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COBS 10A.1 Application

1[Note: ESMA has also issued guidelines under article 16(3) of the ESMA Regulation on complex debt instruments and structured deposits. See [https://www.esma.europa.eu/sites/default/files/library/2015-1787_-_guidelines_on_complex_debt_instruments_and_structured_deposits.pdf ]

Application

COBS 10A.1.1 R

This chapter applies to a firm which:2

  1. (1)

    provides investment services in the course of MiFID or equivalent third country business; or2

  2. (2)

    carries on insurance distribution in relation to insurance-based investment product,2

other than when the firm makes2 a personal recommendation or carries2 out portfolio management.

COBS 10A.1.2 R

This chapter applies to a firm which assesses appropriateness on behalf of a MiFID investment firm so that the other firm may rely on the assessment under COBS 2.4.4R (Reliance on other investment firms: MiFID and equivalent business).

Effect of provisions marked EU

COBS 10A.1.3 R

The effect of GEN 2.2.22AR is that provisions in this chapter marked “EU” and including a Note (‘Note:’) referring to the MiFID Org Regulation2 also apply in relation to the equivalent business of a third country investment firm as if they were rules.

COBS 10A.1.4 R

2Provisions in this chapter marked “EU” and including a Note (‘Note:’) referring to the IDD Regulation apply as if they were rules to firms, to whom the IDD Regulation does not apply, when doing insurance distribution.

COBS 10A.2 Assessing appropriateness: the obligations

COBS 10A.2.1 R

A2firm must ask the client to provide information regarding that client’s knowledge and experience in the investment field relevant to the specific type of product or service offered or demanded to enable the firm to assess whether the service or product envisaged is appropriate for the client.

[Note: article 25(3) of MIFID, first paragraph of article 30(2) of the IDD2]

COBS 10A.2.1A G

2A firm carrying on insurance distribution is also required to comply with the requirements in COBS 7.3 (additional insurance distribution obligations: demands and needs).

[Note: first paragraph of article 30(2) of the IDD]2

Bundled packages: MiFID business and insurance-based investment products

COBS 10A.2.2 R

Where a bundle of services or products is envisaged pursuant to COBS 6.1ZA.16R (for MiFID business) or COBS 6.1ZA.16AR to COBS 6.1ZA.16E (for insurance-based investment products)2, the assessment made pursuant to COBS 10A.2.1R must consider whether the overall bundled package is appropriate.

[Note: article 25(3) of MiFID, first paragraph of article 30(2) of the IDD2]

1

Assessing a client’s knowledge and experience: MiFID business

COBS 10A.2.3 EU

56(1) Investment firms, shall determine whether that client has the necessary experience and knowledge in order to understand the risks involved in relation to the product or investment service offered or demanded when assessing whether an investment service as referred to in Article 25(3) of Directive 2014/65/EU is appropriate for a client.

An investment firm shall be entitled to assume that a professional client has the necessary experience and knowledge in order to understand the risks involved in relation to those particular investment services or transactions, or types of transaction or product, for which the client is classified as a professional client.

[Note: article 56(1) of the MiFID Org Regulation]

Assessing a client’s knowledge and experience: insurance-based investment product

COBS 10A.2.3A EU

215 Without prejudice to the fact that, in accordance with Article 20(1) of Directive (EU) 2016/97, any contract proposed shall be consistent with the customer's demands and needs, insurance intermediaries or insurance undertakings shall determine whether the customer has the necessary knowledge and experience in order to understand the risks involved in relation to the service or product proposed or demanded when assessing whether an insurance service or product distributed in accordance with Article 30(2) of Directive (EU) 2016/97 is appropriate for the customer.

[Note: article 15 of the IDD Regulation]

Information regarding a client’s knowledge and experience: MiFID business

COBS 10A.2.4 EU

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;

(c) the level of education, and profession or relevant former profession of the client or potential client.

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

Information regarding a client’s knowledge and experience: insurance-based investment products

COBS 10A.2.4A EU
  1. 217(1) For the purposes of Article 30(1) and (2) of Directive (EU) 2016/97, the necessary information to be obtained by insurance intermediaries and insurance undertakings with regard to the customer’s or potential customer’s knowledge and experience in the relevant investment field shall include, where relevant, the following, to the extent appropriate to the nature of the customer, and the nature and type of product or service offered or demanded, including their complexity and the risks involved:

    1. (a) the types of service, transaction, insurance-based investment product or financial instrument with which the customer or potential customer is familiar;

    2. (b) the nature, number, value and frequency of the customer’s or potential customer's transactions in insurance-based investment products or financial instruments and the period over which they have been carried out;

    3. (c) the level of education, and profession or relevant former profession of the customer or potential customer.

  2. 17(3) Where information required for the purposes of Article 30(1) or (2) of Directive (EU) 2016/97 has already been obtained pursuant to Article 20 of Directive (EU) 2016/97, insurance intermediaries and insurance undertakings shall not request it anew from the customer.

[Note: article 17(1) and (3) of the IDD Regulation]

Discouraging the provision of information: MiFID business

COBS 10A.2.5 EU

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]

Discouraging the provision of information: insurance-based investment products

COBS 10A.2.5A EU

217(2) The insurance intermediary or insurance undertaking shall not discourage a customer or potential customer from providing information required for the purposes of Article 30(1) and (2) of Directive (EU) 2016/97.

[Note: article 17(2) of the IDD Regulation]

Reliance on information: MiFID business

COBS 10A.2.6 EU

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]

Reliance on information: insurance-based investment products

COBS 10A.2.6A EU

217(4) The insurance intermediary or insurance undertaking shall be entitled to rely on the information provided by its customers or potential customers unless it is aware or ought to be aware that the information is manifestly out of date, inaccurate or incomplete.

[Note: article 17(4) of the IDD Regulation]

Use of existing information: MiFID business and insurance-based investment products

COBS 10A.2.7 G

When assessing appropriateness, a firm may use information it already has in its possession.

Knowledge and experience: MiFID business and insurance-based investment products

COBS 10A.2.8 G

Depending on the circumstances, a firm may be satisfied that the client’s knowledge alone is sufficient for him to understand the risks involved in a product or service. Where reasonable, a firm may infer knowledge from experience.

Increasing the client’s understanding: MiFID business and insurance-based investment products

COBS 10A.2.9 G

If, before assessing appropriateness, a firm seeks to increase the client’s level of understanding of a service or product by providing information to him, relevant considerations are likely to include the nature and complexity of the information and the client’s existing level of understanding.

No duty to communicate firm’s assessment of knowledge and experience: MiFID business and insurance-based investment products

COBS 10A.2.10 G

If a firm is satisfied that the client has the necessary experience and knowledge in order to understand the risks involved in relation to the product or service, there is no duty to communicate this to the client. If the firm does so, it must not do so in a way that amounts to making a personal recommendation unless it complies with the rules in COBS 9A (MiFID and insurance-based investment products2 provisions)1.

COBS 10A.3 Warning the client

COBS 10A.3.1 R
  1. (1)

    If a firm considers, on the basis of information received to enable it to assess appropriateness, that the product or service is not appropriate for the client, the firm must warn the client.

  2. (2)

    This warning may be provided in a standardised format.

[Note: article 25(3) of MiFID, second paragraph of article 30(2) of the IDD1]

COBS 10A.3.2 R
  1. (1)

    If the client does not provide the information to enable the firm to assess appropriateness, or if the client provides insufficient information regarding their knowledge and experience, the firm must warn the client that the firm is not in a position to determine whether the service or product envisaged is appropriate for the client.

  2. (2)

    This warning may be provided in a standardised format.

[Note: article 25(3) of MiFID, third paragraph of article 30(2) of the IDD]

COBS 10A.3.3 G

If a client asks a firm to go ahead with a transaction, despite being given a warning by the firm, it is for the firm to consider whether to do so having regard to the circumstances.

COBS 10A.4 Assessing appropriateness: when it need not be done due to type of investment

COBS 10A.4.1 R
  1. (1)

    A firm is not required to ask its client to provide information or assess appropriateness if either (a) or (aa), and both (b) and (c), are met2:

    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 (see paragraph (2))2; and

      3. (iii)

        is provided at the initiative of the client; or2

    2. (aa)

      the insurance distribution activity:2

      1. (i)

        relates to particular types of insurance-based investment products (see (2A)); and2

      2. (ii)

        is carried out at the initiative of the client; and2

    3. (b)

      the client has been clearly informed (whether in a standardised format or not) that, in the provision of the2 service or insurance distribution activity2, the firm is not required to assess the appropriateness of the financial instrument or service or insurance-based investment product2 provided or offered and that therefore the client does not benefit from the protection of the rules on assessing appropriateness; and

    4. (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. (2A)

    The insurance-based investment products referred to in (1)(aa) are:2

    1. (a)

      insurance-based investment products which only provide investment exposure to financial instruments referred to in (2) and do not incorporate a structure which makes it difficult for the client to understand the risks involved; or2

    2. (b)

      other non-complex insurance-based investment products.2

  4. (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, article 30(3) of the IDD2]

[Note: ESMA3 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].]

3[Note: EIOPA has published guidelines under the IDD which specify criteria for the assessment of insurance-based investment products that incorporate a structure which makes it difficult for the customer to understand the risk involved. The guidelines can be found here: https://eiopa.europa.eu/Publications/Guidelines/EIOPA-17-651-IDD_guidelines_execution_only_EN.pdf.]

Other non-complex financial instruments

COBS 10A.4.2 EU

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]

Other non-complex insurance-based investment products

COBS 10A.4.3 EU

216 An insurance-based investment product shall be considered as non-complex for the purposes of Article 30(3)(a)(ii) of Directive (EU) 2016/97 where it satisfies all of the following criteria:

  1. (a) it includes a contractually guaranteed minimum maturity value which is at least the amount paid by the customer after deduction of legitimate costs;

  2. (b) it does not incorporate a clause, condition or trigger that allows the insurance undertaking to materially alter the nature, risk, or pay-out profile of the insurance-based investment product;

  3. (c) it provides options to surrender or otherwise realise the insurance-based investment product at a value that is available to the customer;

  4. (d) it does not include any explicit or implicit charges which have the effect that, even though there are technically options to surrender or otherwise realise the insurance-based investment product, doing so may cause unreasonable detriment to the customer because the charges are disproportionate to the cost to the insurance undertaking;

  5. (e) it does not in any other way incorporate a structure which makes it difficult for the customer to understand the risks involved.

[Note: article 16 of the IDD Regulation]

COBS 10A.5 Assessing appropriateness: guidance

The initiative of the client: MiFID business and insurance-based investment products

COBS 10A.5.1 G

A service should be considered to be provided, or carried out,1 at the initiative of a client (see COBS 10A.4.1R(1)(a)(iii) and (aa)(ii)1), unless the client demands it in response to a personalised communication from or on behalf of the firm to that client which contains an invitation or is intended to influence the client in respect of a specific financial instrumentfinancial instrument, insurance-based investment product1 or specific transaction.

[Note: recital 85 to MIFID]

COBS 10A.5.2 G

A service can be considered to be provided, or carried out,1 at the initiative of a client notwithstanding that the client demands it on the basis of any communication containing a promotion for, or offer of, financial instruments or insurance-based investment products1 made by any means and that by its very nature is general and addressed to the public or a larger group or category of clients.

[Note: recital 85 to MIFID]

Personalised communications: MiFID business and insurance-based investment products

COBS 10A.5.3 G
  1. (1)

    Communications to the world at large, such as those in newspapers or in billboards, are likely to be by their very nature general and therefore not personalised communications.

  2. (2)

    Communications addressed to a client (such as, for example, an email, telephone call or letter), may or may not be personalised depending on the content.

  3. (3)

    A communication is not personalised solely because it contains the name and address of the client or because a mailing list has been filtered.

  4. (4)

    If a firm is satisfied that a communication does not contain any personalised content, it may wish to make clear that it does not intend the communication to be personalised and that the personal circumstances of the recipient have not been taken into account.

COBS 10A.6 Assessing appropriateness: when a firm need not assess appropriateness due to suitability assessment

COBS 10A.6.1 G

A firm need not assess appropriateness if it is receiving or transmitting an order or carrying on insurance distribution in relation to an insurance-based investment product, for which2 it has assessed suitability under COBS 9A (Suitability (MiFID and insurance-based investment products2 provisions1)).

COBS 10A.6.2 G

A firm may not need to assess appropriateness if it is able to rely on a recommendation made by an investment firm (see COBS 2.4.5G (Reliance on other investment firms: MiFID and equivalent business)) or, in relation to an insurance-based investment product, made by an insurance distributor (see COBS 2.4.5AR (Reliance on other insurance distributors))2.

COBS 10A.7 Record keeping and retention periods for appropriateness records

COBS 10A.7.1 G

A firm is required to keep orderly records of its business and internal organisation, including all services and transactions undertaken by it. The records may be expected to include the client information a firm obtains to assess appropriateness and should be adequate to indicate what the assessment was.

Record keeping: MiFID business

COBS 10A.7.2 EU

56(2) Investment firms shall maintain records of the appropriateness assessments undertaken which shall include the following:

(a) the result of the appropriateness assessment;

(b) any warning given to the client where the investment service or product purchase was assessed as potentially inappropriate for the client, whether the client asked to proceed with the transaction despite the warning and, where applicable, whether the firm accepted the client’s request to proceed with the transaction;

(c) any warning given to the client where the client did not provide sufficient information to enable the firm to undertake an appropriateness assessment, whether the client asked to proceed with the transaction despite this warning and, where applicable, whether the firm accepted the client’s request to proceed with the transaction.

[Note: article 56(2) of the MiFID Org Regulation]

Record keeping: insurance-based investment products

COBS 10A.7.2A EU
  1. 219(1) Without prejudice to the application of Regulation (EU) 2016/679 of the European Parliament and of the Council, insurance intermediaries and insurance undertakings shall maintain records of the assessment of suitability or appropriateness undertaken in accordance with Article 30(1) and (2) of Directive (EU) 2016/97. The records shall include the information obtained from the customer and any documents agreed with the customer, including documents that set out the rights of the parties and the other terms on which the insurance intermediary or insurance undertaking will provide services to the customer. Such records shall be retained for at least the duration of the relationship between the insurance intermediary or insurance undertaking and the customer.

  2. 19(3) In the case of an assessment of appropriateness undertaken in accordance with Article 30(2) of Directive (EU) 2016/97, the record shall further include the following:

    1. (a) the result of the appropriateness assessment;

    2. (b) any warning given to the customer where the insurance-based investment product was assessed as potentially inappropriate for the customer, whether the customer asked to proceed with concluding the contract despite the warning and, where applicable, whether the insurance intermediary or insurance undertaking accepted the customer's request to proceed with concluding the contract;

    3. (c) any warning given to the customer where the customer did not provide sufficient information to enable the insurance intermediary or insurance undertaking to assess the appropriateness of the insurance-based investment product, whether the customer asked to proceed with concluding the contract despite the warning and, where applicable, whether the insurance intermediary or insurance undertaking accepted the customer's request to proceed with concluding the contract.

[Note: article 19(1) and (3) of the IDD Regulation]

Record keeping: MiFID business and insurance-based investment products

COBS 10A.7.3 G

1A firm should refer to SYSC 3.3 (for insurers and managing agents) and2SYSC 9 (for other firms)2 for its obligations in relation to record keeping. These provisions require2 records kept for the purposes of this chapter to be retained for a period of at least five years.