COBS 10 Annex 1 Assessing appropriateness: non-readily realisable securities

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.