COBS 5 – Suitability and Appropriateness

1. Chapter Summary

COBS 5 sets out the requirements for firms to ensure the suitability or appropriateness of products and services offered to clients. It governs how firms assess clients’ knowledge, experience, financial situation, and investment objectives before providing advice or executing transactions. This chapter is critical to safeguarding clients, particularly retail clients, from unsuitable or inappropriate financial products and services, thereby promoting consumer protection and trust in financial markets.

2. Applicability

COBS 5 primarily applies to firms advising retail clients or carrying out discretionary portfolio management or non-advised sales of investment products. It covers MiFID business and applies differently depending on whether the firm provides advice or non-advised execution. Certain rules specifically apply to retail clients, while professional clients are generally excluded or subject to less stringent requirements.

3. Key Rules and Their Meaning

• COBS 5.2.1R – Suitability Assessment Requirement “A firm must assess the suitability of a personal recommendation or discretionary decision for a retail client before providing advice or managing a portfolio.” This means firms must gather detailed client information on knowledge, experience, financial situation, and investment objectives to recommend suitable products. Suitability assessments are mandatory before advising or portfolio management.
• COBS 5.3.1R – Appropriateness Test for Non-Advised Services “Firms must assess the appropriateness of a product or service for a client when providing execution-only services.” For non-advised sales, firms must ensure clients understand the risks associated with the product. If the client lacks knowledge or experience, the firm should warn the client that the product may be inappropriate.
• COBS 5.2.3R – Record Keeping of Suitability Assessments Firms must keep records of all suitability assessments and related client information to demonstrate compliance and for FCA oversight.
• COBS 5.4.1R – Timing of Suitability and Appropriateness Assessments Suitability and appropriateness assessments must be carried out before the transaction is made or the advice is given.

4. Interpretation Notes / FCA Expectations

• The FCA expects a comprehensive and client-focused approach when collecting information for assessments.
• Firms should use proportionate information gathering, matching the complexity of the product and the client’s profile.
• For appropriateness, the FCA allows some flexibility but requires firms to ensure clients understand risks, especially for complex or high-risk products.
• The FCA clarifies that warnings to clients about unsuitability in non-advised sales must be clear and explicit.

5. Practical Considerations for Firms

• Implement robust client fact-finding procedures and documentation systems to collect and record client data relevant to suitability.
• Use structured questionnaires tailored to product complexity and client type to support appropriateness testing.
• Maintain a clear audit trail of all suitability and appropriateness assessments, including client communications and warnings.
• Provide training to advisers and sales staff on suitability and appropriateness requirements and client interaction standards.

6. Related Handbook References

• COBS 2 – Treating Customers Fairly (overarching customer protection principles)
• COBS 6 – Information About Investments (product disclosure requirements)
• COBS 10 – Client Money and Assets (related to client protections)
• PRIN – Principles for Businesses (principle on due skill, care, and diligence)
• SYSC – Systems and Controls (internal controls related to client assessments)

7. Regulatory Focus / Enforcement Risk

• The FCA frequently scrutinizes firms on suitability and appropriateness failings, especially in complaints and enforcement cases involving mis-selling.
• Firms that inadequately document client information or fail to give clear risk warnings face heightened enforcement risk.
• There is particular FCA focus on complex or high-risk products sold under non-advised models, where appropriateness testing is critical.