COBS 10A.4 Assessing appropriateness: when it need not be done due to type of investment

1. (1)

    A firm is not required to ask its client to provide information or assess appropriateness if either (a) or (aa), and both (b) and (c), are met:

   1. (a)

       the service:

      1. (i)

          only consists of execution or reception and transmission of client orders, with or without ancillary services, excluding ancillary service (2) in section B of Annex I to MiFID (granting of credits or loans), where the relevant credits or loans do not comprise existing credit limits of loans, current accounts and overdraft facilities of clients;

      2. (ii)

          relates to particular financial instruments (see paragraph (2)); and

      3. (iii)

          is provided at the initiative of the client; or

   2. (aa)

       the insurance distribution activity:

      1. (i)

          relates to particular types of insurance-based investment products (see (2A)); and

      2. (ii)

          is carried out at the initiative of the client; and

   3. (b)

       the client has been clearly informed (whether in a standardised format or not) that, in the provision of the service or insurance distribution activity, the firm is not required to assess the appropriateness of the financial instrument or service or insurance-based investment product provided or offered and that therefore the client does not benefit from the protection of the rules on assessing appropriateness; and

   4. (c)

       the firm complies with its obligations in relation to conflicts of interest.

2. (2)

    The financial instruments referred to in (1)(a)(ii) are any of the following:

   1. (a)

       shares in companies admitted to trading on:

      1. (i)

          a regulated market or an EU regulated market; or

      2. (ii)

          an equivalent third country market; or

      3. (iii)

          an MTF,

      except shares that embed a derivative and units in a collective investment undertaking that is not a UCITS; or

   2. (b)

       bonds or other forms of securitised debt admitted to trading on:

      1. (i)

          a regulated market or an EU regulated market; or

      2. (ii)

          an equivalent third country market; or

      3. (iii)

          an MTF,

      except those that embed a derivative or incorporate a structure which makes it difficult for the client to understand the risk involved; or

   3. (c)

       money-market instruments, excluding those that embed a derivative or incorporate a structure which makes it difficult for the client to understand the risk involved; or

   4. (d)

       shares or units in a UCITS, excluding structured UCITS; or

   5. (e)

       structured deposits, excluding those that incorporate a structure which makes it difficult for the client to understand the risk of return or the cost of exiting the product before term; or

   6. (f)

       other non-complex financial instruments.

3. (2A)

    The insurance-based investment products referred to in (1)(aa) are:

   1. (a)

       insurance-based investment products which only provide investment exposure to financial instruments referred to in (2) and do not incorporate a structure which makes it difficult for the client to understand the risks involved; or

   2. (b)

       other non-complex insurance-based investment products.

4. (3)

    For the purposes of this rule, a third country market is considered to be equivalent to a regulated market if it is a market in relation to which the Treasury has adopted an affirmative equivalence decision in accordance with the requirements and procedure in paragraph 8 of Part 1 of Schedule 3 to MiFIR.

[Note: article 25(4) of MIFID, article 30(3) of the IDD]

[Note: ESMA has published guidelines which specify criteria for the assessment of (i) debt instruments incorporating a structure which makes it difficult for the client to understand the risk involved, and (ii) structured deposits incorporating a structure which makes it difficult for the client to understand the risk of return or the cost of exiting the product before term (see ESMA/2015/1787 (EN), 4 February 2016).]

[Note: EIOPA has published guidelines under the IDD which specify criteria for the assessment of insurance-based investment products that incorporate a structure which makes it difficult for the customer to understand the risk involved (see EIOPA-17/651, 4 October 2017).]

An insurance-based investment product may be considered as non-complex for the purposes of COBS 10A.4.1R where it satisfies all of the following criteria:

1. (1)

   it includes a contractually guaranteed minimum maturity value which is at least the amount paid by the client after deduction of legitimate costs;

2. (2)

   it does not incorporate a clause, condition or trigger that allows the insurance undertaking to materially alter the nature, risk, or pay-out profile of the insurance-based investment product;

3. (3)

   it provides options to surrender or otherwise realise the insurance-based investment product at a value that is available to the client;

4. (4)

   it does not include any explicit or implicit charges which have the effect that, even though there are technically options to surrender or otherwise realise insurance-based investment product, doing so may cause unreasonable detriment to the client because the charges are disproportionate to the cost to the insurance undertaking;

5. (5)

   it does not in any other way incorporate a structure which makes it difficult for the client to understand the risks involved.

[Note: article 16 of the IDD Regulation]