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COBS 9A.1 Application and purpose

1 Note: ESMA has also issued guidelines under article 16(3) of the ESMA Regulation on certain aspects of the MiFID suitability requirements . See https://www.esma.europa.eu/sites/default/files/library/2015/11/2012-387_en.pdf .

Application

COBS 9A.1.1 R 03/01/2018

This chapter applies to a firm which provides investment advice or portfolio management in the course of MiFID, equivalent third country or optional exemption business.

Effect of provisions marked “EU” for third country investment firms and MiFID optional exemption firms

COBS 9A.1.2 R 03/01/2018

Provisions in this chapter marked “EU” apply in relation to MiFID optional exemption business as if they were rules.

COBS 9A.1.3 G 03/01/2018

The effect of GEN 2.2.22AR is that provisions in this chapter marked “EU” also apply in relation to the equivalent business of a third country investment firm as if they were rules.

COBS 9A.2 Assessing suitability: the obligations

COBS 9A.2.1 R 03/01/2018

When providing investment advice or portfolio management a firm must:

(1)
obtain the necessary information regarding the client’s:
1. (a)
  knowledge and experience in the investment field relevant to the specific type of financial instrument or service;
2. (b)
  financial situation including his ability to bear losses; and
3. (c)
  investment objectives including his risk tolerance,
so as to comply with (2);
(2)
recommend investment services and financial instruments, or take the decision to trade, which is suitable for the client and, in particular, in accordance with the client’s risk tolerance and ability to bear losses.

[Note: first paragraph of article 25(2) of MiFID]

COBS 9A.2.2 G 03/01/2018

Firms should undertake a suitability assessment not only when making a personal recommendation to buy a financial instrument but for all decisions whether to trade, including making any personal recommendations about whether or not to buy, hold or sell an investment.

[Note: recital 87 to the MiFID Org Regulation]

COBS 9A.2.3 G 03/01/2018

Where a firm providing a portfolio management service makes a recommendation or request, or provides advice, to a client to the effect that the client should give or alter a mandate to the firm that defines the limits of the firm’s discretion, that recommendation, request or advice should be considered a recommendation for the purposes of COBS 9A.2.1R. A firm should therefore undertake a suitability assessment in relation to any such recommendation, request or advice.

[Note: recital 89 to the MiFID Org Regulation]

Assessing the extent of the information required

COBS 9A.2.4 EU 03/01/2018

54(2) Investment firms shall determine the extent of the information to be collected from clients in light of all the features of the investment advice or portfolio management services to be provided to those clients. Investment firms shall obtain from clients or potential clients such information as is necessary for the firm to understand the essential facts about the client and to have a reasonable basis for determining, giving due consideration to the nature and extent of the service provided, that the specific transaction to be recommended, or entered into in the course of providing a portfolio management service, satisfies the following criteria:

(a) it meets the investment objectives of the client in question, including client’s risk tolerance;

(b) it is such that the client is able financially to bear any related investment risks consistent with his investment objectives;

(c) it is such that the client has the necessary experience and knowledge in order to understand the risks involved in the transaction or in the management of his portfolio.

[Note: article 54(2) of the MiFID Org Regulation]

Professional clients

COBS 9A.2.5 EU 03/01/2018

54(3) Where an investment firm provides an investment service to a professional client it shall be entitled to assume that in relation to the products, transactions and services for which it is so classified, the client has the necessary level of experience and knowledge for the purposes of point (c) of paragraph 2.

Where that investment service consists in the provision of investment advice to a professional client covered by Section 1 of Annex II to Directive 2014/65/EU, the investment firm shall be entitled to assume for the purposes of point (b) of paragraph 2 that the client is able financially to bear any related investment risks consistent with the investment objectives of that client.

[Note: article 54(3) of the MiFID Org Regulation]

Obtaining information about knowledge and experience

COBS 9A.2.6 EU 03/01/2018

55(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:

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

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

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

Obtaining information about a client’s financial situation

COBS 9A.2.7 EU 03/01/2018

54(4) The information regarding the financial situation of the client or potential client shall include, where relevant, information on the source and extent of his regular income, his assets, including liquid assets, investments and real property, and his regular financial commitments.

[Note: article 54(4) of the MiFID Org Regulation]

Obtaining information about a client’s investment objectives

COBS 9A.2.8 EU 03/01/2018

54(5) The information regarding the investment objectives of the client or potential client shall include, where relevant, information on the length of time for which the client wishes to hold the investment, his preferences regarding risk taking, his risk profile, and the purposes of the investment.

[Note: article 54(5) of the MiFID Org Regulation]

Reliability of information

COBS 9A.2.9 EU 03/01/2018

54(7) Investment firms shall take reasonable steps to ensure that the information collected about their clients or potential clients is reliable. This shall include, but shall not be limited to, the following:

(a) ensuring clients are aware of the importance of providing accurate and up-to-date information;

(b) ensuring all tools, such as risk assessment profiling tools or tools to assess a client’s knowledge and experience, employed in the suitability assessment process are fit-for-purpose and are appropriately designed for use with their clients, with any limitations identified and actively mitigated through the suitability assessment process;

(c) ensuring questions used in the process are likely to be understood by clients, capture an accurate reflection of the client’s objectives and needs, and the information necessary to undertake the suitability assessment; and

(d) taking steps, as appropriate, to ensure the consistency of client information, such as by considering whether there are obvious inaccuracies in the information provided by clients.

[Note: article 54(7) of the MiFID Org Regulation]

Maintaining adequate and up-to-date information

COBS 9A.2.10 EU 03/01/2018

54(7) Investment firms having an on-going relationship with the client, such as by providing an on-going advice or portfolio management service, shall have, and be able to demonstrate, appropriate policies and procedures to maintain adequate and up-to-date information about clients to the extent necessary to fulfil the requirements under paragraph 2.

[Note: article 54(7) of the MiFID Org Regulation]

Discouraging the provision of information

COBS 9A.2.11 EU 03/01/2018

55(2) An investment firm shall not discourage a client or potential client from providing information required for the purposes of Article 25(2) and (3) of Directive 2014/65/EU.

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

Reliance on information

COBS 9A.2.12 EU 03/01/2018

55(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]

Insufficient information

COBS 9A.2.13 EU 03/01/2018

54(8) Where, when providing the investment service of investment advice or portfolio management, an investment firm does not obtain the information required under Article 25(2) of Directive 2014/65/EU, the firm shall not recommend investment services or financial instruments to the client or potential client.

[Note: article 54(8) of the MiFID Org Regulation]

COBS 9A.2.14 G 03/01/2018

Although a firm may not be permitted to make a personal recommendation or take a decision to trade because it does not have the necessary information, its client may still ask the firm to provide another service such as, for example, to arrange a deal or to deal as agent for the client. If this happens, the firm should ensure that it receives written confirmation of the instructions. The firm should also bear in mind the client’s best interests rule and any obligation it may have under the rules relating to appropriateness when providing the different service (see COBS 10A (Appropriateness (for non-advised services in relation to MiFID provisions))).

Identifying the subject of a suitability assessment

COBS 9A.2.15 EU 03/01/2018

54(6) Where a client is a legal person or a group of two or more natural persons or where one or more natural persons are represented by another natural person, the investment firm shall establish and implement policy as to who should be subject to the suitability assessment and how this assessment will be done in practice, including from whom information about knowledge and experience, financial situation and investment objectives should be collected. The investment firm shall record this policy.

Where a natural person is represented by another natural person or where a legal person having requested treatment as professional client in accordance with Section 2 of Annex II to Directive 2014/65/EU is to be considered for the suitability assessment, the financial situation and investment objectives shall be those of the legal person or, in relation to the natural person, the underlying client rather than of the representative. The knowledge and experience shall be that of the representative of the natural person or the person authorised to carry out transactions on behalf of the underlying client.

[Note: article 54(6) of the MiFID Org Regulation]

Bundled packages

COBS 9A.2.16 R 03/01/2018

Where a firm provides a personal recommendation recommending a package of services or products bundled pursuant to COBS 6.1ZA.16R1, the firm must ensure that the overall bundled package is suitable for the client.

[Note: second paragraph of article 25(2) of

MiFID]

COBS 9A.2.17 G 03/01/2018

When considering the suitability of a particular financial instrument 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 have regard to any applicable suitability rules in MCOB.

Switching

COBS 9A.2.18 EU 03/01/2018

54(11) When providing investment advice or portfolio management services that involve switching investments, either by selling an instrument and buying another or by exercising a right to make a change in regard to an existing instrument, investment firms shall collect the necessary information on the client’s existing investments and the recommended new investments and shall undertake an analysis of the costs and benefits of the switch, such that they are reasonably able to demonstrate that the benefits of switching are greater than the costs.

[Note: article 54(11) of the MiFID Org Regulation]

Adequate policies and procedures

COBS 9A.2.19 EU 03/01/2018

54(9) Investment firms shall have, and be able to demonstrate, adequate policies and procedures in place to ensure that they understand the nature, features, including costs and risks of investment services and financial instruments selected for their clients and that they assess, while taking into account cost and complexity, whether equivalent investment services or financial instruments can meet their client’s profile.

[Note: article 54(9) of the MiFID Org Regulation]

Unsuitability

COBS 9A.2.20 EU 03/01/2018

54(10) When providing the investment service of investment advice or portfolio management, an investment firm shall not recommend or decide to trade where none of the services or instruments are suitable for the client.

[Note: article 54(10) of the MiFID Org Regulation]

Guidance on assessing suitability

COBS 9A.2.21 G 03/01/2018

(1)
A transaction may be unsuitable for a client due to the risks of the associated financial instruments, the type of transaction, the characteristics of the order or the frequency of the trading.
(2)
A series of transactions, each of which are 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.
(3)
In the case of portfolio management, a transaction might be unsuitable if it would result in an unsuitable portfolio.

[Note: recital 88 to the MiFID Org Regulation]

Investments subject to restrictions on retail distribution

COBS 9A.2.22 G 03/01/2018

(1)
Firms should note that restrictions and specific requirements apply to the retail distribution of certain financial instruments:
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)
  mutual society shares are subject to specific requirements in relation to dealing and arranging activities (see COBS 22.2);
4. (d)
  contingent convertible instruments and CoCo funds are subject to a restriction on sales and on promotions (see COBS 22.3).
(2)
A firm should be satisfied that an exemption is available before recommending a financial instrument 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.
(3)
In addition to assessing whether the promotion is permitted, a firm giving advice on a financial instrument subject to a restriction on distribution should comply with their obligations in COBS 9A and ensure any personal recommendation is suitable for its client.
(4)
In considering its obligations under COBS 9A, a firm purchasing a financial instrument 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 the client’s best interests, having regard to the FCA’s view that such financial instruments pose particular risks of inappropriate distribution.
(5)
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 financial instrument 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.

Automated or semi-automated systems

COBS 9A.2.23 EU 03/01/2018

54(1) Where investment advice or portfolio management services are provided in whole or in part through an automated or semi-automated system, the responsibility to undertake the suitability assessment shall lie with the investment firm providing the service and shall not be reduced by the use of an electronic system in making the personal recommendation or decision to trade.

[Note: second paragraph of article 54(1) of the MiFID Org Regulation]

COBS 9A.3 Information to be provided to the client

Explaining the reasons for assessing suitability

COBS 9A.3.1 EU 03/01/2018

54(1) Investment firms shall not create any ambiguity or confusion about their responsibilities in the process when assessing the suitability of investment services or financial instruments in accordance with Article 25(2) of Directive 2014/65/EU. When undertaking the suitability assessment, the firm shall inform clients or potential clients, clearly and simply, that the reason for assessing suitability is to enable the firm to act in the client’s best interest.

[Note: first paragraph of article 54(1) of the MiFID Org Regulation]

Suitability reports

COBS 9A.3.2 R 03/01/2018

(1)
[deleted]1
(2)
When providing investment advice to a retail client 1, a firm must, before the transaction is concluded, provide the client with a suitability report in a durable medium specifying the advice given and how that advice meets the preferences, objectives and other characteristics of the client.
(3)
Where the agreement to buy or sell a financial instrument is concluded using a means of distance communication which prevents the prior delivery of the suitability report, the firm may provide the suitability report in a durable medium immediately after the client is bound by any such agreement, provided both the following conditions are met:
1. (a)
  the client has consented to receiving the suitability report without undue delay after the conclusion of the transaction; and
2. (b)
  the firm has given the client the option of delaying the transaction in order to receive the suitability report in advance.
(4)
Where a firm provides a portfolio management service or has informed the client that it will carry out periodic assessment of suitability, the periodic report, provided under COBS 16A.2.1R, must contain an updated statement of how the client’s investments meet the preferences, objectives and other characteristics of the client.

[Note: second, third and fourth paragraphs of article 25(6) of, and recital 82 to, MiFID]

Providing a suitability report

COBS 9A.3.3 EU 03/01/2018

54(12) When providing investment advice, investment firms shall provide a report to the retail client that includes an outline of the advice given and how the recommendation provided is suitable for the retail client, including how it meets the client’s objectives and personal circumstances with reference to the investment term required, client’s knowledge and experience and client’s attitude to risk and capacity for loss.

Investment firms shall draw clients’ attention to and shall include in the suitability report information on whether the recommended services or instruments are likely to require the retail client to seek a periodic review of their arrangements.

Where an investment firm provides a service that involves periodic suitability assessments and reports, the subsequent reports after the initial service is established may only cover changes in the services or instruments involved and/or the circumstances of the client and may not need to repeat all the details of the first report.

[Note: article 54(12) of the MiFID Org Regulation]

COBS 9A.3.4 G 03/01/2018

When providing a suitability report, a firm should consider the requirements in COBS 4.2.1R to ensure that the contents of the suitability report are fair, clear and not misleading.

COBS 9A.3.5 G 03/01/2018

Situations that are likely to require a retail client to seek a periodic review of their arrangements include where a client is likely to need to seek advice to bring a portfolio of investments back in line with the original recommended allocation where there is a probability that the portfolio could deviate from the target asset allocation.

[Note: recital 85 to the MiFID Org Regulation]

Periodic assessments

COBS 9A.3.6 R 03/01/2018

A firm must, in good time before it provides its investment advice, inform the client whether it will provide the client with a periodic assessment of the suitability of the financial instruments recommended to the client.

[Note: article 24(4)(a)(iii) of MiFID]

COBS 9A.3.7 G 03/01/2018

COBS 9A.3.6R supplements COBS 2.2A.2R (information disclosure before providing services (MiFID provisions)).

COBS 9A.3.8 EU 03/01/2018

52(5) Investments firms providing a periodic assessment of the suitability of the recommendations provided pursuant to Article 54(12) shall disclose all of the following:

(a) the frequency and extent of the periodic suitability assessment and where relevant, the conditions that trigger that assessment;

(b) the extent to which the information previously collected will be subject to reassessment; and

[Note: article 52(5) of the MiFID Org Regulation]

COBS 9A.3.9 EU 03/01/2018

54(13) Investment firms providing a periodic suitability assessment shall review, in order to enhance the service, the suitability of the recommendations given at least annually. The frequency of this assessment shall be increased depending on the risk profile of the client and the type of financial instruments recommended.

[Note: article 54(13) of the MiFID Org Regulation]

COBS 9A.4 Record keeping and retention periods for suitability records

COBS 9A.4.1 G 03/01/2018

A firm to which SYSC 9 applies is required to keep orderly records of its1 business and internal organisation (see SYSC 9, General rules on record-keeping1). The records may be expected to reflect the different effect of the requirements in this chapter depending on whether the client is a retail client or a professional client; for example, in respect of information about the client which the firm must obtain and whether the firm is required to provide a suitability report.

COBS 9A.4.2 G 03/01/2018

A firm should refer to SYSC 9 for its obligations in relation to record keeping.

[Note: article 16(7) of MiFID]

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