FCA Handbook - COBS 10A.2 Assessing appropriateness: the obligations

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COBS 10A.2 Assessing appropriateness: the obligations

A firm 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 IDD]

A 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]

Bundled packages: MiFID business and insurance-based investment products

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), 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 IDD]

Assessing a client’s knowledge and experience: MiFID business

(1) When assessing appropriateness, a firm must determine whether the 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.

(2) A firm may 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 they are classified as a professional client.

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

Without prejudice to the fact that, in accordance with COBS 7.3.4R, any insurance-based investment product proposed must be consistent with the client’s demands and needs, a firm must determine whether the client has the necessary knowledge and experience in order to understand the risks involved in relation to the service or insurance-based investment product proposed or demanded when assessing whether an insurance service or insurance-based investment product distributed in accordance with COBS 10A.2.1R and COBS 10A.2.2R is appropriate for the client.

[Note: article 15 of the IDD Regulation]

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

For the purposes of COBS 10A.2.1R the information regarding a client's knowledge and experience in the investment field must include, 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, information on:

(1) the types of service, transaction and financial instrument with which the client is familiar;
(2) the nature, volume and frequency of the client's transactions in financial instruments and the period over which they have been carried out; and
(3) the level of education and profession or relevant former profession of the client.

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

(1)
For the purposes of COBS 10A.2.1R and COBS 10A.2.2R in relation to insurance-based investment products, the necessary information to be obtained by a firm with regard to the client’s knowledge and experience in the relevant investment field must include, where relevant, the following, to the extent appropriate to the nature of the client, and the nature and type of insurance-based investment 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 client is familiar;
2. (b)
  the nature, number, value and frequency of the client’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 client.
(2)
Where information required for the purposes of COBS 10A.2.1R and COBS 10A.2.2R has already been obtained for the purposes of COBS 7.3.4R, a firm must not request information it already has anew from the client.

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

Discouraging the provision of information: MiFID business

A firm must not encourage a client not to provide information required for the purposes of COBS 10A.2.1R.

Discouraging the provision of information: insurance-based investment products

In relation to an insurance-based investment product, a firm must not discourage a client from providing information required for the purposes of COBS 10A.2.1R and COBS 10A.2.2R.

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

Reliance on information: MiFID business

A firm is entitled to rely on the information provided by a client unless it is aware or ought to be aware that the information is manifestly out of date, inaccurate or incomplete.

Reliance on information: insurance-based investment products

In relation to an insurance-based investment product, a firm may rely on the information provided by the client 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

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

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

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

If, before assessing appropriateness, a firm seeks to increase the client’s level of understanding of a service or product by providing information to them, 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

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 products provisions).

Restricted mass market investments

When determining whether a client has the necessary knowledge to understand the risks involved in relation to a restricted mass market investment, a firm should consider asking the client questions that cover, at least, the matters in COBS 10 Annex 1G in relation to non-readily realisable securities or COBS 10 Annex 5G in relation to UK RIE cryptoasset exchange traded notes.

Assessing appropriateness: units in long-term asset funds

When determining whether a client has the necessary knowledge and experience to understand the risks involved in relation to a unit in a long-term asset fund (see COBS 4.12A (Promotion of restricted mass market investments)), a firm should consider asking the client questions that cover, at least, the matters in COBS 10 Annex 3G (Assessing appropriateness: units in a long-term asset fund).