Chapter 3 Flashcards
who does the COBs rule directly apply to
an authorised firm who carrying out long term insurance business or designated business
who do the COBs rules indirectly apply to
an appointed representative of a firm
what does indirectly mean
the firm is responsible for the actions of the appointed representative
what type of business does COBs apply to
MiFID business mainly
if a retail client wants to become a per se professional client and they conduct MiFID business what tests do you need to pass
qualitative and quantitative
qualitative elective retail client test
assessing experiecne and expertise and knowledge of the client to proivde reassurance to the firm that the client possess the necessary capability
quantitative elective professional client test
must meet 2 of the following
- average trading frequency 10 per quarter over previous 4 quarters
- portfolio > 500k
- worked or works in the financial sector for more than 1 year in a professional capacity
what is the elective professional test for retail clients that carry out non MiFID business
only qualitative
what is a 3 step process to allow a retail client to opt up to a elective professional client
written intent from client to be classified as professional
written warning to client explaining lost protection
written client consent to lost protection
examples of professional client
authorised / regulated firms
central banks
governments
supranationals
what are the requirements to be a large undertaking for MiFID business
balance sheet 20 mill
net turnover 40 mill
own funds 2 mill
whar are the requirements to be a large undertaking for non MiFID business
balance sheet 12.5 mill
net turnover 40 mill
average number of employees 250
what are per se eligible counterparties
banks
governments
supranational firms
authorised / regulated firms
who can become an elective eligible counterparty
a large undertaking
under S21 FSMA 2000 a person can only communicate a finanical promotion when
they are authorsied / the content has been approved by an authorised person
it is exempt under the financial promotions order
what are exempt financial promotions
communications from overseas to overseas persons
any follow up communication
introductions to authorised persons made by clients
exempt persons
communications made to an investment professional
a breach of S21 FSMA 2000 can lead to
2 years in jail and an unlimited fine
who are covered by the communication rules
retail clients
what are the general communication rules
all communications are fair, clear and not misleading
what must you state in a financial promotion to a retail client
name of firm
accurate info
sources are made known
benchmarks are given
what are the rules surrounding past performance in financial promotions
they must not be the most prominent feature
cover a least 5 years of performance in complete 12 month periods
reference periods and sources must be clearly shown
state that this is not an indicator of future performance
dislcose the effect of fees and commissions if gross performance is shown
what is a direct offer financial promotion
a promotion that enables a person to enter into an agreement with the firm in a specified manner but doesnt include any personalised advice
what must be included in a non written financial promotion
must identify the caller, their employer, the purpose of the call
must ask whether the client wishes to continue
provide a client with a contact point to cancel an appointment if they have one
communicate at an appropriate point of day
what cold calls are permitted
if an existing client has envisaged a call
permitted to a retail client where the promotion relates to generally marketable packaged prouducts i.e. not volatile or if it relates to readily realisable securities other than warrants.
what is the aim of product governance
to ensure that manfacturers and distributors of investment products act in the clients best interest during the entire product life cycle
what do the product governance rules require a manufacturer to do
- have a product approval process and governance arrangements to adress conflucts of interest and market integrity
- identify potential target market
- ensure product is stress tested
what do the product governance rules require the distributor to do
ensure that
- its board has effective control over the product governance process
- its compliance function over sees and reviews the product governance arrangements
- its relevant staff have the necessary expertise to understand the characteristics and risks of the products
-
what is a packaged retail investment product
any investment whose value is affected by the value or performance of another product not directly bought by the investor
what is an insurance based product
where the maturity is exposed to market based risk
e.g. unit linked life insurance policy
what are the 2 different types of products
packaged retail investment
insurance based product
where should cancelation rights be applied
to packaged retail investments and insurance based investment products
what are the cancellation rights post sale cancellation period
for life and product pensions 30 days
for other products 14 days
when does the cancellation period start
the latter of
- the day of the conclusion of the contract
- the day the consumer recieves the contracts terms and conditions
examples of retail packaged products
life policy
units in regulated and unregulated CIS
interest in an investment trust savings scheme
stakeholder pension
personal pension
structured capital at risk products
what are KIDS required for
all packaged retail and insurance based products
who are products marketed to
retail clients
hence all the rules apply to business with retail clients
what are KIDS used for
to ensure that the customer knows the product and the risks that are being marketed to them
what should a KID include
info about the nature and main features of the product
a desc of the risk reward profile
a desc of what happens if the manufacturer is unable to pay
costs
time restrictions
complaints procedures
what sort of time restrictions are discussed in a KID
cooling off period
min holding period
early enchashment opps
any penalties for missing the above
how long should the KID be
concise
3 pages
who are KIIDs for
for UCITS schemes
what do KIIDS include
- identification of the scheme
- desc of schemes investment objective and policy
- past performance
- costs
- the risk and reward profile
who are KFDs for
apply to non-PRIIP packaged products
examples of non-PRIPP packaged products
pension products
cash deposit ISA
what clients do inducements restrictions apply to
customers
retail and professional
what must a firm do if it takes an inducement
they must disclose to the customer before the service is provided
when is disclosure of inducement not required
- when non MiFID business is carried out and the benefit falls into the reasonable non monetary benefits
- when a firm is giving baisc advice on a stakeholder product
who does third party research restrictions apply to
all customers
retail and professional
when will 3rd party research not be an inducement
when it its recieved in return for
- direct payments made by firm from its own resources
- patments made by a seperate research account
if paying for 3rd party research from a research payment account what must the firm do
The firm must diclose
- the budget as well as the charges before providing the services
- annual info on the total costs the client has incurred for third party research
what must a firm provide to its customers about themselves
- name and address of firm
- contact details
- method / language of communication
- confirmation of firms authorisation and name of competent authority
- nature, frequency and timing of performance reports
- conflicts of interest policy
- info about safeguarding of client assets and money
- info about costs
what document will contain firm information
initial disclosure document
if a firm propsoed to manage investments then what info do they need to give to clients
- method and freq of portfolio valuations
- details of any party who may provide discretionary management
- info of benchmark
- types of designated investments that may be used
- management objectives
- level of risk
when is a client agreement required
when a firm carries out designated investment business for retail clients and MiFID professional clients
when must a firm provide a client agreement by
before the earlier of
- the client agreement becoming binding
- the provision of any services
when is a client agreement not required in retail business
when the firm is affecting contracts of insurance in relation to a life policy
who do suitability and appropriateness rules apply to
retail clients
MiFID professional clients
the rules on suitabiity apply to firms who (MiFID)
makes a personal recommendation in a designated investment
manages investments
in non MiFID business the rules on suitability apply to firms who
if client is a retail client
the firm is management the assets in a pension scheme
what must a firm do before giving advice to a client
they must conduct a fact find
what is a personal investment recommendation
advice given to clients based on their situation but a client can choose whether or not to act on it
what is acting as an investment manager
acting as a discretionary manager so making decisions on behalf of a client
in order to assess suitability what must a firm obtain about their clients
- investment knowledge and experience
- financial situation
- investment objective
what are the 3 objectives that the information gathered must meet
the info must be sufficient enough that the firm beleives that a proposed transaction will
- meet client investment objectives
- client will be able to bear any financial losses
- client has necessary exp and knowledge to understand risks (retail only)
if a the client is a per se professional what can the firm assume
they have the necessary knowledge
they are able to bear any financial losses
what is churning
overtrading in securities
what is switching
overtrading in packaged products
are churning and switching prohibited
they are not prohibited under the new COBs but they are considered unsuitable
what does a suitability report do
shows why a firm believes that a particular packaged product is suitable
what personal recommendations must be accompanied by a suitability report
where the recommendations relate to
- transactions in a packaged retail investment product
- the purchase, sale or conversion of a pension scheme
- an election to make income withdrawals or to purchase annuities
- entering into a pension
- optiong out of a pension
- entering into a transaction relating to a life policy
when does the obligation to provide a suitability report not apply
a recommendation about a regulated CIS where the firm is acting as an investment manager
the client is a resident outside the EEA and not in the UK at that time
what should the suitability report specify
- the client demands and needs
- explain why the firms believes the transaction is suitable
- explain any possible disadvantages
when does a firm need to provide a suitability report
in the case of a life policy
- before contract is concluded
in case of personal / stakeholder pension
- no later than 14 days after contract is concluded
in any other case
- ASAP after effecting the transaction
when should appropriateness assessed for a firm
it applies to a firm which provides non advisory investment services in the course of MiFID business
different between suitability and appropriateness
suitability applies to advisory and discretionary services
appropriateness applies to non advised services i.e. execution only
what does a firm have to assess when considering appropriateness
whether the client
- is able to bear the financial risk in relation to the product / service
- has the knowledge and experience to understand the risks
when is a warning provided to a client in terms of assessing appropriateness
when the firm believes that the investment or service is not appropriate
when the client has not provided sufficient evidence for the firm to make a decision regarding appropriateness
who is an insistent client
a client that still insists that the firm proceeds after the warning has been given
what type of financial instrument does appropriateness need to be assessed
complex financial instruments
so appropriateness only applies to execution only businesses involving complex financial instruments
examples of non complex financial instruments
shares
bonds
money market instruments
units in a UCITS scheme
which clients does conflicts of interest apply to
all client
retail, professional, eligible counterparties
when does a firm have to disclose a conflict of interest
if a firm is unable to manage a conflict then they must disclose in a durable medium
what is a conflicts of interest policy
a policy required under SYSC 10 to ensure that the management and disclosure of conflict of interest risks occur on a fair and consistent basis
what does the SYSC 10 require a written conflicts of interest policy to contain
it must be appropriate for the size and nature of the firm
- must specify potential conflicts
- specify the procedures used to manage those conflicts
when do firms have to provide clients with a conflict of interests policy
before the provide activities
when a firm publishes research it must ensure that
- the communication is labelled as research
- it has to state that any recommendations are not personal recommendations
- it does not promise issuers favorable coverage
- it does not recieve an inducements
- the writer does not directly report to an investment bank, sales or trade personnel
when can a FCA firm front run
the firm is a market maker in the normal cause of business
dealing to execute unsolicited client orders
what is investment research
research which is independent and objective
what must non independent research state
- clearly identified as market communication
- contain and clear statement that it has not been prepared in accordance with the rules to promote independent research and it is not subject to any prohibition of dealing before the research is released
who do the best execution rules apply to
customers
retail and professional clients
what is the purpose of the best execution rules
a firm must take all reasonable steps to obtain the best possible results for its clients taking into account execution factors
what are the execution factors for the best execution rules
speed
price
cost
likelihood of execution - how liquid is the venue
settlement - risk of settlement
what is the most liquid venue
a market amker
what is the most liquid venue
a market maker
examples of a risky settlement and a non risky settlement
trading on an exchange is low risk
trading over the counter has counterparty and settlement risk
what is the best execution criteria
client categorisation
type of order
type of financial instrument
characteristic of execution venue
what is the order execution policy
a policy created to ensure that the best execution is conducted any time you trade with a client
what does an order execution policy contain
prescribed information (for retail clients)
- list of venues
- factors that will affect firms choice of venue
- a warning that instructions from the client may prevent best execution
written agreement
what is a firm deemed to have obtained the best possible result
when the firm has acted on client instructions
i.e. they may not be following what they believe is the best execution
who do the client order handling rules apply to
customers
retail and professoinal
who do the client order handling rules apply to
customers
retail and professional
what do the client order handling rules aim to do
ensure that client orders are handled properly, fairly, promptly and expeditiously
what order should comparable orders be carried out
sequentially
what is aggregation
when a clients order is aggregated alongside the firms own order
why is aggregation done
so that the firm can share its purchasing power and client charges
what conditions have to be met to be able to aggregate orders
- when an order allocation policy is created
- full disclosure is given to clients
- aggregation in unlikely to work to the clients disadvantage
personal account dealing follows the rules from where
they follow the home state regulations of the firm, not of the client
what must firms do in relation to personal account dealing
- all relevant persons need to be trained and are ware of the restrictions on personal transactions
- relevant persons inform the firm of any personal transactions
- the firm records all notifications of personal transactions
when does the personal account dealing rules not apply
when the transactions are in
- a discretionary account managed independently of the relevant person
- shares in a CIS
- life policies
when is the deadline for giving clients the occasional reporting confirmation
asap
for retail clients no later than the next business day
what info does a trade confirmation order contain
info similar to a receipt
when is an occasional reporting confirmation necessary
when doing MiFID business
only exception for non MiFID business is a life policy or personal pension scheme
when does a firm doing non MiFID business with a retail client need to provide a periodic reporting statement
once every 6 months
a client can request to get every 3 months or one year
if there is any derivatives or leveraging then the portfolio has to be sent out every month
what must be included in the periodic report
info about the portfolio
money moving in and out
when must a fund manager of an authorised firm send a report to unit holders
half yearly - short report
annually - long report
what does the long report also contain (for authorised fund managers sending to unit holders)
the full accounts and reports
what is a client asset
an asset that the firm has custody of but does not belong to the firm
what is the purpose of the custody of clients assets rules
to require firms to discharge their fiduciary duty to provide adequate protection for client assets
what it comingling
client assets and money are held in seperate accounts to the firm assets and money
who is liable for the reconciliation discrepency costs of client assets
the firm
when should reconciliations of client money occur
- internal reconciliations every business day
- external reconciliations typically every business day
what is an internal reconiliation
comparing the records of traders to the internal records of client money account balances
what is external reconcilliation
comparing the client account balances to the bank account
who gets the interest from client money accounts
the client
what rules relate to all clients
client categorisation
conflict of interest
investment research disclosure
personal account dealing
client assets / money
rules that apply to retail clients only
financial promotions
packaged products and PRIIPS disclosures - KIDS, KIIDS and cancellation rights
suitability reports
when can a UK firm cold call an overseas person?
any time as long as it complies with UK COBS rules
how long an a eligible counter party or professional client ask for recategorisation for?
it can be either on a trade by trade basis or for trade in general
can warrants be included in a cold call
no
examples of complex instruments
derivatives and warrants and equity
what are examples of execution venues
regulated markets
exchanges
MTFs
dark pools
market makers
OTC
what category of client would a special purpose vehicle fall under
a per se professional client as it falls into the other institutional investment client category
how long does MiFID businesses need to keep records for
5 years from the date of dispatch
who’s allocation takes priority in a aggregation
the clients assets
who’s allocation takes priority in a aggregation
the clients assets
if a firm wants to carry out a transaction non recognised venue, what would the firm need to do
get prior written consent from the client
when musts a KIID be updated
prior to for following a material change
prior to a change in fund rules
must be updated annually at least 35 days before year end
when a firm is acting as an investment manager which of their clients do they need to send periodic statements to?
retail and professional
what are packaged products
life policies , regulated unit trusts, investment savings trust schemes and personal pension plans
is purchase of property covered by COBS
no as property is not a designated investment
what is client money
money held in excess to client obligations
what services can be provided by a stock broker
advisory
discretionary
execution
who is protected under the client agreement rule
retail and professional clients
who does COBS apply to
retail cleint
what business does COBS rules relate to
designated business
when is someone doing eligible counter party business
when dealing / arranging MiFID business
or giving advice
what type of client are local authorities considered as
retail client
when a firm opts up to be an elective professional client along with losing COBS for non MiFID business what else do they lose?
lose the FOS and keep the FSCS
- the FOS is when a firm does not have the resources
does opting down to become a retail client guarantee the right to access the FOS and FSCS?
no
what should financial promotions be
fair, clear and not misleading
are shares in an investment trust a packaged product?
no
are warrants and derivatives high or low volatility fund
high volatility
how long must a client agreement be held by the firm
5 years or duration of relationship - whichever is longer
does a client agreement need to be signed
no - just need to ensure that the client receives it
if advice is being sought do you look for a suitability or appropriateness check
suitability
when must the suitability report by provided by
no later than the 14th day
when is assessing appropriateness not necessary
for execution only business involving shares,bonds, UCITs units
what does appropriateness assess
is the client able to bear the financial risks and has the knowledge to understand the risks
what are safe custody investments
designated investments that the firm receives or holds
what are custody assets
any other assets that the firm holds within the same portfolio as a designated investment on behalf of the client
