4) The FCA Conduct of Business Sourcebook / Client Assets Flashcards
Chapter 4
1
Q
Where is the Conduct of Business Sourcebook (COBS) contained
A
within the Business Standards block of
the FCA Handbook
2
Q
when must Firms ensure their appointed representatives comply with COBS rules
A
when they communicate financial promotions
3
Q
what is The aim of COBS
A
move the regulation towards a better focus on outcomes rather than compliance with detailed prescriptive rules
4
Q
what are The provisions
of MiFID
A
high-level standards for business
conduct, without specifically prescribing how firms should achieve those standard provisions
5
Q
what does COBS contain
A
provisions of MiFID which relate to conduct of business and provisions for investment firms that are not subject to MiFID
6
Q
what is the COBS general application rule is based on
A
geographical location
7
Q
who does COBS apply to
A
UK firms conducting MiFID business for UK clients within the UK
8
Q
Following Brexit, who does the COBS Handbook no longer apply to
A
MiFID business of a UK MiFID firm carried
on from an establishment in an EEA member state
9
Q
what are Post Brexit EEA firms operating from a branch in the UK classified as when carrying out MiFID business within the UK
A
Third country firms
10
Q
where do COBS rules apply on a home state basis
A
investment research and personal account dealing
11
Q
what does it mean if COBS rules apply on a home state basis
A
rules applies to UK firms, regardless of where they are conducting business
12
Q
which activities are subject to COBS
A
- designated investment business
- long-term insurance business - life policies
- accepting deposits
13
Q
which COBS rules are disapplied for firms carrying on eligible counterparty business
A
- A large part of COBS 2 and 4
- COBS 6.1, 8, 10, 11, 12, 14.3, 16
14
Q
why are Appointed representatives exempt from COBS
A
they carry regulated activities under the umbrella of the firm who accept responsibility
14
Q
when do participants in a regulated market not have to comply with COBS 11.4 (client limit orders)
A
when in respect of each other but they must comply when they are executing orders on a client’s behalf.
15
Q
a durable medium
A
- paper
- instrument letting recipient store info to access in future for an appropriate time on an unchanged basis. includes PC, not internet, meets requirement of storage and retrieval. .
16
Q
what conditions must a website meet for the FCA to consider it a durable medium
A
- appropriate to the firm and client, must evidence the client has regular access to internet - providing their email address
- client consent to having info provided in that form
- notified electronically of website and where on the website the info is
- up-to-date
- accessible continuously for such a period of time as the client may need
17
Q
what is a firm required to do if it is carrying on designated investment business
A
categorise its clients
18
Q
what laid down rules on how client categorisation has to be carried out for MiFID business
A
MiFID
18
Q
what laid down rules on how client categorization has to be carried out for non MiFID business
A
FCA - same mifid terminology, different categorizing rules
19
Q
If a firm provides a mix of MiFID and non-MiFID services, how must it categorize clients
A
in accordance with MiFID , unless MiFID business is conducted separately from non-MiFID business
19
Q
what falls within mifid scope
A
investing in a CIS
20
Q
what does fall within mifid scope of activities
A
life policy
20
Q
how does COBS define a client
A
someone to whom a firm provides, intends to provide, or has provided a service
in the course of carrying on a regulated activity
21
retail client
any client who is not a professional client or an eligible counterparty
22
how does COBS define a client in relation to financial promotion rules
it includes persons with whom the firm
communicates, whether or not they are actually clients
23
how are Clients of a firm’s appointed representative or tied agent regarded
clients of the firm.
23
Under COBS how may clients be categorised
* a retail client
* a professional client
* an eligible counterparty
24
two types of Professional clients
per se or elective
25
customer
an umbrella term covering both retail clients and professional clients
26
Per se professional client
* An entity required to be authorised or regulated to operate
* Large undertakings – companies whose balance sheet, turnover or own funds meet certain levels
26
For MiFID and equivalent third country business what is considered a large undertaking
balance sheet = €20 million; net turnover = €40 million; or own funds of €2 million.
27
which per se clients are entities required to be authorised or regulated
* a credit institution
* an investment firm
* any authorised/regulated institution
* insurance company
* CIS or their management company
* a pension fund or their management
* commodity/ commodity derivatives dealer
* any institutional investor.
28
what are considered large undertaking for other (non-MiFID) business
- net assets have at any time in the past two years been at least £5 million, or currency equivalent - limited partnerships calculate without deducting loans owing to partners
- any two from: balance sheet = €12.5 million; net turnover =€25 million;
averaged 250 employees during the year.
- A trustee of a trust - assets of 10m in past 2 years
-
28
when may A trustee of an occupational pension scheme or a small self-administered scheme, or the
trustee/operator of a personal pension or stakeholder pension scheme be considered a large undertaking
has at any time in the past two years had, at least 50 members, and AUM of at least £10 million.
28
what do 'per se' professional clients also includes
* national/regional governments, public bodies, central banks, international/supranational institutions
* institutional investors whose main business is investment in financial instruments.
29
why is ECP category narrower than per se pro client list
it does not include large undertakings
29
when may A retail client be treated as an elective professional client
1) Qualitative test - firm self assesses their ability to make their own decisions and understand risks involved
2) Quantitative test - for mifid
- averaged ten significantly sized transactions on the relevant market in
each of the past four quarters
- portfolio exceeds €500,000
- client worked as a professional in the financial services sector for at least a year
29
what are the only types of business a client can be categorized as an ecp for
* executing orders
* dealing on own account
* receiving and transmitting orders.
30
what can ECPs do however if they would rather have more protections
asking for a client category affording more protection, and, therefore, becoming a professional client
30
drawbacks caused by COBS rules not applying to ECPs
ECP will not benefit from the protections
30
ECP wants to engage in other types of business what is it categorised as
a per se professional client.
31
If a firm knows someone it is providing services (A) is acting as the agent of another person (B) who should it regard as it's client
A
31
when should a firm not treat the agent as its client
when the firm agreed in writing with agent it should treat the end client as its client.
32
when does the end client always preside over the agent in regard of who should be considered the client
if the involvement of Agent in the arrangement is mainly for the
purpose of reducing the firm’s duties to end client
32
Assuming the client passes the qualitative and, for MiFID business, the quantitative test, what must be done next
put in writing to the firm their wish to be reclassified and the specific services and/or products this reclassification will apply to, ack they will lose protection
33
33
when may A professional client be treated as an elective ECP
* a per se professional client (or
institutional investor), and
* they request to be treated as an ECP.
33
how may recategorisation be carried out for a client
* a general basis
* more specific terms, for example, a single transaction only.
34
what circumstances must be met if a local authority/ municipality retail client wants to be an ecp
qualitative test as per COBS 3.5.3, quantitative test (as per COBS 3.5.3B):
- portfolio > 10m£
- at least one year in professional position
- is an ‘administering authority’ of the Local Government Pension Scheme
34
under mifid II what must local authorities and/or municipalities be classed as
retail clients - can reclassify as an ECP where they comply with specific circumstances
34
drawback for classifying a client differently for different instruments
complex internal arrangements for firms
35
If a retail client is classified as an ‘elective professional client' what protections will they lose
* Communicating with clients
* Info about the firm, services,remuneration
* Suitability
* Appropriateness
* Dealing and Carrying out orders
* Reporting info to clients
* Remuneration and incentivisation of staff
* Client reportin
* Investor compensation (FOS & FSCS)
* Exclusion of liability
* Share Trading Obligation
* Transfer of financial collateral arrangements
* Client Money
35
If a professional client is classified as an ‘elective eligible counterparty’ what investor protections will they lose
* Client agreement
* Appropriateness – (for non-advised activity)
* Best Execution
* Order Handling
* Product Governance
* Disclosure on financial instruments
* Package Products
36
what must classified clients be notified of
how the firm has classified them. their rights to request recategorisation and any limits in their protections from this
37
what does The requirement to enter into a client agreement apply to
- designated investment business for retail clients
- MiFID business and ancillary services carried on for
retail/professional clients
37
What do client agreements not apply to
insurance firms issuing life policies as principal
38
what do client agreements state
essential rights and obligations of the firm and the client
38
what form must client agreements take
paper or other durable medium
38
what must be provided to the client In good time before they are bound by client agreements
* agreement terms
* the firm' services relating to that agreement : authorised communications, conflicts of interest and the firm’s authorised status.
39
when may firm provide the agreement and the information immediately after the client is bound by any such agreement.
If the client requests distance communications and the firm complies with voice telephony communications rules
39
How do Firms notify the client of material change to terms in the client agreement
in good time before the change takes effect, and in a durable medium
39
How long must Client agreement records be maintained for
* five years
* the duration of the relationship with the client
whichever is longer
39
which client agreement records must be maintained indefinitely
in the case of a pension transfer, pension opt-outs or freestanding additional voluntary contributions
39
COBS 2.2 and COBS 2.2A
high-level disclosure requirements
40
what must Firms carrying on MiFID business or derivatives, warrants and stock lending provide clients clients with appropriate information about
* the firm and its services
* investments and strategies, risks associated with them
* execution venues
* costs and charges
41
What info must A firm provide client with
* firm's name, address contact details
* languages the client may communicate
* methods of communication
* firm's authorisation and name and details of the authority allowing so
* if firm acts through an appointed representative or tied agent, a
statement of this
* nature, frequency of performance reports of the services
* firm’s conflict of interest policy and fair treatment
42
If a firm proposes to manage investments for a retail client, what info must they provide for them
* method and frequency of the portfolio investment valuation
* any delegation of management
* any benchmark against the portfolio will be compared to
* the types of investment and transactions
* objectives, risk and specific constraints
42
what info must Firms holding client money or investments subject to uk mifid rules provide
1. investments/money may be held by a third party
2. firm’s responsibility for acts of that third party
3. what will happen if the third party became insolvent
4. if investments cannot designated in the country of the third party, what the risks materialize
5. investments are subject to non-UK laws and effects on clients’ rights
6. steps the firm has taken to protect client’s money relevant investor compensation or deposit guarantee schemes available
7. if money/investments are subject to any security interest, full details of this fact and the terms
8. clear information, in a durable medium, in good time before entering into securities detailing clearly what the firm’s obligations are
43
What information on the costs and charges must firms provide their clients with
* total price to be paid
* if total cannot be indicated, provide how they will be calculated so the client can verify and clarify later
* costs must be itemised separately
* if paid in foreign currency, what currency is involved and conversion rates
* the fact that further costs, charges, or taxes may be payable how they are to be paid
* information about compensation schemes
43
What if ECP or a professional requests details on the costs and charges
this would be a commercial decision on whether a firm provides this as there is no regulatory obligation to
43
When may a firm provide client information immediately after the provision of services
a. at the request of the client, distance
communication prevented the firm providing information before
b. the firm complies with the rules of voice telephone communications.
44
how are client agreement disclosures made
durable medium or, firm’s website if the conditions are satisfied,
44
COBS 6.2A and COBS 6.2B
describing advice services
44
which Advisers are not considered independent
who do not select instruments from the whole of the market or a sufficient range of relevant products available on the market, will be classified as restricted
44
Two ways advisers can charge the consumer for the advice and service they provide
pay the adviser separately for the service, or the charge is deducted from the amount being invested.
45
how are adviser charges agreed
the adviser and the consumer to agree the charge, prior to the service being provided to the client
45
what are Advisers prohibited from
receiving trail commission on any business carried out with consumers, including existing client
45
what were advisers permitted to receive trail commission for
on advice for legacy business up until 2016
46
what must firms disclose in respect of a personal recommendation in relation to a retail investment product
whether the advice will be independent advice or restricted - in a services and costs disclosure document or a combined initial disclosure document
46
When a third party firm is involved, who is responsible for accuracy of client information, and
the appropriateness of any recommendations
The third-party firm
47
When a third party firm is involved, who is responsible for concluding the services or transactions.
The original firm
48
When a firm relies on information provided by a third party, how should this information be given
in writing.
48
For non-MiFID investment firms, the FCA states that it will generally be reasonable for a firm to rely
on information from where
information provided to it in writing by an unconnected authorised person, or a professional firm,
49
Who is the onus on the to show that a firm has been at fault and breached principles
the FCA
49
What are firms not captured by the Consumer Duty subject to
FCA’s Fair Treat of Customers (FTOC)
49
six outcomes to explain to firms what FCA believes FTOC should do for consumers:
1. confident firms see fair treatment of customers
as central to the corporate culture.
2. Products and services in the retail market are designed to meet the needs of consumers
3. Consumers have clear information and kept informed before, during and after the point of sale.
4. advice is suitable and takes account of consumer circumstances.
5. products perform as firms led them to expect
6. Consumers do not face post-sale barriers imposed by firms to change product
50
Where is it not an offence under FSMA for a person to communicate a financial promotion
where * the person is an authorised firm
* the promotion has been approved by
an authorised firm.
50
Who do rules in COBS 4.1.1 apply to
firms communicating with clients regarding their designated investment business.
51
Which exemptions apply when communicating or approving a financial promotion
* for qualifying credit, home purchase/reversion plan
* a promotion for a non-investment insurance contract
* promotion of unregulated CIS
* promotion that relates to a credit agreement, a consumer hire agreement or credit related regulated activity.
51
what are financial promotion rules consistent with
Principles 6 (the interests of its customers and treat them fairly) and 7 (the information needs of its clients) of the Principles for Businesses
51
For firms subject to the Consumer Duty, what principles apply for financial promotions
Principle 12 (Consumer Duty) will apply instead of principles 6 and 7.
52
Firms must ensure that all communications are ..
fair, clear and not misleading.
53
when they are drafting financial promotions for deposit accounts what does FCA guidance advise firms to take account of
Code of Conduct for the Advertising of Interest-Bearing Accounts, produced by UK Finance and the Building Societies Association (BSA)
54
Which financial promotions are not identifiable as such
promotions made to a professional client or
ECP
54
Who does the FCA anti-greenwashing rule, and guidance affect
regulated firms undertaking client communication, marketing or making a statement about
‘sustainability characteristics’ of a product or service
55
when are financial promotion rules disapplied
excluded communications:
* high net worth (Article 48 of the FPO) and sophisticated investors (Article
50 and 50A of the FPO).
* financial promotion order (FPO) which makes
promotion exempt if communicated by an unauthorised person, or originates outside UK and cannot effect the UK.
* From outside the UK, and would be exempt under the FPO if the office they are communicated were a separate unauthorised person
* Subject to the Takeover Code.
* One-off promotions that are not cold calls.
55
2023 HM Treasury changes to financial promotion exemptions for high net worth individual and sophisticated investors.
* income of £170,000 (£100,000 previously)
* assets £430,000 (£250,000 previously)
* removing criterion of > one investment in unlisted company in the previous two years
* turnover required to satisfy ‘company director’ to £1.6M to be eligible for self-certified sophisticated investor exemption
* provide details of themselves in communications using exemptions.
* Updating certified HNWI exemption - removing ‘certified’.
* Updating HNWI and self-certified sophisticated investor statements.
* Applying these changes to CIS promotion
55
4 methods of communication
* real time – face-to-face, telephone, presentations and
interactive dialogue
* unsolicited real-time - ‘cold calls'
* non-real-time, emails, letters or websites, typically where a record is made
* direct offer promotions - an agreement including a form to respond/ specify the manner of responding.
55
COBS 4
The section of the COBS rules which deals with communications to clients
56
where does COBS 4 not apply
where Prospectus Regulation Rules PRR 3.3 applies instead
57
what does Prospectus Regulation Rules PRR 3.3 apply to
offers, or admission to trading, of transferable securities which:
- require a prospectus under sec85 FSMA
- where an election to produce a prospectus is made under Section 87 of FSMA.
58
A prospectus advertisement
any type of communication specifically promoting the offer to subscribe/acquire securities.
58
criteria to allow An advertisement relating to trading to be issued
1. it states that a prospectus has been (or will be) published, and where investors can obtain it
2. is clearly recognisable as an advertisement
3. the information in it is accurate
4. it is consistent with information that in the prospectus
58
Two phases for the application of the new UK prospectus regime
- FCA granted powers to make rules
- FCA makes rules following the formal consultation process
59
what cant be promoted to retail investors
'Non Mass Market Investments' (NMMI)
60
what is the minimum cooling off period for first time investors with a firm.
Minimum 24 hour
60
what must personalised risk warnings include
the client’s name
61
where is The definition of ‘qualifying cryptoasset’ set out
paragraph 26F of Schedule 1 to the Financial Promotion Order (FPO).
61
what is A ‘qualifying cryptoasset’
any ‘cryptographically’ secured digital representation of transferable and fungible value or contractual right, does not include electronic money or an existing controlled investment.
62
What has the Government introduced as a bespoke exemption in the FPO for cryptoasset businesses registered with the FCA
cryptoasset businesses which are registered with the FCA under the MLRs, but which are not authorised persons , can communicate their
own cryptoasset financial promotions to UK consumers
62
four routes to legally promoting cryptoassets to consumers
1. by an authorised person.
2. by an unauthorised person but approved by authorised person.
3. promotion communicated by cryptoasset business registered with FCA MLRs
4. communicated in compliance with the conditions of an exemption in the FPO
63
how has the fca classified cryptoassets
“Restricted Mass Market Investments”, they are permitted to be marketed to UK consumers subject to certain restrictions.
64
Restrictions to cryptoasset mass marketing
* Clear risk warnings
* associated risk warnings – general and
personalised.
* Banning incentives to invest.
* Positive frictions
* cooling off period (24 hours)
* direct offer financial promotion rules
* client categorization requirements, and
* self-certified sophisticated investor category will
not be applied.
* Appropriate assessments
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