2) End of Chapter Questions Flashcards
When are some COBS rules modified or disapplied for specific circumstances?
Annex 1 of COBS 1 sets out certain COBS rules which are disapplied for specific types of activity. For example, the following COBS rules are disapplied for firms carrying on eligible counterparty business
- A large part of COBS 2 - the conduct of business obligations
- Much of COBS 4 - communicating with clients (inc. fin promos)
- COBS 6.1 - provision of info about the firm, its services and its remuneration
- COBS 8 - client agreements
- COBS 10 - appropriateness (for non-advised services)
- Certain parts of COBS 11 - best execution, client order handling and use of dealing commission
- Parts of COBS 12 - labelling of non-independent research
- COBS 14.3 - info relating to designated investments
- COBS 16 - reporting requirements to clients
What is the purpose of the FCA’s corporate finance specialist regime?
Pre-MiFID, the COB sourcebook had only limited application for corporate finance business, reflecting the nature of the business and the general sophisticated nature of the customers in these markets, as well as the FCA’s discretion to allow a concessionary regime
However, the implementation of MiFID on 1 Nov 2007 reduced the ability of the FCA to grant concessions or mods to those conduct of business rules required to implement MiFID. Those corp fin firms which were carrying out MiFID business found themselves subject to the reqs of COBS, non-MiFID have some exemption from these rules
COBS 18 sets out rules disapplied for certain firms
When is a firm required to act honestly, fairly and professionally in accordance with the best interests of its client?
In relation to DIB carried on for:
- a retail client
- in relation to MiFID or equiv third-country business, for any other client
What is the purpose of the inducements provisions?
Apply to MiFID and non-MiFID DIB
Only apply to professional and retail clients - investment firms not subject to the detailed inducement provisions when undertaking eligible counterparty business
Inducements rules may be described as payments rules as they prohibit any payment unless expressly permitted
What is the purpose of the financial promotions rules?
Financial promotions are identified as such, and they are fair, clear and not misleading
Consistent with FCA’s Principles for Businesses 6 and 7:
Principle 6 - a firm must pay due regard to the interests of its customers and treat them fairly
Principle 7 - a firm must pay due regard to the info needs of its clients and communicate info to them in a way which is clear, fair and not misleading
What is the purpose of the client categorisation requirements?
Determines the level of protection the client receives
Retail have the most, ECP have the least
Retail are not professional or ECP
Professional are elective or per se.
Elective is one who has chosen to be as such
Per se fall into any of the following categories - unless they are ECP or categorised differently under other specific provision
What does MiFID II mean for the treatment of ECPs?
MiFID II introduces the following express obligations on firms when dealing with ECPs to:
- act honestly, fairly and professionally in their dealings with ECPs
- communicate in a way which is fair, clear and not misleading
- provide certain info to ECPs
- provide certain reports to ECPs
How do the client categorisation rules apply when a person is acting as the agent of another person?
If a firm is providing services for A who is acting as the agent of B, the firm should treat A as its client unless expressly written.
Another exception is if the involvement of A is mainly for the purpose of reducing the firm’s duties to B
What is the purpose of providing a higher level of protection for clients?
Firms can classify clients on financial instrument or txn level, but this is more complex internally
What is a corporate finance contact?
For most purposes, a corp fin contact or venture capital contact is not a client because the firm does not provide a service to such a contact
They are considered clients for financial promotion purposes, either communicating or approving
Communicating or approving a financial promotion that is or is likely to be communicated to such a contact is not MiFID or equiv third-country business. In such circumstance, the non-MiFID client categorisations are relevant and, in categorising these contacts as elective professional clients, the quantitative test does not need to be satisfied
What are the main conflicts of interest that will arise for a corporate finance firm?
Firms must take into account, as a minimum, whether the firm, or a person directly or indirectly linked by control to the firm:
- is likely to gain or avoid loss at the expense of the client
- has an interest in the outcome of a service provided to the client or of a txn carried out on behalf of the client, which is different from the client’s interest in that outcome
- has a financial or other incentive to favour the interest of another client or group of clients over the interest of the client
- carries on the same business as the client
- receives, or will receive, from a person other than the client an inducement in relation to a service provided to the client, in the form of monies, goods or services other than the standard commission or fee for that service
What processes and procedures is a firm required to have in order to manage conflicts of interest?
Chinese wall - info held by an employee in one part of the business is kept from other parts of the business where necessary
What is the purpose of the personal account dealing rules?
Apply to employees who are relevant persons and involved in activities that could lead to conflicts of interest, or who could have access to inside info or other confidential client info
Relevant persons are directors, managers, partners, appointed reps and those carrying out regulated activities
When is a firm required to undertake a suitability assessment?
Exists to ensure personal recommendations (or decisions to trade) are suitable for their clients’ needs
When a firm makes a personal recommendation or is managing investments, it should obtain the necessary info regarding the client’s:
- Knowledge and experience in the investment field of the DIB
- financial situation
- investment objectives
What is the purpose of the best execution requirements?
Apply to both MiFID and non-MiFID business
-Exemption for firms acting in the capacity of an operator of a regulated collective scheme when purchasing or selling units/shares in that scheme
Best execution rules under COBS require firms to execute orders on the terms most favourable for clients
Best execution factors:
- price, costs, speed, likelihood of execution and settlement, size, nature and any other consideration relevant to the execution of an order
