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COBS 14 – Suitability Requirements for Advising and Selling Investments

PostedJune 24, 2025
UpdatedJune 24, 2025
ByAndy

1. Chapter Summary

COBS 14 sets out the FCA’s requirements for assessing the suitability of investment products and services when firms provide advice or discretionary portfolio management to clients. It ensures that firms consider the client’s investment objectives, financial situation, knowledge, and experience before recommending or executing transactions. This chapter is crucial to protect clients from unsuitable investment decisions and to uphold market integrity and consumer confidence.

2. Applicability

Applies to firms conducting MiFID business where advice or discretionary portfolio management is provided, primarily focused on retail clients. Professional clients and eligible counterparties are generally exempt from suitability requirements but may be subject to other conduct rules. This chapter governs situations where a firm recommends or manages investments on behalf of a client.

3. Key Rules and Their Meaning

  • COBS 14.2.1R – Suitability Assessment Obligation Firms must obtain necessary information about the client’s knowledge, experience, financial situation, and investment objectives to recommend suitable products. In practice: Firms cannot advise or manage investments without understanding the client’s needs and circumstances to avoid unsuitable recommendations.
  • COBS 14.3.1R – Assessing Suitability When recommending or executing transactions, firms must reasonably believe the investment is suitable for the client, considering the information obtained. Meaning: This is a proactive responsibility requiring firms to analyze and match products to client profiles carefully.
  • COBS 14.4.1R – Suitability Report Firms must provide clients with a suitability report explaining why a recommended investment is appropriate. Nuance: The report should be clear, tailored to the client, and include all material considerations influencing the recommendation.
  • COBS 14.5.1R – Ongoing Suitability Review For discretionary portfolio management, firms must periodically review the client’s portfolio to ensure continued suitability. In practice: Suitability is not a one-time check but an ongoing obligation as client circumstances and markets evolve.

4. Interpretation Notes / FCA Expectations

  • FCA guidance highlights the need for a thorough fact-finding process including verification of client information where possible.
  • The suitability assessment should be documented comprehensively to demonstrate compliance.
  • Firms must take a holistic approach, factoring in risk tolerance, investment horizon, and other client-specific factors.
  • FCA expects firms to maintain clear and transparent communication with clients, avoiding jargon and ensuring understanding of risks and product features.

5. Practical Considerations for Firms

  • Implement structured client onboarding questionnaires that capture all necessary suitability information.
  • Use suitability assessment tools and workflows integrated into advisory processes.
  • Prepare and deliver personalised suitability reports to clients after advice or transaction execution.
  • Establish regular portfolio review schedules for discretionary management clients.
  • Train staff extensively on suitability obligations and keep audit trails of all assessments and communications.

6. Related Handbook References

  • COBS 9A – Suitability and appropriateness for investment advice and portfolio management
  • COBS 13 – Client categorisation and appropriateness assessment for non-advised services
  • PRIN 2A – FCA Principles for Businesses regarding client interests and communications
  • SYSC 10 – Conflicts of interest and governance related to client treatment
  • MIFIDPRU – Prudential rules affecting investment advice and portfolio management firms

7. Regulatory Focus / Enforcement Risk

  • The FCA closely monitors firms’ suitability processes due to high consumer harm risk from unsuitable advice.
  • Enforcement action often arises from inadequate fact-finding, poor documentation, failure to provide suitability reports, or insufficient ongoing reviews.
  • Firms are encouraged to adopt robust systems and controls to prevent mis-selling and ensure compliance with suitability obligations.
  • Recent FCA thematic reviews have emphasized transparency in fees, conflicts of interest disclosure, and the quality of suitability assessments.