COBS 9.3 Guidance on assessing suitability

1. (1)

   A transaction may be unsuitable for a client because of the risks of the designated investments involved, the type of transaction, the characteristics of the order or the frequency of the trading.

2. (2)

   In the case of managing investments, a transaction might also be unsuitable if it would result in an unsuitable portfolio.

1. (1)

   A series of transactions that are each suitable when viewed in isolation may be unsuitable if the recommendation or the decisions to trade are made with a frequency that is not in the best interests of the client.

2. (2)

   A firm should have regard to the client's agreed investment strategy in determining the frequency of transactions. This would include, for example, the need to switch a client within or between packaged products.

When a firm is making a personal recommendation to a retail client about income withdrawals or purchase of short-term annuities, it should consider all the relevant circumstances including:

1. (1)

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

2. (2)

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

3. (3)

   the client’s attitude to risk, ensuring that any discrepancy is clearly explained between his attitude to an income withdrawal or purchase of a short-term annuity and other investments.

When considering the suitability of a particular investment product which is linked directly or indirectly to any form of loan, mortgage or home reversion plan, a firm should take account of the suitability of the overall transaction. The firm should also have regard to any applicable suitability rules in MCOB.

1. (1)

   1Firms should note that section 238 of the Act and COBS 4.12.3 R set out restrictions on the promotion of non-mainstream pooled investments to retail clients.

2. (2)
   1. (a)

      Firms should bear in mind that the provision of advice or information may involve the communication of a financial promotion (see PERG 8). In particular, making a personal recommendation that a client should enter into a non-mainstream pooled investment will generally amount to a financial promotion of that investment because a personal recommendation typically includes an invitation or inducement to engage in investment activity.

   2. (b)

      Due to the restrictions in section 238 of the Act and COBS 4.12.3 R, the promotion of a non-mainstream pooled investment to a retail client is not permitted except where a valid exemption is available and relied on by the firm communicating the promotion. Firms should therefore first satisfy themselves that an exemption is available in relation to the promotion of the non-mainstream pooled investment before recommending the investment to a retail client.

3. (3)
   1. (a)

      In addition to assessing whether the promotion is permitted, a firm giving advice on a non-mainstream pooled investment should comply with their obligations in COBS 9 and ensure any personal recommendation is suitable for its client.

   2. (b)

      In considering its obligations under COBS 9, a firm purchasing a non-mainstream pooled investment on behalf of a client as part of a discretionary management agreement should have regard to whether that client is a person to whom promotion of that non-mainstream pooled investment is permissible under COBS 4.12.4 R (5). Whilst the restriction in COBS 4.12.3 R does not affect transactions where there is no prior communication with the client in connection with the transaction, a discretionary investment manager should exercise particular care to satisfy himself that the transaction is suitable for the client and that it is in that client's best interests, if promotion of the investment would not have been permitted.