FCA Handbook - COBS 14.3A Information about financial instruments (MiFID provisions)

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COBS 14.3A Information about financial instruments (MiFID provisions)

Application

This section applies to a firm in relation to its MiFID, equivalent third country or optional exemption business.

Certain provisions in this section require firms to provide clients with information ‘in good time’. Guidance on the provision of information ‘in good time’ can be found in COBS 1.4.2G.

Providing a description of the nature and risks of financial instruments

A firm must provide a client with:

(1)
appropriate guidance on, and warnings of, the risks associated with investments in financial instruments or in respect of particular investment strategies;
(2)
information on whether a particular financial instrument is intended for retail or professional clients, taking account of the identified target market in accordance with the rules in PROD 3; and
(3)
the information required by this section in a comprehensible form in such a manner that the client is reasonably able to understand the nature and risks of the investment service and of the specific type of financial instrument that is being offered and, consequently, to take investment decisions on an informed basis. That information may be provided in a standardised format.

[Note: article 24(4)(b) and article 24(5) of MiFID]

COBS 14.3A.3R supplements COBS 2.2A.2R (Information disclosure before providing services (MiFID provisions)).

(1) A firm must provide a client with a general description of the nature and risks of financial instruments, taking into account, in particular, the client's categorisation as either a retail client, professional client or eligible counterparty.
(2)
The description in (1) must explain, in sufficient detail to enable the client to take investment decisions on an informed basis:
1. (a)
  the nature of the specific type of financial instrument concerned;
2. (b)
  the functioning and performance of the financial instrument in different market conditions, including both positive and negative conditions; and
3. (c)
  the risks particular to that specific type of financial instrument.
(3)
Where relevant to the specific type of financial instrument concerned and the status and level of knowledge of the client, the description of the risks in (1) and (2) must include:
1. (a)
  the risks associated with that type of financial instrument including an explanation of leverage and its effects;
2. (aa)
  the risk of losing the entire investment, including the risks associated with insolvency of the issuer or related events, such as bail in;
3. (b)
  the volatility of the price of such instruments and any limitations on the available market for such instruments;
4. (c)
  information on any impediments to, or restrictions on, disinvestment (which may, for example, be relevant to illiquid financial instruments or financial instruments with a fixed investment term). This must include:
  1. (i)
    an illustration of the possible exit methods and consequences of any exit;
  2. (ii)
    possible constraints on the sale of such instruments; and
  3. (iii)
    the estimated time frame for the sale of the such instrument before recovering the initial costs of the transaction;
  (d) the fact that an investor might assume, as a result of transactions in such instruments, financial commitments and other additional obligations, including contingent liabilities, additional to the cost of acquiring the instruments; and
5. (e) any margin requirements or similar obligations, applicable to instruments of that type.

If a firm provides a retail client with information about a financial instrument that is the subject of a current offer of transferable securities to the public and a prospectus has been published in connection with that offer in accordance with the rules in PRM, that firm must inform the client where that prospectus is made available to the public.

Where a financial instrument is composed of 2 or more different financial instruments or services, a firm must provide an adequate description of:

(1) the legal nature of that financial instrument;

(2) the components of that financial instrument; and

(3) the way in which the interaction between the components affects the risks of the investment.

(1) Where a financial instrument incorporates a guarantee or capital protection, a firm must provide the client with information about the scope and nature of that guarantee or capital protection.

(2) When the guarantee is provided by a third party, the information in (1) must include sufficient detail about the guarantor and the guarantee to enable the client to make a fair assessment of the guarantee.

Satisfying the provision rules

(1)
Where a firm is required to provide information to a client before the provision of a service, each transaction in respect of the same type of financial instrument should not be considered as the provision of a new or different service.
(2)
But a firm should ensure that the client has received all relevant information in relation to a transaction which subsequently takes place, such as details of product charges that differ from those disclosed in respect of the prior transaction or transactions.

Timing of disclosure

A firm must provide a client with the information required by this section in good time before the provision of investment services or ancillary services to a client.

Medium of disclosure

The information provided in accordance with the rules in this section must be provided in a durable medium or by means of a website (where it does not constitute a durable medium) provided that the website conditions are satisfied.

Keeping the client up-to-date

(1) A firm must notify a client in good time about any material change to the information provided under the rules in this section which is relevant to a service that the firm is providing to that client.

(2) The notification in (1) must be given in a durable medium if the information to which it relates was given in a durable medium.

Record keeping

A firm to which SYSC 9 applies is required to keep records of all services, activities and transactions undertaken by it.

In complying with the requirements in SYSC 9, a firm to which those rules apply must keep a record of the information provided to each client in compliance with the rules in this section applicable to MiFID, equivalent third country or optional exemption business.