4. The FCA's Conduct of Business and Client Assets Sourcebooks Flashcards
IMPORTANT: What is the aim of The Conduct of Business Sourcebook (COBS)?
To move the regulatory approach towards a better focus on outcomes rather than compliance with detailed and prescriptive rules. It also implemented the provisions of MiFID which relate to conduct of business.
IMPORTANT: What is the impact of location on the application of the COBS rules?
The general application rule is based on geographical location and states that firms are subject to COBS if they carry on any of a range of activities from an establishment maintained by them or their appointed representative in the UK. SO if a French bank e.g. establishes a branch in the UK but doesn’t carry on business in the UK, then not subject to COBS
-COBS Handbook no longer applies to MiFID business of a UK MiFID firm carried on from an establishment in another EEA state.
-The rules in COBS that derive from MiFID apply to a Non-UK MiFID investment firm, EEA firms operating from a branch in the UK will be classified as a ‘third-country firm’ carrying out MiFID business within the UK.
IMPORTANT: If a bank establishes a branch in the UK, under what circumstances will it be subject to the FCA Conduct of Business sourcebook?
a) Only if advising or selling is carried out be UK nationals
b) Only if its products or services are unique to the UK
c) Only if business is carried on within the UK
d) Under all circumstances
C
IMPORTANT: What activities are subject to the COBS rules?
The activities which are subject to COBS are:
* designated investment business
* long-term insurance business in relation to life policies (so not all),
* accepting deposits – in part, eg, financial promotion rules, and rules on preparing and providing product information.
To which one of the following activities do the conduct of business rules apply?
ALong-term insurance business in relation to life policies
BOffering car breakdown insurance
CCredit unions
DRegulated mortgages
A)
COBs rules apply to:
* designated investment business
* long-term insurance business in relation to life policies (so not all),
* accepting deposits – in part, eg, financial promotion rules, and rules on preparing and providing product information.
IMPORTANT: Does COBS apply to appointed representatives directly or indirectly?
Indirectly
MEM & IMPORTANT: What are examples of designated Investment business? Mifid instruments and Non-Mifid?
Dealing
Broking (/Overseeing)
Advising
Managing
MIFID instruments:
Shares
bonds
derivatives
Non-Mifid DI:
Packages products
-retail investment products
When a firm provides designated investment business to a retail client, the training and competency requirements do not apply for which of the following?
A Advising and dealing on certain investments
B Managing investments
C Daily oversight of safeguarding assets
D Arranging deals in derivatives
D)
The rules apply for advising, dealing, managing and overseeing/broking on a daily basis. Doesn’t say ‘arranging’
Under the FCA Training and Competency rules, who must be supervised?
A All staff performing any activity
B All staff performing specified activities
C Staff not yet deemed competent performing specified activities
D Staff not yet deemed competent performing any activit
B - Under the Training and Competency rules, firms must not allow an employee to carry on any of the
specified activities without appropriate supervision. Firms are required to ensure that employees are
appropriately supervised at all times.
Which of the following is true of the training and competence rules?
A Authorised firms are required to ensure their employees arecompetent for their role in the firm under Principle forBusinesses 3, Management and Control
B Approved examinations must be obtained within one year ofworking for an authorised firm
C An employee must have passed the regulatory module beforedealing with professional clients
D An overseas individual may be allowed to sit just the regulatorymodule if they have at least four years relevant experienceoutside the UK
A
Which of the following is true with regard to the Training and Competence Sourcebook?
A
Authorised firms are only required to ensure that theirapproved persons are competent for their role in the firm
B
FCA firm employees must have their competence regularlyreviewed
C
Appropriate examinations must be obtained for relevant roleswithin three years of working in the financial services
D
All employees must take appropriate examinations
B
IIMPORTANT: An FCA firm must not knowingly deal for its own account until the clients for whom the publication was intended have has a reasonable time to react to it unless:
- The firm is a market maker dealing the in the normal course of business (No matter what info they have they are obliged to trade the securities for liquidity)
- Unsolicited client orders (if a client comes in and asks firm to deal then the firm is permitted)
The COBS relating to financial promotions require an individual with appropriate expertise to check that the promotion is fair, clear and not misleading. For which of the following types of financial promotion is such a confirmation exercise required before issue?
A
Real-time financial promotions
B
Non real-time financial promotions
C
All financial promotions
D
Real-time and non real-time financial promotions
B - The general requirement for such a check is a requirement for non-real time (written) financial promotions only.
IMPORTANT: What activities are partially exempt from COBS?
A range of COBS rules are disapplied, in certain cases, for firms carrying on ELIGABLE COUNTERPARTY BUSINESS. These include:
* General conduct of business obligations (such as inducements).
* Communicating with clients (including financial promotions).
* Provision of information about the firm, its services and its remuneration.
* Client agreements.
* Appropriateness requirements (non-advised services).
* Best execution and client order handling.
* Labelling of non-independent research.
* Information relating to designated investments
When an appointed representative is communicating a promotion to retail clients, andmaking appointments, which of the following is not required?
A
The detailed risks of the investment
B
Whether the client wishes to continue
C
The caller’s name
D
A contact point to cancel the appointment
A - risks can be discussed at a later date.
IMPORTANT : Do appointed representatives have to comply with the COBS rules?
No, appointed representatives are exempt, because they can carry out a range of regulated activities under the umbrella of their principal firm, which has accepted responsibility for the activity.
IMPORTANT: How will a MiFID firm classify its client in relation to non-MiFID business?
MiFID laid down rules on how client categorisation has to be carried out for MiFID business. For non-MiFID business, the FCA uses the same client categorisation terminology, but the rules on how the categories must be applied are modified in some cases.
If a firm provides a mix of MiFID and non-MiFID services, it must categorise clients in accordance with the MiFID requirements, unless the MiFID business is conducted separately from the non-MiFID business.
IMPORTANT Q: What are the three client categories? WHO HAS THE LEAST PROTECTION?
- a retail client
- a professional client (An entity required to be authorised or regulated to operate in the financial markets or large undertakings - Mifid = balance sheet of EUR20mln and Non-Mifid = net assets are at least £5m OR governments)
- an eligible counterparty (no large undertakings: E.G. credit institution, investment firm, insurance company, central bank, pension fund etc)
The classification determines the level of protection the client receives, with retail clients being afforded the most protection, and eligible counterparties the least.
MEM & IMPORTANT: A client is considered an eligible counterparty for the execution of orders. Which of the following is true?
AThe client receives regulatory protection for the execution of orders
BThe client will be classified as a per se professional client for advisory services
CThe firm must assess the client against large undertaking criteria
DNeither firm nor counterparty may transact due to potential conflicts of interest
B - Eligible counterparty (ECP) status only applies to eligible counterparty business, i.e. dealing activities. ECP status does not apply to advisory services. Any client considered an ECP for dealing will be a per se PC for advisory services.
Which one of the following would automatically be treated as a per-se professional clientfor MiFID business?
A
A company with a balance sheet of €13m and a turnover of€30m
B
A Trust with a balance sheet of €22m and own funds of €1.5m
C
A company with own funds of €2.5m and a balance sheet of€12.5m
D
An authorised firm with a balance sheet of €18m and ownfunds of €32m
D - all authorised/regulated (btw you have to be authorised or exempt to be regulated) firms are treated as per se professional for both MiFID and Non-MiFIDbusiness.
MEM & IMPORTANT: What are the criteria for reclassifying a retail client as an elective professional client?
- Qualitative test (MiFID and non): the firm has assessed their (or its) expertise, experience and knowledge and believes that they can make their own investment decisions and understand the risks involved
*Quantitative test (MiFID) :
- the client carried out 10 significantly sized transactions PER QUARTER on the relevant market OVER the past 4 quarters
- Client’s financial portfolio > €500,000 (cash deposits and financial instruments)
* the client works or has worked as a professional in the financial services sector for at least 1 year on a basis which requires knowledge of the transactions envisaged.
Assuming the client passes the qualitative and, for MiFID business, the quantitative test, the client must put in writing to the firm their wish to be reclassified
A retail client wishes to opt up to a professional client. Which of the following is arequirement under the quantitative test?
A
10 trades in the previous quarter in the investment in question
B
Expertise, experience and knowledge of the investment inquestion
C
Portfolio of investment assets above €500K
D
At least 3 years relevant professional experience
C -
Not A because it’s at least 10 significant trades PER quarter in the last 4 QUARTERS. This statement isn’t enough.
Not D because it’s at least 1 year, not 3.
An existing client approaches their firm and requests that they give him a lower level ofprotection. Which of the following would be appropriate action for the firm to take? The firm must:
A
Offer this level of protection based on specific clientinstructions
B
Only offer this level of protection if the client in question isalready deemed a professional client
C
Not offer this level of protection as if it were appropriate to doso it would have categorised the client as such already
D
First assess the client and then, if necessary, warn them of theadditional risks
D - they are asking to opt up so assess and then warn.
Which of the following firms would be required to comply with the UK Conduct ofBusiness rules?
A
A UK subsidiary of a foreign firm writing life assurancebusiness for UK clients
B
A Japanese bank arranging hedging strategies for a UK basedcompany
C
A French company conducting business with a Germancompany
D
A UK bank arranging a commercial loan for a client in the UK
A: A package product
Designed Investment business -
Dealing
Broking (/Overseeing)
Advising
Managing
NOT arranging
MIFID instruments:
Shares
bonds
derivatives
Non-Mifid DI:
Packaged products
-retail investment products
Therefore, not B because it’s hedging (this is an exemption to being a specified investment even)
Not C because it’s nothing to do with the UK
Not D because it’s ARRANGING and loans arent the instruments
IMPORTANT: Who are per se eligable counterparties?
-Authorised/Regulated firm
-Central bank
-Government
-Supranational
Which one of these is not a per se eligible counterparty?
AInsurance company
BUCITS scheme
CLocal authority
DSupranational organisation
C
A and B are authorised/regulated firms
IMPORTANT: Who can be an elective eligable counterparty?
The large undertaking firm (never an individual investor). No test.
Which of the following could be categorised as an elective professional client?
A An investor with a personal portfolio worth €100,000 and onaverage 20 transactions per quarter
B A clerk at a financial services firm with, on average, fivetransactions per year
C The head of research at a fund management firm with aportfolio worth €700,000
D An unauthorised firm with a balance sheet of €40m andturnover of €55m
C - As that’s the quantative test for professional clients. Not D as that’s criteria for a large undertaking (per se professional)
IMPORTANT: Where a person with whom the firm is dealing (A) is acting as an agent of another person (B), who should the firm regard as the client? What are the exceptions to this?
The agent (A). Exceptions:
-Written agreement between the firm and agent to treat B as the client
-Purpose of the agency is to avoid duties owed to B (appointed representative)
IMPORTANT: George has verbally agreed that Elaine should make some investments on his behalf. If Elaine approaches investment firm A to make an investment, and the firm knows that the agreement is in place, who would be deemed to be A’s client and why?
A_ George, because the firm knows that the agreement has been made verbally
B) Elaine, because the firm knows that the agreement has been made verbally
C) George because it doesn’t matter how the agreement has been made, it is still his money
D) Elaine, because it doesn’t matter how the agreement has been made, it is her who has made the investment decision
A) SHOULD BE IN WRITING in order for the client to be Elaine
Which one of the following is not defined as the client of a firm?
A A client of an appointed representative of the firm
B A person acting through an agent
C A person to whom a financial promotion is communicated by the firm
D A potential client
B) An agent is to be considered to be the client unless agreed otherwise (written agreement or appointed rep (then both are considered))
IMPORTANT: What are the notification requirements to clients on their client categorisation?
New clients must be notified of how the firm has classified them.
Before the services are provided, they must also be advised of their rights to request recategorisation and of any limits in their protections which will arise from this.
In the absence of agreement to the contrary, what must the firm do if a per se eligiblecounterparty asks to be subject to conduct of business protections?
A
Re-categorise it as a retail client
B
Re-categorise it as a professional client
C
Recategorise it as an eligible counterparty
D
The firm has to refuse the request
B - the client must be recategorised as a professional client and given more protection. A would be too drastic - If they request, they can also be classified as a retail client.
A per se professional client asks an authorised firm for it to be categorised as a retailclient for extra protection for MiFID business. Which is TRUE about the firm’s response?
A
A report of market manipulation should be madeIMMEDIATELY to the FCA
B
Re-categorisation is possible without telling the client
C
The firm would enter into a written agreement regarding re-categorisation
D
Although the firm must do it, they can wait until the client hassigned a risk warning
C
-Risk warnings would be signed if the client were opting-up. All clients are permitted to ask for extraprotection by being re-categorised. This re-categorisation can be, generally, regarding specificservices or regarding specific investments.
IMPORTANT: What is the overriding principle to be applied in determining the categorisation status of a client?
A Clients are categorised as retail or professional according to their declared personal wealth
or balance sheet size if a corporate entity
B Any client is a retail client unless they meet the criteria of a professional investor or
eligible counterparty
C Clients are first categorised as - US/Non-US; then EU/Non-EU and finally UK/Non-UK
D All clients are categorised as retail or professional according to how many years
experience they have of using investment products
B
IMPORTANT Q: When is a firm required to provide a client agreement? Unless? What types of client does it involve?
In good time before the retail client is bound by the agreement, or before the provision of investment services, (whichever is earlier).UNLESS THE FIRM ACT AS PRINCIPAL WITH AN INSURANCE CONTRACT. RETAIL (mifid and non-mifid) AND PROFESSIONAL (MIFID ONLY).
According to the conduct of business rules and in relation to MiFID business, a firm musthave in place a client agreement when it carries on:
A
Designated investment business for a retail client only
B
Eligible counterparty business
C
Any regulated activity for a retail client and a professional clientonly
D
Designated investment business for a retail client and MiFIDbusiness for a professional client
D
A retail client who is habitually resident overseas does not wish to be sent a basicagreement letter for insurance business. The firm should:
A Report them to the FCA
B Send them the client agreement regardless
C Not send them a client agreement
D Not do business with them
C - Effecting insurance contracts is an exception to the rule requiring retail clients to be sent a clientagreement. The location of the client is irrelevant
Under which of the following circumstances do the conduct of business rules not require a firm to enter into a client agreement?
AThe client is habitually resident outside the UK
BThe firm has established, by taking reasonable steps, that the client does not want to enter into such an agreement
CThe client is habitually resident outside the UK and the firm has established, by taking reasonable steps, that the client does not want to enter into such an agreement
DThe client enters into an insurance contract with the firm as principal
D
IMPORTANT Q: For which type of business must firms retain client agreement records indefinitely?
a) Home reversion plans
b) long-term care insurance
c) Pension opt-outs
d) Endowment mortgages
C) Pension transfers, pension opt-outs or freestanding additional voluntary contributions.
IMPORTANT: What information must be disclosed prior to providing services?
- the firm and its services
- designated investments and proposed investment strategies, including appropriate guidance on, and warnings of, the risks associated with investments in those designated investments or in respectof particular investment strategies
- execution venues
- the costs and associated charges.
IMPORTANT: When is a firm required to disclose any dealing comission arrangements to new customers?
a) On completion of the first transaction in designated investment business
b) Only when it signs a customer agreement
c) Prir to conducting any designated investment business
d) When the firm sends out the first valuation
C, others include:
* the firm and its services
* designated investments and proposed investment strategies, including appropriate guidance on, and warnings of, the risks associated with investments in those designated investments or in respectof particular investment strategies
* execution venues
* the costs and associated charges.
IMPORTANT Q: If a firm is unable to provide a professional client, in advance, with a total price for all costs and charges which will be incurred, what action should it take?
a) Defer providing the service
b) Quote a max amount
c) Disclose the calculation basis
d) Specify the date it will be available
C) so that the client can verify and clarify them later
IMPORTANT Q: Information about the firm that the firm must provide to clients or potential clients:
- the name and address of the firm, including the contact details necessary to enable the client to communicate effectively with the firm
- in respect of MiFID business or equivalent third-country business, the languages in which the client may communicate and receive documents and other information from the firm
- the methods of communication to be used between the firm and the client, including those for the sending and reception of orders
- a statement of the fact that the firm is authorised and the name and contact details of the competent authority enabling it
- if the firm is acting through an appointed representative or, where applicable, a tied agent, a statement detailing this fact, specifying in which EEA state the appointed representative or tied agent is registered is required
- the nature, frequency and timing of reports on the performance of the service provided by the firm to the client, in accordance with the rules on reporting to clients on the provision of services
- information about the firm’s CONFLICT OF INTEREST POLICY, a summary of the firm’s policy, including the manner in which the firm will ensure fair treatment of the client and that further details are available on request. That’s retail, professional and eligible counterparty clients.
Client information should be provided in good time before the provision of the firm’s services. But when may the firm provide the information immediately after the provision of services?
a. at the request of the client, the agreement was concluded using a means of distance communication which prevented the firm providing the information beforehand
b. the firm complies with the rules in relation to voice telephone communications.
The disclosures must be made in a durable medium or, if the website conditions are satisfied, via the firm’s website.
What is durable medium?
A durable medium is paper, or any instrument which lets the recipient store the info so that they can access it for future reference for an appropriate time and on an unchanged basis.
IMPORTANT Q: For the purposes of the FCA Rules, the term ‘durable medium’ excludes websites unless they meet prescribed requirements relating to:
a) size and storage
b) storage and retrieval
c) retrieval and cost
d) cost and size
B) A durable medium is paper, or any instrument which lets the recipient store the info so that they can access it for future reference for an appropriate time and on an unchanged basis. It includes storage on PC but excludes internet sites unless they meet th requirement in relation to STORAGE AND RETRIEVAL
IMPORTANT: In line with the FCA Conduct of Business Sourcebook, what method of information storage
meets the requirements for a durable medium?
A Wealth manager’s website
B Financial Times website
C Email from an investment manager
D Sales call between investment manager and client
C) A durable medium is paper, or any instrument which lets the recipient store the info so that they can access it for future reference for an appropriate time and on an unchanged basis.
IMPORTANT Q: Where the conduct of business sourcebook requires information to be provided to a client, the firm is permitted to provide this by means of a website subject to which one of the following conditions?
a) The client must specifically agree to this approach
b) The client must be a market counterparty
c) The firm must hold exempt status under the Data Protection Act
d) The firm must be a non-MiFID firm
A, evidence needs to exist that client has regular access to the internet
IMPORTANT Q: In order for a firm to treat customers fairly and meet the FCA’s consumer outcomes, a client who wishes to make a complaint:
a) Should not fave any unreasonable barriers
b) Must receive a response within 7 days
c) Will be eligable for fixed levels of compensation
d) Must not be communicated with directly.
A
IMPORTANT: What is the Retail Distribution Review (RDR) and who does it apply to (what clients)?
- Applies to retail clients
*It says that firms making personal recommendations to retail clients must either be independent (owe duty of care to customer e.g. an investment manager) or restricted (owe duty of care to employer and restricted to only certain products or the whole market)
Under the retail distribution review (RDR), financial advisers must complete CPD. Whatdoes the abbreviation CPD refer to?
AContinuous personal development
BContinuous psychological development
CContinuous professional development
DContinuous physical development
C
Under the regime created by the retail distribution review, which of the following is TRUE?
AAdvisers must only charge an up-front fee for advice
BFees should be itemised, based on the product, and disclosed up-front
CThe charge can be ongoing and based on a percentage of the funds invested
DPayment of commissions that are already in place for previous advice must continue
C) Advisers must move to fee-based charging. This can be an upfront fee or an ongoing fee based on a percentage of the funds invested (as long as an on going service is provided). Fees should be itemised and disclosed up front, but this should be based on the service provided not the product.
IMPORTANT Q: If a firm carrying on UK MiFID business receives an instruction to provide investment or ancillary services for a client through another UK MiFID firm or is subject to equivalent regulations, what can the firm rely on?WHO RETAINS RESPONSIBILITY FOR THE COMPLETENESS AND ACCURACY OF THE INFORMATION:the firm, 3rd party, both or depends on agreement?
- information relayed about the client to it by the third party firm, and
- recommendations that have been provided by the third party firm.
The third-party firm retains responsibility for the completeness and accuracy of client information, and the appropriateness of any recommendations which are provided.
The firm takes responsibility for concluding the services or transactions
IMPORTANT Q: Under FCA rules all financial promotions to a retail client are obliged to contain which one of the following items?
a) Statement requesting future contact
b) The firm’s name
c) Comparisons with different types of investments
d) Past performance information
B
In which of the following circumstances may an unauthorised firm make a financial
promotion? It:
A Is never permitted to make a financial promotion
B Is permitted to make a financial promotion only if the content
and inducement have been approved by an authorised person
C Is permitted to make a financial promotion only if the content,
but not the inducement, have been approved by an authorised
person
D Is always permitted to make a financial promotion
B
IMPORTANT: A firm produces a circular to existing retail clients promoting an Individual Savings Account
(ISA) product.
What must this promotion contain?
A A statement that the tax treatment of their ISA product is guaranteed until the next
general election
B A statement that tax treatment depends on individual circumstances and is subject to
change
C Information on how to obtain independent tax advice concerning the tax treatment for
individuals buying their product
D Details of any proposed changes to the tax rules concerning ISA’s published by HMRC in
the last year
B
IMPORTANT Q: The rules on financial promotions apply to firms communicating or approving a financial promotion other than:
a) A promotion for a non-investment insurance contract
b) A promotion for an authorised collective investment scheme
c) A stakeholder pension
d) A endowment policy
A
Others not applied to are: qualifying credit, a home purchase plan, home reversionn plan, a promotion for a non-investment insurance contract or the promotion of an unregulated CIA which it’s not permitted to approve.
IMPORTANT: what type of client/s do the financial promotion rules apply to?
Retail only as they are most vulnerable
Important Q: An appointed representative of an insurance company wishes to make a financial promotion. Who is responsible for its content?
a) Another authorised firm with specific permission to approve such promotions
b) The appointed representative
c) Approval is not required as its exempt
d) The authorised insurance company
D) Techinically, a fin promotion communicated by an authorised rep is an exempt promotion and doesn’t need approval but the authorised firm is responsiuble for the content and any actions of its authorised reps.
IMPORTANT Q: In accordance with the Conduct of Business Sourcebook, a firm is not allowed to approve a financial promotion if:
a) The firm is less than 12 months old
b) The promotion is classed as real-time
c) The firm only offers one class of product
d) the promotion relates to a pension transfer
b) firms may not approve real-time promotions e.g. personal visits, telephone conversation or other interactive dialogue.
IMPORTANT: With regard to the approval of a non-real time financial promotion, which of the following is true? A firm:
ACan use any third party to approve the financial promotion but it remains the responsibility of the firm
BCannot use a third party to approve the financial promotion
CCan use any authorised third party to approve the financial promotion and the promotion remains the responsibility of the firm
DCan use any authorised third party and the promotion becomes the responsibility of the third party
D In approving a financial promotion, the approving firm takes on the responsibility of the promotion.
Under FCA regulations, which of the following is true of a written financial promotion?
A
A firm may not arrange for a third party to carry out theconfirmation exercise
B
A firm can arrange for a third party to carry out the confirmationexercise and the responsibility for the promotion lies with thethird party
C
A confirmation exercise is not required for a non-real timepromotion
D
A firm can arrange for a third party to carry out the confirmationexercise and the responsibility for the promotion remains withthe firm
D - CONFIRMATION IS NOT THE SAME AS APPROVAL. Approval would lead to theapproving firm taking on the responsibility. Confirmation, effectively proof reading, would leave theresponsibility with the original firm.
When confirming whether a financial promotion complies with the financial promotionsregulations, which of the following is TRUE?
A
There is no need for authorised firms to confirm compliance
B
Confirmation of compliance must be made by a person withappropriate expertise
C
Confirmations of the promotions must be made by thecommunicating firm
D
Confirmations of the promotions must be made by somebodyother than the communicating firm to ensure no conflict ofinterest
B-
Then If a firm is not authorised, they must get the promotion checked by an authorised firm.
IMPORTANT: What is the purpose of the financial promotion rules?
To ensure that promotions are identified as such, and that they are fair, clear and not misleading.
IMPORTANT Q: Which two of the Principles for Businesses are amplified by the financial promotion rules and communication?
The financial promotion rules are consistent with Principles 6 and 7 of the Principles for Businesses:
* 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 information needs of its clients and communicate information to them in a way which is CLEAR, FAIR AND NOT MISLEADING.
The FCA rules on financial promotions expand which Principle for Businesses?
A Market Conduct
B Financial Prudence
C Customers’ Interests
D Clients’ Assets
C
IMPORTANT Q: A financial promotion issued to retail clients is only required to give a balanced impression of short, medium and long-term prospects if:
a)the investment term is 15 years or more
b)The investment charges are front-end loaded
c) A quoted yield is included
d) Paste performance data is included
A quoted yield is included
IMPORTANT Q: Where a financial promotion is issued to retail clients, the rules state that it must be presented in a way likely to be understood by:
a) financial inexperienced adults
b) the average member of the target group
c) any reasonably educated person
d)a typical existing customer
c) average member of the target group
IMPORTANT Q: A firm is sending out a financial promotion to a group of retail clients. Under the COBS Financial promotion rules, it must:
a) relate only to packaged products
b) be cleary identifiable as a promotion
c)relate only to products produced by the firm itself
d)be sent to intermediaries for distribution
b
IMPORTANT Q: If an unauthorised person communicates a promotion to gorups other than those for which limited approval has been received, then they:
a)must include a warning within the communication
b) must ask the recipient to acknowledge this restriction
c) will commit an offence under the regulations
d) will be liable for an consequential loss
c
IMPORTANT: A person must NOT communicate a financial promotion unless:
-It is an authrosied person
-The content has been approved by an authorised person.
IMPORTANT: A firm that communicates a financial promotion produced by a third party would never be in breach of the rules if:
-It has established that an authorised firm has approved the promotion
-It communicates the promotion only to those it was intended (e.g. purely targeting a high net worth people don’t widely circulate)
-The promotion is not ceased to be fair, clear and not misleading
IMPORTANT Q: A financial promotion is issued by an FCA-authorised firm and includes a reference to the FCA but also refers to matters not regulated by the FCA. Which one of the following is most accurate:
a) The promotion is not allowed
b) the promotion is allowed, but no mention should be made of the FCA
c) the promotion must not be communicated to retail clients
d)the promotion must make it clear which matters are not regulated by the FCA
D
IMPORTANT: What types of communication are subject to the fair, clear and not misleading communication rule?
Firms must ensure that all communications relating to designated investment business, including financial promotions, are fair, clear and not misleading.
IMPORTANT Q: If ABC are appointed representative of firm XYZ, then:
A) ABC’s clients will all be classed as XYZ’s market counterparty clients
b) ABC must process all transactions onan execution-only basis
c) XYZ is responsible for the compliance of ABC’s financial promotions
d) XYZ is not permitted to have any other appointed representatives.
C
Important: Financial promotion approval rules:
Before a firm approves a financial promotion, it must confirm that it complies with relevant regulations.
if financial promotion is communicated by a 3rd party (e.g. appointed representatives) it’s not in breach if:
-An authorised firm has approved the promotion
-It communicates the promotion only to those it was intended
-The promotion has not ceased to be fair, clear and not misleading.
MEM & IMPORTANT Q: List the main exceptions to the financial promotion approval rules.
The financial promotion rules are disapplied in certain cases, notably for excluded communications.
These are communications which:
* are exempt under the Financial Promotion Order (FPO – an HM Treasury order which allows unauthorised persons to communicate specified types of promotion, or, in specified circumstances, without the communication having to be approved by an authorised firm), or
* originate outside the UK and cannot have an effect within the UK, or
* are overseas communication which meets the criteria for exemption under the FPO, or
* are subject to (or exempted from) the TAKEOVER CODE or similar rules in another EEA state, or
* are PERSONAL QUOTES OR ILLUSTRATION FORMS
* are ONE-OFF promotions that are not cold calls (subject to certain conditions), or
* are promotions about unregulated CISs which are permitted because they fall within one of the exemptions in FSMA 2000 (Promotion of Collective Investment Schemes (Exemptions) Order 2001).
The financial promotion rules do not apply to marketing communications in respect ofwhich one of the following?
A
A predator company posting details of a takeover toshareholders
B
An authorised firm communicating details of derivativeinvestments to clients
C
An independent financial adviser communicating its services inrelation to pensions
D
An insurance company communicating a financial promotionregarding life policies
A - this is the takeover code
What is a prospectus and what are the rules of financial promotions around this?
Prospectus - a doc that gives enough info to investors so they can decide whether or not to buy their shares or bonds
When advertising/fin promoting the issue you need to make it clear that it is not a prospectus but make clear where they can get hold of the prospectus & that the advert doesn’t contradict the prospectus
IMPORTANT: The COBS rules are dis-applied to which one of the following types of financial promotions?
A) Communications subject to the Takeover Code
B) Direct offer financial promotions
c) Investments on which the client has requested communication
d) Unwritten promotions
A) think the exceptions to fin promo rules
IMPORTANT: A professional client receives a financial promotion.
Which one of the following statements relating to this promotion is TRUE?
A Promotions to professional clients must always be in writing and identifiable as such
B The financial promotion rules do not apply to professional clients
C The promotion need not be clearly identifiable as a financial promotion as it is being made
to a professional client
D As the client is either a retail client or a professional client the promotion does not need to
be identifiable as such
C: because financial promotion rules only apply to retail clients, not professional
IMPORTANT Q: A financial promotion for an overseas firms should explain:
a) Any credit risks associated with the product
b) Whether the firm has recevied UK regulatory approval
c) If the underlying investment contains any forms of guarantee
d) The extent to which the UK compensation scheme may apply
d) Firms aren’t permitted to communicate or approve promotions for overseas firms unless the promotion explains whether and to what extent to which the UK compensation scheme arrangements will be available.
Firm XYZ is an authorised person in the UK and communicates a promotion from Firm JKL, an authorised overseas person. Which of the following is TRUE?
AThere would be no compensation cover
BAs the promotion is being relayed through a UK firm the compensation scheme is available
CThe extent to which the compensation will or will not be available must be stated
DThe compensation cover follows home state rules
C - It’s not compulsory to have a compensation scheme, but it’s good to have as it gives clients more confidence if something were to go wrong.
Who performs the regulatory check of a mail-shot sent by an appointed representative?
A The compliance department of the appointing firm
B The marketing department of the appointing firm
C The overseer of the appointed representative who authorisedthe mail shot
D The Financial Conduct Authority
A - A mail-shot is a non-real time financial promotion. The rules require each promotion to be signed off by compliance or another employee with sufficient knowledge to do so. (of an authrosied firm?)
A fund manager sends out a mailshot blindly to several clients. The email containsinformation regarding the manager’s products and his website. Which of the following is coveredunder the Distance Marketing Directive?
A
The email but not the website
B
The website but not the email
C
Neither the email nor the website
D
The email and the website
D - Since the email promotes the website, both would be covered under the directive. They are both communicating to clients from a distance.
IMPORTANT: What is a prospectus advertisement?
Any type of communication (eg, TV, press, email, letter, text and brochure)
which specifically promotes the offer to subscribe or acquire securities.
IMPORTANT Q: All prospectus advertisements must contain a prominent statement that:
a) No other prospectus will be issued
b) the advertisment is required under Section 85 of the FSMA
c) It is an advertisment not a prospectus
d) The FCA has approved the advertisment
C) This should be a bold statement. INvestors should not subscribe to any transferable securities which it refers to ,except on the basis of information in the prospectus
IMPORTANT: A bank advertises securities to the public.
What must be included in this advertisement?
A The name of the bank’s complaints officer
B Details of where investors can obtain the full prospectus
C The address of the Financial Conduct Authority
D Information on how to obtain a translation of the advertisement to any official EU
language
B
MEM no. of years & IMPORTANT Q: Firms must ensure that information including indications of past performance is such that (&how many years do you have to display of past performance?):
*the past performance is NOT THE MOST PROMINENT ELEMENT/FEATURE OF A PROMOTION
* it COVERS AT LEAST THE IMMEDIATELY PRECEDING FIVE YEARS (or the whole period for which the investment has been offered, and/or the financial index has been established, and/or the service has been provided if this is less than five years); in any event, it must show complete 12-month periods
* reference periods and relevant sources are clearly shown
* there is a clear and prominent warning that the data and/or figures refer to the investment’s past performance and that past performance is not a reliable indicator of future results
* if the figures are in a currency other than that of the EEA state in which the client is resident, that the currency is stated and there is a warning about the possible effects of currency fluctuations, and
* if the performance is cited gross, that the effects of commissions, fees, tax and other charges are disclosed.
When an FCA firm undertakes a promotion to a retail client, which is TRUE?
A
Past performance can only be given for products for whichthere is five year performance history
B
The past performance must be the most prominent feature
C
Past performance data is mandatory when promoting to retailclients
D
There must be a warning that any performance data is not areliable indicator of future performance
D - not A because it 1) didnt specify completing in 12 month periods and 2) for whole life of the investment if it isn’t 5 years old.
IMPORTANT: COBS 4.6 stipulates that the firms giving figures on past performance must:
a) not make these the most prominent feature of the communication
b) relate the figures to an investment or financial index
c) Ensure that they cover at least the immediately preceding 3 years
d) Disclose the effects of commissions, fees or other charges only if performance is quoted net
A
B is for simulated, the period must be 5 years or life of investment, and D is future performance
What is a simulated past performance?
firms give figures based on simulated (ie, notional, not having taken place in reality) past performance because the product or service does not have a track record
IMPORTANT Q: A firm must ensure that the simulated past performance figures:
- relate to an investment or FINANCIAL INDEX
- are based on the actual past performance of one or more investments and/or indices which are the same as, or underlie, the investments being simulated
- meet the rules set out in relation to past performance (except for the statement that they relate to that investment’s past performance, since they do not), and
- contain a prominent warning that they relate to simulated past performance and that past performance is not a reliable indicator of future performance.
Firms must ensure that information containing an indication of the possible future performance of relevant business, a relevant investment, a structured deposit or a financial index:
- is not based on, or does not refer to, simulated past performance
- is based on reasonable assumptions supported by objective data
- if it is based on gross performance, discloses the effects of commissions, fees, tax and or other charges, and
- contains a prominent warning that such forecasts are not reliable indicators of future performance.
IMPORTANT Q: Which of the following is a non-real-time communication?
a) Email
b) Telephone conversation
c) Cold-call
d) Group presentation
A
What is Unsolicited Real-Time Communications (Cold Calling)?
‘Cold calling’ is the common term that refers to the practice of authorised persons or exempt persons contacting people without a prior appointment with a view to communicating a financial promotion to them.
IMPORTANT Q: When can cold calling be permitted? and not permitted?
Cold calls can be made to retail clients where there is an existing relationship and the client would envisgage receiving such a call, the call related to a generally marketable packaged product which is neither a HIGHER VOLATILITY FUND OR A LIFE POLICY LINKED TO SUCH A FUND. Or it can relate to a controlled actiivity relating to a limited range of investments including deposits and readily realisable investments but NOT warrants or generally marketable non-deared package products.
So OIC ISAs can be cold called about. but not unregulated colective investment schemes, financial futures or warrants.
An unsolicited real-time communication is simply an elaborate regulatory description of acold call, but what can be promoted via such a communication?
A
Readily realisable securities which include warrants
B
A personal pension
C
Higher volatility fund
D
Geared packaged products
B:
A firm may only make a cold call in one of the following three circumstances:
- The recipient of the cold call has an established existing client relationship with the firm andenvisages receiving cold calls
- The cold call relates to a generally marketable product (which is not a higher volatility fund)
- The cold call relates to activities where the only investments involved are readily realisablesecurities (other than warrants) and generally marketplace non-geared packaged products.
Which of the following complies with COBS rule 4.8 on cold calls? Assume all calls areunsolicited by the client.
A
A call to a prospective client who would envisage a call werethey to become a client
B
A call that relates to a retail investment product, such as aninvestment trust share
C
A call to a retail client, where the investment being sold is ablue-chip stock
D
A call to a retail client, relating to a controlled activity in readilyrealisable securities
D - readily realisable, generally marketable product.
What is a financial promotion?
An invitation or inducement to engage in investment activity, communicated by a person in the course of business (basically an advert of marketing)
IMPORTANT Q: What is Churning?
‘Churning’ is the activity of over-dealing and/or trading more frequently for a client in order to generate additional fees and/or commissions for the firm. It is relevant where, for example, a firm manages a client’s portfolio on a discretionary basis.
What is Switching?
‘Switching’ is the activity of selling one investment and replacing it with another to get more fees.
IMPORTANT: What are the rules on churning and who they do they apply to?
In the context of assessing suitability, a series of transactions that look suitable in isolation may not be so if the recommendations and/or the trading decisions to make them are so frequent as to be detrimental to the client. Firms should bear in mind the client’s investment strategy when determining how frequently the firm should deal for them, including determining whether or not it is suitable to switch between packaged products.
IMPORTANT: A client’s portfolio is managed on a discretionary basis.
A key risk to the client in these circumstances is that:
A the FCA’s Conduct of Business Rules will only apply on a limited basis
B churning may take place
C an assessment of suitability on the client’s portfolio will not be required because the client
will be a professional client
D switching will always result in the payment of additional fees
B
According to guidance in the FCA handbook which of the following would BEST indicatethat an investment manager of a client portfolio was engaged in churning?
A
Excessive activity in a client’s portfolio containing shares
B
The investment manager acting in collusion with clients tosecure a dominant position over the supply of or demand foran investment
C
The sale or purchase of an investment from the portfolio wherethere is no change in beneficial interest or market risk
D
Excessive activity in a client’s portfolio containing packagedproducts
A -
Not D as excessive activity in a client’s portfolio containing packaged products is switching.
IMPORTANT: When should we apply the suitability rules?
-Acting as investment manager (discretionary services)
-Personal recommendation (Advisory services)
NOT EXECUTION ONLY.
IMPORTANT: What are the purposes of the suitability rules for the client(s)?
The facts that the firm outght to reasonably be aware of in order:
-To meet the client’s investment objectives (PC & RC)
-Client is able to bear financial risks (elective PC and RC)
-Client has necessary knowledge and experience to understand those risks (RC)
Applies to retail clients (MiFID&non-MiFID) and professional clients (MiFID only)
To assess suitability for a retail client which one of the following, regarding the client, isthe first thing that a firm should obtain from the client?
A
Appetite for risk
B
Financial commitments
C
Knowledge and experience
D
Preferred investment types
C - Although all four might be considered for suitability, the first thing to be assessed would be the client’slevel of knowledge and experience as this would then lead in to the other areas (e.g. to understand risks)
IMPORTANT: What happens when the client refuses a fact find for suitability rules?
It’s not possible for firm to act in a discretionary capacity.
IMPORTANT: What happens when the client refuses a fact find for suitability rules?
It’s not possible for firm to act in a discretionary capacity.
IMPORTANT: What are the exceptions to the requirement to provide a suitability report?
-if the personal recommendation is made by a FRIENDLY SOCIETY IN CONNECTION WITH A SMALL LIFE POLICY sold by it, with a premium not exceeding £50 a year or (if payable weekly) £1 a week
-A regulated CIS where the firm is acting as investment manager;
-The client is habitually resident outside the EEA;
-Increases to a regular premium in an existing contract; and
-An additional single contribution to a product where a single contribution has already been paid
A financial adviser makes a personal recommendation on a retail investment product to a retail client. For which of the following reasons would the adviser NOT need to send out a suitability report? The recommendation relates to:
ATransactions in a regulated CIS
BThe surrender of a stakeholder pension
CMaking withdrawals from a short-term annuity
DA small life policy from a friendly society
D
MEM & IMPORTANT Q: When should the suitability report be provided in terms of timing, for:
-Life policies
-cash isas
-personal pension schemes
-any other case
- 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), or
- in connection with CASH ISAs and a personal PENSION scheme or a stakeholder pension, if the cancellation rules apply, within 14 days of concluding the contract, or
- in any other case, before the transaction is concluded unless the agreement is concluded using a distant marketing communication and if the client consents as soon as possible after the transaction is effected or executed.
IMPORTANT: A firm makes a personal recommendation in connection with a life policy, where this cover is required immediately. When must a suitability report be provided?
a) Before the contract is concluded
b) Immediately after the contract is concluded
c) Within 14 days of concluding the contract
d) As soon as possible after the transaction is concluded
B: 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),
After completing the sale of a personal pension to a retail client, the advisory firm must follow up with which of the following?
AA suitability report within 14 calendar days
BCancellation rights after 14 calendar days
CA suitability report within 7 calendar days
DCancellation rights after 30 calendar days
A - remember timing of suitability report for pension plan - 14 cal days. Cancellation rights need to be told at the point of sale.
IMPORTANT: Which client(s) should a suitability report be created for?
Retail clients
IMPORTANT: A firm must provide a client with a suitability report if it makes a personal recommendation. This applies to any investment advice to acquire or sell any investment including:
equities
derivatives
structured products, and
unregulated collective investments.
IMPORTANT Q: How is the suitability assessment different for Professional Clients&Elective Professional Clients compared to Retail clients? IS A FIRM ALLOWED TO ASSUME THAT A PER SE PROFESSIONAL CLIENT OR AN ELECTIVE PROFESSIONAL CLIENT CAN BEAR INVESTMENT RISKS CONSISTENT WITH THEIR OBJECTIVES?
A firm is entitled to assume that a professional client (per se and elective professional clients) in UK MiFID has the necessary experience and knowledge in that area. A firm is entitled to assume that a per se professional client is able to financially bear any related investment risks consistent with their investment objectives. A firm, however, is not permitted to make this same assumption for elective professional clients.
IMPORTANT Q: Who are ‘per se’ professional clients?
-Authorised/Regulated firms
-Central Bank
-Government
-Supranational
-Large Undertaking
-Other institutional investors
MEM & IMPORTANT: How is a company labelled as a ‘large undertaking’, criteria? (MiFID and non-MiFID)
MiFID: 2/3 of:
Balance sheet: EUR 20m
Net turnover: EUR 40m
Own funds: EUR 2m
Non-MiFID: 2/3 of:
Balance sheet: 12.5m
Net turnover: 25m
Avr no. 250 employees
IMPORTANT: What is an elective professional client?
A retail client that has opted up. Needs to pass the qualative and quantative tests.
What is an insistent client?
- The firm has given the client a personal recommendation
- The client decides to enter into a transaction which is different from that recommended by the firm in the personal recommendation, and
- The client wishes the firm to facilitate the transaction.
What information should be communicated to an Insistent Client?
- that the firm has not recommended the transaction and that it will not be in accordance with the firm’s personal recommendation
- the reasons why the transaction will not be in accordance with the firm’s personal recommendation
- the risks of the transaction proposed by the insistent client, and
- the reasons why the firm did not recommend that transaction to the client.
Then the firm should obtain an acknowledgement from the insistent client that:
* the transaction is not in accordance with the firm’s personal recommendation,
* the transaction is being carried out at the request of the client.
IMPORTANT: what kind of business do you apply a appropriateness test to?
Execution only business for COMPLEX instruments only (e.g. derivatives and structured products & warrants)
IMPORTANT: What client(s) do you test appropriateness for?
Professional and retail (MiFID and non-MiFID) and retail direct offers.
IMPORTANT: Summary of when you do suitability or appropriateness
- Does service provide management services:
Y, suitability applies. N: - Is the investment a complex product?
N: Neither suitability or appropriateness, Y: - is the product promoted through a direct offer?
No: Appropriateness applies, Y: - Is the investment for a retail client?
Y: Appropriateness applies, N: Neither
IMPORTANT: In assessing the appropriateness of an investment for a client, a firm must:
A understand the risk appetite of the client
B fully disclose all charges associated with the investment
C determine the client’s understanding of the investment
D clarify where an investor’s funding has come from
C
A firm engaging in a transaction triggered the COBS requirement to display proof ofappropriateness for the transaction because the client:
A Was resident outside the UK
B Engaged in execution only trades
C Requested it
D Had been categorised as a professional client
B - Appropriateness is for non-advised trades and protects both professional and retail clients. The mostlikely factor to trigger the requirement to assess appropriateness is the execution only service,specifically when relating to a complex product.
