COBS 4.12B Promotion of non-mass market investments

1In addition to the persons listed in COBS 4.12B.1R, persons (including unauthorised persons) who benefit from a temporary exemption or exclusion from the general prohibition under:

1. (1)

   Part 7 of the EU Exit Passport Regulations; or

2. (2)

   Part 4 of the Electronic Commerce and Solvency 2 (Amendment etc.) (EU Exit) Regulations 2019 (SI 2019/1361),

are required to comply with the rules in this section as a consequence of:

1. (3)

   regulation 59 of the EU Exit Passport Regulations; or

2. (4)

   regulation 19 of the Electronic Commerce and Solvency 2 (Amendment etc.) (EU Exit) Regulations 2019.

1. (1)

   1Where a firm communicates any promotion of a non-mass market investment in the context of advice, it should have regard to and comply with its obligations under COBS 9 or 9A (as applicable). Firms should also be mindful of the appropriateness requirements in COBS 10 and 10A which apply to a wide range of non-advised services.

2. (2)
   1. (a)

      The effect of COBS 4.12B.7R(1)(b) is that where a firm wishes to rely on exemptions 9 (certified high net worth investors) or 11 (self-certified sophisticated investors), as provided by COBS 4.12B.7R(5), the preliminary assessment of suitability must be undertaken before promotion of the non-mass market investment is made to or directed at clients (in addition to other requirements). Where a firm approves or communicates a financial promotion the preliminary assessment of suitability must be undertaken by that firm as required by COBS 4.12B.7R(3).

   2. (b)

      There is no duty to communicate the preliminary assessment of suitability 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 or 9A (as applicable) on suitability.

   3. (c)

      The requirement for a preliminary assessment of suitability does not extend to a full suitability assessment, unless advice is being offered in relation to the non-mass market investment being promoted, in which case the requirements in COBS 9 or 9A apply (as applicable). However, it requires that the firm takes reasonable steps to acquaint itself with the client’s profile and objectives in order to ascertain whether the non-mass market investment under contemplation is likely to be suitable for that client. The firm should not promote the non-mass market investment to the client if it does not consider it likely to be suitable for that client following such preliminary assessment.

1Where a firm is relying on exemptions 9 (certified high net worth investors), 10 (certified sophisticated investors) or 11 (self-certified sophisticated investors), in accordance with COBS 4.12B.7R(1)(a), it must first take reasonable steps to establish that the retail client falls into one of those categories and then the firm must undertake a preliminary assessment of suitability in accordance with COBS 4.12B.7R(1)(b), where relevant. Once a firm has completed these steps, it must comply with the rules in COBS 4.12B.14R to COBS 4.12B.35R.

1The effect of COBS 4.12B.10R(3) and related provisions in this section is that a personalised risk warning and cooling off period are only required on the first occasion that a firm, or other person communicating a financial promotion, communicates a financial promotion relating to a non-mass market investment to a particular retail client.

1For the purposes of COBS 4.12B.13R(2), the following reasons are considered to be valid:

1. (1)

   the relevant part of the risk summary in COBS 4 Annex 1R would be misleading in relation to the particular investment;

2. (2)

   the relevant part of the risk summary in COBS 4 Annex 1R would be irrelevant in relation to the particular investment;

3. (3)

   the risk summary in COBS 4 Annex 1R does not include a risk that is relevant to the particular investment, and it is appropriate for that further risk to be included;

4. (4)

   the sole purpose of the relevant statement in the risk summary is to include a hyperlink to a webpage and the medium of communication does not permit the incorporation of a link.

This list is not exhaustive.

1COBS 4.12B.15R does not prevent the person who is subject to it from engaging with the retail client during the cooling off period. This includes for the purposes of providing the client with the personalised risk warning required by COBS 4.12B.14R and obtaining the information necessary to undertake the preliminary assessment of suitability required by COBS 4.12B.7R(1)(b).

1For the purposes of COBS 4.12B.17R monetary and non-monetary incentives include, but are not limited to:

1. (1)

   offering bonuses when investing in a non-mass market investment3;

2. (2)

   offering bonuses where the client refers another person;

3. (3)

   offering cashback when investing in a non-mass market investment;

4. (4)

   offering discounts or rebates on fees paid that are linked to volumes of trades made3 in non-mass market investments;

5. (5)

   offering free gifts once an investment in a non-mass market investment has been made such as laptops or mobile telephones; or

6. (6)

   offering any additional free investments or offering discounts on investments.

1. (1)

   Information and research tools do not constitute non-monetary incentives.3

2. (2)

   Lower fees or charges not linked to volumes of trades, made available to all retail clients, do not constitute a monetary incentive.3

3. (3)

   The effect of COBS 4.12B.17R(3) is that a financial promotion may offer an incentive to transfer an existing holding of a non-mass market investment (for example, from one platform to another). However, the incentive must relate solely to the transfer and must not be used to encourage retail clients to otherwise engage in investment activity in relation to non-mass market investments.3

3Subject to COBS 4.12B.18G and COBS 4.12B.19G, the following factors are relevant in determining whether a benefit is an incentive:

1. (1)

   A benefit which is intrinsically connected with the investment or investment activity that is the subject of the financial promotion is unlikely to constitute an incentive – for example, voting rights which are carried by a share. However, a benefit which is entirely separable from the investment or investment activity that is the subject of the financial promotion is likely to be an incentive.

2. (2)

   A benefit which is only available for a fixed period of time, or is contingent upon investing in a non-mass market investment in the future, is likely to constitute an incentive. This would not include, for example, a benefit which is offered in connection with a specified event such as the first close of an investment.

3. (3)

   A benefit which is only available to retail clients who invest through a particular medium is likely to constitute an incentive – for example, a benefit which is only offered to retail clients who invest via a social media link.

1. (1)

   3COBS 4.12B.17R applies irrespective of the nature of the investment activity. This means that the rule applies not only in relation to incentives to buy non-mass market investments but also, for example, to incentives to enter into agreements for the purposes of transacting in non-mass market investments.

2. (2)

   The rationale for offering the incentive is immaterial. This means that the rule applies to incentives which are intended, for example, to encourage retail clients to make investments ahead of the end of the tax year.

1. (1)

   1Reference in COBS 4.12B.21R(5)(b)(i)(B) to the ‘provision’ of an investment is to a person developing, managing or packaging an investment such as an operator. It does not refer to persons involved in distributing, or intermediating the sale of, an investment such as a financial adviser or a person arranging investments.

2. (2)

   A firm relying on COBS 4.12B.21R(5) should consider obtaining external legal advice (from legal advisers with relevant expertise and experience) on the appropriateness of omitting the words in that rule from a risk warning. Any such advice should be recorded as part of the firm’s compliance with COBS 4.12B.21R(5)(c).

1Even where it is not possible to provide a risk warning in a durable medium (for example, because the financial promotion is a real time financial promotion), the recipient of the financial promotion must still be provided with an appropriate risk summary in a durable medium at or around the time that the financial promotion is communicated (COBS 4.12B.21R(4)).

1The FCA expects firms to take account of the latest version of the international Web Content Accessibility Guidelines (WCAG) accessibility standard when designing how the risk warning will be displayed: https://www.w3.org/WAI/WCAG21/quickref/

1For the purposes of COBS 4.12B.26R, design features which might reduce the visibility or prominence of a risk warning or risk summary include, but are not limited to:

1. (1)

   using a font size for the risk warning or risk summary that is smaller than the standard size used in the financial promotion;

2. (2)

   using a background colour that does not sufficiently contrast the text or makes it difficult for the client to read the text;

3. (3)

   fading the text of the risk warning or risk summary;

4. (4)

   placing the risk warning or risk summary at the bottom of the promotion or embedding it within other standard information, for example legal information or the firm’s contact details;

5. (5)

   requiring additional links to be clicked in order for the full text of the risk warning to be seen;

6. (6)

   using a font or background in the risk warning or risk summary in the same colours as the firm’s brand, or using a font or background in the same colours as the rest of the financial promotion; and

7. (7)

   using a font or background in the risk warning or risk summary in the same colour as other forms of disclosure and standard information; the colour of the font and background should distinguish the risk warning or risk summary from other forms of information.

1The FCA expects firms to take account of the latest version of the international Web Content Accessibility Guidelines (WCAG) accessibility standard when designing how the personalised risk warning or risk summary will be displayed: https://www.w3.org/WAI/WCAG21/quickref/

1For the purposes of COBS 4.12B.30R, design features which might reduce the visibility or prominence of a personalised risk warning or risk summary include, but are not limited to:

1. (1)

   using a font size for the personalised risk warning or risk summary that is smaller than the standard size used in the financial promotion;

2. (2)

   using a background colour that does not sufficiently contrast the text or makes it difficult for the retail client to read the text;

3. (3)

   fading the text of the personalised risk warning or risk summary;

4. (4)

   placing the personalised risk warning or risk summary at the bottom of the promotion or embedding it within other standard information, for example legal information or the firm’s contact details;

5. (5)

   requiring additional actions to be taken by the retail client, such as requiring additional links to be clicked in order for the full text of the personalised risk warning or risk summary to be seen;

6. (6)

   using a font or background in the risk warning in the same colours as the firm’s brand, or using a font or background in the same colours as the rest of the financial promotion; and

7. (7)

   using a font or background in the risk warning in the same colour as other forms of disclosure and standard information; the colour of the font and background should distinguish the personalised risk warning or risk summary from other forms of information.

1. (1)

   1There is an illustration of how a firm should comply with COBS 4.12B.33R(2) in (2) below.

2. (2)

   Where a firm pays 30% of the total amount of capital raised by the issue of speculative illiquid securities towards costs, fees, charges and commissions and other expenses to any third party, the statement should say: “For every £100 you invest, £30 will be paid to third parties to meet costs, fees, charges and commissions.”

1The statement providing the breakdown of expenditure in COBS 4.12B.33R(3) should be included in the financial promotion in a clear and prominent way.

1The purpose of the statements required by COBS 4.12B.33R is to enable an investor to consider the proportion of capital raised by an issue of a speculative illiquid security that will not be invested. This information should help the investor to assess the risk that the issuer will be unable to pay any advertised interest payments, other income or otherwise to repay the investor’s capital at maturity.

1Where the financial promotion will relate to more than one type of non-mass market investment, the retail client may sign a combined statement that meets the requirements in COBS 4 Annex 2R to COBS 4 Annex 4R, as applicable, in respect of each type of non-mass market investment to which the financial promotion will relate.

1. (1)

   1A firm which wishes to rely on any of the certified high net worth investor exemptions (see Part I of the Schedule to the Promotion of Collective Investment Schemes Order, Part I of Schedule 5 to the Financial Promotion Order and COBS 4.12B.38R) should have regard to its duties under the Principles and the client's best interests rule. In particular, the firm should take reasonable steps to ascertain that the retail client does, in fact, meet the income and net assets criteria set out in the relevant statement for certified high net worth investors.

2. (2)

   In addition, the firm should consider whether the promotion of the non-mass market investment is in the interests of the retail client and whether it is fair to make the promotion to that client on the basis that the client is a certified high net worth investor, having regard to the generally complex nature of non-mass market investments. A retail client who meets the criteria for a certified high net worth investor but not for a certified sophisticated investor may be unable to properly understand and evaluate the risks of the non-mass market investment in question.

1. (1)

   1A firm which is asked to or proposes to assess and certify a retail client as a certified sophisticated investor (see article 23 of the Promotion of Collective Investment Schemes Order, article 50 of the Financial Promotion Order and COBS 4.12B.39R) should have regard to its duties under the Principles and the client's best interests rule. In particular, the firm should carry out that assessment with due skill, care and diligence, having regard to the generally complex nature of non-mass market investments and the level of experience, knowledge and expertise that the retail client being assessed must possess in order to be fairly and reasonably assessed and certified as a sophisticated investor.

2. (2)
   1. (a)

      For example, a retail client whose investment experience is limited to mainstream investments such as regularly traded securities issued by listed companies, life policies or units in regulated collective investment schemes (other than qualified investor schemes) is generally unlikely to possess the requisite knowledge to adequately understand the risks associated with investing in non-mass market investments.

   2. (b)

      In exceptional circumstances, however, the retail client may have acquired the requisite knowledge through means other than their own investment experience, for example, if the retail client is a professional of several years’ experience with the design, operation or marketing of complex investments such as options, futures, contracts for differences or non-mass market investments.

1. (1)

   1A firm which wishes to rely on any of the self-certified sophisticated investor exemptions (see Part II of the Schedule to the Promotion of Collective Investment Schemes Order, Part II of Schedule 5 to the Financial Promotion Order and COBS 4.12B.40R) should have regard to its duties under the Principles and the client's best interests rule. In particular, the firm should consider whether the promotion of the non-mass market investment is in the interests of the client and whether it is fair to make the promotion to that client on the basis of self-certification.

2. (2)

   For example, it is unlikely to be appropriate for a firm to make a promotion under any of the self-certified sophisticated investor exemptions without first taking reasonable steps to satisfy itself that the investor does in fact have the requisite experience, knowledge or expertise to understand the risks of the non-mass market investment in question. A retail client who meets the criteria for a self-certified sophisticated investor but not for a certified sophisticated investor may be unable to properly understand and evaluate the risks of a non-mass market investment.

1. (1)

   1A firm which wishes to rely on one of the one-off promotion exemptions provided by the Promotion of Collective Investment Schemes Order or the Financial Promotion Order to promote a non-mass market investment to a retail client should have regard to its duties under the Principles and the client’s best interests rule. In particular, the firm should consider whether the financial promotion of the non-mass market investment is in the interests of the client and whether it is fair to make the financial promotion to that client on the basis of a one-off promotion exemption.

2. (2)

   The one-off promotion exemptions permit the promotion of investments to clients under certain conditions (see PERG 8.14.3G to PERG 8.14.13G for guidance on the scope of the one-off exemptions in the Financial Promotion Order). Firms should note that, in the FCA’s view, promotion of a non-mass market investment to a retail client who is not a certified high net worth investor, a certified sophisticated investor or a self-certified sophisticated investor is unlikely to be appropriate or in that client’s best interests.

1. (1)

   1A firm which wishes to promote units in a qualified investor scheme to a retail client in circumstances where the firm considers the financial promotion to be an excluded communication (see COBS 4.12B.4R(1)) should have regard to its duties under the Principles and the client’s best interests rule.

2. (2)

   As explained in COLL 8.1, qualified investor schemes are intended only for professional clients and retail clients who are sophisticated investors. Firms should note that, in the FCA’s view, promotion of units in a qualified investor scheme to a retail client who is not a certified sophisticated investor or a self-certified sophisticated investor is unlikely to be appropriate or in that client’s best interests.

[deleted.]2

1In this section:

1. (1)

   any requirement that a document is signed may be satisfied by an electronic signature or electronic evidence of assent; and

2. (2)

   any references to writing should be construed in accordance with GEN 2.2.14R and its related guidance provisions.

1. (1)

   1COBS 4.12B.50R provides that a debenture or preference share will fall within the definition of a speculative illiquid security where the proceeds of the issue are to be used by the issuer or a member of the issuer’s group to fund various activities including buying or acquiring investments (other than specified investments) or the buying or construction of real property.

2. (2)

   However, COBS 4.12B.54R(1) provides an exemption in cases where the investments (other than specified investments) that are bought or acquired, or the property which is bought or constructed are or will be used by the issuer or a member of the issuer’s group for a general commercial or industrial purpose which it carries on.

3. (3)

   General commercial or industrial purpose is defined in COBS 4.12B.55R.

4. (4)

   The effect of the exemption in COBS 4.12B.54R(1) is that a debenture or preference share will not be a speculative illiquid security where the proceeds of the issue are used by the issuer or a member of the issuer’s group to buy or acquire investments (other than specified investments), or to buy or construct real property, and the relevant investments or property are or will be used by the issuer or group member for the purposes of its own commercial or industrial activities. This is illustrated in the examples in (5) and (6) below.

5. (5)

   In relation to COBS 4.12B.50R(2)(c) (buying or acquiring investments other than specified investments):

   1. (a)

      where a company issues a debenture or preference share and uses the proceeds to purchase IT equipment for use in its business, to the extent that the IT equipment might be considered an investment, the debenture or preference share will benefit from the exemption because the IT equipment is used by the company for its own commercial activities (in this case, for use by its staff to provide services to customers);

   2. (b)

      where a supermarket chain issues a debenture or preference share and uses the proceeds to purchase stock (for example wine) for sale as part of its retail business, to the extent that the wine might be considered an investment, the debenture or preference share will benefit from the exemption because the wine is used by the supermarket for its own commercial activities (in this case, to sell it on to its retail customers for a profit);

   3. (c)

      where a company issues a debenture or preference share and uses the proceeds to buy or acquire art or fine wine as an investment, it will not benefit from the exemption because the art or fine wine will not be used by the company itself for its own commercial activities; if the art or fine wine is used to generate a pooled return, then the exemption would also not apply as a result of COBS 4.12B.55R(2)(a); and

   4. (d)

      where a company issues a debenture or preference share and uses the proceeds to purchase IT equipment for the purpose of hiring or leasing those out to another company, it will not benefit from the exemption because it is not using the IT equipment for its own commercial activities and hiring and leasing services are excluded from the definition of general commercial or industrial purpose as a result of COBS 4.12B.55R(2)(c).

6. (6)

   In relation to COBS 4.12B.50R(2)(d) or (e) (buying or constructing real property):

   1. (a)

      where a retailer issues a debenture or preference share and uses the proceeds to build a shop, the debenture or preference share will benefit from the exemption because the property is used by the retailer for its own commercial activities (in this case, the sale of goods);

   2. (b)

      where a property developer issues a debenture or preference share and uses the proceeds to fund the costs of a property development or construction of property, which is intended to be sold or rented out for commercial purposes or as residential dwellings, it will not benefit from the exemption because the development will not be used by the developer itself, and property development and construction services are excluded from the definition of general commercial or industrial purpose (see COBS 4.12B.55R(2)(b));

   3. (c)

      where a company issues a debenture or preference share to fund the costs of constructing a power station which the company intends to operate itself with a view to selling the electricity it produces, the debenture or preference share will benefit from the exemption (unless COBS 4.12B.54R(2) applies). That is because it will use the property for its own commercial or industrial activities (generating electricity). However, firms should also consider COBS 4.12B.54R(2) and the guidance in (7) below.

7. (7)

   COBS 4.12B.54R(2) provides that the general commercial or industrial purposes exemption does not apply where the ability of the issuer to pay the coupon or other income or to repay capital on maturity in relation to the debenture or preference share is wholly or predominantly linked to, contingent on, highly sensitive to, or dependent on, a return generated as a result of the matters referred to in COBS 4.12B.50R(2)(d) or (e) (buying or construction of real property).

8. (8)

   The effect of the above is that where a company issues a debenture or preference share for the purpose of buying real property, an interest in real property or funding the construction of a particular project and the company’s ability to pay interest on the debenture or preference share or repay capital depends on the success of that purchase or project, the exemption in COBS 4.12B.54R(1) will not apply. In those circumstances, the debenture or preference share will be a speculative illiquid security unless one of the other exemptions in COBS 4.12B.54R applies.