COBS 9.3 Guidance on assessing suitability
- (1)
A transaction may be unsuitable for a client because of the risks of the designated investments involved, the type of transaction, the characteristics of the order or the frequency of the trading.
- (2)
In the case of managing investments, a transaction might also be unsuitable if it would result in an unsuitable portfolio.
[Note: recital 57 to the MiFID implementing Directive]
Churning and switching
- (1)
A series of transactions that are each suitable when viewed in isolation may be unsuitable if the recommendation or the decisions to trade are made with a frequency that is not in the best interests of the client.
- (2)
A firm should have regard to the client's agreed investment strategy in determining the frequency of transactions. This would include, for example, the need to switch a client within or between packaged products.
[Note: recital 57 to the MiFID implementing Directive]
Income withdrawals and short-term annuities
When a firm is making a personal recommendation to a retail client about income withdrawals or purchase of short-term annuities, it should consider all the relevant circumstances including:
- (1)
the client's investment objectives, need for tax-free cash and state of health;
- (2)
current and future income requirements, existing pension assets and the relative importance of the plan, given the client’s financial circumstances;
- (3)
the client’s attitude to risk, ensuring that any discrepancy is clearly explained between his attitude to an income withdrawal or purchase of a short-term annuity and other investments.
Loans and mortgages
When considering the suitability of a particular investment product which is linked directly or indirectly to any form of loan, mortgage or home reversion plan, a firm should take account of the suitability of the overall transaction. The firm should also have regard to any applicable suitability rules in MCOB.