Background to appropriateness requirements

The Financial Conduct Authority’s (FCA) Rules on ‘appropriateness’ and the appropriateness test (which are contained in chapters 10 and 10A of the FCA's Conduct of Business sourcebook (COBS 10 and COBS 10A) were originally introduced under the Markets in Financial Instruments Directive (Directive 2004/39/EC) (MiFID) with the aim of increasing investor protection in the non-advised market. The objective of the test is to help firms determine whether their clients have enough knowledge and experience to understand the risks involved in a product offered or service demanded. Knowledge and experience have to be assessed in a way that is appropriate to:

1. •

   the client in question

2. •

   the service, and

3. •

   the product

MiFID (Directive 2004/39/EC) was replaced by the recast Markets in Financial Instruments Directive (Directive 2014/65/EU) (MiFID II Directive) and the Markets in Financial Instruments Regulation (Regulation (EU) 600/2014) (MiFIR) (together the MiFID II framework). Both the MiFID II Directive and MiFIR entered into force on 2 July 2014. As amended, the majority of the MiFID II framework has applied since 3 January 2018,