A firm that is carrying on a regulated activity on a non-advised basis, whether or not the rules in this chapter apply to its activities, should also consider whether other rules in COBS apply.3

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

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.

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.

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.

1. (1)

   3When determining whether a client has the necessary knowledge to understand the risks involved in relation to a restricted mass market investment4, a firm should consider asking the client questions that cover, at least, the matters in4:

   1. (a)

      COBS 10 Annex 1G in relation to non-readily realisable securities; 4

   2. (b)

      COBS 10 Annex 2G in relation to P2P agreements or P2P portfolios; or5

      4
   3. (c)

      [deleted]4

   4. (d)

      [deleted]4

   5. (e)

      [deleted]4

   6. (f)

      [deleted]4

   7. (g)

      [deleted]4

   8. (h)

      [deleted]4

   9. (i)

      [deleted]4

   10. (j)

       [deleted]4

   11. (k)

       [deleted]4

   12. (l)

       [deleted]4

   13. (m)

       5COBS 10 Annex 3G in relation to units in a long-term asset fund.

If a client asks a firm to go ahead with a transaction, despite being given a warning by the firm, it is for the firm to consider whether to do so having regard to the circumstances.

2As explained in COBS 4.12A.33G, COBS 10.4 is not relevant for the purpose of complying with the rules requiring an appropriateness assessment under COBS 4.12A in relation to restricted mass market investments.

A service should be considered to be provided at the initiative of a client (see COBS 10.4.1 R (1)(a)1) unless the client demands it in response to a personalised communication from or on behalf of the firm to that particular client which contains an invitation or is intended to influence the client in respect of a specific financial instrument or specific transaction.

A service can be considered to be provided at the initiative of a client notwithstanding that the client demands it on the basis of any communication containing a promotion or offer of investments2 made by any means that by its very nature is general and addressed to the public or a larger group or category of clients.

1. (1)

   Communications to the world at large, such as those in newspapers or on billboards, are likely to be by their very nature general and therefore not personalised communications.

2. (2)

   Communications addressed to a client (such as, for example, an email,2 telephone call or2 letter), may or may not be personalised depending on the content.

3. (3)

   A communication is not personalised solely because it contains the name and address of the client or because a mailing list has been filtered.

4. (4)

   If a firm is satisfied that a communication does not contain any personalised content, it may wish to make clear that it does not intend the communication to be personalised and that the personal circumstances of the recipient have not been taken into account.

The circumstances in which valuation systems will be independent of the issuer (see COBS 10.4.1 R (3)(b)) include where they are overseen by a depositary that is regulated as a provider of depositary services in a the United Kingdom3.

A firm need not assess appropriateness if it is receiving or transmitting an order in relation to which it has assessed suitability under COBS 9 (Suitability (including basic advice)).

A1firm is required to keep orderly records of its business and internal organisation, including all services and transactions undertaken by it.1 The records may be expected to include the client information a firm obtains to assess appropriateness and should be adequate to indicate what the assessment was.

1This Annex belongs to COBS 10.2.9G(1)(a) and COBS 10A.2.11G.

When determining whether a retail client has the necessary knowledge to understand the risks involved in relation to a non-readily realisable security, a firm should consider asking the client questions that cover, at least, the following matters:

1. (1)

   the nature of the client’s contractual relationship with the issuer and any underlying beneficiaries of the investment;

2. (2)

   the possibility that the client could lose all the money they invest;

3. (3)

   the risk of failure of the issuer and the associated risk of losing all of the money invested;

4. (4)

   the regulated status of the investment activity, including that the issuance of securities does not ordinarily involve regulated activity and the implications in relation to FCA regulation;

5. (5)

   the extent to which the protection of the Financial Ombudsman Service or FSCS apply to the investment activity (including the fact that these services do not protect investors against poor investment performance and that the Financial Ombudsman Service cannot ordinarily consider complaints in relation to unauthorised persons);

6. (6)

   the potential illiquidity of non-readily realisable securities (including the unlikelihood or impossibility that the client will be able to sell the security and the nature of the mechanisms through which the client could be paid their money back);

7. (7)

   the risk to any management and administration of the client’s investment in the event of the issuer becoming insolvent or otherwise failing;

8. (8)

   the role of the issuer (including its role in assessing and making underlying investments);

9. (9)

   that where a security is held in an innovative finance ISA (IFISA), this does not reduce the risk of the security or otherwise protect the client from the risk of losing their money;

10. (10)

    the benefits of diversification and that retail clients should not generally invest more than 10% of their net assets in restricted mass market investments;

11. (11)

    where the security is a share:

    1. (a)

       the likelihood of dividend payments;

    2. (b)

       the risk of dilution from further issues of shares and the implications for the value of the security; and

    3. (c)

       the risk of any further issues of shares granting preferential rights that negatively impact existing investors and the implications for the value of the security;

12. (12)

    where the security is a debenture:

    1. (a)

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

    2. (b)

       that investing in a debenture is not comparable to depositing money in a savings account; and

    3. (c)

       that returns may vary over time; and

13. (13)

    where an investment in a non-readily realisable security is, or is to be, arranged by a firm:

    1. (a)

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

    2. (b)

       the role of the firm and the scope of the service it provides to clients (including the extent of the due diligence that the firm undertakes in relation to the securities that it distributes); and

    3. (c)

       the risk to any management and administration of the client’s investment in the event of the firm becoming insolvent or otherwise failing.

1This Annex belongs to COBS 10.2.9G(1)(b).

When determining whether a retail 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 questions that cover, at least, the following matters:

1. (1)

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

2. (2)

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

3. (3)

   that the client can lose all of the money that they invest in a P2P agreement or P2P portfolio;

4. (4)

   that P2P agreements or P2P portfolios are not covered by FSCS and that the Financial Ombudsman Service does not protect investors against poor performance of P2P agreements or P2P portfolios;

5. (5)

   that returns may vary over time;

6. (6)

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

7. (7)

   the characteristics of any:

   1. (a)

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

   2. (b)

      risk diversification facilitated by the firm; or

   3. (c)

      contingency fund offered by the firm; or

   4. (d)

      any other risk mitigation measure adopted by the firm;

8. (8)

   that any of the measures in (7) adopted by the firm cannot guarantee that the client will not suffer a loss in relation to the money invested;

9. (9)

   that where a firm has not adopted any risk mitigation measures (such as those in (7)), the extent of any loss of money invested is likely to be greater than if risk mitigation measures were adopted by the firm;

10. (10)

    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 (including the fact that any advertised access to money invested is not guaranteed);

11. (11)

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

12. (12)

    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;

13. (13)

    that where a P2P agreement or P2P portfolio is held in an innovative finance ISA (IFISA), this does not reduce the risk of the P2P agreement or P2P portfolio or otherwise protect the client from the risk of losing their money; and

14. (14)

    the benefits of diversification and that retail clients should not generally invest more than 10% of their net assets in restricted mass market investments.

1This Annex belongs to COBS 10.2.9G(1)(m).

When determining whether a retail client has the necessary knowledge to understand the risks involved in relation to a long-term asset fund, a firm should consider asking the client questions that cover, at least, the following matters:

1. (1)

   the possibility that the client could see the value of the amount they invest go down;

2. (2)

   the potential illiquidity of LTAFs and their underlying assets;

3. (3)

   the possibility that it could take the client many years to make a profit on the money they invest, and (where relevant) that payments of income may be limited or non-existent;

4. (4)

   that due to the dealing frequency and notice period after a redemption request has been accepted (see COLL 15.8.12R (Dealing: redemption of units):

   1. (a)

      the client will not know the value of the proceeds of redemption until the end of the notice period; and

   2. (b)

      it will take at least [period of time] for the client to receive the proceeds of redemption;

5. (5)

   the risk of the LTAF’s investments failing and the associated risk of the client losing all of the money invested;

6. (6)

   the extent to which the protection of the Financial Ombudsman Service or FSCS apply to the investment activity (including the fact that these services do not protect investors against poor investment performance);

7. (7)

   the nature of the client’s contractual relationships with the authorised fund manager (including its role in assessing and making underlying investments);

8. (8)

   the benefits of diversification and that retail clients should not generally invest more than 10% of their net assets in restricted mass market investments;

9. (9)

   where the units in the LTAF are, or are to be, dealt or arranged by another firm (AF):

   1. (a)

      the nature of the client’s contractual relationships with (AF);

   2. (b)

      the role of AF and the scope of the service it provides to clients (including the extent of the due diligence that AF undertakes in relation to units in LTAFs that it deals in or arranges); and

   3. (c)

      the risk to any management and administration of the client’s investment in the event of AF becoming insolvent or otherwise failing.