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IMC Unit 1 > Chapter 3 > Flashcards

Chapter 3 Flashcards

1
Q

Conduct of Business Rules

A

Apply directly to firms conducting designated business in the UK (the Firm is accountable to the regulator). They apply indirectly to appointed representatives (the regulator would discipline the Firm appointing the representative, then the Firm would discipline the representative).

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2
Q

Designated Investment Business

A

Subset of regulatory activities, includes all MiFID Business and non-MiFID

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3
Q

Clients’ Best Interest Rule

A

Acting honestly, fairly, professional if a gap in the conduct of business rules

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4
Q

Client Types

A

Eligible Counterparty (not a customer)
Customers:
- Retail
- Professional

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5
Q

Retail Clients

A

Assumed to have the least knowledge, maximum Conduct of Business Rules applied

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6
Q

Professional Clients

A

More knowledge than retail, they deserve less protection that Retail under Conduct of Business Rules. Per se clients: authorised/regulated firm, central bank, government, supranational.

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7
Q

Eligible Counterparty

A

Assumed to have the most knowledge and therefore have the least protection. Either identified automatically or elective, for example a large undertaking are not an eligible counterparty per se (professional client by default), but they can elect to become eligible counterparty to reduce red tape / cost

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8
Q

(Per Se) Professional

A

Authorised/Regulated firms, governments, central banks, supranationals, other institutional (e.g. special purpose vehicles), large undertaking

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9
Q

Large Undertaking

A

At a company, meet 2/3 criteria to be considered a per se professional client:
MiFID Business: balance sheet EUR 20m, net turnover EUR 40m, own funds EUR 2m
Non-MiFID Business: balance sheet EUR 12.5m, net turnover EUR 25m, average employees 250

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10
Q

(Elective) Professional

A

Retail client who has chosen to opt up
- Qualitative test to assess knowledge, experience, etc. (all)
- Quantitative test to meet 2/3 criteria (MiFID business only): average trade frequency 10 per quarter over previous 4, portfolio at least EUR 500k, works in financial sector for more than 1 year
Process: written intent from client to be classified as professional, firm explains loss of protections, client accepts

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11
Q

(Per Se) Eligible Counterparties

A

Only certain business are automatically considered as Eligible Counterparties:
- Authorised/regulated firms
- Government, central bank, supranational

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12
Q

(Elective) Eligible Counterparties

A

Available to any undertaking that is a per se professional client (except institutional investor), e.g. a large undertaking
Process: obtain client confirmation to be treated as an eligible counterparty

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13
Q

Financial Promotions

A

Invitation or inducement to engage in investment activity communicated in the course of business.
Section 21, FSMA 2000: must not communicate unless the content has been approved by an authorised person or is exempt under the Financial Promotions Order
Only retail customers are covered by Section 21

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14
Q

Client Communications

A

Fair, clear, and not misleading
Rules do not apply to communications to persons outside the UK made from outside of the UK
Non-written and written communication

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15
Q

Retail Client Communications

A

Name of the firm, details are accurate, promotion is comprehensible (think consumer duty), not obscure any important points
Applies to traditional advertising and social media - FCA requires firms to comply with all guidance given unknown reach

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16
Q

Past Performance Rules

A

Track record data must not be the most prominent feature, cover 5 years in complete 12-month periods, reference periods and sources, indicator of future of performance, currency statement, currency risk, disclosure of fees

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17
Q

Direct Offer Financial Promotion (Written)

A

Enables a person to enter into an agreement with the firm in a specific manner. Must contain relevant information to enable a person to make an informaed assessment:
- All designated investment business (contract, information about services)
- Non-MiFID business
- Additional appropriate information
Recipient may unknowingly end up in a legal agreement

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18
Q

Direct Offer Financial Promotion (Unwritten)

A

Solicited (requested) or unsolicited (cold call)
Fair, clear, and not misleading
Identify the caller, the employer, the purpose of the call
Ask whether the client wishes to continue
Provide client who has an appointment with the contact point in the event of an escalation
Communicate at an appropriate time of day

19
Q

Cold Calls

A

Unsolicited contact with a client / prospect
Frowned upon and generally banned unless permitted under FCA regulations:
- Existing client who has opted in to telephone marketing
- Anyone if generally marketable product or readily realisable securities other than warrants
For example, gearing or leverage products are not generally marketable for retail clients and therefore would be inappropriate

20
Q

Product Governance

A

Ensures firms have adequate and appropriate product oversight and process
- Target market analysis: specify types of clients the product is supposed to be compatible
- Stress testing: adverse scenarios and outcomes for clients
- Information sharing and disclosure: providing appropriate information about the product
- Proportionality: regular review of products, taking account of risks

21
Q

Key Information Documents (KIDs)

A

For PRIIP products to support retail clients:
- Information about the nature and features
- Risk/reward profile (SRI)
- Description if manufacturer unable to pay
- Costs
- Time restrictions
- Compliants procedures
3 sides of A4 paper maximum

22
Q

PRIIP

A

Packackaged Retail Investment & Insurance-based Products

23
Q

Key Investor Information Documents (KIIDs)

A

Under UCITS, and although UCITS schemes are PRIIPs:
- Identification fo the scheme
- Short description
- Past performance
- Costs
- Risk/reward profile

24
Q

Cancellation

A

Rights for private individuals to change their mind and not face unreasonable challenges, also known as cooling off period for 14 calendar days for standard products and 30 calendar days for life period

25
Q

Inducements

A

Fees, commissions, non-monetary benefits
Banned for firms doing business with retail and professional customers as introduces conflict of interest
Under MiFID, no inducements, unless certain conditions are met:
- Designed to improve client experience
- Does not impair duty to act in clients’ best interests
Must be clearly disclosed to the client in advance if the certain conditions are met

26
Q

Third Party Research / Inducements

A

For all customers (retail and professional), MiFID II restricted provision of research. Can only be paid for in a clear and specific manner, has to be transparent. Firm has to outline in advance the budget and charges. Firm will need to regularly assess the quality and effectiveness of research paid for

27
Q

Information About the Firm

A

Must be provided to customers before providing services in a comprehensive form:
- Name and contact details
- Method and language
- Statement of authorisation
- Nature of representation
- Reporting standards
- Conflicts of interest
- Investment safeguarding
- Costs & charges
Initial Disclosure Document (IDD) provided to customer before engaging in business

28
Q

Client Agreements

A

Standard terms and conditions under which business carried out for the customer. Also called a termsheet or T&Cs letter:
- All retail clients
- Professional clients with regard to MiFID business
Written document which states terms and conditions, as well as rights and responsibilities
If not provided then agreements may not be legally binding
Firm must provide this before the earlier pf the client agreement becoming binding or the provision of any services

29
Q

Suitability

A

Applies to all customers (retail & professional (MiFID only)) and Firms are required to obtain sufficient information through a ‘fact find’ before they try to provide advice:
- Personal recommendation / advice
- Acting as investment manager
Suitable advice with regard to information disclosed through the ‘fact find’:
- To meet client’s investment objectives (PC + RC)
- Client is able to bear risk (elective PC + RC)
- Client has necessary knowledge (RC)
Churning & switching is deemed to be automatically unsuitable by the regulator

30
Q

Suitability Report

A

For retail customers, Firm has to explain why product is suitable for the customer

31
Q

Appropriateness

A

Non-advised services, i.e. execution-only business, applies to all customers and direct offers (RC only):
- Assess whether firm must assess whether client can bear financial risk and has the knowledge and experience to understand those risks
- Firm provides warnings on whether investment or service is appropriate
Only applies to complex instruments and packaged products, e.g. not stocks and shares

32
Q

Conflict of Interest

A

Applies to all clients to avoid Firm recommendations that conflict the clients’ best interests, either between the Firm-client or two/multiple clients:
- Firm must have system of controls to identify and manage
- If unable to manage, the Firm must disclose in a durable medium
- Firm has to draft a conflict of interest policy under SYSC 10 that is appropriate to the size and nature of the firm
- Firm must specify the procedure the firm will use to manage conflicts, e.g. chinese walls

33
Q

Conflict of Interest (Published Research)

A

Applies to all clients, when a MiFID firm publishes research it can have an impact of financial instruments available on the market:
- Firm does not promise issuers favourable coverage in advance
- Firm does not receive any inducement associated with that research
- Research writer must not report to investment banking, sales or trading personnel
- FCA firms must not front-run research in the normal course of business

34
Q

Best Execution

A

Trying to achieve best outcomes for the customer we are servicing:
- Take all reasonable steps to achieve best execution (speed, price, cost)
- Client categorisation (retail, professional, etc.)
- Type of order
- Instrument being traded
- Characteristics of venue (place on which execution can take place)

35
Q

Order Execution Policy

A

Meet best execution for every single customer for execution services to obtain the best possible result:
Retail clients:
- List of execution venues
- Factors that affect choice of venues (Best Ex factors)
- Risk warning
Retail & Professional:
- Reviewed under a material change
When a client gives specific instructions, the Firm can follow those instructions and they can be considered to have obtained the best possible result, regardless of price, speed, etc.

36
Q

Client Order Handling

A

Describes how firms need to handle order flow from their clients:
- Prompt (don’t introduce price risk), fair (for all customers) and expeditious (easy to follow)
- Carried out sequentially (first in first out, FIFO)
Aggregation can take place so long as:
- Order allocation policy (client fills first, before firm’s)
- Full disclosure needeed
- Aggregation is unlikely to work to a client’s disadvantage

37
Q

PAD

A

Personal Account Dealing restrictions to stop employees of firms which constitutes a conflict of interest:
- Prohibited under Market Abuse Regulations
- Confidential information relating to client transactions
- Likely to conflict with firm’s obligations to customer
Arrangements:
- Employees know about restrictions
- Relevant person informs the firm
- Records all notifications
Does not apply to:
- A discretionary account managed independently of the relevant person
- Shares in a CIS
- Life policies

38
Q

Reporting Rules

A

Under Conduct of Business

39
Q

Occasional Reporting Rules

A

Otherwise known as transaction confirmations, ensures retail clients are advised on the details of a transaction in a durable medium no later than the next business day (promptly). All MiFID business must comply:
- Firm/Client/Date/Time
- Type/Venue/Instrument transacted price
- Total consideration/commission
Exceptions are non-MiFID business, plus life policies and personal pension scheme (not a SIPP)

40
Q

Period Statement

A

At suitable intervals, the firm will provide the client with a statement in a durable medium of activity within the period:
- Value and composition of portfolio managed
- Assets/cash moving in/out of the portfolio
Generally, these are every 6-months as described under MiFID, though retail customers can ask fro 3-monthly or annual statements. Derivatives/leveraged products should be monthly

41
Q

CASS

A

Client Asset rules, assets the firm has custody of but doesn’t own. Require firms to discharge fiduciary duty to provide adequate protection:
- Restrict mingling of client and firm asset in case of liquidation
- Minimise risk of using client assets without consent
- Assets must be registered in the name of the client or nominee (separate legal entity to the firm servicing)
- Regular reconciliation required to ensure discrepencies are promptly corrected

42
Q

Client Money

A

Covered by CASS, money (cash) the firm has possession of but owned by clients of the firm:
- Segregated from firm’s own money
- Held in an approved bank account and easily identifiable from the firm’s
- Regular reconciliation
- Interest and income earned on client money must be paid to the client money account unless the firm and client have agreed otherwise

43
Q

Record Keeping

A

Required for Conduct of Business and CASS, records need to be maintained to proove compliance:
- Non-MiFID records for 3 years
- MiFID business for 5 years
- 5 years for life policies or pensions
- Pension transfers and opt-outs are held indefinitely
- Client assets (CASS 6 and 7) for 5 years

44
Q

Rule Application

A

Apply to eligible counterparties, i.e. all clients:
- Client categorisation
- Conflict of interest
- Investment research disclosures
- Personal dealing
- Client assets
Retail clients only:
- Financial promotions
- Packaged prodict and PRIIPs disclosures including KIDs and KIIDs, and cancellation rights
- Suitability reports
All other rules apply to retail and professional clients, i.e. all customers

IMC Unit 1 (10 decks)

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