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COBS 10.2 Assessing appropriateness: the obligations

COBS 10.2.1RRP
  1. (1)

    When providing a service to which this chapter applies, a firm must ask the client to provide information regarding his knowledge and experience in the investment field relevant to the specific type of product or service offered or demanded so as to enable the firm to assess whether the service or product envisaged is appropriate for the client.

  2. (2)

    When assessing appropriateness, a firm must determine whether the client has the necessary experience and knowledge in order to understand the risks involved in relation to the product or service offered or demanded2.

2

COBS 10.2.2RRP

The information regarding a client's knowledge and experience in the investment field includes, to the extent appropriate to the nature of the client, the nature and extent of the service to be provided and the type of product or transaction envisaged, including their complexity and the risks involved, information on:

  1. (1)

    the types of service, transaction and designated investment with which the client is familiar;

  2. (2)

    the nature, volume, frequency of the client's transactions in designated investments and the period over which they have been carried out;

  3. (3)

    the level of education, profession or relevant former profession of the client.

2

COBS 10.2.3RRP

A firm must not encourage a client not to provide information required for the purposes of its assessment of appropriateness.

2

Reliance on information1

COBS 10.2.4RRP

A firm is entitled to rely on the information provided by a client unless it is aware that the information is manifestly out of date, inaccurate or incomplete.

2

Use of existing information1

COBS 10.2.5GRP

When assessing appropriateness, a firm may use information it already has in its possession.

Knowledge and experience1

COBS 10.2.6GRP

Depending on the circumstances, a firm may be satisfied that the client's knowledge alone is sufficient for him to understand the risks involved in a product or service. Where reasonable, a firm may infer knowledge from experience.

Increasing the client's understanding1

COBS 10.2.7GRP

If, before assessing appropriateness, a firm seeks to increase the client's level of understanding of a service or product by providing information to him, relevant considerations are likely to include the nature and complexity of the information and the client's existing level of understanding.

No duty to communicate firm's assessment of knowledge and experience1

COBS 10.2.8GRP

If a firm is satisfied that the client has the necessary experience and knowledge in order to understand the risks involved in relation to the product or service, there is no duty to communicate this to the client. If the firm does so, it must not do so in a way that amounts to making a personal recommendation unless it complies with the rules in COBS 9 (Suitability (including basic advice) (non-MiFID provisions))2.

P2P agreements

COBS 10.2.9G
  1. (1)

    3When determining whether a client has the necessary knowledge to understand the risks involved in relation to a P2P agreement or a P2P portfolio, a firm should consider asking the client multiple-choice questions that avoid binary (yes/no) answers and cover, at least, the following matters:

    1. (a)

      the nature of the client’s contractual relationships with the borrower and the firm;

    2. (b)

      the client’s exposure to the credit risk of the borrower;

    3. (c)

      that all capital invested in a P2P agreement or P2P portfolio is at risk;

    4. (d)

      that P2P agreements or P2P portfolios are not covered by FSCS;

    5. (e)

      that returns may vary over time;

    6. (f)

      that entering into a P2P agreement or investing in a P2P portfolio is not comparable to depositing money in a savings account;

    7. (g)

      the characteristics of any:

      1. (i)

        security interest, insurance or guarantee taken in relation to the P2P agreements or P2P portfolio; or

      2. (ii)

        risk diversification facilitated by the firm; or

      3. (iii)

        contingency fund offered by the firm, or

      4. (iv)

        any other risk mitigation measure adopted by the firm;

    8. (h)

      that any of the measures in (g) adopted by the firm cannot guarantee that the client will not suffer a loss in relation to the capital invested;

    9. (i)

      that where a firm has not adopted any risk mitigation measures (such as those in (g)), the extent of any capital losses is likely to be greater than if risk mitigation measures were adopted by the firm;

    10. (j)

      illiquidity in the context of a P2P agreement or P2P portfolio, including the risk that the lender may be unable to exit a P2P agreement before maturity even where the firm operates a secondary market;

    11. (k)

      the role of the firm and the scope of its services, including what the firm does and does not do on behalf of lenders; and

    12. (l)

      the risks to the management and administration of a P2P agreement or P2P portfolio in the event of the firm’s becoming insolvent or otherwise failing.