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COBS 4.14 Restrictions on the promotion of speculative illiquid securities to retail clients

Application and purpose

COBS 4.14.1R

2This section applies to:

  1. (1)

    firms;

  2. (2)

    TP firms; and

  3. (3)

    Gibraltar-based firms,

when approving or communicating financial promotions in relation to speculative illiquid securities.

COBS 4.14.2G

In addition to the persons listed in COBS 4.14.1R, persons (including unauthorised persons) who benefit from a temporary exemption or exclusion from the general prohibition under:

  1. (1)

    Part 7 of the EU Exit Passport Regulations; or

  2. (2)

    Part 4 of the Electronic Commerce and Solvency 2 (Amendment etc.) (EU Exit) Regulations 2019 (SI 2019/1361)

are required to comply with the rules in this section as a consequence of:

  1. (3)

    regulation 59 of the EU Exit Passport Regulations; or

  2. (4)

    regulation 19 of the Electronic Commerce and Solvency 2 (Amendment etc.) (EU Exit) Regulations 2019.

COBS 4.14.3R

Throughout this section:

  1. (1)

    References to firm include references to a Gibraltar-based firm.

  2. (2)

    Gibraltar-based firm has the same meaning as in the Gibraltar Order.

COBS 4.14.4G
  1. (1)

    The rules in this section are intended to ensure that financial promotions relating to speculative illiquid securities are not communicated to ordinary retail investors.

  2. (2)

    The rules in this section therefore restrict firms and TP firms approving or communicating financial promotions in relation to speculative illiquid securities which are addressed to or disseminated in such a way that they are likely to be received by a retail client, subject to certain exemptions.

  3. (3)

    The rules also ensure financial promotions contain prominent information on key risks, costs and charges related to the speculative illiquid security.

  4. (4)

    The rules reflect the often complex and high-risk nature of speculative illiquid securities.

  5. (5)

    The definition of speculative illiquid security can be found in COBS 4.14.20R.

Restriction on the promotion of speculative illiquid securities to retail clients

COBS 4.14.5R
  1. (1)

    A firm or a TP firm must not communicate or approve a financial promotion in relation to a speculative illiquid security where that financial promotion is addressed to or disseminated in such a way that it is likely to be received by a retail client.

  2. (2)

    The restriction in (1) is subject to COBS 4.14.6R.

Exemptions from the restriction on the promotion of speculative illiquid securities

COBS 4.14.6R
  1. (1)

    The restriction in COBS 4.14.5R(1) does not apply if the financial promotion:

    1. (a)

      falls within an exemption in the first column in the table in (3) below; and

    2. (b)

      is made to or directed at only those recipients whom the firm or TP firm has taken reasonable steps to establish are persons in the middle column of the table; and

    3. (c)

      where the third column of the table refers to the need for a preliminary assessment of suitability, that assessment is undertaken before the financial promotion is made to or directed at the recipient.

  2. (2)

    A firm or a TP firm may rely on more than one exemption in relation to the same financial promotion.

  3. (3)

    Title of exemption

    Promotion to:

    Promotion of speculative illiquid security which is:

    1. Certified high net worth investor

    An individual who meets the requirements set out in COBS 4.14.17R or a person (or persons) legally empowered to make investment decisions on behalf of such an individual.

    Any speculative illiquid security the firm or TP firm considers is likely to be suitable for that individual, based on a preliminary assessment of the client’s profile and objectives.

    [See COBS 4.14.7G]

    2. Certified sophisticated investor

    An individual who meets the requirements set out in COBS 4.14.18R, including an individual who is legally empowered (solely or jointly with others) to make investment decisions on behalf of another person who is the firm’s or the TP firm’s client.

    Any speculative illiquid security.

    3. Self-certified sophisticated investor

    An individual who meets the requirements set out in COBS 4.14.19R including an individual who is legally empowered (solely or jointly with others) to make investment decisions on behalf of another person who is the firm’s or TP firm’s client.

    Any speculative illiquid security the firm or TP firm considers is likely to be suitable for that individual, based on a preliminary assessment of the client’s profile and objectives.

    [See COBS 4.14.7G].

    4. Excluded communications

    Any person.

    Any speculative illiquid security, provided the financial promotion is an excluded communication.

Preliminary assessment of suitability

COBS 4.14.7G
  1. (1)

    The effect of COBS 4.14.6R(1)(c) is that where a firm or TP firm wishes to rely on exemptions 1 (certified high net worth investors) or 3 (self-certified sophisticated investors), the preliminary assessment of suitability must be undertaken before the financial promotion of the speculative illiquid security is made to or directed at clients (in addition to other requirements).

  2. (2)

    There is no duty to communicate the preliminary assessment of suitability to the client. If the firm or the TP 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 9 or 9A (as applicable) on suitability.

  3. (3)

    The requirement for a preliminary assessment of suitability does not extend to a full suitability assessment, unless advice is being offered in relation to the speculative illiquid security being promoted, in which case the requirements in COBS 9 or 9A apply (as applicable). However, it requires that the firm or TP firm takes reasonable steps to acquaint itself with the client’s profile and objectives to ascertain whether the speculative illiquid security under contemplation is likely to be suitable for that client. The firm or TP firm should not promote the speculative illiquid security to the client if it does not consider it likely to be suitable for that client following such preliminary assessment.

Requirements governing the form and content of financial promotions for speculative illiquid securities

COBS 4.14.8R

Subject to COBS 4.14.5R and COBS 4.14.6R, a firm or TP firm must not communicate or approve a financial promotion which relates to a speculative illiquid security unless it contains:

  1. (1)

    a risk warning that complies with COBS 4.14.9R;

  2. (2)

    if applicable, the date on which the financial promotion was approved; and

  3. (3)

    statements that comply with COBS 4.14.12R disclosing all costs, charges and commission.

COBS 4.14.9R
  1. (1)

    For the purposes of COBS 4.14.8R(1), and subject to COBS 4.14.9R(2) and COBS 4.14.9R(3), the financial promotion must contain the following risk warning:

    You could lose all of your money invested in this product.

    This is a high-risk investment and is much riskier than a savings account.

  2. (2)

    Where the financial promotion contains a reference to an innovative finance ISA, the risk warning is as follows:

    You could lose all of your money invested in this product.

    This is a high-risk investment and is much riskier than a savings account.

    ISA eligibility does not guarantee returns or protect you from losses.

  3. (3)

    Where the number of characters contained in the risk warnings in this rule exceeds the character limit permitted by a third-party marketing provider, the following risk warning must be used:

    You could lose all of your money invested in this product.

  4. (4)

    Where the financial promotion does not appear on a website or mobile application, the risk warning must be provided in a durable medium.

COBS 4.14.10R

The relevant risk warning in COBS 4.14.9R must be:

  1. (1)

    prominent;

  2. (2)

    contained within its own border and with bold and underlined text as indicated;

  3. (3)

    if provided on a website or via a mobile application, statically fixed and visible at the top of the screen even when the retail client scrolls up or down the webpage; and

  4. (4)

    if provided on a website, included on each linked webpage on the website.

COBS 4.14.11G

The relevant risk warning, including the font size, should be:

  1. (1)

    proportionate to the financial promotion, taking into account the content, size and orientation of the financial promotion as a whole; and

  2. (2)

    published so that it is clearly legible against a neutral background.

COBS 4.14.12R

For the purposes of COBS 4.14.8R(3) the financial promotion must contain:

  1. (1)

    a statement which expresses as a percentage the total amount of the capital raised by the issue of the speculative illiquid security which will be paid out in costs, fees, charges and commissions and other expenses to any third party;

  2. (2)

    a statement which expresses as a cash sum the percentage referred to in (1) above; and

  3. (3)

    in addition to the statements in (1) and (2) above, a statement which provides a breakdown of the actual or potential expenditure to be paid out of an investor’s capital and details of the third party (or parties) who will receive it.

COBS 4.14.13G
  1. (1)

    There is an illustration of how a firm or TP firm should comply with COBS 4.14.12R(2) in (2) below.

  2. (2)

    Where a firm or TP firm pays 30% of the total amount of capital raised by the issue of speculative illiquid securities towards costs, fees, charges and commissions and other expenses to any third party, the statement should say: “For every £100 you invest, £30 will be paid to third parties to meet costs, fees, charges and commissions.”

COBS 4.14.14R

The statements providing the percentage figure in COBS 4.14.12R(1) and the cash sum in COBS 4.14.12R(2) must be:

  1. (1)

    prominent;

  2. (2)

    contained together within their own border and with bold text;

  3. (3)

    immediately follow the most prominent reference to the expected return on the speculative illiquid security; and

  4. (4)

    published so that they are clearly legible against a neutral background.

COBS 4.14.15G

The statement providing the breakdown of expenditure in COBS 4.14.12R(3) should be included in the financial promotion in a clear and prominent way.

COBS 4.14.16G

The purpose of the statements required by COBS 4.14.12R is to enable an investor to consider the proportion of capital raised by an issue of speculative illiquid securities that will not be invested. This information should help the investor to assess the risk that the issuer will be unable to pay any advertised interest payments, other income or otherwise to repay the investor’s capital at maturity.

Definitions of certified high net worth and sophisticated investors

COBS 4.14.17R

A certified high net worth investor is an individual who has signed, within the period of twelve months ending on the day on which the communication is made, a statement in the following terms:

“HIGH NET WORTH INVESTOR STATEMENT

I make this statement so that I can receive promotional communications which are exempt from the restriction on promotion of speculative illiquid securities. The exemption relates to high net worth investors and I declare that I qualify as such because at least one of the following applies to me:

I had, throughout the financial year immediately preceding the date below, an annual income to the value of £100,000 or more. Annual income for these purposes does not include money withdrawn from my pension savings (except where the withdrawals are used directly for income in retirement).

I held throughout the financial year immediately preceding the date below, net assets to the value of £250,000 or more. Net assets for these purposes do not include:

  1. (a)

    the property which is my primary residence or any money raised through a loan secured on that property; or

  2. (b)

    any rights of mine under a qualifying contract of insurance; or

  3. (c)

    any benefits (in the form of pensions or otherwise) which are payable on the termination of my service or on my death or retirement and to which I am (or my dependants are), or may be, entitled; or

  4. (d)

    any withdrawals from my pension savings (except where the withdrawals are used directly for income in retirement).

I accept that the investments to which the promotions will relate may expose me to a significant risk of losing all of the money or other property invested. I am aware that it is open to me to seek advice from an authorised person who specialises in advising on speculative illiquid securities.

Signature:

Date:

COBS 4.14.18R

A certified sophisticated investor is an individual who:

  1. (1)

    has a written certificate signed within the last 36 months by a firm or TP firm confirming they have been assessed by that firm or TP firm as sufficiently knowledgeable to understand the risks associated with engaging in investment activity in speculative illiquid securities; and

  2. (2)

    has signed, within the period of twelve months ending with the day on which the communication is made, a statement in the following terms:

    “SOPHISTICATED INVESTOR STATEMENT

    I make this statement so that I can receive promotional communications which are exempt from the restriction on promotion of speculative illiquid securities. The exemption relates to certified sophisticated investors and I declare that I qualify as such.

    I accept that the investments to which the promotions will relate may expose me to a significant risk of losing all of the money or other property invested. I am aware that it is open to me to seek advice from an authorised person who specialises in advising on speculative illiquid securities.

    Signature:

    Date: ”

COBS 4.14.19R

A self-certified sophisticated investor is an individual who has signed, within the period of twelve months ending with the day on which the communication is made, a statement in the following terms:

“I declare that I am a self-certified sophisticated investor for the purposes of the restriction on promotion of speculative illiquid securities. I understand that this means:

  1. (i)

    I can receive promotional communications made by a person who is authorised by the Financial Conduct Authority which relate to investment activity in speculative illiquid securities;

  2. (ii)

    the investments to which the promotions will relate may expose me to a significant risk of losing all of the property invested.

I am a self-certified sophisticated investor because at least one of the following applies:

  1. (a)

    I am a member of a network or syndicate of business angels and have been so for at least the last six months prior to the date below;

  2. (b)

    I have made more than one investment in an unlisted company in the two years prior to the date below;

  3. (c)

    I am working, or have worked in the two years prior to the date below, in a professional capacity in the private equity sector, or in the provision of finance for small and medium enterprises;

  4. (d)

    I am currently, or have been in the two years prior to the date below, a director of a company with an annual turnover of at least £1 million.

I accept that the investments to which the promotions will relate may expose me to a significant risk of losing all of the money or other property invested. I am aware that it is open to me to seek advice from someone who specialises in advising on speculative illiquid securities.

Signature:

Date: ”

Definition of speculative illiquid security

COBS 4.14.20R

For the purposes of this section, and subject to COBS 4.14.22R to COBS 4.14.24R, a speculative illiquid security is a debenture or preference share which:

  1. (1)

    has a denomination or minimum investment of less than £100,000 (or an equivalent amount as defined in COBS 4.14.21R); and

  2. (2)

    has been issued, or is to be issued, in circumstances where the issuer or a member of the issuer’s group uses, will use or purports to use some or all of the proceeds of the issue directly or indirectly for one or more of the following:

    1. (a)

      the provision of loans or finance to any person other than a member of the issuer’s group;

    2. (b)

      buying or acquiring specified investments (whether they are to be held directly or indirectly);

    3. (c)

      buying or acquiring investments other than specified investments (whether they are to be held directly or indirectly);

    4. (d)

      buying real property or an interest in real property (whether it is to be held directly or indirectly);

    5. (e)

      paying for or funding the construction of real property.

COBS 4.14.21R

For the purposes of COBS 4.14.20R(1):

  1. (1)

    an equivalent amount in relation to an amount denominated in any currency other than sterling is an amount of equal value denominated wholly or partly in another currency; and

  2. (2)

    the equivalent amount is to be calculated at the latest practicable date before (but in any event not more than three business days before) the date of the issue of debentures or preference shares.

COBS 4.14.22R

A debenture or preference share that does not otherwise fall within COBS 4.14.20R is not a speculative illiquid security by virtue only of the fact that the proceeds of the issue are used to buy or acquire specified investments as part of the ordinary cash management activities or treasury functions of an issuer (or its group) carrying on a general commercial or industrial purpose as defined in COBS 4.14.24R(1).

COBS 4.14.23R

For the purposes of COBS 4.14.20R, and notwithstanding the exemption for readily realisable securities in COBS 4.14.24R(3)(d), a debenture is also a speculative illiquid security if:

  1. (1)

    it meets the conditions set out in COBS 4.14.20R; and

  2. (2)

    it:

    1. (a)

      is admitted to official listing on an exchange in the United Kingdom or an EEA State; and

    2. (b)

      is not regularly traded on or under the rules of such an exchange; or

  3. (3)

    it:

    1. (a)

      is a newly issued debenture which can be reasonably expected to be admitted to official listing on an exchange in the United Kingdom or an EEA State; and

    2. (b)

      cannot reasonably be expected to be regularly traded on or under the rules of such an exchange when it begins to be traded.

COBS 4.14.24R

A debenture or preference share is not a speculative illiquid security where one or more of the exemptions in (1), (3) or (4) below applies.

  1. (1)

    This exemption applies where:

    1. (a)

      the issuer or a member of the issuer’s group uses the proceeds of the issue for the purpose of the activities in COBS 4.14.20R(2)(c) (buying or acquiring investments other than specified investments), (d) (buying real property or an interest in real property) or (e) (paying for or funding the construction of real property); and

    2. (b)

      the relevant property or investment is or will be used by the issuer or a member of the issuer’s group for a general commercial or industrial purpose which it carries on.

  2. (2)

    The exemption in (1) will not apply in respect of a debenture or preference share within COBS 4.14.20R(2) (d) or (e) if the ability of the issuer to pay in relation to the debenture or preference share:

    1. (a)

      any coupon or other income; and/or

    2. (b)

      capital at maturity

    is wholly or predominantly linked to, contingent on, highly sensitive to or dependent on a return generated as a result of the matters referred to in COBS 4.14.20R(2)(d) or (e).

  3. (3)

    This exemption applies where the debenture or preference share is:

    1. (a)

      issued, or to be issued, by a credit institution;

    2. (b)

      issued, or to be issued by an investment trust;

    3. (c)

      a non-mainstream pooled investment;

    4. (d)

      a readily realisable security except for a debenture within COBS 4.14.23R; or

    5. (e)

      a P2P agreement.

  4. (4)

    This exemption applies where:

    1. (a)

      the issuer is:

      1. (i)

        a property holding vehicle; or

      2. (ii)

        a single-company holding vehicle;

    2. (b)

      any financial promotions made relating to the investment comply with COBS 4.7.7R to COBS 4.7.12G as appropriate; and

    3. (c)

      any financial promotion made relating to a single-company holding vehicle clearly and prominently states which single company the investment relates to.

COBS 4.14.25R
  1. (1)

    For the purposes of COBS 4.14.24R(1)(b), a general commercial or industrial purpose includes the following:

    1. (a)

      a commercial activity, involving the purchase, sale and/or exchange of goods or commodities and/or the supply of services; or

    2. (b)

      an industrial activity involving the production of goods; or

    3. (c)

      a combination of (a) and (b).

  2. (2)

    For the purposes of COBS 4.14.24R(1)(b), a general commercial or industrial purpose does not include:

    1. (a)

      investment to generate a pooled return;

    2. (b)

      property development or construction services;

    3. (c)

      hiring, leasing or rental services.

Guidance on general commercial or industrial purpose

COBS 4.14.26G
  1. (1)

    COBS 4.14.20R provides that a debenture or preference share will fall within the definition of a speculative illiquid security where the proceeds of the issue are to be used by the issuer or a member of the issuer’s group to fund various activities including buying or acquiring investments (other than specified investments) or the buying or construction of real property.

  2. (2)

    However, COBS 4.14.24R(1) provides an exemption in cases where the investments (other than specified investments) that are bought or acquired, or the property which is bought or constructed are or will be used by the issuer or a member of the issuer’s group for a general commercial or industrial purpose which it carries on.

  3. (3)

    General commercial or industrial purpose is defined in COBS 4.14.25R.

  4. (4)

    The effect of the exemption in COBS 4.14.24R(1) is that a debenture or preference share will not be a speculative illiquid security where the proceeds of the issue are used by the issuer or a member of the issuer’s group to buy or acquire investments (other than specified investments), or to buy or construct real property, and the relevant investments or property are or will be used by the issuer or group member for the purposes of its own commercial or industrial activities. This is illustrated in the examples in (5) and (6) below.

  5. (5)

    In relation to COBS 4.14.20R(2)(c) (buying or acquiring investments other than specified investments):

    1. (a)

      where a company issues a debenture or preference share and uses the proceeds to purchase IT equipment for use in its business, to the extent that the IT equipment might be considered an investment, the debenture or preference share will benefit from the exemption because the IT equipment is used by the company for its own commercial activities (in this case, for use by its staff to provide services to customers);

    2. (b)

      where a supermarket chain issues a debenture or preference share and uses the proceeds to purchase stock (for example wine) for sale as part of its retail business, to the extent that the wine might be considered an investment, the debenture or preference share will benefit from the exemption because the wine is used by the supermarket for its own commercial activities (in this case, to sell it on to its retail customers for a profit);

    3. (c)

      where a company issues a debenture or preference share and uses the proceeds to buy or acquire art or fine wine as an investment, it will not benefit from the exemption because the art or fine wine will not be used by the company itself for its own commercial activities; if the art or fine wine is used to generate a pooled return, then the exemption would also not apply as a result of COBS 4.14.25R(2)(a);

    4. (d)

      where a company issues a debenture or preference share and uses the proceeds to purchase IT equipment for the purpose of hiring or leasing those out to another company, it will not benefit from the exemption because it is not using the IT equipment for its own commercial activities and hiring and leasing services are excluded from the definition of general commercial or industrial purpose as a result of COBS 4.14.25R(2)(c).

  6. (6)

    In relation to COBS 4.14.20R(2)(d) or (e) (buying or constructing real property):

    1. (a)

      where a retailer issues a debenture or preference share and uses the proceeds to build a shop, the debenture or preference share will benefit from the exemption because the property is used by the retailer for its own commercial activities (in this case, the sale of goods);

    2. (b)

      where a property developer issues a debenture or preference share and uses the proceeds to fund the costs of a property development or construction of property, which is intended to be sold or rented out for commercial purposes or as residential dwellings, it will not benefit from the exemption because the development will not be used by the developer itself, and property development and construction services are excluded from the definition of general commercial or industrial purpose (see COBS 4.14.25R(2)(b));

    3. (c)

      where a company issues a debenture or preference share to fund the costs of constructing a power station which the company intends to operate itself with a view to selling the electricity it produces, the debenture or preference share will benefit from the exemption (unless COBS 4.14.24R(2) applies). That is because it will use the property for its own commercial or industrial activities (generating electricity). However, firms and TP firms should also consider COBS 4.14.24R(2) and the guidance in (7) below.

  7. (7)

    COBS 4.14.24R(2) provides that the general commercial or industrial purposes exemption does not apply where the ability of the issuer to pay the coupon or other income or to repay capital on maturity in relation to the debenture or preference share is wholly or predominantly linked to, contingent on, highly sensitive to or dependent on a return generated as a result of the matters referred to in COBS 4.14.20R(2)(d) or (e) (buying or construction of real property).

  8. (8)

    The effect of the above is that where a company issues a debenture or preference share for the purpose of buying real property, an interest in real property or funding the construction of a particular project and the company’s ability to pay interest on the debenture or preference share or repay capital depends on the success of that purchase or project, the exemption in COBS 4.14.24R(1) will not apply. In those circumstances, the debenture or preference share will be a speculative illiquid security unless one of the other exemptions in COBS 4.14.24R applies.