Content Options

View Options

Status: You are viewing the version of the handbook as on 2007-10-31.

COB 5.3 Suitability

Application

COB 5.3.1R

This section applies to a firm when it:

  1. (1)

    makes a personal recommendation concerning a designated investment to a private customer; or

  2. (2)

    acts as an investment manager for a private customer; or

  3. (3)

    manages the assets of an occupational pension scheme (OPS), personal pension scheme14 or stakeholder pension scheme; or

    14
  4. (4)

    promotes a personal pension scheme by means of a direct offer financial promotion to a group of employees; or9

  5. (5)

    if the firm is not an insurer, makes a personal recommendation to an intermediate customer or a market counterparty to take out a life policy9;10

but this section does not apply to a firm when providing basic advice on a stakeholder product.10

COB 5.3.2G

This section does not apply to a firm in respect of a direct offer financial promotion, except in respect of a promotion of a personal pension scheme under COB 5.3.28 R.

COB 5.3.3G

Firms are reminded of the requirements of COB 3.9.6 R (Direct offer financial promotions: general requirements). A direct offer financial promotion must make it clear that, if a private customer is in any doubt about the suitability of the agreement which is the subject of the promotion, he should contact the firm, or another appropriate firm if the firm does not offer advice.97

Purpose

COB 5.3.4G

Principle 9 (Customers: relationships of trust) requires a firm to take reasonable care to ensure the suitability of its advice and discretionary decisions. The purpose of this section is to amplify this requirement. The nature of the steps firms need to take will vary greatly, depending on the needs and priorities of the private customer, the type of investment or service being offered, and the nature of the relationship between the firm and the private customer and, in particular, whether the firm is giving a personal recommendation or acting as a discretionary investment manager.

Requirement for suitability generally

COB 5.3.5R
  1. (1)

    A firm must take reasonable steps to ensure that, if in the course of designated investment business:9

    1. (a)

      it makes any personal recommendation to a private customer to:9

      1. (i)

        buy, sell, subscribe for or underwrite a designated investment (or to exercise any right conferred by such an investment to do so); or9

      2. (ii)

        elect to make income withdrawals, or purchase a short-term annuity or not13; or9

      3. (iii)

        enter into a pension transfer or pension opt-out from an occupational pension scheme; or9

    2. (b)

      it effects a discretionary transaction for a private customer (except as in (5)); or9

    3. (c)

      it makes a personal recommendation to an intermediate customer or a market counterparty to take out a life policy;9

    the advice on investments or transaction is suitable for the client.9

  2. (2)

    If the recommendation or transaction in (1) relates to a packaged product:9

    1. (a)

      it must, subject to COB 5.3.8 G - COB 5.3.10 R, be the most suitable from the range of packaged products, on which advice on investments is given to the client as determined by COB 5.1.7 R; and9

    2. (b)

      if there is no packaged product in the firm's relevant range of packaged products which is suitable for the client, no recommendation must be made.9

  3. (3)

    In making the recommendation or effecting the transaction in (1), the firm must have regard to:9

    1. (a)

      the facts disclosed by the client; and9

    2. (b)

      other relevant facts about the client of which the firm is, or reasonably should be, aware.9

  4. (4)

    A firm which acts as an investment manager for a private customer must take reasonable steps to ensure that the private customer's portfolio or account remains suitable, having regard to the facts disclosed by the private customer and other relevant facts about the private customer of which the firm is or reasonably should be aware.9

  5. (5)

    Where, with the agreement of the private customer, a firm has pooled his funds with those of others with a view to taking common discretionary management decisions, the firm must take reasonable steps to ensure that a discretionary transaction is suitable for the fund, having regard to the stated investment objectives of the fund.9

COB 5.3.5AG
  1. (1)

    9If circumstances arise in which a firm reasonably concludes that there are several packaged products in the relevant range which would satisfy the test in COB 5.3.5 R (2), it will act in conformity with that rule if it recommends only one of those products.

  2. (2)

    If a client does not wish to proceed in accordance with a recommendation, a firm may nonetheless make further recommendations providing any such recommendation is suitable for the client in accordance with the obligation in COB 5.3.5 R.

COB 5.3.6R

9[deleted]

COB 5.3.7R

9[deleted]

COB 5.3.8G

9[deleted]

9Suitability of packaged products: out-of-range recommendations

COB 5.3.8AR
  1. (1)

    9A firm when not selecting packaged products from the whole market (and notwithstanding COB 5.3.5 R (2)) may recommend a packaged product outside the range of packaged products on which it provides advice to a particular client if the recommended packaged product is suitable for the client and had it been included would have been at least as suitable as the most suitable packaged product in that range.

  2. (2)

    A firm must take reasonable steps to ensure that an appointed representative of a firm only acts as in (1) with its explicit written permission, either generally or in relation to the specific recommendation.

COB 5.3.8BG

9COB 5.3.8A R enables a firm to advise on packaged products from outside a particular range ofpackaged product. This will enable such advising on investments to be given on a one-off basis by firms which have only one range of packaged products and by other firms which may have more than one but without the firm needing to change the scope or range of the advice on investments which the client is expecting to receive.

COB 5.3.9R

[deleted]

19
COB 5.3.10R

[deleted]

19

9Requirement for suitability: whole-of-market advisers

COB 5.3.10AR
  1. (1)

    9A firm which holds itself out as giving personal recommendations to private customers on packaged products from the whole market (or the whole of a sector of that market) must not give any such personal recommendation unless it:

    1. (a)

      has carried out a reasonable analysis of a sufficiently large number of packaged products which are generally available from the market (or sector of the market); and

    2. (b)

      conducts the analysis in (a) on the basis of criteria which reflect adequate knowledge of the packaged products generally available from the market as a whole (or from a relevant sector).

  2. (2)

    A firm in (1) must satisfy the obligation in COB 5.3.5 R (2) by taking reasonable steps to ensure that a personal recommendation given to a private customer is:

    1. (a)

      in accordance with its analysis carried out under (1); and

    2. (b)

      is the packaged product which on the basis of that analysis is the most suitable to meet the customer's needs.

COB 5.3.10BR
  1. (1)

    9A firm which holds itself out as giving personal recommendations to intermediate customers or market counterparties on life policies from the whole market (or from a relevant sector) must not give any such personal recommendation unless it:

    1. (a)

      has carried out an analysis of a sufficiently large number of life policies which are generally available from the market (or sector of the market); and

    2. (b)

      conducts the analysis in (a) on the basis of criteria which reflect adequate knowledge of the life policies generally available from the market as a whole (or from a relevant sector).

  2. (2)

    A firm in (1) must satisfy the obligation in COB 5.3.5 R (2) by taking reasonable steps to ensure that a personal recommendation given to a client is:

    1. (a)

      in accordance with its analysis carried out under (1); and

    2. (b)

      for a life policy which on the basis of that analysis is suitable to meet the client's needs.

COB 5.3.11G

[deleted]

19

Requirement for suitability: manager of OPS, personal pension scheme14 and stakeholder pension scheme

COB 5.3.12R

A firm that manages the assets of an occupational pension scheme, personal pension scheme14 or stakeholder pension scheme must take reasonable steps to ensure the suitability of specific transactions and of the investment portfolio under management with regard to the investment objectives specified in the portfolio mandate.8

Requirements for suitability: other specific requirements

COB 5.3.13G
  1. (1)

    COB 5.3.20 R contains specific rules applicable to the suitability of broker funds.

  2. (2)

    COB 5.3.21 R - COB 5.3.27 R contain specific rules applicable to the suitability of pension transfers and pension opt-outs.

  3. (3)

    COB 5.3.28 R contains specific rules applicable to the promotion of personal pension schemes, including group personal pension schemes by means of direct offer financial promotions.

  4. (4)

    COB 5.3.29 G contains guidance which is relevant for assessing the suitability of:

    1. (a)

      pension transfers and pension opt-outs;

    2. (b)

      personal pension schemes and free-standing additional voluntary contributions (FSAVCs) compared to stakeholder pension schemes;

    3. (c)

      hybrid products;

    4. (d)

      industrial assurance policies;

    5. (e)

      income withdrawals and short-term annuities13;

    6. (f)

      ISA, PEP or CTF transfers; and6

    7. (g)

      contracting out of SERPS; and6

    8. (h)

      borrowing to invest.68

Requirement for a suitability letter: other specific requirements9

COB 5.3.14R
  1. (1)

    A firm that gives a personal recommendation, in relation to a life policy, to a person who is a policyholder or a prospective policyholder of a life policy, must provide the person with a suitability letter prior to the conclusion of the contract, unless one of the exceptions in COB 5.3.19 R applies.39

  2. (2)

    If, following a personal recommendation by a firm that does not fall within (1), a private customer:9

    1. (a)

      buys, sells, surrenders, converts, cancels, or suspends premiums for or contributions to, a personal pension scheme14 or a stakeholder pension scheme; or9

      14
    2. (b)

      elects to make income withdrawals or purchase a short-term annuity13; or 9

    3. (c)

      acquires a holding in, or sells all or part of a holding in, a scheme; or9

    4. (d)

      enters into a pension transfer or pension opt-out from an OPS;9

    the firm must provide the customer with a suitability letter, within the time period stipulated by COB 5.3.18 R, unless one of the exceptions in COB 5.3.19 R applies.

COB 5.3.15G

A suitability letter is not required in respect of a personal recommendation made by a firm to buy or sell shares or units in a regulated collective investment scheme when the firm is acting as an investment manager for a private customer (see COB 5.3.19 R (1)).

COB 5.3.16R

The suitability letter in COB 5.3.14 R must:

  1. (1)

    explain why the firm has concluded that the transaction is suitable for the customer, having regard to his personal and financial circumstances;

  2. (2)

    contain a summary of the main consequences and any possible disadvantages of the transaction;

  3. (3)
    1. (a)

      in the case of a personal pension scheme which is not a stakeholder pension scheme, explain the reasons why the firm considers the personal pension scheme to be at least as suitable as a stakeholder pension scheme;

    2. (b)

      in the case of an FSAVC:

      1. (i)

        if the customer has the alternative of a stakeholder pension scheme, explain the reasons why the firm considers the recommended contract to be at least as suitable as a stakeholder pension scheme or as any additional voluntary contribution (AVC) or the facility to make additional contributions to the occupational pension scheme which may be available; or

      2. (ii)

        if the customer does not have the alternative of a stakeholder pension scheme, explain the reasons why the firm considers the recommended contract to be at least as suitable as any AVC or the facility to make additional contributions to the occupational pension scheme which may be available;9

  4. (4)

    identify the individual who is authorised by the firm to advise on the type of product that has been recommended;9

  5. (5)

    if the recommended product is from a product provider (or if relevant, an undertaking in the immediate group of that provider) which is identified in section 6 of the firm'sinitial disclosure document given in accordance with COB 4.3.3R (1), include the information given in section 6 or in section 6 of the firm's combined initial disclosure document; and9

  6. (6)

    in the case of a recommendation by a firm under COB 5.3.8A R (Suitability of packaged products: out-of-range recommendations) explain why it has recommended a packaged product outside the firm'srange of packaged products, including why it is suitable for the customer.9

COB 5.3.17G

COB 5.3.30 G provides guidance on the contents of suitability letters.

COB 5.3.18R

The firm must provide the letter required by COB 5.3.14 R (2) to the customer:9

  1. (1)

    in the case of a pension contract or stakeholder pension scheme, where the cancellation rules require notification of the right to cancel, no later than the fourteenth day after the contract is concluded; or 359

  2. (2)

    in any other case, when or as soon as possible after the transaction is effected.

COB 5.3.18AR

9A firm may provide a statement of demands and needs to the client orally, instead of the suitability letter in COB 5.3.14 R, if:

  1. (1)

    the client requests it; or

  2. (2)

    immediate cover is necessary;

but in both cases the firm must provide the suitability letter immediately after the conclusion of the contract, on a durable medium.

COB 5.3.18BR

9If the only contact between the firm and the client before conclusion of the contract is by telephone, the suitability letter must be provided immediately after the conclusion of the contract, on a durable medium.

9Suitability: intermediate customers and market counterparties

COB 5.3.18CR
  1. (1)

    9If a firm makes a personal recommendation to an intermediate customer or a market counterparty to take out a life policy, it must explain to the client the reasons for personally recommending that life policy.

  2. (2)

    The explanation required under (1) must:

    1. (a)

      take account of the complexity of the life policy proposed; and

    2. (b)

      be provided to the client before the contract is concluded.

COB 5.3.18DG

9A firm should take the following into account when explaining the reasons for a personal recommendation to an intermediate customer or a market counterparty in accordance with COB 5.3.18A R:

  1. (1)

    the firm should explain why the client's demands and needs combine to make the recommended contract suitable for the client;

  2. (2)

    the firm should not merely state what contract is being recommended with no link to the client's demands and needs;

  3. (3)

    a firm that offers contracts from more than one insurance undertaking should include a statement of why a particular insurance undertaking has been recommended; reasons may include contract features not available anywhere else, price, or service levels.

Exceptions from requirement to provide a suitability letter

COB 5.3.19R

COB 5.3.14 R does not apply:

  1. (1)

    if the firm is acting as an investment manager for a private customer and makes a personal recommendation relating to a regulated collective investment scheme;

  2. (2)

    if the firm is not acting as an outgoing ECA provider, and the customer is habitually resident in another EEA State at the time of acknowledging consent to the proposal form to which the personal recommendation relates;

  3. (3)

    if the customer is habitually resident outside the EEA and the customer is not present in the United Kingdom (or EEA in the case of a firm acting as an outgoing ECA provider) at the time of acknowledging consent to the proposal form to which the personal recommendation relates;

  4. (4)

    to any personal recommendation by a friendly society for a life policy sold by it with a premium not exceeding £50 a year or, if payable weekly, £1 a week;9

  5. (5)

    to any personal recommendation to increase a regular premium to an existing contract; and

  6. (6)

    to any personal recommendation to invest additional single premiums or single contributions to an existing packaged product to which a single premium or single contribution has previously been paid.2

Record keeping requirements

COB 5.3.19AR

3A firm must make and retain a record of a private customer's suitability letter that it has provided in satisfying COB 5.3.14 R. The record must be retained for a minimum period after the letter is provided, as follows:

  1. (1)

    for a record relating to a pension transfer, pension opt-out or free-standing additional voluntary contribution (FSAVC), indefinitely;

  2. (2)

    for a record relating to a life policy, personal pension scheme14 or stakeholder pension scheme, six years;

    14
  3. (3)

    in any other case, three years.

Suitability of broker funds

COB 5.3.20R

A firm acting as a broker fund adviser for a private customer must:

  1. (1)

    take account of the characteristics of the broker fund, including the charging arrangements, in total, when assessing the suitability of the arrangements;

  2. (2)

    review on a regular basis the customer's current investment objectives and strategies relative to those at the time of any previous periodic report to the customer in accordance with COB 8.2.4 R (Requirement for a periodic statement);

  3. (3)

    follow up the review with a recommendation in writing to the customer, to be provided at least annually, either to continue with the investment or to withdraw, and in either case to supply reasons for the recommendation;

  4. (4)

    provide the customer with an alternative recommendation if the broker fund arrangement is no longer suitable; and

  5. (5)

    ensure that any significant change in the investment strategy of the fund, where known to the firm, is notified to the customer in advance together with confirmation why the fund continues to be suitable for the customer's circumstances or an alternative recommendation.

Suitability of pension transfers and opt-outs

COB 5.3.21R

If a personal recommendation about a pension transfer or pension opt-out is to be made on a firm's behalf by an individual who is not one of its pension transfer specialists, the firm must have established procedures for checking:

  1. (1)

    the individual's compliance with the firm's procedures;

  2. (2)

    the correctness of the application of the transfer value analysis system, where applicable; and

  3. (3)

    the merits of the proposed transaction and the suitability of the recommendation;

and any such recommendation must be assessed by one of the firm's designated pension transfer specialists to ensure the procedures have been followed.

COB 5.3.22R
  1. (1)

    A firm must ensure that a transfer value analysis is carried out in accordance with COB 6.6.87 R - COB 6.6.93 R (Projections) before it makes any recommendation to a customer to transfer out of a defined benefits pension scheme.

  2. (2)

    A copy of the analysis must be delivered with the key features document or otherwise provided to the customer before he gives consent to the application to transfer.

  3. (3)

    The firm must take reasonable steps to ensure the customer understands the analysis, drawing attention to factors which do and do not support the recommendation to transfer.

COB 5.3.23R

A firm must provide a projection of the possible future benefits of the proposed individual pension contract before it makes any personal recommendation to a customer to opt out of, or transfer from, an occupational pension scheme.

  1. (1)

    The format and nature of the benefits given in the projection must, so far as possible, be the same as those which apply under the occupational pension scheme of which the customer is, or is eligible to become, a member.

  2. (2)

    If it is not possible for the benefits shown in the projection to replicate those of the occupational pension scheme, an explanation must be given.

  3. (3)

    If the customer has expressed an interest in changing the structure of his eventual benefits, an additional projection may also be prepared on that basis.

COB 5.3.24R

A suitability letter relating to a personal recommendation to opt out of or transfer from an occupational pension scheme must include:

  1. (1)

    a summary of the disadvantages as well as the advantages of opting out or transferring; and

  2. (2)

    in the case of a pension opt out, a financial analysis explaining the decision to opt-out.

COB 5.3.25R

If, contrary to the advice of the firm, a private customer instructs the firm to arrange a pension opt-out or pension transfer, the firm must:

  1. (1)

    make and retain a clear record of the firm's advice that the private customer should not proceed with the pension opt-out or pension transfer and the private customer's instructions to proceed with the transaction; and

  2. (2)

    provide a further confirmation and explanation, in writing, to the private customer that the firm's advice is that the private customer should not proceed with the pension opt-out or pension transfer.

COB 5.3.26R

[deleted]11

COB 5.3.27R

A firm must keep separate records for each private customer of every pension transfer, pension opt-out or free-standing additional voluntary contribution (FSAVC) which it has arranged, whether advised or not, and retain these records indefinitely.

Suitability of personal pension schemes: promotions to employees

COB 5.3.28R

When a firm promotes a personal pension scheme including a group personal pension scheme, by means of a direct offer financial promotion to a group of employees, the firm must;

  1. (1)

    be satisfied on reasonable grounds that the pension scheme is likely to be at least as suitable for the majority of the employees as a stakeholder pension scheme;

  2. (2)

    record why it thinks the promotion is justified; and

  3. (3)

    retain the record for a minimum period of six years after the financial promotion is last communicated.3

COB 5.3.29G

Guidance on matters which should be taken into account when assessing the suitability of various personal recommendations. This table belongs to COB 5.3.13 G (4).

9999888966666

Suitability of guidance

A

Pension Transfers and Pension Opt-outs

1

When advising a customer who is, or is eligible to be, an active member of a defined benefits occupational pension scheme whether he should opt out or transfer, a firm should:

(a)

start by assuming it will not be suitable; and

(b)

only then consider it to be suitable if it can clearly demonstrate on the evidence available at the time that it is in the customer's best interests.

2

When the firm is recommending a customer to transfer or opt out of any other type of occupational pension scheme, the suitability letter should include:

(a)

a clear explanation why transferring or opting out is more suitable than remaining in the occupational pension scheme;

(b)

a request for the customer to contact the firm immediately should clarification or further information be needed or if the letter does not match the customer's understanding of why the transfer or opt-out has been recommended;

(c)

a statement to the effect that the firm has relied on information supplied by the customer and the occupational pension scheme;

(d)

particularly with pension opt-outs, an arithmetical analysis setting out the financial implications of leaving the scheme;

Pension Opt-outs only

3.

When advising on a pension opt-out from an occupational pension scheme, a firm should:

(a)

identify all the rights and benefits available to the customer under the occupational pension scheme and carefully consider the effect of replacing them with the very different benefits of a personal pension; the following factors should be taken into account relating to the occupational pension scheme:

(i)

spouse's, civil partner's, 12dependants' and children's pensions;

(ii)

early retirement provision, including retirement in ill-health;

(iii)

revaluation rates both in deferment and payment, and whether they are guaranteed or discretionary (and if discretionary, whether likely to continue);

(iv)

ancillary benefits (for example, tax-free cash or lump-sum death benefits);

(v)

transfer club arrangements, where applicable;

(vi)

the customer's contribution and the employer's contribution;

(vii)

benefits on leaving service;

(viii)

whether or not eligibility for other benefits, such as permanent health insurance, is dependent on being a member of the occupational pension scheme;

(ix)

the financial security of the occupational pension scheme, by reference (for example) to the last actuarial statement or the most recent trustee's report and accounts; and

(b)

take into account the following additional factors:

(i)

whether or not the employer would contribute to the personal pension scheme;

(ii)

the charging structure of the personal pension and its impact on transfer values in the early years;

(iii)

subjective factors relating to the customer's personal circumstances such as;

-

future career plans and earning prospects (including any reasonable likelihood of career progression making better occupational terms available) and intended retirement date;

-

attitude towards earnings-related compared with money-purchase benefits;

-

attitude to financial risk and security;

-

a possible wish to make pension arrangements separate from employment (for example, because the customer is on a short-term non-renewable employment contract or does not expect to stay in his current employment for more than a short period);

-

any value the customer attaches to personal control;

-

the customer's cash needs;

(c)

if the customer is about to change, or has just changed, employment, consider the issues in (ii) and (iii) in relation to any scheme of the new employer for which the customer is eligible now, or will become eligible in the near future;

(d)

if the customer is an active or prospective member of a money-purchase occupational scheme, follow 1- 3 to the extent that the factors listed are relevant to such schemes taking particular account of differences in costs and charges.

Pension Transfers only

4.

(a)

Advising a customer on the suitability of transferring deferred benefits from a defined benefits occupational pension scheme requires detailed consideration of the ceding scheme compared to the individual pension contract to which the transfer would take place. A process will be needed which should include procedures:

(i)

for gathering ceding scheme information as detailed in (b);

(ii)

to assess the customer's attitude to risk and security; this is relevant not merely to the choice of contract or fund, but also (and more fundamentally) to the initial choice between an occupational pension scheme and an individual pension contract;

(iii)

to ascertain the customer's career aspirations and desired retirement age and to consider what a realistic retirement age would be, having regard to the size of the transfer value and the extent to which it can be converted into a stream of income before State pension age;

(iv)

to ascertain whether the customer's new employer (if any) has arrangements to accept transferred benefits, as if so a further analysis may be necessary;

(v)

enabling the representative to look at other pension options, if available;9

(vi)

for carrying out a transfer value analysis;

(vii)

for enabling the customer to receive sufficient, clear information to make an informed investment decision (see (iii)).

(b)

The following information as a minimum will be needed from the ceding scheme in respect of the customer:

(i)

spouse's, civil partner's, 12dependants' and children's pensions;

(ii)

early retirement provision, including retirement in ill-health;

(iii)

transfer value quotation detailing:

-

guarantee period;

-

pre- and post- April 1988 Guaranteed Minimum Pension and Excesses;

-

revaluation rates in deferment and payment and whether they are guaranteed or discretionary and if discretionary whether they are likely to continue and how far they are reflected in the transfer value;

-

tax-free cash arrangements;

(iv)

lump-sum death benefits;

(v)

transfer club arrangements, if applicable;

(vi)

relevant earnings;

(vii)

period of service;

(viii)

scheme details (for example benefits, bridging pensions, guarantee periods, position pre- and postnormal retirement date, history of discretionary increases);

(ix)

whether members' benefits have been equalised for service from 17 May 1990;

(x)

ill-health benefits;

(xi)

a consideration of the scheme's financial position and whether the transfer value has been reduced because the scheme is underfunded.

(c)

Relevant items of information about the customer include:

(i)

the different risks of personal pension schemes and defined benefit pension schemes;

(ii)

the impact of fluctuations in annuity rates on the size of the eventual pension;

(iii)

the impact of protected rights on the planned retirement date;

(iv)

any changes to the tax-free lump-sum;

(v)

any reduction in immediate death benefits;

(vi)

the transfer value analysis including an indication of the rate of growth needed to ensure the investor is no worse off as a result of any transfer;

(vii)

the position and interests of the customer's spouse , civil partner 12and dependants.

(d)

(a) - (c) also apply to prospective money-purchase benefits transfers where appropriate; and additional information concerning the customer should be considered, including:

(i)

the possibility of incurring early transfer penalties and new front-end charges;

(ii)

how the transfer affects the investment risk;

(iii)

how the effects of charges and expenses differ between the schemes;

(iv)

changes to the tax-free cash;

(v)

any reduction in immediate death benefits.

B.

Personal Pension Schemes and FSAVCs compared to Stakeholder Pension Schemes

1.

A particular feature of the personal pension scheme market is that a potential investor in a personal pension scheme will always have the option of a stakeholder pension scheme and may find that equally suitable for his or her needs.

2.

Representatives will need to undertake the comparison between personal pension schemes and stakeholder pension schemes and, as required by COB 5.3.16 R (3), explain in the suitability letter why, if they have recommended a personal pension scheme, it is considered to be at least as suitable.9

3.

There are some circumstances where a potential investor in an FSAVC will have the option of a stakeholder pension scheme, in addition to the option of an in-house AVC.

4.

Representatives will need to undertake a comparison between the three options and explain in the suitability letter why, if they have recommended an FSAVC, it is considered to be at least as suitable as a stakeholder pension scheme or the in-house AVC.9

5.

If a representative without access to a stakeholder pension scheme makes a comparison with a stakeholder pension scheme, the comparison may be with a stakeholder pension scheme on the minimum product standards unless the representative is or ought to be aware that the customer has access to a stakeholder pension scheme on more advantageous terms.

6.

The guidance in this section of the table applies equally to recommendations for individual and group personal pensions, even though the latter may, in accordance with Regulation 22 of the Stakeholder Pension Scheme Regulations 2000 (SI 2000/1403), exempt an employer from having to designate a stakeholder pension scheme for his employees.

7.

Firms are reminded that key features documents for personal pension schemes should signpost the availability of , as set out in COB 6.5.21 (5).

8.

Firms promoting a personal pension scheme (including a group personal pension scheme) to the employees of a particular employer through direct offer financial promotion are reminded of the provisions of COB 5.3.28 R. Accordingly, firms should take reasonable care to ensure that the personal pension scheme is likely to be at least as suitable as a stakeholder pension scheme for the majority of employees to whom the personal pension scheme is being promoted, and that this is adequately evidenced.

C.

Hybrid Products

1.

A 'hybrid product' is a product which results from combining a package of products to create one recommended solution. An example is a 'back to back' contract which takes a lump sum investment and splits it into two amounts; one part is used to provide income through the purchase of a temporary annuity and the other part is invested in a unit trust or life insurance bond so that by the end of the annuity term the growth may produce the return of the original lump sum invested.

2.

The requirements for suitability and best investment advice apply to all elements of a hybrid product:

(a)

if appropriate, representatives need to scrutinise ready-made packages from a single product provider to make sure that each element is competitive and that a better solution is not available by combining elements from different providers;9

(b)

simplicity or administrative convenience is not sufficient reason for using one provider for all elements.

D.

Industrial Assurance Policies

If an industrial assurance policy is recommended to a customer and a comparable policy (which is not an industrial assurance policy) is available which is at least as suitable, the suitability letter should explain clearly the reasons why the industrial assurance policy is being recommended.

E.

Income withdrawals and short-term annuities

13

When a firm is advising a customer about personal pension fund withdrawals or purchase of short-term annuities13:

(a)

the customer's personal and financial circumstances should be considered carefully, in particular:

(i)

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

(ii)

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

(iii)

the customer's attitude to risk, ensuring that any discrepancy between his attitude to risk relating to pension fund withdrawals or purchase of a short-term annuity13 and that in relation to other investments is clearly explained;

(b)

the suitability letter should explain:

(i)

the purpose of the contract for the customer;

(ii)

the relative importance of the contract, given the customer's financial circumstances;

(iii)

the customer's attitude to risk; and

(iv)

the risk factors involved in entering into a pension fund withdrawal or purchase of a short-term annuity13, which include13:

13

-

the capital value of the fund may be eroded, especially if investment returns are poor and a high level of income is taken; this could result in a lower income in the future;13

13

-

the investment returns may be less than those shown in the illustrations;

-

annuity or scheme pension rates may be at a worse level in the future;13

13

-13

when maximum withdrawals are taken or the maximum short-term annuity is purchased, high levels of income may not be sustainable;13

-13

the maximum income that can be withdrawn under an alternatively secured pension after age 75 is significantly less than the maximum that applies before age 75.13

F.

ISA, PEP or CTF transfers8

When a firm is advising a customer on whether to transfer existing ISA, PEP or CTF holdings, COB 5.2 (Know your customer) and COB 5.3 (Suitability) apply. All the advantages and disadvantages of transferring should be considered. In particular the following information (which is not exhaustive) should be considered and provided to the customer, usually as part of the suitability letter, before the transfer takes place:8

(a)

exit charges and any other costs associated with the transfer;

(b)

initial start-up charges;

(c)

transaction details (that is, whether holdings are liquidated or transferred intact, as permitted by the terms and conditions);

(d)

possibility (and likely effects) of shortfall, following cancellation;

(e)

potential for loss of income or growth, following a rise in markets, while the ISA transfer, PEP transfer or CTF transfer remains pending.8

G.

Contracting out of SERPS

When a firm is advising a customer on whether to contract out of SERPS in favour of an appropriate personal pension or contracted-out money-purchase scheme ('COMP'):

(a)

representative should give careful consideration to:9

(i)

the range of pivotal ages outside which it will generally be in the best interests of customers to remain in SERPS;

(ii)

the level of earnings below which it may not be in a new customer's interests to contract out;

(iii)

the minimum length of time for which a customer may benefit from being contracted out;

(b)

factors to be taken into account when making this assessment include:

(i)

customer's age and sex;

(ii)

State pension age for females (where different from males);

(iii)

customer's level and stability of earnings and tax position;

(iv)

customer's career prospects (including the likely period for remaining contracted-out);

(v)

customer's existing pension provision or opportunity to participate in an occupational pension scheme;

(vi)

potential loss of rights compared to SERPS benefits;

(vii)

terms of the personal pension scheme or contracted-out money-purchase scheme with particular reference to the level of charges;

(viii)

customer's attitude to risk.

(c)

The suitability letter should clearly explain any risks in contracting out.

H.6

Borrowing to invest

When considering the suitability of a particular investment product which is linked directly or indirectly to any form of loan, mortgage or home reversion plan15, a firm6:15

15

(a)6

should take account of the source of the funds being invested and the suitability of the overall transaction; and6

(b)6

must follow any relevant suitability and other rules in COB and MCOB.6

For example, the circumstances in which a recommendation to enter intoan equity release transaction15 and invest the funds into a long-term care insurance contract might be appropriate are limited, and both COB 5.3 and MCOB 8.5 apply.6

15
COB 5.3.30G

Guidance on the contents of suitability letters.

This table belongs to COB 5.3.17 G.

999

Guidance on the contents of suitability letters

Introduction

1.

COB 5.3.14 R requires a written explanation of a recommendation relating to a product to be provided to a private customer. This is commonly referred to as 'the suitability letter' although it does not need to take the form of a letter, for example it might form part of:

(a)

a financial report to the customer (provided that it is prominent); or

(b)

a fact find document (a copy of the whole fact find or just the recommendation section could be given to the customer); if a copy of the fact find or the recommendation section is sent, the copy should be of sufficient quality to be clearly legible.

2.

A suitability letter, to be successful, should explain simply and clearly why the recommendation is viewed as suitable having regard to the customer's:

(a)

personal and financial circumstances;

(b)

needs and priorities identified through the fact finding process;

(c)

attitude to risk in the area of need to which the recommendation relates.

When a suitability letter is needed

3.

COB 5.3.14 R sets out the occasions when a suitability letter is required. COB 5.3.19 R sets out the exceptions to this rule. A letter is required in all cases where pension transfers or pension opt-outs are recommended.

Style and presentation

4.

The style and presentation of a suitability letter is left for firms to decide so that they can design a document which works best for the market in which they transact business. A suitability letter is more likely to be effective if it demonstrates these features:

(a)

personalisation - the more personalised the suitability letter, the more effective it is likely to be;

(b)

simplicity and plain English - when technical terms need to be incorporated, they should be explained if the customer is unlikely to understand their meaning;

(c)

concise and clear messages - lengthy explanations in extensive letters are likely to reduce the effectiveness of the letter with the customer disinclined to read it properly.

5.

Ideally each suitability letter will be different, reflecting the approach of the representative, the customer's profile, subjects discussed and the considerations on which the advice was based. Some firm may wish to introduce a degree of standardisation to suitability letter production to aid quality control. When using a standardised approach the firms should take the following into account:9

(a)

standard paragraphs are best limited to the description of the most common needs and the products which will satisfy those needs;

(b)

the firm should clearly link the customer's own needs, priorities and attitude to risk to the product recommended rather than just setting out stock motives that may apply to all customers;

(c)

tick box, pre-printed forms should rarely be used, and when they are it should only be in the simplest and most straightforward advice situations.

Content

6.

A firm should take the following into account when constructing a suitability letter:

(a)

the letter should explain why the customer's needs, priorities, attitude to risk and financial situation all combine to make the recommended product suitable for the customer. It should not merely state what product is being recommended with no link to the customer's personal circumstances;

(b)

other needs discussed during the factfind process which the customer does not wish to consider do not need to be included in the suitability letter (although they should be recorded in the factfind); they should be included if they assist in demonstrating why the product recommended is considered suitable;

(c)

alternative products which were recommended but rejected by the customer should be mentioned;

(d)

only the available options under a contract which have been recommended, whether accepted or rejected, need be mentioned in the letter;

(e)

where the range of packaged products from which advice on investments has been given contains the products of more than one product provider in respect of the same type of packaged product, the letter should include (the list is not exhaustive) why a particular product provider has been recommended; reasons may include product features not available elsewhere, price, service levels, performance track record, investment prospects, medical evidence terms, reputation and financial strength.9

Signing

7.

Each suitability letter should be signed by a person authorised by the firm to advise on the type of product which is being recommended. Ideally this will be the representative who gave the particular advice but, if not, both the signatory and the representative should accept responsibility for the letter and the recommendation.9

Timing of suitability letters

8.

Suitability letters should be issued to customers at the time that the recommendation is made or as soon as possible afterwards, to allow as much time as possible for the customer to consider the recommendation before any cancellation period ends. In any event the letter should be issued no later than the issue of the cancellation notice or, in situations where no cancellation notice will be issued, for example in the case of personal pension income withdrawals, before the transaction is put into effect.