Reset to Today

To access the FCA Handbook Archive choose a date between 1 January 2001 and 31 December 2004.

Content Options:

Content Options

View Options:


You are viewing the version of the document as on 2024-07-31.

Timeline guidance

COBS 10A.1 Application

1[Note: ESMA has also issued guidelines under article 16(3) of the ESMA Regulation on complex debt instruments and structured deposits , 4 February 2016/ESMA/2015/1787 (EN)3.

Application

COBS 10A.1.1 R

This chapter applies to a firm which:2

  1. (1)

    provides investment services in the course of MiFID or equivalent third country business; or2

  2. (2)

    carries on insurance distribution in relation to insurance-based investment product,2

other than when the firm makes2 a personal recommendation or carries2 out portfolio management.

COBS 10A.1.2 R

This chapter applies to a firm which assesses appropriateness on behalf of a MiFID investment firm so that the other firm may rely on the assessment under COBS 2.4.4R (Reliance on other investment firms: MiFID and equivalent business).

4

COBS 10A.1.3 R

The effect of GEN 2.2.22AR is that provisions in this chapter marked “UK”3 and including a Note (‘Note:’) referring to the MiFID Org Regulation2 also apply in relation to the equivalent business of a third country investment firm as if they were rules.

COBS 10A.1.4 R

[deleted]4

2 3

COBS 10A.2 Assessing appropriateness: the obligations

COBS 10A.2.1 R

A2firm must ask the client to provide information regarding that client’s knowledge and experience in the investment field relevant to the specific type of product or service offered or demanded to enable the firm to assess whether the service or product envisaged is appropriate for the client.

[Note: article 25(3) of MIFID, first paragraph of article 30(2) of the IDD2]

COBS 10A.2.1A G

2A firm carrying on insurance distribution is also required to comply with the requirements in COBS 7.3 (additional insurance distribution obligations: demands and needs).

[Note: first paragraph of article 30(2) of the IDD]2

Bundled packages: MiFID business and insurance-based investment products

COBS 10A.2.2 R

Where a bundle of services or products is envisaged pursuant to COBS 6.1ZA.16R (for MiFID business) or COBS 6.1ZA.16AR to COBS 6.1ZA.16E (for insurance-based investment products)2, the assessment made pursuant to COBS 10A.2.1R must consider whether the overall bundled package is appropriate.

[Note: article 25(3) of MiFID, first paragraph of article 30(2) of the IDD2]

1

Assessing a client’s knowledge and experience: MiFID business

COBS 10A.2.3 UK

356(1) Investment firms, shall determine whether that client has the necessary experience and knowledge in order to understand the risks involved in relation to the product or investment service offered or demanded when assessing whether an investment service as referred to in [COBS 10A.1.1R] is appropriate for a client.

An investment firm shall be entitled to assume that a professional client has the necessary experience and knowledge in order to understand the risks involved in relation to those particular investment services or transactions, or types of transaction or product, for which the client is classified as a professional client.

[Note: article 56(1) of the MiFID Org Regulation]

Assessing a client’s knowledge and experience: insurance-based investment product

COBS 10A.2.3A R

6Without prejudice to the fact that, in accordance with COBS 7.3.4R, any insurance-based investment product proposed must be consistent with the client’s demands and needs, a firm must determine whether the client has the necessary knowledge and experience in order to understand the risks involved in relation to the service or insurance-based investment product proposed or demanded when assessing whether an insurance service or insurance-based investment product distributed in accordance with COBS 10A.2.1R and COBS 10A.2.2R is appropriate for the client.

[Note: article 15 of the IDD Regulation]

Information regarding a client’s knowledge and experience: MiFID business

COBS 10A.2.4 UK

355(1) Investment firms shall ensure that the information regarding a client's or potential client’s knowledge and experience in the investment field includes the following, 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:

  1. (a) the types of service, transaction and financial instrument with which the client is familiar;

  2. (b) the nature, volume, and frequency of the client’s transactions in financial instruments and the period over which they have been carried out;

  3. (c) the level of education, and profession or relevant former profession of the client or potential client.

[Note: article 55(1) of the MiFID Org Regulation]

Information regarding a client’s knowledge and experience: insurance-based investment products

COBS 10A.2.4A R
  1. (1)

    6For the purposes of COBS 10A.2.1R and COBS 10A.2.2R in relation to insurance-based investment products, the necessary information to be obtained by a firm with regard to the client’s knowledge and experience in the relevant investment field must include, where relevant, the following, to the extent appropriate to the nature of the client, and the nature and type of insurance-based investment product or service offered or demanded, including their complexity and the risks involved:

    1. (a)

      the types of service, transaction, insurance-based investment product or financial instrument with which the client is familiar;

    2. (b)

      the nature, number, value and frequency of the client’s transactions in insurance-based investment products or financial instruments and the period over which they have been carried out;

    3. (c)

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

  2. (2)

    Where information required for the purposes of COBS 10A.2.1R and COBS 10A.2.2R has already been obtained for the purposes of COBS 7.3.4R, a firm must not request information it already has anew from the client.

[Note: article 17(1) and (3) of the IDD Regulation]

Discouraging the provision of information: MiFID business

COBS 10A.2.5 UK

355(2) An investment firm shall not discourage a client or potential client from providing information required for the purposes of [COBS 9A.2.1R and COBS 10A.2.1R].

[Note: article 55(2) of the MiFID Org Regulation]

Discouraging the provision of information: insurance-based investment products

COBS 10A.2.5A R

6In relation to an insurance-based investment product, a firm must not discourage a client from providing information required for the purposes of COBS 10A.2.1R and COBS 10A.2.2R.

[Note: article 17(2) of the IDD Regulation]

Reliance on information: MiFID business

COBS 10A.2.6 UK

355(3) An investment firm shall be entitled to rely on the information provided by its clients or potential clients unless it is aware or ought to be aware that the information is manifestly out of date, inaccurate or incomplete.

[Note: article 55(3) of the MiFID Org Regulation]

Reliance on information: insurance-based investment products

COBS 10A.2.6A R

6In relation to an insurance-based investment product, a firm may rely on the information provided by the client unless it is aware or ought to be aware that the information is manifestly out of date, inaccurate or incomplete.

[Note: article 17(4) of the IDD Regulation]

Use of existing information: MiFID business and insurance-based investment products

COBS 10A.2.7 G

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

Knowledge and experience: MiFID business and insurance-based investment products

COBS 10A.2.8 G

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 understanding: MiFID business and insurance-based investment products

COBS 10A.2.9 G

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 experience: MiFID business and insurance-based investment products

COBS 10A.2.10 G

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 9A (MiFID and insurance-based investment products2 provisions)1.

Restricted mass market investments

COBS 10A.2.11 G

4When determining whether a client has the necessary knowledge to understand the risks involved in relation to a restricted mass market investment, a firm should consider asking the client questions that cover, at least, the matters in COBS 10 Annex 1G in relation to non-readily realisable securities.

Assessing appropriateness: units in long-term asset funds

COBS 10A.2.12 G

5When determining whether a client has the necessary knowledge and experience to understand the risks involved in relation to a unit in a long-term asset fund (see COBS 4.12A (Promotion of restricted mass market investments)), a firm should consider asking the client questions that cover, at least, the matters in COBS 10 Annex 3G (Assessing appropriateness: units in a long-term asset fund).

COBS 10A.3 Warning the client

COBS 10A.3.1 R
  1. (1)

    If a firm considers, on the basis of information received to enable it to assess appropriateness, that the product or service is not appropriate for the client, the firm must warn the client.

  2. (2)

    This warning may be provided in a standardised format.

[Note: article 25(3) of MiFID, second paragraph of article 30(2) of the IDD1]

COBS 10A.3.2 R
  1. (1)

    If the client does not provide the information to enable the firm to assess appropriateness, or if the client provides insufficient information regarding their knowledge and experience, the firm must warn the client that the firm is not in a position to determine whether the service or product envisaged is appropriate for the client.

  2. (2)

    This warning may be provided in a standardised format.

[Note: article 25(3) of MiFID, third paragraph of article 30(2) of the IDD]

COBS 10A.3.3 G

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.

COBS 10A.4 Assessing appropriateness: when it need not be done due to type of investment

COBS 10A.4.1 R
  1. (1)

    A firm is not required to ask its client to provide information or assess appropriateness if either (a) or (aa), and both (b) and (c), are met2:

    1. (a)

      the service:

      1. (i)

        only consists of execution or reception and transmission of client orders, with or without ancillary services, excluding ancillary service (2) in section B of Annex I to MiFID (granting of credits or loans), where the relevant credits or loans do not comprise existing credit limits of loans, current accounts and overdraft facilities of clients;

      2. (ii)

        relates to particular financial instruments (see paragraph (2))2; and

      3. (iii)

        is provided at the initiative of the client; or2

    2. (aa)

      the insurance distribution activity:2

      1. (i)

        relates to particular types of insurance-based investment products (see (2A)); and2

      2. (ii)

        is carried out at the initiative of the client; and2

    3. (b)

      the client has been clearly informed (whether in a standardised format or not) that, in the provision of the2 service or insurance distribution activity2, the firm is not required to assess the appropriateness of the financial instrument or service or insurance-based investment product2 provided or offered and that therefore the client does not benefit from the protection of the rules on assessing appropriateness; and

    4. (c)

      the firm complies with its obligations in relation to conflicts of interest.

  2. (2)

    The financial instruments referred to in (1)(a)(ii) are any of the following:

    1. (a)

      shares in companies admitted to trading on:

      1. (i)

        a regulated market or an EU regulated market4; or

      2. (ii)

        an equivalent third country market; or

      3. (iii)

        an MTF,

      except shares that embed a derivative and units in a collective investment undertaking that is not a UCITS; or

    2. (b)

      bonds or other forms of securitised debt admitted to trading on:

      1. (i)

        a regulated market or an EU regulated market4; or

      2. (ii)

        an equivalent third country market; or

      3. (iii)

        an MTF,

      except those that embed a derivative or incorporate a structure which makes it difficult for the client to understand the risk involved; or

    3. (c)

      money-market instruments, excluding those that embed a derivative or incorporate a structure which makes it difficult for the client to understand the risk involved; or

    4. (d)

      shares or units in a UCITS, excluding structured UCITS as referred to in the second subparagraph of article 36(1) of the KII Regulation; or

    5. (e)

      structured deposits, excluding those that incorporate a structure which makes it difficult for the client to understand the risk of return or the cost of exiting the product before term; or

    6. (f)

      other non-complex financial instruments.

  3. (2A)

    The insurance-based investment products referred to in (1)(aa) are:2

    1. (a)

      insurance-based investment products which only provide investment exposure to financial instruments referred to in (2) and do not incorporate a structure which makes it difficult for the client to understand the risks involved; or2

    2. (b)

      other non-complex insurance-based investment products.2

  4. (3)

    For the purposes of this rule, a third country market is considered to be equivalent to a regulated market if it is a market in relation to which the Treasury has4 adopted an affirmative equivalence decision in accordance with the requirements and procedure1 in paragraph 8 of Part 1 of Schedule 3 to MiFIR4..

    11

[Note: article 25(4) of MIFID, article 30(3) of the IDD2]

[Note: ESMA3 has published guidelines which specify criteria for the assessment of (i) debt instruments incorporating a structure which makes it difficult for the client to understand the risk involved, and (ii) structured deposits incorporating a structure which makes it difficult for the client to understand the risk of return or the cost of exiting the product before term (see ESMA/2015/1787 (EN), 4 February 2016)4.]

3[Note: EIOPA has published guidelines under the IDD which specify criteria for the assessment of insurance-based investment products that incorporate a structure which makes it difficult for the customer to understand the risk involved (see EIOPA-17/651, 4 October 2017)4.]

Other non-complex financial instruments

COBS 10A.4.2 UK

457 A financial instrument which is not explicitly specified in [COBS 10A.4.1R(2)] shall be considered as non-complex for the purposes of paragraph (2)(f) of that rule if it satisfies the following criteria:

  1. (a) it does not fall within Article 2(1)(24)(c) of Regulation (EU) No 600/2014 or paragraphs 4 to 11 of Part 1 of Schedule 2 to the Regulated Activities Order;

  2. (b) there are frequent opportunities to dispose of, redeem, or otherwise realise that instrument at prices that are publicly available to market participants and that are either market prices or prices made available, or validated, by valuation systems independent of the issuer;

  3. (c) it does not involve any actual or potential liability for the client that exceeds the cost of acquiring the instrument;

  4. (d) it does not incorporate a clause, condition or trigger that could fundamentally alter the nature or risk of the investment or pay out profile, such as investments that incorporate a right to convert the instrument into a different investment;

  5. (e) it does not include any explicit or implicit exit charges that have the effect of making the investment illiquid even though there are technically frequent opportunities to dispose of, redeem or otherwise realise it;

  6. (f) adequately comprehensive information on its characteristics is publicly available and is likely to be readily understood so as to enable the average retail client to make an informed judgment as to whether to enter into a transaction in that instrument.

[Note: article 57 of the MiFID Org Regulation]

COBS 10A.4.2A G

5As explained in COBS 4.12A.33G, COBS 10A.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.

Other non-complex insurance-based investment products

COBS 10A.4.3 R

6An insurance-based investment product may be considered as non-complex for the purposes of COBS 10A.4.1R where it satisfies all of the following criteria:

  1. (1)

    it includes a contractually guaranteed minimum maturity value which is at least the amount paid by the client after deduction of legitimate costs;

  2. (2)

    it does not incorporate a clause, condition or trigger that allows the insurance undertaking to materially alter the nature, risk, or pay-out profile of the insurance-based investment product;

  3. (3)

    it provides options to surrender or otherwise realise the insurance-based investment product at a value that is available to the client;

  4. (4)

    it does not include any explicit or implicit charges which have the effect that, even though there are technically options to surrender or otherwise realise insurance-based investment product, doing so may cause unreasonable detriment to the client because the charges are disproportionate to the cost to the insurance undertaking;

  5. (5)

    it does not in any other way incorporate a structure which makes it difficult for the client to understand the risks involved.

[Note: article 16 of the IDD Regulation]

COBS 10A.5 Assessing appropriateness: guidance

The initiative of the client: MiFID business and insurance-based investment products

COBS 10A.5.1 G

A service should be considered to be provided, or carried out,1 at the initiative of a client (see COBS 10A.4.1R(1)(a)(iii) and (aa)(ii)1), unless the client demands it in response to a personalised communication from or on behalf of the firm to that client which contains an invitation or is intended to influence the client in respect of a specific financial instrumentfinancial instrument, insurance-based investment product1 or specific transaction.

[Note: recital 85 to MIFID]

COBS 10A.5.2 G

A service can be considered to be provided, or carried out,1 at the initiative of a client notwithstanding that the client demands it on the basis of any communication containing a promotion for, or offer of, financial instruments or insurance-based investment products1 made by any means and that by its very nature is general and addressed to the public or a larger group or category of clients.

[Note: recital 85 to MIFID]

Personalised communications: MiFID business and insurance-based investment products

COBS 10A.5.3 G
  1. (1)

    Communications to the world at large, such as those in newspapers or in 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, telephone call or 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.

COBS 10A.6 Assessing appropriateness: when a firm need not assess appropriateness due to suitability assessment

COBS 10A.6.1 G

A firm need not assess appropriateness if it is receiving or transmitting an order or carrying on insurance distribution in relation to an insurance-based investment product, for which2 it has assessed suitability under COBS 9A (Suitability (MiFID and insurance-based investment products2 provisions1)).

COBS 10A.6.2 G

A firm may not need to assess appropriateness if it is able to rely on a recommendation made by an investment firm (see COBS 2.4.5G (Reliance on other investment firms: MiFID and equivalent business)) or, in relation to an insurance-based investment product, made by an insurance distributor (see COBS 2.4.5AR (Reliance on other insurance distributors))2.

COBS 10A.7 Record keeping and retention periods for appropriateness records

COBS 10A.7.1 G

A firm is required to keep orderly records of its business and internal organisation, including all services and transactions undertaken by it. 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.

Record keeping: MiFID business

COBS 10A.7.2 UK

356(2) Investment firms shall maintain records of the appropriateness assessments undertaken which shall include the following:

  1. (a) the result of the appropriateness assessment;

  2. (b) any warning given to the client where the investment service or product purchase was assessed as potentially inappropriate for the client, whether the client asked to proceed with the transaction despite the warning and, where applicable, whether the firm accepted the client’s request to proceed with the transaction;

  3. (c) any warning given to the client where the client did not provide sufficient information to enable the firm to undertake an appropriateness assessment, whether the client asked to proceed with the transaction despite this warning and, where applicable, whether the firm accepted the client’s request to proceed with the transaction.

[Note: article 56(2) of the MiFID Org Regulation]

Record keeping: insurance-based investment products

COBS 10A.7.2A R
  1. (1)

    4Without prejudice to the application the General data protection regulation, a firm must maintain records of the assessment of appropriateness undertaken in accordance with COBS 10A.2.1R and COBS 10A.2.2R in relation to an insurance-based investment product.

  2. (2)

    The records maintained under (1) must include the information obtained from the client and any documents agreed with the client, including documents that set out the rights of the parties and the other terms on which the firm will provide services to the client.

  3. (3)

    The records in (1) must be retained for at least the duration of the relationship between the firm and the client.

  4. (4)

    The record in (1) must also include the following:

    1. (a)

      the result of the appropriateness assessment;

    2. (b)

      any warning given to the client where the insurance-based investment product was assessed as potentially inappropriate for the client, whether the client asked to proceed with concluding the policy despite the warning and, where applicable, whether the firm accepted the client’s request to proceed with concluding the policy;

    3. (c)

      any warning given to the client where the client did not provide sufficient information to enable the firm to assess the appropriateness of the insurance-based investment product, whether the client asked to proceed with concluding the policy despite the warning and, where applicable, whether the firm accepted the client’s request to proceed with concluding the policy.

[Note: article 19(1) and (3) of the IDD Regulation]

Record keeping: MiFID business and insurance-based investment products

COBS 10A.7.3 G

1A firm should refer to SYSC 3.3 (for insurers and managing agents) and2SYSC 9 (for other firms)2 for its obligations in relation to record keeping. These provisions require2 records kept for the purposes of this chapter to be retained for a period of at least five years.