COBS 9A is the section of the FCA Handbook that sets the suitability requirements for MiFID and insurance-based investment business, essentially, most modern investment advice and discretionary portfolio management. It requires a firm to obtain the information needed to ensure a recommendation is suitable: the client's knowledge and experience, financial situation (including the ability to bear losses), and investment objectives (including risk tolerance). Where a personal recommendation is made to a retail client, the firm must provide a suitability report.
Key takeaways
- COBS 9A applies to MiFID business (investment advice and portfolio management); the older COBS 9 covers non-MiFID business such as pensions and life products. Many advice cases touch both.
- Suitability rests on three pillars: knowledge and experience, financial situation and capacity for loss, and objectives and risk tolerance.
- A suitability report is required for personal recommendations to retail clients, explaining why the recommendation is suitable.
- Suitability is not a one-off, for ongoing relationships, firms must keep assessing that recommendations remain suitable.
- Weak evidencing of capacity for loss and risk tolerance is one of the most common causes of upheld complaints and FCA criticism.
What does COBS 9A actually require?
At its core, COBS 9A requires that before making a personal recommendation (or managing a portfolio), a firm gathers enough information about the client to reasonably believe the recommendation meets three conditions:
- It meets the client's investment objectives, including their attitude to risk and how long they want to invest.
- The client is able to bear any related investment risks consistent with their objectives, their capacity for loss.
- The client has the necessary knowledge and experience to understand the risks involved.
If the firm does not obtain the necessary information, it must not make a recommendation. "The client didn't want to answer" is not a defence for recommending anyway.
The three pillars of suitability
Knowledge and experience. Does the client understand the nature and risks of the product or service? A sophisticated investor and a first-time investor need different explanations, and possibly different recommendations.
Financial situation and capacity for loss. This is broader than "how much can you invest." It includes income, assets, liabilities, commitments, and critically the client's ability to absorb losses without material harm to their standard of living. Capacity for loss is objective, it is about financial reality, not feelings.
Investment objectives and risk tolerance. What is the money for, over what time horizon, and how much risk is the client both willing (attitude to risk) and able (capacity for loss) to take? Attitude and capacity must be reconciled: a client comfortable with volatility but unable to afford losses should not be placed in a high-risk strategy.
COBS 9 vs COBS 9A, what's the difference?
The two sit side by side:
- COBS 9, suitability for non-MiFID business, including most pension and protection advice.
- COBS 9A, suitability for MiFID business: investment advice on financial instruments and portfolio management.
In practice, a single piece of holistic financial planning, say, a pension transfer feeding into an investment portfolio, can engage both. The underlying suitability logic is consistent, but firms need to apply the right rule set to the right elements and reflect that in their process.
What must a suitability report contain?
For a personal recommendation to a retail client, the report must, at minimum:
- Specify the client's demands and needs.
- Explain why the recommendation is suitable, having regard to the three pillars above.
- Set out any disadvantages or points the client should weigh, so the recommendation is presented fairly.
Under the Consumer Duty, a further test applies: the client must be able to understand the report. A technically complete report that the client cannot follow fails the consumer understanding outcome.
Where suitability goes wrong
- Thin capacity-for-loss analysis. A risk questionnaire score is recorded, but there is little evidence the client could actually withstand the recommended level of loss.
- Objectives that don't drive the recommendation. Goals are captured but the recommended solution is not clearly linked back to them.
- Reports written for the file. Dense, templated documents that satisfy a checklist but not the client's understanding.
- Stale suitability. In ongoing relationships, circumstances change but the original assessment is never revisited.
Frequently asked questions
What is COBS 9A in simple terms?
It is the FCA rulebook section that says an investment recommendation must be suitable for the specific client, based on their knowledge, financial situation and objectives, and that you must gather the information to prove it.
What is the difference between COBS 9 and COBS 9A?
COBS 9 covers suitability for non-MiFID business (such as pensions and protection); COBS 9A covers MiFID business (investment advice and portfolio management).
What is "capacity for loss"?
It is the client's objective ability to absorb investment losses without a material impact on their standard of living. It is distinct from attitude to risk, which is about willingness.
Is a suitability report always required?
For a personal recommendation to a retail client, yes, the firm must provide a suitability report explaining why the recommendation is suitable.
Does the Consumer Duty change COBS 9A?
It adds to it. The technical suitability rules remain, but the Duty's consumer understanding outcome means the report must also be genuinely understandable to the client.