2)7) Advising and Dealing (COBS 9 and 11)

Question 1

7.1 When do the suitability requirements (COBS 9) for non-MiFID business apply to a firm? (3)

Answer 1

When a firm:
- makes a personal recommendation to a retail client in relation to a designated investment
- manages investments of a retail client of the firm
- manages the assets of an occupational pension scheme, stakeholder pension scheme or personal pension scheme, other than in relation to MiFID, equivalent third-country or optional exemption business or to an insurance-based investment product

Question 2

7.1 When do the COBS 9A rules (regarding the suitability requirements for MiFID business) apply? (2)

Answer 2

When firms provide:
- investment advice or portfolio management in the course of MiFID, equivalent third-country or optional exemption business
- investment advice in relation to an insurance-based investment product

Question 3

7.2 What background info should a firm obtain about a client when making a personal recommendation, managing investments, the assets of an occupational pension scheme, stakeholder pension scheme or personal pension scheme, or for an insurance-based investment product? (3)

These are to make suitable recommendations or decisions for the client

Answer 3

• the knowledge and experience in the investment field relevant to the specific type of DIB
• financial situation
• investment objectives

Question 4

7.2 For non-MiFID business, when must a firm provide a retail client with a suitability report regarding a personal recommendation to the client? (4)

Answer 4

If the client:
- acquires a holding in, or sells all or part of a holding in:
- a regulated CIS
- an investment trust, in which the shares have been or are to be acquired through an investment trust savings scheme
- an investment trust in which the shares are to be held in an individual savings account (ISA) which has been promoted as the means for investing in one or more specific trusts
- buys, sells, surrenders, converts or cancels rights under, or suspends contributions to, a personal pension scheme or a stakeholder pension scheme
- elects to make income withdrawals or purchase a short-term annuity
- enters into a pension transfer or pension opt-out

A firm must also provide a suitability report if it makes a personal recommendation in connection with a life assurance policy

For MiFID business (9.A.3.3), investment firms must provide a report to the retail client when providing investment advice

Question 5

7.2 What are the exceptions to the requirement to provide a suitability report? (4)

Answer 5

• when a firm acting as an investment manager for a retail client makes a personal recommendation in connection with a regulated CIS
• when the client is habitually resident outside the UK, and is not present in the UK at the time of acknowledging consent to the proposal form to which the personal recommendation relates
• when the personal recommendation is to increase a regular premium to an existing contract
• if it is to invest additional single premiums or single contributions to an existing packaged product to which a single premium or single contribution has previously been paid

Question 6

7.2 What is the timing a suitability report must be provided within?

Answer 6

• in connection with a life policy, before the contract is concluded - unless the necessary information is provided orally, or cover is required immediately (in which case the report must be provided in a durable medium immediately after the contract is concluded)
• in connection with a personal pension scheme or a stakeholder pension, when the cancellation rules apply, within 14 days of concluding the contract
• in any other case, when or as soon as possible after the txn is effected or executed

Question 7

7.2 What is the minimum information a suitability report must contain? (3)

Answer 7

• specify the client’s demands and needs
• explain any possible disadvantages of the txn
• explain why the firm has concluded that the recommended txn is suitable for the client - having due regard to the info provided by the client

Question 8

7.2 What additional requirements does the sale of a life policy by telephone have for a suitability report, where the only contact between the firm and client before the contract is concluded by telephone?

Answer 8

The suitability report must:
- comply with the distance marketing disclosure rules
- be provided immediately after the conclusion of the contract
- be in a durable medium

Question 9

7.2.1 What requirements should a firms recommendation to a client meet, in regards to the situation of the client?

Answer 9

The firm should have reasonable basis to believe the service or txn:
- meets the clients’ investment objectives
- carries a level of investment risk that the client can bear financially
- carries risks that the client has the experience and knowledge to understand

Question 10

7.2.1 What info should a firm gather in relation to a client’s investment objectives?

Answer 10

• the length of time for which the client wishes to hold the investment
• their preferences regarding risk taking
• their risk profile
• purposes of the investment

Question 11

7.2.1 What info should a firm gather in relation to a client’s financial situation?

Answer 11

• the source and extent of their regular income, assets (including liquid assets), investments, real property
• their regular financial commitments

Question 12

7.2.1 What info should a firm gather in relation to a client’s knowledge and experience?

Answer 12

• the types of service/txn/designated investment with which they are familiar
• the nature, volume, frequency and period of their involvement in such designated investments
• their level of education, profession or relevant former profession

Question 13

7.2.2 What assumptions may a firm make with regards to a professional client, in respect of MiFID or equivalent third-country business?

Answer 13

• they have the necessary experience and knowledge of the products, txns or services concerned
• they are able financially to bear any related investment risks consistent with their investment objectives

Question 14

7.3 Who do the rules on best execution apply to?

Answer 14

Both MiFID and non-MiFID businesses

They require firms to execute orders on the terms that are most favourable to their client, in relation to all financial instruments

Question 15

7.3 What is best execution?

Answer 15

Best execution requires that firms take into account not only price factors, but also such issues as other costs, speed, likelihood of execution and settlement, and all these in the light of the size and nature of the deal, in determining the means of obtaining the best outcome for a client when executing their deal

Question 16

7.3 How are the relative importance of each factor of best execution decided per client?

Answer 16

• the client themselves, including how they are categorised
• the client order
• the financial instruments involved
• the execution venues to which that order could be directed

Question 17

7.3 What is the four-fold cumulative test?

Answer 17

For each txn it engages in, an investment firm must assess if the client is placing a legitimate reliance on the firm and/or the firm is using its discretion.

In relation to OTC txns, when a duty of best execution exists, investment firms should have processes in place to consistently check the fairness of the pricing they provide and retain any relevant market data to allow them to justify their pricing decisions

The test must establish:
- the client initiated the txn
- the client does not (cannot) shop around for quotes
- the client is not able to identify the relative levels of price transparency within a market
- review information provided by the firm and any agreement reached

Question 18

7.3.1 What is the role of price in best execution?

Answer 18

For retail clients, firms must take into account the total consideration for the txn
- the price of the financial instrument
- the costs relating to execution
- including all expenses directly related to it such as execution venue fees, clearing and settlement fees, and any fees paid to third parties

Question 19

7.3.2 What should a firm consider when there is more than one possible execution venue for a client’s order?

Answer 19

• its own costs
• the costs of the relevant venues

Its own commissions should not allow it to discriminate between execution venues, and a firm should not charge a different commission or spread to clients for execution in different venues if that difference does not reflect actual differences in the cost to the firm of executing in those venues

Question 20

7.3.3 How should a firm behave when it receives a specific instruction from a client?

Answer 20

It must execute the order as instructed
It will be deemed to have satisfied the obligation to obtain the best possible result if it follows the instructions (even if an alternative means of executing the order would have given a better result).

firms should not induce a client to instruct an order in a particular way when they know this will not give the best possible result

Question 21

7.4 What should firms ensure when handling client orders?

Answer 21

They should ensure that:
- executed client orders are promptly and accurately recorded and allocated
- comparable orders are executed sequentially and promptly, unless this is impracticable or clients interests require otherwise
- retail clients are informed of any material difficulty in the prompt execution of their order, promptly on the firm becoming aware of this
- when the firm is responsible for overseeing or arranging settlement, the assets or money are delivered promptly and correctly