COBS 9.3 Guidance on assessing suitability

1. (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. (2)

   In the case of managing investments, a transaction might also be unsuitable if it would result in an unsuitable portfolio.

1. (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. (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.

When a firm is making a personal recommendation to a retail client about income withdrawals, uncrystallised funds pension lump sum payments3 or purchase of short-term annuities, it should consider all the relevant circumstances including:

1. (1)

   the client's investment objectives, need for tax-free cash and state of health;

2. (2)

   current and future income requirements, existing pension assets and the relative importance of the plan, given the client’s financial circumstances;

3. (3)

   the client’s attitude to risk, ensuring that any discrepancy is clearly explained between his or her3 attitude to an income withdrawal, uncrystallised funds pension lump sum payment3 or purchase of a short-term annuity and other investments.

1. (1)

   79When a firm is making a personal recommendation to a retail client about the investment of funds in the client’s capped drawdown pension fund or flexi-access drawdown pension fund its suitability assessment under COBS 9.2.1R(1)(a) should include consideration of pathway investments.

2. (2)

   Pathway investments do not need to be considered where the personal recommendation is to purchase a fixed-term product that:

   1. (a)

      provides a guaranteed income, a guaranteed capital return or both; and

   2. (b)

      does not expose the client to investment risk, if the client remains in the product for the fixed term.

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.

1. (1)

   Firms should note that restrictions and specific requirements apply to the retail distribution of certain investments:2

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   1. (a)

      non-mainstream pooled investments are subject to a restriction on financial promotions (see section 238 of the Act and COBS 4.12);

   2. (b)

      non-readily realisable securities are subject to a restriction on direct offer financial promotions (see COBS 4.7);

   3. (c)

      contingent convertible instruments and CoCo funds are subject to a restriction on sales and on promotions (see COBS 22.3);

   4. (d)

      mutual society shares are subject to specific requirements in relation to dealing and arranging activities (see COBS 22.3);4

   5. (e)

      deferred shares issued by a credit union are subject to specific requirements in relation to dealing and arranging activities (see CREDS 3A.5);4

   6. (f)

      credit union subordinated debt is subject to a restriction on direct offer financial promotions (see CREDS 3A.5);11

      4
   7. (g)

      11speculative illiquid securities are subject to a restriction on financial promotions (see COBS 4.14).

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2. (2)

   A firm should be satisfied that an exemption is available before recommending an investment subject to a restriction on distribution to a retail client, noting in particular that a personal recommendation to invest will generally incorporate a financial promotion.2

3. (3)
   1. (a)

      In addition to assessing whether the promotion is permitted, a firm giving advice on a designated investment subject to a restriction on distribution 2 should comply with their obligations in COBS 9 and ensure any personal recommendation is suitable for its client.

      2
   2. (b)
      2
      1. (i)

         In considering its obligations under COBS 9, a firm purchasing a designated investment subject to a restriction on distribution on behalf of a retail client as part of a discretionary management agreement should exercise particular care to ensure the transaction is suitable and in that client’s best interests, having regard to the FCA’s view that such designated investments pose particular risks of inappropriate distribution.2

      2. (ii)

         A restriction on promotion does not affect a transaction where there has been no prior communication with the client in connection with the investment by the firm or a person connected to the firm. Nonetheless, if promotion of a designated investment to a retail client would not have been permitted, then the discretionary manager’s decision to purchase it on behalf of the retail client should be supported by detailed and robust justification of his assessment of suitability.2

6Guidance on assessing suitability when a firm is making a personal recommendation for a retail client who is, or is eligible to be, a member of a pension scheme with safeguarded benefits and who is considering whether to transfer, convert or opt-out is contained in COBS 19.1.6G (in respect of full pension transfer or conversion advice or advice on a pension opt-out) and COBS 19.1A.11G (in respect of abridged advice).10