on the collection of personal and financial information about a private customer

1

COB 5.2.5 R does not prescribe the method of obtaining sufficient personal and financial information about a private customer. A firm may design and use a process suitable for the market in which it transacts business. This process is often described as "fact-finding" and the document which records the information is often known as the "fact-find".

(a)

Information collected from a private customer should, at a minimum provide an analysis of a customer's personal and financial circumstances leading to a clear identification of his needs and priorities so that, combined with attitude to risk, a suitable investment can be recommended.

(b)

A customer information record can be electronic or paper based and it should be readily available and accessible at all times.

(c)

There is no requirement under the regulatory system to obtain the private customer's consent in writing to a customer information record. When a customer is to give consent in writing to an information record, the request for consent should include a prominent warning advising the customer to read the information record in full before giving consent.

(d)

Firms may send a customer a copy of the information record as proof of compliance with COB 5.3.14 R (Suitability letter). Further guidance on the contents of suitability letters is contained in COB 5.3.29 G.

Affordability

2

In assessing whether a private customer can afford an investment, due regard should be given to that customer's current level of income and expenditure, and any likely future changes to his income and expenditure.

Friendly societylife policies

3

When recommending a friendly societylife policy, the premium of which does not exceed £50 a year or, if the premiums are payable weekly, £1 a week, the firm should:

(a)

obtain details of the private customer's (and his dependants') net income and expenditure; and

(b)

keep a record of the reasons why the recommended transaction is considered to be suitable for that individual customer.

3Statement of demands and needs

COB 5.2.12R
  1. (1)

    3Unless either COB 5.2.13 R or COB 5.2.14 R applies, a firm must provide the client with a statement of his demands and needs if:

    1. (a)

      it makes a personal recommendation of a life policy to a client; or

    2. (b)

      it arranges (whether through issuing a direct offer financial promotion or otherwise) for the client to enter into a life policy.

  2. (2)

    Unless (3) applies, the statement in (1) must be provided:

    1. (a)

      as soon as practicable, and in any event before the conclusion of the contract for the life policy; and

    2. (b)

      in a durable medium.

  3. (3)

    A firm may provide the statement in (1) orally if:

    1. (a)

      the client requests it; or

    2. (b)

      immediate cover is necessary;

    but in both cases the firm must provide the information in (1) immediately after the conclusion of the contract, in a durable medium.

COB 5.2.13R

3If the only contact between the firm and the client before conclusion of the contract is by telephone, the statement of demands and needs must be provided immediately after the conclusion of the contract, in a durable medium.

COB 5.2.14R

3A firm need not provide a statement of demands and needs if the required information is contained in a suitability letter, or explanation of a personal recommendation, provided under COB 5.3.

COB 5.2.15G
  1. (1)

    3A firm may provide the demands and needs statement as part of an application form so that the demands and needs statement is made dependent upon the customer providing personal information on the application form (including an application forming part of a direct offer financial promotion).

  2. (2)

    For quotations (see COB 4.3.3AG), there is no requirement for the firm to provide a demands and needs statement, but one must be provided before the conclusion of the contract, unless the only contact between the firm and the client is by telephone, in which case COB 5.2.13 R applies.

  3. (3)

    A key features document that complies with COB 6.1.4 (Requirement to produce key features) may be used as the statement of demands and needs required by COB 5.1.12R (1)(b).

COB 5.2.16G

3COB 5.2.17 G contains guidance on the contents of the statement required by COB 5.2.12R (1).

COB 5.2.17G

3Guidance on the contents of the statement required by COB 5.2.12R (1).

This table belongs to COB 5.2.16 G.

Introduction

(1)

Where relevant, the statement should explain simply and clearly why the personal recommendation is viewed as suitable, having regard to the client's personal demands and needs.

Style and Presentation

(2)

The style and presentation of the statement is left for the firm to decide, so that a statement can be designed which works best for the market in which the firm transacts business. A statement is more likely to be effective if it demonstrates these features:

(a)

simplicity and plain language: when technical terms need to be incorporated, they should be explained if the client is unlikely to understand their meaning; and

(b)

concise and clear messages: lengthy explanations and extensive statements are likely to reduce the effectiveness of the statement, and make the client less likely to read the statement properly.
COB 5.2.18G

3Firms are reminded of the record keeping obligations under SYSC 3.2.20 R