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Corporate Finance Regulation > 2)1) The application and general provisions of the FCAs Conduct of Business Sourcebook (COBS) to Corporate Finance Business > Flashcards

2)1) The application and general provisions of the FCAs Conduct of Business Sourcebook (COBS) to Corporate Finance Business Flashcards

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1
Q

1.1 What is the aim of COBS?

A

To move the regulatory approach towards a better focus on outcomes rather than compliance with details and prescriptive rules
Also implements the provisions of MiFID which relate to conduct of business

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2
Q

1.1 Who is subject to CBS rules according to the general application rule in COBS 1.1?

A

Any firm that carries on any range of activities from an establishment maintained by them or their appointed representative in the UK. This is the case whether or not a firm is subject to MiFID

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3
Q

1.1 Summary of the two points above:

There is an exception to this rule for investment research and personal account dealing, where the COBS rules apply on a home state basis

A

Following Brexit, the COBS handbook no longer applies to MiFID business of a UK MiFID firm carried on from an establishment in an EEA member state
The rules in COBS that derive from UK MiFID apply to a non-UK MiFID investment firms (i.e., third-country firms operating a branch). Post Brexit, EEA firms operating from a branch in the UK will be classified as third-country firms when carrying out UK MiFID business within the UK

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4
Q

1.1.1 Which activities do the COBS rules apply to?(4)

A
  • accepting deposits (certain rules only)
  • designated investment business (DIB)
  • long-term insurance business in relation to life policies
  • activities relating to the above
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5
Q

1.1.1 Which COBS rules are disapplied for firms carrying on eligible counterparty business?

A
  • A large part of COBS 2 - the conduct of business obligations
  • Much of COBS 4 - communicating with clients (inc. financial promotions)
  • COBS 6.1 - provision of information about the firm, its services, and its remuneration
  • COBS 8 and COBS8A - client agreements
  • COBS 10 - appropriateness (for non-advised services)
  • Certain parts of COBS 11 - best execution, client order handling, and the use of dealing commission
  • Parts of COBS 12 - labelling of non-independent research
  • COBS 14.3 - information relating to designated investments
  • COBS 16 - reporting info to clients
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6
Q

1.1.2 Who do the COBS rules that derive from MiFID apply to? and those that derive from MiFID II?

A

MiFID applies to third-country investment firms doing MiFID business from an establishment in, and within the territory of, the UK
MiFID II applies to UK MiFID firms carrying on MiFID business from a UK establishment

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7
Q

2.1.1 Who does the rule to act honestly, fairly and professionally in accordance with the best interests of its client?

A

In relation to DIB carried on:
- for a retail client
- in relation to MiFID or equivalent third-country business for any other client

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8
Q

2.1.1 What should a firm not seek to do in any communication relating to DIB?

A
  • exclude or restrict
  • rely on any exclusion or restriction of any duty or liability it may have to a client under the reg system
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9
Q

1,2 According to COBS 18.3 (corporate finance business), which rules and provisions do not apply or are not expected to be relevant in respect of corporate finance business carried on by a MiFID firm? (4)

A
  • adviser charging and remuneration (COBS 6.1A)
  • describing the breadth of advice when advising on investments (COBS 6.2B)
  • disclosure of charges, remuneration and commission (COBS 6.4)
  • suitability reports (COBS 9.4)
    • although it should be noted that COBS 9A.2 ‘Assessing Suitability’ for MiFID business does not apply
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10
Q

1.2 Which provisions/rules apply to non-MiFID business (ie, corporate finance business carried on by a firm which is not MiFID or equivalent third-country business)?

A
  • acting honestly, fairly and professionally (COBS 2.1.1)
  • inducements (COBS 2.3A)
  • agent as client and reliance on others (COBS 2.4)
  • client categorisations (COBS3)
  • communicating to clients, including financial promotions (COBS 4, but excluding 4.5 to 4.11)
  • aspects of the Distance Marketing Directive in relation to distance contracts (COBS 5.1)
  • e-commerce (COBS 5.2)
  • prohibition of future service restrictions (COBS 11A.2)
  • personal account dealing (COBS 11.7A)
  • investment research and non-independent research (COBS 12)
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11
Q

2.2 What do the rules on inducement ban?

A

Giving or receiving of inducements which:
- impair the firm’s duty to act in the best interest of its client
- are not designed to improve the quality of service provided to the client
- are not clearly disclosed

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12
Q

2.2 When are firms prohibited to pay or accept fees or commissions, or providing or receiving non-money benefits?

A
  • fees, commissions or non-monetary benefits paid to or by the client, or someone on their behalf (such as management fees)
  • proper fees which are necessary for the provision of the service (eg, custody costs, legal fees, settlement fees) and which cannot by their nature give rise to conflicts
  • fees, commissions or non-monetary benefits paid to/by a third party (or someone on their behalf) which are permissible only if:
  • they do not impair compliance with the firm’s duty to act in the client’s best interests
  • they are designed to enhance the quality of the service to the client
  • they are disclosed in accordance with set standards prior to the provision of the service to the client
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13
Q

2.2 How can firms satisfy their disclosure obligations? (3)

A
  • disclose the essential arrangements for such payments/benefits in summary form
  • undertake to their client that further details will be disclosed on request
  • they give such details on request
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14
Q

2.2 How long must firms keep full records of inducements made to other firms, for all MiFID business?

A

Min. 5 years

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15
Q

2.3 In a case where a firm (F1) is providing investment or ancillary services for a client through another firm (F2), what are the responsibilities of each firm?

A

F2 is responsible for the information provided to F1, as well as considering the appropriateness of the recommendations provided to the client
F1 is responsible for concluding the services or transaction based on the information or recommendations in accordance with the applicable regulatory requirements

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16
Q

2.3 What must firm F1 establish about firm F2?

A

F2 is not connected with the firm and is competent to provide the info

F1 must receive information in writing from F2 to show it has complied with the relevant obligations relating to KYC and suitability

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17
Q

2.3 What does FCA guidance state about a firm relying on information provided to it in writing by an unconnected authorised person?

A

It is generally reasonable unless it is aware, or ought reasonably to be aware, of anything that would give it reasonable grounds to question the accuracy of the info provided

This means, for instance, that info provided by a law firm can be acted upon/carried out by a regulated firm without having to undertake KYC and suitability or appropriateness assessments

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18
Q

3.1 What is a financial promotion?

A

‘An invitation or an inducement to engage in investment activity, that is communicated in the course of business’

Describes most forms and methods of marketing financial services and products

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19
Q

3.1 What does S.21 FSMA say about financial promotions?

A

It is an offence to issue a financial promotion, unless by an authed firm

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20
Q

3.1 Which types of activity do the financial promotion rules not apply to?

A
  • for qualifying credit, a home purchase plan or a home revision plan
  • promotion for a non-investment insurance contract
  • the promotion of an unregulated collective investment scheme (CIS) which it is not permitted to approve
  • for credit agreement, consumer hire agreements or a credit-related regulated activity
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21
Q

3.1 Who do the financial promotion rules apply to?

A

Firms which carry on business with, or communicates a financial promotion to, a client in the UK (even when the firm is based overseas)

22
Q

3.1 Which rules apply when the client is an eligible counterparty?

A

Only principle 7 (for comms not to be misleading)
Firms must comm in a way that is fair, clear and not misleading, taking account of the nature of the elective eligible counterparty (ECP) and its business

23
Q

3.1 Appointed representatives of firms enjoy exemption from regulation (S.39 FSMA and the FSMA (Appointed Representatives) Regulations 2001), but what is the cost of this for them?

A

The appointing firm has the responsibility to vet and monitor, which the FCA would otherwise do itself

These provisions are found in the FCA’s Supervision Manual (Chapter 12)

24
Q

3.1 What does the principal provision (SUP 12.3.2G) state?

A

The firm is responsible, to the same extent as if it had expressly permitted it, for anything that the appointed rep does or omits to do, in carrying on the business for which the firm has accepted responsibility

25
Q

3.1.2 What are principles 6 and 7 of the FCA’s Principles for Businesses?

A

Principle 6 - a firm must pay due regard to the interests of it customers and treat them fairly
Principle 7 - a firm must pay due regard to the information needs of its clients and communicate information to them in a way which is clear, fair and not misleading

These only apply where the firm is not in scope of the FCA’s Consumer Duty requirements. Firms in scope must adhere to principle 12 and ensure that they act to deliver good outcomes for retail customers

26
Q

3.1.2 When can an individual/firm communicate a financial promotion?

A
  • they are an authed person
  • the content of the financial promotion is approved by an authed person

This applies unless the financial promotion is subject to an exemption

27
Q

3.1.2 What is the maximum penalty for breach of S.21 of FSMA?

A

2 years in jail and/or an unlimited fine

28
Q

3.1.3 What should firms ensure for their financial promotions?

A
  • those which deal with products or services where a client’s capital may be at risk make this clear
  • those quoting yields give a balanced impression of both the short-term and long-term prospects of the investment
  • if an investment product is, or service charges are, complex, or if the firm may receive more than one element of remuneration, this is communicated fairly, clearly and in a manner which is not misleading and which takes into account the information needs of the recipients
  • in cases where the communication names the FCA as the firm’s regulator, any matters which it refers to that are not regulated by the FCA are clearly identified as not being FCA-regulated (Note, a financial promotion does not have to include reference to the FCA)
    -those relating to packaged or stakeholder products not produced by the firm itself give a fair, clear and non-misleading impression of the producer or manager of the product
29
Q

3.1.4 When does a firm not have to clearly identify promotions which they communicate or approve, and which are addressed to clients?

A

When they are a third-party prospectus in respect of MiFID (or equivalent third-country) business
Exceptions in respect of non-MiFID business, include prospectus advertisements, image advertising, non-retail communicating and deposits

30
Q

3.1.4 What is the FCAs general rule in communicating with retail clients regarding prominence?

A

Information does not emphasise any potential benefits, without giving a fair and prominent indication of any relevant risks
It must also not disguise, diminish or obscure important items
Firms must use the same font size for risk warnings as is used in the main part of financial promotions to avoid making this section seem less important and so that it is not missed by investors

31
Q

3.1.5 What exemptions does the Financial Promotion Order (FPO) provide to unauthorised persons?

A
  • the sale of a body corporate (eg, an information memorandum in relation to a company sale)
  • offering qualifying credit to corporate entities
  • promotions made only to investment professionals or certified high net worth individuals (HNWIs), high net worth companies, sophisticated investors, and self-certified sophisticated investors
  • communications by journalists (with some provisions)
  • communications by a govt, central bank or financial market
  • communications by a company to its shareholders and creditors
  • prospectuses and supplementary prospectuses approved by the FCA
32
Q

3.1.5 How do the financial promotions powers work for the FCA?

A
  1. The FCA will give a direction to an authed firm to remove its own financial promotion or one it approves on behalf of an unauthed firm, setting out its reasons for banning
  2. Firms can make representations to the FCA if they think the FCA is making the wrong decision
  3. The FCA will decide whether to confirm, amend or revoke the direction. If it is confirmed, the FCA will publish it, along with a copy of the promotion and the reasons behind the decision

firms can refer the matter to the Upper Tribunal if the FCA decides not to revoke the direction

33
Q

3.1.5 What were the changes the HMT published in Nov 2023 published regarding financial promotion exemptions for HNWIs and sophisticated investors? (6)

It is the aim for these to be implemented on 31 Jan 2024
All new financial promotions, even made to individuals already promoted to under the current exemptions, will need to be made in accordance with the updated exemptions

A

Increasing the thresholds for HNWI exemption to:
- income at least £170k in the last financial year (prev. £100k)
- net assets at least £430k in the last financial year (£250k prev.)

Amended criteria for self-cert. sophisticated investor exemption:
- removed criterion of having made more than one investment in an unlisted company in the previous two years
- increasing company turnover req for ‘company director’ criterion to £1.6mill

Req businesses to provide details of themselves in any comms made using the exemptions

Updated title of certified HNWI exemption by removing ‘certified’

Updating the HNWI and self-cert. sophisticated investor statements

Applying these changes to the equivalent exemptions for promotion of CIS

34
Q

3.2.1 Which DIBs and financial promotions do the rules of communicating with retail clients (both non-MiFID and MiFID) not apply to? (4)

These apply to direct offer financial promotions (involving an offer and response)(COBS 4.7) and cold calls and other unwritten promotions (COBS 4.8)

A
  • those in respect of qualifying credit, home purchase plans or home revision plans
  • those for non-investment insurance contracts (such as motor or home insurance)
  • unregulated CISs which cannot be made by an authed person (i.e. hedge funds or PE funds)
  • for credit agreements, consumer hire agreements or a credit-related regulated activity
35
Q

3.2.1 What rules do firms need to adhere to if they provide info about a DIB or issue/approve a financial promotion that is likely to be received by a retail client? (7)

A
  • firm’s name is on comms
  • info is accurate and does not emphasise benefits without also giving fair emphasis to relevant risks
  • info is sufficient for, and presented in a way likely to be understood by, the avg member of the group to whom it is directed or by whom it is likely to be received
  • info does not disguise, diminish, or obscure important items, statements or warnings
  • uses a font size in the indication of relevant risks that is at least equal to the predominant font size used throughout the info provided, as well as a layout that means such info is prominent
  • consistently presented in the same language throughout all forms of info and marketing materials that are provided to each client, unless the client has agreed to receive info in more than one language
  • up to date and relevant to the means of comms used
36
Q

3.2.2 How must firms present Past Performance? (6)

A
  • past performance indication is not the most prominent feature
  • covers at least the immediately preceding 5 years (or entire period the investment has been available if this is less than 5 years)
  • reference periods and sources are clearly shown
  • clear and prominent warning that the data/figures refer to the past and that past performance is not a reliable indicator of future results
  • currency clearly stated for figures, and currency fluctuations may affect returns
  • if disclosed performance is gross, the effect of commissions, fees and other charges is disclosed
37
Q

3.2.2 What must simulated past performance figures show to clients? (4)

A
  • relate to an investment or financial index
  • based on actual past performance of one or more investments/indices which are the same as, or underlie, the investments being simulated
  • meet the rules set out above on past performance (excluding the statement that they relate to that investment’s past performance)
  • contain a prominent warning that they relate to simulated past performance, and the past performance is not a reliable indicator of future performance
38
Q

3.2.2 What must information containing an indication of possible future performance of the relevant business, investment, structured deposit or a financial index show? (5)

A
  • this is not based on and does not refer to simulated past performance
  • based on reasonable assumptions supported by objective data
  • based on performance scenarios in different market conditions (both -ve and +ve) and reflects the nature and risks of the specified types of investments included in the analysis
  • if based on gross performance, disclose the net effects
  • prominent warning that forecasts are not reliable indicators of future performance
39
Q

3.2.3 What must a direct offer or invitation (such as in the newspaper, trade magazine, or mailed directly) contain if they are likely to be received by a retail client? (8)

These are unnecessary if the client would have to refer to another doc containing this info in order to respond to the offer

A
  • info about the firm and services
  • when relevant, info about management of investments
  • info about the safekeeping of investments and money
  • info about costs and charges
  • info about the nature and risks of any relevant DIBs, including info about taxation, where relevant
  • When an investment is the subject of a public offer, any prospectus published in accordance with the Prospectus Directive
  • If a DIB combines two or more investments or services, resulting in greater risk than the risks associated with the components singly, an adequate description of those components and how that increase in risk arises
  • If a DIB incorporates a third party guarantee, enough detail for the client to make a fair assessment of it
40
Q

3.2.4 When can a firm initiate an unwritten promotion to a particular person outside its premises? (4)

A
  • it is at an appropriate time of the day
  • identifies themselves, the firm and the reason for the call at the outset
  • clarification if the client would like to continue or terminate the conversation
  • gives the client a contact point if they arrange an appointment with them
41
Q

3.2.4 When can firms cold call? (3)

A
  • the recipient has an existing client relationship with the firm, and would envisage receiving such a call
  • the call relates to a generally marketable packaged product which is neither a higher-volatility fund, nor a life policy linked to such a fund
  • relates to a controlled activity relating to a limited range of investments, including deposits and readily realisable investments other than warrants or generally marketable non-geared packaged products
42
Q

3.2.4 When can firms communicate or approve a financial promotion for overseas firms? (4)

A
  • the promotion sets out which firm has approved/communicated it
  • the rules for the protection of investors does not apply
  • the extent that the UK compensation scheme arrangements arrangements will be available
  • if the communicator wishes to do so, the details of any overseas compensation/deposit protection scheme available

Overseas firm must deal with UK clients with honesty and reliability

43
Q

3.2.5 Where is the process for approving financial promotions laid out?

A

the FSMA and reflected in COBS 4.10 rules

44
Q

3.2.5 What is the summary of the new goals set out by the FSMA by the consultation, announced in July 2020 by HMT, for approved firms authorising financial promotions? (4)

Govt as also provided proposals to implement a transitional period between the two regimes

A
  • More effective prevention and intervention (for the FCA)
  • Ensuring approver firms have relevant expertise
  • More effective FCA oversight and supervision
  • Improved DD (for authorised approvers and their promotions)
45
Q

3.2.5 What are the rules for a firm approving a financial promotion?

A

Firm must confirm it complies with the financial promotion rules
If it later becomes aware the financial promotion no longer complies, it must withdraw its approval and notify anyone it knows to be relying on its approval as soon as reasonably practicable

Firms may not approve real-time financial promotions i.e. personal visits, phone calls or other interactive dialogue

Can only approve promotion of an unauthed collective scheme if they would have been able to legitimately promote it for themselves

46
Q

3.2.6 In relation to non-MiFID business, when is a firm not in breach of the rules? (4)

A

-if it communicates a financial promotion that has been produced by another party
-takes reasonable care to establish that another authed firm has confirmed that the promotion complies with the rules
-takes reasonable care that it comms it only to the type of recipient it was intended for at the time of the confirmation
- as far as it is aware, the promotion is still fair, clear and not misleading, and has not been withdrawn by the other party

47
Q

3.2.7 What change has been made to authorised firms approving financial promotions of non-authed firms (as of 7 Feb 2024)?

A

Authed firms that wish to approve financial promotions must seek approval from the FCA, unless it is exempt

48
Q

3.2.7 What are the exemptions for authed firms approving non-authed persons promotions without FCA approval? (3)

A

they can approve
- their own promotions where communicated by an unauthed person
- promotions prepared by their appointed rep, where the promotion relates to a regulated activity for which the authed person has accepted responsibility
- prepared by an unauthed person within their corporate group

49
Q

3.2.8 What is the anti-greenwashing rule?

A
  • comes into effect 31 May 2024
  • applied to all regulated firms in respect of all marketing comms in that any sustainability claims must be clear, fair and not misleading
50
Q

3.2.8 What were the main areas the “Sustainability Disclosure Requirements (SDR) and Investment Labels” regime FCA consultation paper focused on?

A

Establish 4 sustainable investment labels to help consumers, coming into effect 31 July 2024
- Sustainable focus
- Sustainable improvers
- Sustainable impact
- Sustainability mixed goals

Naming and marketing rules come into effect from 2 Dec 2024

Consumer-facing disclosures:
- simple to assist in understanding the main sustainability features of a product
- Detailed disclosures for a wider target audience come into effect from 2 Dec 2025
- Pre-contractual disclosures
- Sustainability product report
- Sustainability entity report
- Restrictions on the use of sustainability related terms unless the product has a ‘sustainable investment label’
- distributors must ensure product entry level info, including investment labels, are made/provided to customers
- These rules come into effect from 2 Dec 2025 for firms with AUM > £50bill or from 2 Dec 2026 for firms £50bill > AUM > £5bill

Corporate Finance Regulation (25 decks)

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