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.

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).

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.

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]

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]

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]

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]

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]

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]

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]

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]

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.]

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]

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]