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COBS 10A.4 Assessing appropriateness: when it need not be done

COBS 10A.4.1R
  1. (1)

    A firm is not required to ask its client to provide information or assess appropriateness if:

    1. (a)

      the service:

      1. (i)

        only consists of execution or reception and transmission of client orders, with or without ancillary services, excluding ancillary service (2) in section B of Annex I to MiFID (granting of credits or loans), where the relevant credits or loans do not comprise existing credit limits of loans, current accounts and overdraft facilities of clients;

      2. (ii)

        relates to particular financial instruments; and

      3. (iii)

        is provided at the initiative of the client;

    2. (b)

      the client has been clearly informed (whether in a standardised format or not) that, in the provision of this service, the firm is not required to assess the appropriateness of the financial instrument or service provided or offered and that therefore the client does not benefit from the protection of the rules on assessing appropriateness; and

    3. (c)

      the firm complies with its obligations in relation to conflicts of interest.

  2. (2)

    The financial instruments referred to in (1)(a)(ii) are any of the following:

    1. (a)

      shares in companies admitted to trading on:

      1. (i)

        a regulated market; or

      2. (ii)

        an equivalent third country market; or

      3. (iii)

        an MTF,

      except shares that embed a derivative and units in a collective investment undertaking that is not a UCITS; or

    2. (b)

      bonds or other forms of securitised debt admitted to trading on:

      1. (i)

        a regulated market; or

      2. (ii)

        an equivalent third country market; or

      3. (iii)

        an MTF,

      except those that embed a derivative or incorporate a structure which makes it difficult for the client to understand the risk involved; or

    3. (c)

      money-market instruments, excluding those that embed a derivative or incorporate a structure which makes it difficult for the client to understand the risk involved; or

    4. (d)

      shares or units in a UCITS, excluding structured UCITS as referred to in the second subparagraph of article 36(1) of the KII Regulation; or

    5. (e)

      structured deposits, excluding those that incorporate a structure which makes it difficult for the client to understand the risk of return or the cost of exiting the product before term; or

    6. (f)

      other non-complex financial instruments.

  3. (3)

    For the purposes of this rule, a third country market is considered to be equivalent to a regulated market if it is a market in relation to which the Commission has, at the request of a competent authority,1 adopted an affirmative equivalence decision in accordance with the requirements and procedure1 in article 25(4) of MiFID1.

[Note: article 25(4) of MIFID]

[Note:

ESMA has published guidelines which specify criteria for the assessment of (i) debt instruments incorporating a structure which makes it difficult for the client to understand the risk involved, and (ii) structured deposits incorporating a structure which makes it difficult for the client to understand the risk of return or the cost of exiting the product before term. The guidelines can be found here: [https://www.esma.europa.eu/sites/default/files/library/2015-1787_-_guidelines_on_complex_debt_instruments_and_structured_deposits.pdf].]

Non-complex financial instruments

COBS 10A.4.2EU

57 A financial instrument which is not explicitly specified in Article 25(4)(a) of Directive 2014/65/EU shall be considered as non-complex for the purposes of Article 25(4)(a)(vi) of Directive 2014/65/EU if it satisfies the following criteria:

(a) it does not fall within Article 4(1)(44)(c) of, or points (4) to (11) of Section C of Annex I to Directive 2014/65/EU;

(b) there are frequent opportunities to dispose of, redeem, or otherwise realise that instrument at prices that are publicly available to market participants and that are either market prices or prices made available, or validated, by valuation systems independent of the issuer;

(c) it does not involve any actual or potential liability for the client that exceeds the cost of acquiring the instrument;

(d) it does not incorporate a clause, condition or trigger that could fundamentally alter the nature or risk of the investment or pay out profile, such as investments that incorporate a right to convert the instrument into a different investment;

(e) it does not include any explicit or implicit exit charges that have the effect of making the investment illiquid even though there are technically frequent opportunities to dispose of, redeem or otherwise realise it;

(f) adequately comprehensive information on its characteristics is publicly available and is likely to be readily understood so as to enable the average retail client to make an informed judgment as to whether to enter into a transaction in that instrument.

[Note: article 57 of the MiFID Org Regulation]