10 UK Regulatory Environment (2)

Question 1

List the five sections of the Conduct of Business Sourcebook (COBS) that are most relevant to SA2. (5)

Answer 1

COBS2: Conduct of Business Obligations.

COBS4: Communicating with clients, including financial promotions.

COBS6: Information about the firm, its services and remuneration.

COBS13: Preparing product information.

COBS20: With profits

Question 2

Summarise the rules of COBS4: Communicating with clients, including financial promotions. (3)

Answer 2

1. All communications with customers must be clear, fair and not misleading.
2. Separate treatment is given to cold calls and other promotions that are not in writing.
3. Specific rules are included in the way that past performance can be used in financial promotions.

Question 3

Summarise the rules of COBS6: Information about the firm, its services and remuneration. (4)

Answer 3

1. The rules require the disclosure of certain information to customers when contact is first made.
2. A prospective policyholder must receive an “initial disclosure document” (IDD) which includes information on the nature of the firm and its services and how it is remunerated for them.
3. The IDD will also state whether firm is providing independent, restricted or no advice.
4. There are also details of calculating “commission equivalence” amounts (updated from 1/1/13 to allow for RDR).

Question 4

Summarise the rules of COBS13: Preparing product information. (6)

Answer 4

1. A prospective policyholder must receive at or before the point of sale a customer-specific “key features” document.
2. The KFD must include a table with four columns of figures for each of the first 5 years of the contract and for each 5th year thereafter:
   
   • Total premiums paid to date
   • Total charges to date
   • The effect of deductions to date
   • The surrender or transfer value that may be available
3. Projections of the maturity benefits must be shown based on the central rate of return along with a lower and higher rate of return. The effect of charges on the central assumption is also shown as a reduction in yield figure.

Question 5

List the four main areas that COBS20 (with profits) covers. (4)

Answer 5

1. TCF
2. PPFM
3. Communications with policyholders
4. With-profits governance.

Question 6

What do the rules cover in COBS20. (7)

Answer 6

1. MVRs - Detail on the circumstances in which MVRs can be applied.
2. Distributions - Circumstances under which bonus distributions can be made or surplus transferred.
3. NB - The terms on which with profits new business should be accepted.
4. DIE - The process for reattribution of the inherited estate.
5. Run-Off - Details required in run-off plans if firms close (or effectively close) to new business.
6. CVAS - The use of target payout ranges.
7. WPC - The establishment and responsibilities of a With-Profits Committee to inform the decision making of the firm’s governing body.

Question 7

List ten areas covered by a PPFM. (10)

Answer 7

1. Payouts - how they are determined:
   
   • RB policy
   • TB policy
   • Smoothing policy
2. Charges and expenses
3. Equity
   
   • Between generations of policyholders (DIE)
   • Between policyholders and shareholders
4. Investment strategy
5. Business risk and how it is managed
6. Closure to NB

Question 8

Summarise seven particularly important requirements relating to the PPFM. (7)

Answer 8

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1. Drafting - the PPFM should not be cautiously or broadly drafted.
2. Funds - a company with >1 with-profits fund can decide whether to have >1 PPFM.
3. Notice - 3 months notice must be given for changes to principles whereas it is ok to inform retrospectively within 12 months for changes to practices. Only policyholders affected need be notified.
4. Cross-subsidies - a company must detail its practice with regard to cross-subsidies between different generations of policyholders.
5. Scope - the PPFM need only cover issues that are reasonably foreseeable and that may impact the with-profits business.
6. Availability - the PPFM need only be made available on request.
7. Assessment of Compliance - a company’s governance must involve an independent assessment e.g. by a with-profits committee of whether the fund has been run in compliance with the PPFM. The independent assessor must produce an annual report.

Question 9

What does COBS2 cover? (2)

Answer 9

1. COBS2 is the Conduct of Business Regulations.
2. The rules require a firm to act honestly, fairly and professionally in accordance with the best interests of the client.