COBS 10 Annex 5 Assessing appropriateness: UK RIE cryptoasset exchange traded notes

This Annex belongs to COBS 10.2.9G(1)(o).

When determining whether a retail client has the necessary knowledge to understand the risks involved in relation to a UK RIE cryptoasset exchange traded note, a firm should consider asking the client questions that cover, at least, the matters in COBS 10 Annex 5.3G(1) to (12).

Firms may need to ask additional or alternative questions to ensure that the retail client has the necessary knowledge to understand the risks involved in relation to the specific type of UK RIE cryptoasset exchange traded note offered.

The matters are:

1. (1) the role of the business offering or marketing the UK RIE cryptoasset exchange traded note (the business) and the scope of its services, including what the business does and does not do on behalf of clients, such as what due diligence is and is not undertaken by the business on any underlying investments;

2. (2) the nature of the client's contractual relationship with the issuer and any underlying beneficiaries of the investment;

3. (3) the role of the issuer (including its role in assessing and making underlying investments);

4. (4) that the client can lose all of the money that they invest in UK RIE cryptoasset exchange traded notes;

5. (5) the potential complexity of investments in UK RIE cryptoasset exchange traded notes and the associated difficulty of understanding the risks of the investment;

6. (6) that the performance of many UK RIE cryptoasset exchange traded notes can be highly volatile and that the value of an investment linked to cryptoassets can fall as quickly as it can rise;

7. (7) the risk of losing money as a result of operational risks (such as through cyber-attacks, loss of private keys, comingling of funds) or financial crime;

8. (8) the risk to any management and administration of the client's investment in the event of the business becoming insolvent or otherwise failing;

9. (9) the extent to which the protection of the Financial Ombudsman Service or FSCS applies to the investment activity (including the fact that these services might not be available and do not protect investors against poor investment performance);

10. (10) the benefits of diversification and that retail clients should not generally invest more than 10% of their net assets in restricted mass market investments;

11. (11) in respect of the UK RIE cryptoasset exchange traded note:

12.        (a) the client's exposure to the credit risk of the issuer;

13.        (b) that returns may vary over time; and

14. (12) where an investment in a UK RIE cryptoasset exchange traded note is, or is to be, arranged by a firm:

15.        (a) the nature of the client's contractual relationships with the firm;

16.        (b) the role of the firm and the scope of the service it provides to clients (including the extent of the due diligence that the firm undertakes in relation to the securities that it distributes); and

17.        (c) the risk to any management and administration of the client's investment in the event of the firm becoming insolvent or otherwise failing.