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CISI Financial Planning & Advice > 3 : 6 - Planning in a Regulated Environment > Flashcards

3 : 6 - Planning in a Regulated Environment Flashcards

1
Q

What does the Senior Managers and Certification Regime (SMCR) aim to do?

A

It aims to increase individual accountability within the banking sector.

It focuses on the most senior individuals in firms who hold key roles or have overall responsibility for whole areas of relevant firms in dual authorised firms

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2
Q

What are Dual authorised firms?

A

A firm that is authorised and regulated by both the PRA and FCA

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3
Q

What does PRA stand for?

A

The Prudential Regulation Authority (PRA)

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4
Q

Those not subject to the Senior Managers Regime (SMR) – broadly the individuals in a firm authorised
and regulated solely by the FCA – are subject to what?

A

The FCA Approved persons regime.

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5
Q

Who is the The ‘Certification Regime’ (CR) for?

A

Deposit-taking firms (excluding credit unions)

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6
Q

What does the CR require?

A

Relevant firms to assess the fitness and propriety of certain employees who could pose a risk of significant harm to the firm or any of its customers.

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7
Q

If the regulators refuse to grant approval to someone as fit and proper, the matter may be referred to..?

A

The Financial Services and Markets Tribunal (FSMT)

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8
Q

In assessing fitness and propriety, the most important considerations will be the person’s:

(3)

A
  • honesty, integrity and reputation
  • competence and capability
  • financial soundness.
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9
Q

Approved person and senior management status must be obtained from the appropriate regulator when?

A

Prior to appointment to undertake a controlled function

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10
Q

The regulator must be informed within how many

days if the person stops performing the controlled function?

A

Within 7 days

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11
Q

What are credit and Disclosure Barring Service (DBS)

checks undertaken for?

A

This will hopefully uncover those who are financially unsound or have previously been involved in fraudulent activity.

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12
Q

Approved persons under the FCA are subject to the Statements of Principle and…?

A

the Code of Practice for Approved Persons (APER)

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13
Q

Those subject to SMR and the CR are subject to what..?

A

The Code of Conduct (COCON).

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14
Q

FCA principles - how many Statements of Principle for Approved Persons?

A

7

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15
Q

Principles 1 to 4 apply to who?

A

All approved persons

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16
Q

Principles 5 to 7 apply to who?

A

Only those approved to perform significant influence functions

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17
Q

What activities indicate a significant influence functions?

A

They tend to be governing, oversight, compliance, actuarial and management roles within firms, rather than customer functions

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18
Q

What is the FCA Statement of Principle 1

A

An approved person must act with integrity in carrying out their controlled function.

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19
Q

What is the FCA Statement of Principle 2

A

An approved person must act with due skill, care and diligence in carrying out their controlled function.

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20
Q

What is the FCA Statement of Principle 3

A

An approved person must observe proper standards of market conduct in carrying out their controlled function.

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21
Q

What is the FCA Statement of Principle 4

A

An approved person must deal with the FCA and with other regulators in an open and cooperative way.

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22
Q

What is the FCA Statement of Principle 5

A

An approved person performing a significant influence function must take reasonable steps to ensure that the business is organised so that it can be controlled effectively.

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23
Q

What is the FCA Statement of Principle 6

A

An approved person performing a significant influence function must exercise due skill, care and diligence in managing the business in his controlled function

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24
Q

What is the FCA Statement of Principle 7

A

An approved person performing a significant influence function must take reasonable steps to ensure that the business complies with the relevant requirements and standards of the regulatory system.

25
Q

What is the Code of Practice for Approved Persons?

A

The Code sets out descriptions of conduct which, in the FCA’s opinion, do not comply with the relevant Statements of Principle.

The Code also sets out certain factors which are to be taken into account in determining whether an approved person’s conduct complies with a particular Statement of Principle.

26
Q

COCON Individual and Senior Manager Conduct Rules - how many apply to all individuals?

A

5

27
Q

What are the COCON rules?

A
  • Rule 1 – You must act with integrity.
  • Rule 2 – You must act with due skill, care and diligence.
  • Rule 3 – You must be open and cooperative with the FCA, the PRA and other regulators.
  • Rule 4 – You must pay due regard to the interests of customers and treat them fairly.
  • Rule 5 – You must observe proper standards of market conduct.
28
Q

The FCA Handbook includes HOW MANY Key Principles for Businesses (The Principles), which authorised firms must observe.

A

11

29
Q

The 11 Principles for Businesses are:

A
  • Integrity
  • Skill, care and diligence
  • Management and control
  • Financial prudence
  • Market conduct
  • Customers’ interests
  • Communication with clients
  • Conflicts of interest
  • Customers: relationships of trust
  • Clients’ assets
  • Relations with regulators
30
Q

How does the FCA define a customer?

A

It is worth noting that the FCA defines customers differently to clients.

The term client covers a variety of parties doing business with the firm, including professional counterparties.

The term customer applies, very broadly, to those clients who are not professionals and who may, therefore, need protection.

31
Q

How should competence be assessed?

A

A firm should not assess a person as competent to carry on any of a specified range of activities until they have demonstrated competence and passed each module of an appropriate examination.

32
Q 
Firms must not allow employees to do any of the following, without having passed each module of an
appropriate examination:
A
  • certain advising and dealing activities
  • acting as a broker/fund adviser
  • advising on syndicate participation at Lloyd’s
  • acting as a pension specialist.
33
Q

How does an advisor demonstrate that they maintain competence?

A

All retail investment advisers must hold a Statement of Professional Standing (SPS) issued by an
accredited body.

34
Q

What does the SPS demonstrate?

A

The SPS confirms that an adviser adheres to ethical standards, holds appropriate qualifications for their role (including completion of gap-fill) and has undertaken appropriate CPD during the year.

A retail investment adviser must complete a minimum of 35 hours’ compulsory CPD each year, that meets certain requirements.

35
Q

How long must training record-keeping be kept?

A

• at least five years for MiFID business including life policies or pension cases; at least three years for
non-MiFID business

• indefinitely for a pension transfer specialist.

36
Q

What 8 areas cover the typical CISI code of practise?

A
  1. Client
  2. Firm and industry
  3. Regulator
  4. Market participant
  5. Client
  6. Client, colleagues and self
  7. Client, self
  8. Industry, self
37
Q

What do COBS and ICOBS apply to?

A

Firms carrying on the relevant activities (see below) from an establishment maintained by them in the UK.

They also apply to a firm’s MiFID business carried on from an establishment in another European Economic Area (EEA) state.

38
Q

The 3 activities subject to COBS are?

A
  • designated investment business
  • long-term insurance business in relation to life policies
  • activities relating to the above.
39
Q

Underpinning the conduct of business rules is the ‘client’s best interests rule’. This states that what?

A

A firm must act honestly, fairly and professionally in accordance with the best interests of its client.

40
Q

Under COBS, clients are generally categorised as:

3

A
  • retail
  • professional
  • eligible counterparties.
41
Q

The importance of how a client is classified is related to what?

A

The level of protection that the client can benefit from.

ie, a retail client is afforded the highest level of protection.

42
Q

If clients do wish to opt up (ie: become ‘professional’ and dispense with the extra protection of being a retail client) - they must be able to meet 2 criteria from the quantitative test list below in order to become “elective professional clients”:

A

• average trade frequency of greater than ten trades per quarter over previous four quarters
• portfolio worth over €500,000
• has worked, or been involved, in the financial sector for more than one year in a professional
capacity which requires the knowledge of the transaction or service envisaged.

43
Q

What else must be confirmed for a client to become an ‘elective professional client’?

A

Furthermore, the firm must apply a qualitative test, whereby it assesses the expertise, experience and knowledge of the client that shows the client is capable of making their own investment decisions and understanding the risks.

The client must tell the firm that they wish to be treated as a professional client and the firm must confirm compensation rights and protections which may be lost.

The client must then confirm they understand the loss of protections.

44
Q

What is the general principles of Communicating with Clients (COBS 4)?

A

Be Fair, Clear and not Misleading

45
Q

In being Fair, Clear and not Misleading, Firms must ensure that their communications include:

A
  • if the firm’s regulator, ie, the FCA, is named in a promotion, and, where matters are not regulated by the FCA, that it says so
  • financial promotions which deal with products or services where the client’s capital is at risk must say this
  • information quoting yields must give a balanced view of both short-term and long-term prospects
  • if an investment is complex, it must be clearly explained

• where communications relate to a packaged product, the provider of that product is accurately,
fairly and clearly described.

46
Q

How is past performance to be used?

A

Firms must make sure that:

  • it is not any more prominent than other information,
  • that it covers at least five years or since launch
  • it shows the effects of charges and commission.
47
Q

What information must be provided in good time before provision of the service to a client?

A

All firms are required to provide retail customers with general information about itself, its services, its reporting to customers, compensation arrangements and how it safeguards client money and assets.

It must also provide the client with information on costs and associated charges including all fees, commissions, charges, expenses and taxes.

48
Q

Recap:

When do rules on suitability apply?

A

When firms make personal recommendations relating to designated investments, and when they manage investments.

(The rules are based on Principle 9 of the Principles for Businesses.)

49
Q

Recap:

In order to assess the suitability of an investment decision for any particular client, the adviser should look at 3 different elements concerning that client:

A
  • knowledge and experience in the investment field relevant to the specific type of designated investment or service
  • financial situation, and
  • investment objectives.
50
Q

The specific transaction to be recommended must:

3

A

• meet the client’s investment objectives

• be such that the client is able financially to bear any related investment risks consistent with the
investment objectives, and

• be such that the client has the necessary experience and knowledge in order to understand the risks
involved in the transaction or in the management of their portfolio.

51
Q

When managing their obligation to prevent conflicts of interest, a firm is obliged to:

A
  • maintain effective organisational and administrative arrangements designed to prevent conflicts
  • arrange for those producing external-facing investment research to have appropriate barriers in place to stop this information flowing to other parts of the firm
  • ensure that, when conflicts cannot be managed away, they are disclosed
  • have and maintain a conflicts policy
  • provide clients with the description of that policy
  • keep records of where conflicts have arisen.
52
Q

What are Chinese Walls?

A

This is one mechanism for controlling the flow of information in an organisation. When Chinese walls are established, information held by employees in one department or ‘on one side of the wall’ cannot be shared with those in another department.

These information flow barriers can be achieved by physically locating staff in different locations and by procedural and administrative restrictions.

53
Q

How are firms managing investments required to provide periodic statements?

A
  • In a durable medium (unless such statements are provided by another person).
  • This should happen at least six-monthly, but the client can request them every three months.
  • If the portfolio is leveraged (some assets within the portfolio have been bought with borrowed funds), a statement must be sent monthly.
54
Q

Why Is Reporting Important for Clients and the firms?

A

Obviously for clients it means that they can compare and contrast the performance over a given period. It may prompt them to contact the adviser.

For firms, it provides the firm with information about performance and allows them to monitor their activities against other management information (MI). Reporting can be a crucial monitoring tool for a firm’s business activities

55
Q

There are 2 types of adviser in relation to personal recommendations and retail investment products:

A
  • Independent Advice

- Restricted Advice

56
Q

What is the definition of Independent Advice?

A

Independent advice is advice which is unbiased and unrestricted, and based on a comprehensive and fair analysis of the relevant market.

Genuinely independent advice is free from any restrictions that could affect advisers’ ability to recommend what is best for the customer.

57
Q

What is the definition of Restricted Advice?

A

Firms that do not give independent advice but advise on a limited range of products or providers will be giving restricted advice.

They must still meet FCA suitability requirements even if they offer restricted advice.

It may not be suitable for the client. It is not acceptable for a firm to make a recommendation for a product that closely matches the needs of the consumer, from the restricted range of products they offer, when that product is not suitable.

58
Q

Give examples of how Referral to a Specialist can be used to benefit a client

A

This could be for financial planning advice (eg: pension transfer advice) or for advice from another profession (eg: a tax adviser or a solicitor).

It is important that all of those involved in advising a client do so in a collaborative manner to ensure the client is receiving the correct advice.

EG: a solicitor could create a discretionary trust deed, a financial planner could manage the assets within the trust and a tax adviser could advise on the periodic and exit charges of the trust.

CISI Financial Planning & Advice (34 decks)

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