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COBS 22.3 Restrictions on the retail distribution of contingent convertible instruments and CoCo funds

Restrictions

COBS 22.3.1RRP
  1. (1)

    1The restrictions in this section apply in relation to the following investments:

    1. (a)

      a contingent convertible instrument; or

    2. (b)

      a security issued by a CoCo fund; or

    3. (c)

      a beneficial interest in either of (a) or (b).

  2. (2)

    A firm must not:

    1. (a)

      sell an investment to a retail client in the EEA; or

    2. (b)

      communicate or approve an invitation or inducement to participate in, acquire or underwrite an investment where that invitation or inducement is addressed to or disseminated in such a way that it is likely to be received by a retail client in the EEA.

  3. (3)

    The restrictions do not apply if the firm has taken reasonable steps to ensure that one (or more) of the exemptions in COBS 22.3.2R applies.

  4. (4)

    In this section a retail client includes a person who would be a retail client if he were receiving services from the firm in the course of the firm carrying on a regulated activity.

Exemptions

COBS 22.3.2RRP

1Each of the exemptions listed below applies only if the retail client is of the type described for the exemption and provided any additional conditions for the exemption are met.

Title

Type of retail client

Additional conditions

Certified high net worth investor

(a) An individual who meets the requirements set out in COBS 4.12.6R; or

(b) an individual in an EEA State other than the UK who meets requirements which are broadly equivalent to those set out in COBS 4.12.6R; or

(c) a person (or persons) legally empowered to make investment decisions on behalf of an individual who meets the earnings or net asset requirements in (a) or (b) above

The firm must consider that the investment is likely to be suitable for that individual, based on a preliminary assessment of that individual’s profile and objectives (see COBS 4.12.5G(2)).

Certified sophisticated investor

(a) An individual who meets the requirements set out in COBS 4.12.7R; or

(b) an individual in an EEA State other than the UK who meets requirements which are broadly equivalent to those set out in COBS 4.12.7R; or

(c) an individual who meets the requirements for either (a) or (b) above and who is legally empowered (solely or jointly with others) to make investment decisions on behalf of another person who is the firm's client.

Not applicable.

Self-certified sophisticated investor

(a) An individual who meets the requirements set out in COBS 4.12.8R; or

(b) an individual in an EEA State other than the UK who meets requirements which are broadly equivalent to those set out in COBS 4.12.8R; or

(c) an individual who meets the requirements for either (a) or (b) above and who is legally empowered (solely or jointly with others) to make investment decisions on behalf of another person who is the firm's client.

The firm must consider that the investment is likely to be suitable for that individual, based on a preliminary assessment of that individual’s profile and objectives (see COBS 4.12.5G(2)).

Solicited advice

Any retail client.

The restrictions do not apply provided all of the following requirements are met:

(a) there is no invitation or inducement to participate in, acquire or underwrite the investment other than a personal recommendation on the investment;

(b) the personal recommendation is made following a specific request by that client for advice on the investment; and

(c) the client has not previously received any other communication (whether or not a financial promotion) from the firm or from a person connected to the firm which is intended to influence the client in relation to the investment.

(See Note 1)

MiFID or equivalent third country business other than financial promotions

Any retail client.

COBS 22.3.1R(2)(a) does not apply to MiFID or equivalent third country business (see COBS 9.3.5G).

Prospectus

Any retail client.

The restrictions do not apply to the distribution of a prospectus required under the Prospectus Directive.

Issuers

Any retail client

To the extent that the firm is acting as issuer of a contingent convertible instrument, the restrictions only apply to the original issuance of the contingent convertible instrument and not to subsequent trading in the secondary market.

Indirect investment

Any retail client

The restrictions do not apply in relation to a beneficial interest in a contingent convertible instrument acquired through participation in a regulated collective investment scheme, investment in a non-mainstream pooled investment (provided it is not a CoCo fund), or membership of an occupational pension scheme.

Note 1

A person is connected with a firm if it acts as an introducer or appointed representative for that firm or if it is any other person, regardless of authorisation status, who has a relevant business relationship with the firm.

Note 2

See COBS 2.4 for rules and guidance on agent as client and reliance on others.

Adaptation of other rules and guidance to contingent convertible instruments and CoCo funds

COBS 22.3.3RRP
  1. (1)

    For the purposes of any assessments or certifications required by the exemptions in COBS 22.3.2R, any references in COBS 4.12 provisions to non-mainstream pooled investments must be read as though they are references to contingent convertible instruments or CoCo funds, as relevant.

  2. (2)

    If the firm is relying on the high net worth investor, the sophisticated investor or the self-certified sophisticated investor exemption to comply with this section, the statement the investor must sign should have references to non-mainstream pooled investments replaced with references to contingent convertible instruments or CoCo funds, as relevant.

  3. (3)

    The firm must give the retail client a written copy of any statements that individual has been asked to sign as part of certification as a high net worth, sophisticated or self-certified sophisticated investor for the purposes of compliance with this section.

COBS 22.3.4GRP

A firm wishing to certify a retail client as a sophisticated investor for the purposes of this section should note that, in the FCA’s view, it is likely that the only retail clients with the requisite sophistication in relation to contingent convertible instruments or CoCo funds are those with significant experience with investment in multiple types of complex financial instruments and who have sufficient understanding of how credit institutions are run, including risks to the ability of those institutions to meet prudential requirements on an ongoing basis.

Record keeping

COBS 22.3.5RRP

A firm which carries on an activity which is subject to this section must comply with the following record-keeping requirements:

  1. (1)

    the person allocated the compliance oversight function in the firm must make a record at or near the time of the activity certifying it complies with the restrictions set out in this section;

  2. (2)

    the making of the record required in (1) may be delegated to one or more employees of the firm who report to, and are supervised by, the person allocated the compliance oversight function, provided the process for certification of compliance has been reviewed and approved by the person allocated the compliance oversight function no more than 12 months before the date of the sale or communication or approval of the invitation or inducement;

  3. (3)

    when making the record required in (1), the firm must make a record of which exemption was relied on for the purposes of the activity within the scope of this section, together with the reason why the firm is satisfied that that exemption applies;

  4. (4)

    where the firm relies on the certified high net worth investor, the certified sophisticated investor or the self-certified sophisticated investor exemption, the record in (1) must include a copy of the certificate or investor statement (as signed by the investor) and of the warnings or indications required by the exemption, as applicable;

  5. (5)

    a firm must retain the record required in (1) for five years if it relates to MiFID or equivalent third country business, and otherwise for three years.

COBS 22.3.6GRP

To the extent the requirements in COBS 22.3.5R apply to the communication or approval of any invitation or inducement, such requirements are in addition to those set out in COBS 4.11.