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IMC Unit 1 > Chapter 3 > Flashcards

Chapter 3 Flashcards

1
Q

who does the COBs rule directly apply to

A

an authorised firm who carrying out long term insurance business or designated business

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2
Q

who do the COBs rules indirectly apply to

A

an appointed representative of a firm

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3
Q

what does indirectly mean

A

the firm is responsible for the actions of the appointed representative

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4
Q

what type of business does COBs apply to

A

MiFID business mainly

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5
Q

if a retail client wants to become a per se professional client and they conduct MiFID business what tests do you need to pass

A

qualitative and quantitative

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6
Q

qualitative elective retail client test

A

assessing experiecne and expertise and knowledge of the client to proivde reassurance to the firm that the client possess the necessary capability

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7
Q

quantitative elective professional client test

A

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

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8
Q

what is the elective professional test for retail clients that carry out non MiFID business

A

only qualitative

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9
Q

what is a 3 step process to allow a retail client to opt up to a elective professional client

A

written intent from client to be classified as professional
written warning to client explaining lost protection
written client consent to lost protection

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10
Q

examples of professional client

A

authorised / regulated firms
central banks
governments
supranationals

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11
Q

what are the requirements to be a large undertaking for MiFID business

A

balance sheet 20 mill
net turnover 40 mill
own funds 2 mill

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12
Q

whar are the requirements to be a large undertaking for non MiFID business

A

balance sheet 12.5 mill
net turnover 40 mill
average number of employees 250

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13
Q

what are per se eligible counterparties

A

banks
governments
supranational firms
authorised / regulated firms

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14
Q

who can become an elective eligible counterparty

A

a large undertaking

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15
Q

under S21 FSMA 2000 a person can only communicate a finanical promotion when

A

they are authorsied / the content has been approved by an authorised person
it is exempt under the financial promotions order

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16
Q

what are exempt financial promotions

A

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

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17
Q

a breach of S21 FSMA 2000 can lead to

A

2 years in jail and an unlimited fine

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18
Q

who are covered by the communication rules

A

retail clients

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19
Q

what are the general communication rules

A

all communications are fair, clear and not misleading

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20
Q

what must you state in a financial promotion to a retail client

A

name of firm
accurate info
sources are made known
benchmarks are given

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21
Q

what are the rules surrounding past performance in financial promotions

A

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

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22
Q

what is a direct offer financial promotion

A

a promotion that enables a person to enter into an agreement with the firm in a specified manner but doesnt include any personalised advice

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23
Q

what must be included in a non written financial promotion

A

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

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24
Q

what cold calls are permitted

A

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.

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25
Q

what is the aim of product governance

A

to ensure that manfacturers and distributors of investment products act in the clients best interest during the entire product life cycle

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26
Q

what do the product governance rules require a manufacturer to do

A
  • 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
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27
Q

what do the product governance rules require the distributor to do

A

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
-

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28
Q

what is a packaged retail investment product

A

any investment whose value is affected by the value or performance of another product not directly bought by the investor

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29
Q

what is an insurance based product

A

where the maturity is exposed to market based risk
e.g. unit linked life insurance policy

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30
Q

what are the 2 different types of products

A

packaged retail investment
insurance based product

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31
Q

where should cancelation rights be applied

A

to packaged retail investments and insurance based investment products

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32
Q

what are the cancellation rights post sale cancellation period

A

for life and product pensions 30 days
for other products 14 days

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33
Q

when does the cancellation period start

A

the latter of
- the day of the conclusion of the contract
- the day the consumer recieves the contracts terms and conditions

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34
Q

examples of retail packaged products

A

life policy
units in regulated and unregulated CIS
interest in an investment trust savings scheme
stakeholder pension
personal pension
structured capital at risk products

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35
Q

what are KIDS required for

A

all packaged retail and insurance based products

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36
Q

who are products marketed to

A

retail clients
hence all the rules apply to business with retail clients

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37
Q

what are KIDS used for

A

to ensure that the customer knows the product and the risks that are being marketed to them

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38
Q

what should a KID include

A

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

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39
Q

what sort of time restrictions are discussed in a KID

A

cooling off period
min holding period
early enchashment opps
any penalties for missing the above

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40
Q

how long should the KID be

A

concise
3 pages

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41
Q

who are KIIDs for

A

for UCITS schemes

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42
Q

what do KIIDS include

A
  • identification of the scheme
  • desc of schemes investment objective and policy
  • past performance
  • costs
  • the risk and reward profile
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43
Q

who are KFDs for

A

apply to non-PRIIP packaged products

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44
Q

examples of non-PRIPP packaged products

A

pension products
cash deposit ISA

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45
Q

what clients do inducements restrictions apply to

A

customers
retail and professional

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46
Q

what must a firm do if it takes an inducement

A

they must disclose to the customer before the service is provided

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47
Q

when is disclosure of inducement not required

A
  • 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
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48
Q

who does third party research restrictions apply to

A

all customers
retail and professional

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49
Q

when will 3rd party research not be an inducement

A

when it its recieved in return for
- direct payments made by firm from its own resources
- patments made by a seperate research account

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50
Q

if paying for 3rd party research from a research payment account what must the firm do

A

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

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51
Q

what must a firm provide to its customers about themselves

A
  • 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
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52
Q

what document will contain firm information

A

initial disclosure document

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53
Q

if a firm propsoed to manage investments then what info do they need to give to clients

A
  • 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
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54
Q

when is a client agreement required

A

when a firm carries out designated investment business for retail clients and MiFID professional clients

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55
Q

when must a firm provide a client agreement by

A

before the earlier of
- the client agreement becoming binding
- the provision of any services

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56
Q

when is a client agreement not required in retail business

A

when the firm is affecting contracts of insurance in relation to a life policy

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57
Q

who do suitability and appropriateness rules apply to

A

retail clients
MiFID professional clients

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58
Q

the rules on suitabiity apply to firms who (MiFID)

A

makes a personal recommendation in a designated investment
manages investments

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59
Q

in non MiFID business the rules on suitability apply to firms who

A

if client is a retail client
the firm is management the assets in a pension scheme

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60
Q

what must a firm do before giving advice to a client

A

they must conduct a fact find

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61
Q

what is a personal investment recommendation

A

advice given to clients based on their situation but a client can choose whether or not to act on it

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62
Q

what is acting as an investment manager

A

acting as a discretionary manager so making decisions on behalf of a client

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63
Q

in order to assess suitability what must a firm obtain about their clients

A
  • investment knowledge and experience
  • financial situation
  • investment objective
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64
Q

what are the 3 objectives that the information gathered must meet

A

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)

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65
Q

if a the client is a per se professional what can the firm assume

A

they have the necessary knowledge
they are able to bear any financial losses

66
Q

what is churning

A

overtrading in securities

67
Q

what is switching

A

overtrading in packaged products

68
Q

are churning and switching prohibited

A

they are not prohibited under the new COBs but they are considered unsuitable

69
Q

what does a suitability report do

A

shows why a firm believes that a particular packaged product is suitable

70
Q

what personal recommendations must be accompanied by a suitability report

A

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

71
Q

when does the obligation to provide a suitability report not apply

A

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

72
Q

what should the suitability report specify

A
  • the client demands and needs
  • explain why the firms believes the transaction is suitable
  • explain any possible disadvantages
73
Q

when does a firm need to provide a suitability report

A

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

74
Q

when should appropriateness assessed for a firm

A

it applies to a firm which provides non advisory investment services in the course of MiFID business

75
Q

different between suitability and appropriateness

A

suitability applies to advisory and discretionary services
appropriateness applies to non advised services i.e. execution only

76
Q

what does a firm have to assess when considering appropriateness

A

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

77
Q

when is a warning provided to a client in terms of assessing appropriateness

A

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

78
Q

who is an insistent client

A

a client that still insists that the firm proceeds after the warning has been given

79
Q

what type of financial instrument does appropriateness need to be assessed

A

complex financial instruments
so appropriateness only applies to execution only businesses involving complex financial instruments

80
Q

examples of non complex financial instruments

A

shares
bonds
money market instruments
units in a UCITS scheme

81
Q

which clients does conflicts of interest apply to

A

all client
retail, professional, eligible counterparties

82
Q

when does a firm have to disclose a conflict of interest

A

if a firm is unable to manage a conflict then they must disclose in a durable medium

83
Q

what is a conflicts of interest policy

A

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

84
Q

what does the SYSC 10 require a written conflicts of interest policy to contain

A

it must be appropriate for the size and nature of the firm
- must specify potential conflicts
- specify the procedures used to manage those conflicts

85
Q

when do firms have to provide clients with a conflict of interests policy

A

before the provide activities

86
Q

when a firm publishes research it must ensure that

A
  • 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
87
Q

when can a FCA firm front run

A

the firm is a market maker in the normal cause of business
dealing to execute unsolicited client orders

88
Q

what is investment research

A

research which is independent and objective

89
Q

what must non independent research state

A
  • 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
90
Q

who do the best execution rules apply to

A

customers
retail and professional clients

91
Q

what is the purpose of the best execution rules

A

a firm must take all reasonable steps to obtain the best possible results for its clients taking into account execution factors

92
Q

what are the execution factors for the best execution rules

A

speed
price
cost
likelihood of execution - how liquid is the venue
settlement - risk of settlement

93
Q

what is the most liquid venue

A

a market amker

94
Q

what is the most liquid venue

A

a market maker

95
Q

examples of a risky settlement and a non risky settlement

A

trading on an exchange is low risk
trading over the counter has counterparty and settlement risk

96
Q

what is the best execution criteria

A

client categorisation
type of order
type of financial instrument
characteristic of execution venue

97
Q

what is the order execution policy

A

a policy created to ensure that the best execution is conducted any time you trade with a client

98
Q

what does an order execution policy contain

A

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

99
Q

what is a firm deemed to have obtained the best possible result

A

when the firm has acted on client instructions
i.e. they may not be following what they believe is the best execution

100
Q

who do the client order handling rules apply to

A

customers
retail and professoinal

101
Q

who do the client order handling rules apply to

A

customers
retail and professional

102
Q

what do the client order handling rules aim to do

A

ensure that client orders are handled properly, fairly, promptly and expeditiously

103
Q

what order should comparable orders be carried out

A

sequentially

104
Q

what is aggregation

A

when a clients order is aggregated alongside the firms own order

105
Q

why is aggregation done

A

so that the firm can share its purchasing power and client charges

106
Q

what conditions have to be met to be able to aggregate orders

A
  • when an order allocation policy is created
  • full disclosure is given to clients
  • aggregation in unlikely to work to the clients disadvantage
107
Q

personal account dealing follows the rules from where

A

they follow the home state regulations of the firm, not of the client

108
Q

what must firms do in relation to personal account dealing

A
  • 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
109
Q

when does the personal account dealing rules not apply

A

when the transactions are in
- a discretionary account managed independently of the relevant person
- shares in a CIS
- life policies

110
Q

when is the deadline for giving clients the occasional reporting confirmation

A

asap
for retail clients no later than the next business day

111
Q

what info does a trade confirmation order contain

A

info similar to a receipt

112
Q

when is an occasional reporting confirmation necessary

A

when doing MiFID business
only exception for non MiFID business is a life policy or personal pension scheme

113
Q

when does a firm doing non MiFID business with a retail client need to provide a periodic reporting statement

A

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

114
Q

what must be included in the periodic report

A

info about the portfolio
money moving in and out

115
Q

when must a fund manager of an authorised firm send a report to unit holders

A

half yearly - short report
annually - long report

116
Q

what does the long report also contain (for authorised fund managers sending to unit holders)

A

the full accounts and reports

117
Q

what is a client asset

A

an asset that the firm has custody of but does not belong to the firm

118
Q

what is the purpose of the custody of clients assets rules

A

to require firms to discharge their fiduciary duty to provide adequate protection for client assets

119
Q

what it comingling

A

client assets and money are held in seperate accounts to the firm assets and money

120
Q

who is liable for the reconciliation discrepency costs of client assets

A

the firm

121
Q

when should reconciliations of client money occur

A
  • internal reconciliations every business day
  • external reconciliations typically every business day
122
Q

what is an internal reconiliation

A

comparing the records of traders to the internal records of client money account balances

123
Q

what is external reconcilliation

A

comparing the client account balances to the bank account

124
Q

who gets the interest from client money accounts

A

the client

125
Q

what rules relate to all clients

A

client categorisation
conflict of interest
investment research disclosure
personal account dealing
client assets / money

126
Q

rules that apply to retail clients only

A

financial promotions
packaged products and PRIIPS disclosures - KIDS, KIIDS and cancellation rights
suitability reports

127
Q

when can a UK firm cold call an overseas person?

A

any time as long as it complies with UK COBS rules

128
Q

how long an a eligible counter party or professional client ask for recategorisation for?

A

it can be either on a trade by trade basis or for trade in general

129
Q

can warrants be included in a cold call

A

no

130
Q

examples of complex instruments

A

derivatives and warrants and equity

131
Q

what are examples of execution venues

A

regulated markets
exchanges
MTFs
dark pools
market makers
OTC

132
Q

what category of client would a special purpose vehicle fall under

A

a per se professional client as it falls into the other institutional investment client category

133
Q

how long does MiFID businesses need to keep records for

A

5 years from the date of dispatch

134
Q

who’s allocation takes priority in a aggregation

A

the clients assets

135
Q

who’s allocation takes priority in a aggregation

A

the clients assets

136
Q

if a firm wants to carry out a transaction non recognised venue, what would the firm need to do

A

get prior written consent from the client

137
Q

when musts a KIID be updated

A

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

138
Q

when a firm is acting as an investment manager which of their clients do they need to send periodic statements to?

A

retail and professional

139
Q

what are packaged products

A

life policies , regulated unit trusts, investment savings trust schemes and personal pension plans

140
Q

is purchase of property covered by COBS

A

no as property is not a designated investment

141
Q

what is client money

A

money held in excess to client obligations

142
Q

what services can be provided by a stock broker

A

advisory
discretionary
execution

143
Q

who is protected under the client agreement rule

A

retail and professional clients

144
Q

who does COBS apply to

A

retail cleint

145
Q

what business does COBS rules relate to

A

designated business

146
Q

when is someone doing eligible counter party business

A

when dealing / arranging MiFID business
or giving advice

147
Q

what type of client are local authorities considered as

A

retail client

148
Q

when a firm opts up to be an elective professional client along with losing COBS for non MiFID business what else do they lose?

A

lose the FOS and keep the FSCS
- the FOS is when a firm does not have the resources

149
Q

does opting down to become a retail client guarantee the right to access the FOS and FSCS?

A

no

150
Q

what should financial promotions be

A

fair, clear and not misleading

151
Q

are shares in an investment trust a packaged product?

A

no

152
Q

are warrants and derivatives high or low volatility fund

A

high volatility

153
Q

how long must a client agreement be held by the firm

A

5 years or duration of relationship - whichever is longer

154
Q

does a client agreement need to be signed

A

no - just need to ensure that the client receives it

155
Q

if advice is being sought do you look for a suitability or appropriateness check

A

suitability

156
Q

when must the suitability report by provided by

A

no later than the 14th day

157
Q

when is assessing appropriateness not necessary

A

for execution only business involving shares,bonds, UCITs units

158
Q

what does appropriateness assess

A

is the client able to bear the financial risks and has the knowledge to understand the risks

159
Q

what are safe custody investments

A

designated investments that the firm receives or holds

160
Q

what are custody assets

A

any other assets that the firm holds within the same portfolio as a designated investment on behalf of the client

IMC Unit 1 (11 decks)

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