Chapter 3 Flashcards
Harmonisation of Financial Services in Europe
3.1.1 Explain the legal status of EU Directives and Regulations within the UK
Financial Services Action Plan (FASP) has 3 objectives:
To create a single EU wholesale market
To achieve open and secure retail markets
To create state-of-the-art prudential rules and structures of supervision
EU member state and company or individual ‘verticle-direct effect’ EU directive has precedence over national law
This doesn’t apply between two companies ‘horizontal-direct effect’ - In applying national law, the court should interpret the law in such a way as to achieve the result required by the EU directive
Regulations - the most direct form of EU law
Once passed they have binding legal force throughout all member states
Different to directives which are addressed to national authorities
The European Securities and Markets Authority
3.1.2 Explain the role and powers of the European Securities and Markets Authority (ESMA)
3 supervisory bodies established post-financial crisis 2008
European Securities and Markets Authority (ESMA)
European Banking Authority (EBA)
European Insurance and Occupational Pension Authority (EIOPA)
ESMA - integrity, transparency, efficiency and orderly function of the securities markets in Europe & investor protection
ESMA sets standards at a high-level - day-to-day supervision carried out by national supervisory authorities (see page 77 for details on powers)
Level 1 directives and regulations - high-level political objectives on the area concerned
Level 2 (ESMA greater role) drafting of subordinate acts concerned with the substantive content of the legislative requirements
Level 3 ESMA develops guidelines and recommendations to establish consistent, efficient and effective supervisory practises within the European System of Financial Supervision & consistent application of EU law
Level 4 is a fast track procedure allowing ESMA to be requested to launch an enquiry and can issue a recommendation addressed to the national authority within 2 months of investigation. Also gives ESMA ability to launch own investigations
The Markets in Financial Instruments Directives
3.1.3 Explain the purpose and scope of the MiFID I and II and the Markets in Financial Instruments Regulation (MIFR)
EU harmonisation - ‘cross-border’ trade = issue of ‘passports’ from home regulator
Investment Services Directive (ISD) - ‘single passport’ authorised firm in an EU member state can trade across EEA
ISD superseded my MiFID - widened the rage of investment services that can be ‘passported’ as well as:
Personal recommendation - core investment service to be passported
Multilateral Trading Facilities (MTF - self regulated trading venue) covered by passport
Commodity derivatives, credit derivatives and financial contracts for differences
A derivative is a contract between two or more parties whose value is based on an underlying asset = futures, forward contracts, options and swaps etc.
MiFID II (repealed MiFID ) and MIFR. MiFID II has introduced
Organised Trading Facilities (OTF - a multilateral system, not a reg market (RM) or MTF, 3rd party buying and selling interests in bonds, financial products, emissions allowances or derivatives which interact that results in a contract - not equities) to capture unregulated trades on non-reg trading platforms
Strengthening transparency requirements before and after instrument trading
Limiting the size of positions held in commodity derivatives
Rules to avoid potential risk and creation of disorderly markets
Investor protection to safeguard clients’ interests
MiFID II distinguished between investment services and activities and ancillary services
A firm performing IS and A - subject to MiFID for IS and A and AS
A firm performing AS - not subject to MiFID (See page 80 for AS)
MiFID II services - page 79 - 80
MIFR - doesn’t need to be implemented into national law.
Sets out reporting requirements - trade data to public and competent authorities
PMs in UK who rely on a report made by their EEA sell-side brokers’ reports may need to report in their own name to FCA under MiFR
The UCITS Directives
3.1.4 Explain the purpose and scope for the Undertakings Collective Investment in Transferable Securities directives
UK obligation under UCITS directive - FCA gives automatic recognition to certain CIS in other UE member states
Under this 1986 dir - CIS that complies with its conditions and is authorised in any EU member state can be marketed without further authorisation
FCA responsible for recognising a scheme under UCITS. - UCITS I -> UCITS III in 2002.
UCITS 2 split into 3 parts
The management directive - increases the scope for management companies’ activities that can be passported, protect investors by ensuring MCs are suitably capitalised, and that they have appropriate measures in place for risk management and reporting
The Product Directive - expands range and type of financial instruments permitted in UCITS funds. Allows the use of derivatives for investment and risk reduction purposes, and increases the investment limits for certain financial instrument and puts a limit on a fund’s exposure to any one group of companies
UCITS IV (2011):
A passport for MCs
A procedure for x-border fund mergers
Into of master-feeder structures to permit asset pooling
Intro of KIID
A notification procedure for x-border marketing
Strengthening of supervisor co-op
UCITS V - enhances rules on responsibilities of depositaries and introduced a remuneration policy for UCIT FMS
The Alternative Investment Fund Managers Directive (AIFMD)
3.1.5 Explain the purpose, scope and requirements of the Alternative Investment Fund Managers Directive
AIFMD covers management, administration and marketing of Alternative Investment Funds (AIFs)
AIF = collective investment undertaking no subject to UCITS inc. hedge, private equity, retail investment, investment companies and real estate funds
Focus on managers rather than AIFs themselves
AIFMD requires auth if:
€100m, if any of the AIF uses leverage; or
€500m, if the AIFs don’t use leverage and do not give their investors a right of redemption within 5 years if initial investment in each AIF
(Leverage results from using borrowed capital as a funding source when investing to expand the firm’s asset base and generate returns on risk capital. Leverage is an investment strategy of using borrowed money—specifically, the use of various financial instruments or borrowed capital—to increase the potential return of an investment. Leverage can also refer to the amount of debt a firm uses to finance assets. When one refers to a company, property or investment as “highly leveraged,” it means that item has more debt than equity.)
If AIFM has assets under the above = ‘sub-threshold’ therefore lighter regulations. 2 types of sub-threshold:
Small authorise UK AIFM is FCA-auth and not opted into the AIFMD - relevant for small private FMs
Small registered UK AIFM is:
An internal AIFM of a corporate body - investment trust
The unauth manager of property funds, operated by an FCA-auth operator
An FM that has applied for registration under the EU VC Funds Regulator or the Euro Social Entrepreneurship Funds Regulation
ST AIFM - FCA SYSC and COBS apply and cannot benefit from EU Marketing passport
AIFM requirements inc
Brokers/ counterparties that are subject to reg supervision, financially sound and have the necessary organisational structure to provide services to the AIFM or AIF
Quarterly, semi-annual or annual reports to their respective EU state regulator
Disclose the extent of leverage employed
The European Market Infrastructure Regulation
3.1.6 Explain the purpose of the European Market Infrastructure Regulation (EMIR)
EMIR covers OTC derivatives, central counterparties and trade repositories
Requires anyone entered into a derivatives contract to report and risk manage their derivative position
In the UK, EMIR implemented through the Financial Services and Markets Act 2000 (FSMA)
(A derivative is a financial security with a value that is reliant upon or derived from, an underlying asset or group of assets—a benchmark. The derivative itself is a contract between two or more parties, and the derivative derives its price from fluctuations in the underlying asset.
The most common underlying assets for derivatives are stocks, bonds, commodities, currencies, interest rates, and market indexes. These assets are commonly purchased through brokerages.)
EMIR 3 requirement for those who trade derivatives:
To clear OTC derivs that have been declared subject to the clearing obligation through a central counterparty
To put in place certain risk management procedures for OTC derivs transactions that are not cleared
To report derivative transactions to a trade repository
he Foreign Account Tax Compliance Act and Common Reporting Standard
3.1.7 Explain the purpose and scope of the Foreign Account Tax Compliance Act (FATCA) and the Common reporting standard (CRS)
FATCA = US law to prevent US citizens from using offshore banking facilities
Applies to non-US financial institutions and imposes a 30% withholding tax on US source income paid to non-US financial institutions
Non-US FIs can enter into an agreement with US Internal Revenue Service and disclose info on their US account holders.
Requires Foreign FIs (FFI) to provide info about their US customers to the IRS
FFI + IRS agreement = participating FFI, FFI doesn’t have agreement = non-participating FFI - 30% withholding tax applied
Reporting to IRS = annual report which includes
Name, address and US taxpayer ID number; year-end account balance/value, the total gross amount of interest credited to the account and total gross amount paid or credited to account holder
The UK - US intergovernmental agreement that allows UK FIs to meet their FATCA obligations through HMRC
For non-UK clients, FATCA reporting through Irish Tax Auth
CRS - info standard for the automatic exchange of tax and financial info on a global scale - combat tax evasion
FIs obliged to provide details to HMRC about anyone who owns foreign investments and appears to be a UK resident. Data reported includes:
PID (name, address DoB), account numbers, year-end balance and valuations, interested credited and proceeds of assets sold
EU Benchmarks Regulation (BMR)
3.1.8 Explain the purpose and scope of the EU Benchmarks Regulation
BMR created to address the issue of benchmarks susceptibility to manipulation
BMR seeks to - benchmarks are robust, reliable and to minimise CoI in BM-setting processes
A benchmark = a standard against which the performance of a security, mutual fund or investment manager can be measured. Generally, broad market and market-segment stock and bond indexes are used for this purpose.
Defined under regulation as:
Any index by reference to which the amount payable under a financial instrument or financial contract, or the value of a financial instrument, is determined; or,
An index that is used to measure the performance of an investment fund
BMR defines an index as a figure that is publically available and is regularly determined by either applying formula or other calculation, or by making an assessment on the basis of the value of one or more of the underlying assets/prices
Benchmarks are indexes created to include multiple securities representing some aspect of the total market.
Three entities defined under BMR:
Benchmark Administrator - has control over the provision of a benchmark that is used on financial instruments traded on trading venues - the main impact on BMR will be administrators
Supervised contributor - an authorised person that contributes input data that is not available to the admin
Benchmark user - An authorised person who conducts financial services by referencing an index
BMR - Six categories of Benchmark
Critical BMs - contracts underlying the BM is at least €500bn
Significant BMs - contracts underlying the BM is at least €50bn
Commodity BMs - an underlying asset of the BM is a commodity as defined in MiFID II (subject to Annex II BMR)
Regulated Data BMs - input data to the BM is provided directly from regulated venues
Interest rate BMs - BM determined on the basis of the rate at which banks may lend to or borrow from other banks or agents in the money markets (Subject to Annex I BMR)
Non-significant BMs - contracts underlying the BM is at less than €50bn
BMR also introduces a code of conduct for contributors of input data
Supervised entities (regulated firms) also affected by the BMR:
Should only use BMS if the BM or admin appears on a register of eligible BMs that will be maintained by ESMA - European Securities and Markets Authority
Should have robust written plans for what they would do it a BM materially changed or ceases to be provided - client-facing terms
When issuing prospectuses on investment products that reference a BM, users should state whether the BM is provided by an admin included on the ESMA register.
The UK Regulatory Structure
3.2.1 Describe and distinguish between the roles of the FCA, Prudential Regulatory Authority, BoE, Financial Policy Committee and HM Treasury
FSA 2012 amended the FSMA 2000 - it created the current regulatory framework
Established macro-prudential regulator - the FPC within the BoE to monitor and respond to systemic risks
Transferred responsibility of prudential regulation of banks, insures and systemic important investment firms to the PRA. PRA is governed by the PRC
Created a business conduct regulator - the FCA - both retail and wholesale markets, promoting consumer protection
The FCA, ‘Ensures the relevant markets function well’ - has 3 op objectives
Secure an appropriate degree of protection for consumers
Protect and enhance the integrity of the UK financial system
Promote effective competition in the interest of consumers in the market for regulated financial services and services provided by recognised investment exchanges (RIEs) in carrying out certain regulated activity
FCA scope includes
CoB regulation
Lead regulator for firms (FCA-authorised firms) other than PRA-authorised
Markets regulation
Regulatory oversight of client assets and countering financial crime
PRA - responsible for prudential supervision of banks, insurers, large investment firms
FCA - responsible for their conduct regulation and prudential supervision of small firms
FSA 2012 - power to place boundaries between PRA and FCA and requires regulators to consult each other
FCA can ban misleading financial promotions
PRA - legal entity within BoE, ensures the safety and soundness of its regulated firms (supervises resilience - liquidity and leverage)
Orderly resolution with failed authorised firms
Coordinates with FCA and FPC
FPC - monitors the whole financial system and identifies risk to stability and takes action to address them
Committee of the BoE - meets quarterly
Dual Regulated Firms
3.2.2 Explain the different roles of the FCA and PRA for dual-regulated investment firms
FCA and PRA share admin process for DR firms
Applications from DR firms are considered by both regulatory bodies
Consent - When DR applies to PRA, FCA can give or refuse consent (FCA look at conduct implications)
If refused PRA must refuse app
PRA focuses on soundness of firm
Consult - When firm applies for a change in control, a waiver that is materially important to the FCA’s objectives, passporting, transfer of insurance business or cancellation of permissions - the PRA must consult the FCA.
PRA must consider FCA response but no bound by it
PRA - quality of capital and liquidity, appropriate resources to measure, monitor and manage risk, to be fit and proper and conduct their business prudently
Before taking action against DR drism - FCA must consult PRA - choose which is appropriate to investigate or conduct separate investigations
The FSMA 200 as amended by the FSA 2012
3.2.3 Explain the scope of the FSMA 2000 (as amended)
Main framework for the regulation of investment business in the UK
Anyone conducting investment business in th eUK is required to be an authorised or an exempt person
Authorised Person:
Auth due to Part 4A permission - must apply to the FCA (unless systemically important to be auth by PRA) under Part 4A of the FSMA
A person who qualifies for auth. From EEA state who is auth in home state and is able to carry on investment business in the UK under passporting rules
FSMA 3 factors for invest business that requires auth:
Whether the investment come within the scope of the system of regulation
Whether the activity carried out in relation to those investments is regulated
Whether any exemption is available
Criminal offences under FSMA (as amended by FSA 2012) inc:
Person who isn’t authorised or exempt describing themselves as such
Misleading a market or investors by making misleading/dishonest statement of promise
Knowingly/recklessly creating a false impression for personal gain, or for causing a loss to another
FSA 2012 introduced a new offence in relation to BMs
Make another person a false or misleading statement
Any act or engage in a course of conduct which creates a false/misleading impression as to the price or value of any investment , or as to the interest rate appropriate to any transaction
FCA has lead in investigating any of the above
Regulated Activities Order
3.2.4 Explain the scope of the Regulated Activities Order 2001 (AA) in terms of regulated activities and specific investments
Regulated investments and activities defined the RAO 2001
Specified investments - include all investment instruments and rights to those instruments - excludes physical assets (land, commodities etc.)
Includes provisions of credit as well as regulated mortgages also regulated by FCA under RAO
MiFID II added structured deposits and emission allowances as SIs
Regulated Activities - accepting deposits, issuing electronic money, effecting or carrying out contracts of insurance as principal, dealin in, arranging deals in or managing investments, arrangina mortgage or other home finance transaction, MTFs and OTFs.
Other Regulatory Bodies
3.2.5 Explain the function of the following bodies/persons: Payment System Regulator, the Competition and Markets Authority, the Department for Business, Energy and INdustrial Strategy, The Panel on Takeovers and Mergers and the Information Commissioner’s Office.
PSR - regulates payment systems in the UK (subsidiary of the FCA)
Regulates systems designated by HM Treasury inc: BACS, C&C, Faster payment system, LINK, Northern Ireland Cheque Clearing, Mastercard and Visa Europe.
BoE responsible for supervising financial market infrastructure
CMA - concerned with takeovers of publicly listed companies as they can affect public interest
Will investigate all mergers that meet the turnover test or the share of supply test
Turnover Test = if target company has a UK TO of £70m or more
Share of supply test = if merging parties will together supply 25% of goods or services wither in the UK as a whole or in substantial part
Has 40 days to undertake phase 1 merger study - if merger is suspected to lead to substantial lessening of competition will move to phase 2 - if phase 2 suspects significant reduction in competition it can block the merger or impose remedies if already occured
BEIS - Only in exceptional cases will the SoS for BEIS intervene and make decisions in place of the CMA. National Security is only public interest defined consideration.
ICO - independent authority that promotes operness of official info and protection of private info. It oversees:
Data protection act (regulates outside of scope of GDPR)
General Data Protection Regulation
FoI act
Environ Info Regs
The Privacy and Electronic Communications Regs
GDPR - protects privacy rights of an individual, based on premise individuals are aware of what data is held about them and how
Anyone who handles personal info must comply with 6 principles ensuring PD is:
Processed lawfully, fairly and transparently in relation to individual
Collected for specified, explicit and legitimate purposes and not further processed in a manner incompatible with those purposes
Adequate, relevant and limited to what is necessary in relation to the processing purposes
Accurate and kept up to date - inaccurate data erased and rectified ASAP
Kept in a form that identifies when data no longer required to be stored - except archiving for public, historical or scientific purposes
Processed in a manner that ensures appropriate security of the personal data
A data processor is responsible for processing personal data on behalf of a data controller
Large data controllers will have to appoint a data protection office
Other GDPR changes include:
Consent - requires consent to be specific and only valid for agreed duration
Fair processing notices - include details of the grounds that are used to justify processing of the data, period data is retained, mechanism of the export (if outside EU) and the source of the data.
Data Subject rights - rights of data subject enhanced under GDPR
Personal data breach - organisations must notify the ICO within 72hrs or a breach
Export of personal data - data cannot be exported outside of EEA unless the recipient non-EEA country is deemed by the European Commision to offer adequate DP safeguards.
The Panel on Takeovers and Mergers (PTM)
3.2.6 Explain the make-up of the Takeover Panel and how it is financed
PTM - responsible for operating and enforcing City Code and act as the referee of the fair conduct of TO bids ensuring fair treatment of shareholders
Financed partly by a levy on share transactions and rules apply to all publicly quoted companies
PTM levy payable on trades in securities of companies incorporated in UK, the CIs or IoM or shares admitted to trading on a UK-reg market or MTF
Levy = 100p per contract where total consideration of the trade is > £10k
Payable on equity share capital or assets that give rights to ESC
Not-payable on covered warrants, debentures or other debt securities, preference shares; permanent interest bearing securities, contracts for differences and total return swaps, spread bets or option contracts.
3.2.7 Explain the regulatory status of the City Code on TO&M (the City Code)
PTM has statutory basis set out in the Companies Act 2006, City Code has statutory force
Code conducts the regulation of bid and restrict the actions of predator companies, target companies and third parties. It aims to provide protection for shareholders and to allow a reasonable period in which a bid may be considered.
3.2.8 Explain the main provisions of the City Code, including the bid timetable
Principle equal treatment of all shareholders in a particular class
Bidder acquiring 30% or more of a company is required to make a cash offer of the highest price they paid in the previous year
Offer doc sent to SH 28 days the announcement
Offeror 28 day put up or shut up deadline
Target companies director must advise SH of their views within 14 days after offer doc sent
If bidders stake in the target company reaches 50%, company required to keep the offer open for acceptance by the remaining SHs
Predator company acquires 90% stake -> force minority of SH to sell shares.
Trustee Act 2000
3.2.9 Explain the purpose and scope of the Trustee Act 2000: the rights and duties of the parties involved and the nature of the trust deed and the investment powers of trustees
Pension, trust fund or charity allow investment policy to be left to the discretion of trustees
Investment provisioning within Trustee Act 2000 doesn’t apply to occupational pension schemes, authorised unit trusts or certain schemes under the Charities Act 2001
The TA 2000 allows a trustee to make any kind of investment inc land and property
Must obtain and consider proper advice
Regard of standard investment criteria which is:
The suitability to the trust of an investment
The need to diversify investments as appropriate for the circumstances of the trust
Regulation of Pension Funds
3.2.10 Explain the significance of the Pension Act 2004 (including scheme specific funding requirement, the Pensions Regulator, the Pension Protection Fund), the Pension Act 2008 (including automatic enrolment and the National Employment Savings Trust (NEST)) and the reforms to pensions from April 2015 (including freedom of choice in how pension is taken)
Pension act 2004 introduced developments to occupational pension schemes including:
Creating the Pensions Regulator (TPR) with objectives:
Protecting benefits of members of Occ Schemes and Personal Pension Schemes
Reducing risk of situation arising that could lead to calls of compensation from the Pension Protection Fund (PPF)
Promoting good admin in the schemes it regulates
Intro PPF to provide compensation where defined benefit pension scheme becomes insolvent and unable to pay liabilities
Introduction of a scheme-specific funding requirement. The sch funding provisions include requirements for trustees of defined benefit schs to:
Prepare a statement of funding principles specific to each scheme - how funding objective will be met (reviewed every 3 years)
Obtain periodic actuarial valuations and actuarial reports (actuarial - business pro deals in risk)
Prepare a schedule of contributions
Implement a recovery plan where the statutory funding objective is not met
PA 2008 was the next major development in OPS - requires job holders (age 22 - state pension age with annual earnings over £10K) to be enrolled in a qualifying scheme
Gov set up NEST so that all employers can have access to a suitable scheme if they done have a quality scheme in place
Pension flexibility in 2015 allow benefits in a defined contribution pension scheme to be access in more flexible ways from age 55.
Uncrystallised Funds Pension Lump Sum (UFPLS) = money drawn from the fund without purchasing annuity or entering into a drawdown plan ( Annuity is a series of payments made at equal intervals). Typically 25% UFPLS tax free. Multiple UFPLS can be taken over a retirement period - regular or irregular
Purchasing lifetime annuity with some or all the accumulated fund that will pay an income until death - PCLS up to 25% of the fund can be accessed before annuity purchased.
ENtering a flexi-drawdown plan - no limits on the amount that can be taken from DD fund each year. PCLS of 25% can be taken when fund is put into DD. DD payments taxed as income
UK gov 3 pension and financial advice schemes (gov planning to merge all three into one body)
Money Advice scheme - funded on levy on financial services firms - impartial advice on financial matters
Pension wise - intro after PF 2015, free impartial advice on choices for those with defined contribution schemes
The Pension Advisory Service - grant aided by the Department for Work and Pensions. This service offers free, impartial advice on all pension matters inc state, personal and occ pensions
3.2.11 Explain the purpose of a Statement of Investment principles
PA 1995 made trustees responsible for producing a Statement of Investment Principles (reviewed every 3 years)
SIP sets out principles governing how decisions about investments are made, and must include the schemes policy on:
Choosing investments
Kinds of investments to be held
Risk - how measured and managed and expected investment returns
Realising investments
The extent the scheme takes account of social, environmental or ethical considerations when making investment decisions
Using the rights attached to investments if applicable
Before SIP drawn up, trustees must:
Obtain and consider the written advice of a person with appropriate knowledge and experience of financial matter and IM
Consult with the scheme sponsor
The role and statutory objectives of the FCA
3.3.1 Explain the role and statutory objectives of the FCA
FCA responsible for regulating conduct on wholesale markets and prudential regulation for firms not under PRA
Objectives:
Secure an appropriate degree of protection for consumers
Protect and enhance the integrity of the UK financial system
Promote effective competition
The Financial Conduct Authority Handbook
3.3.2 Identify and distinguish among the blocks of the FCA handbook
Block 1 - High level standards
Principles for businesses (PRIN) - sets out fundamental obligations of all FCA regulated firms
FCA 11 principles are the foundation for other rules and guidance in the handbook
Senior Management Arrangements, Systems and Controls (SYSC) focuses on responsibilities of directors and senior management - control, supervision and accountability systems
Code of Conduct (COCON) - conduct rules for staff operating in firms subject to SenMan and Certification regime
Threshold Conditions (COND) - sets out the minimum statutory conditions that a firm is required to satisfy IOT gain and retain authorisation
Statements of Principle and Code of Practice for Approved Persons(APER) - set out the standards of behaviour expected from App Pers
Fit and Proper Test for Approved Persons (FIT) - sets out minimum standard to becoming an App Pers. employee applications and continuing assessing fitness and propriety of App Pers.
Training and Competence (TC) - contains staff competence reqs. Initial and ongoing competence of staff and record keeping
Block 2 - Sets out prudential requirements that affect firms - not rel for exam
Block 3 - Business standards
Conduct of Business (COBS) - COB reqs applying to firms carrying out investment business
Market Conduct (MAR 1 and 2) - Sets out rules and guidance for the wholesale and prof market, including market abuse (MAR 1) and stabilisation after a new issue (MAR 2)
Client Assets (CASS) - R&G on holding client money, inc reqs for segregation and safe custody of assets, statutory trust WRT client money and retrieving info in the event of insolvency
Product intervention and Product Governance Sourcebook (PROD) - rules governing product oversight and governance process - sets out FCA statements of policy on making temp prod intervention rules
Block 4 - Regulatory Processes
Supervision (SUP) - deals with SUP issues and requirements concerning the regulators relationship with firms
Decision Procedure and Penalties Manual (DEPP) - sets out FCA decision-making procedures that involve giving statutory notices, policy WRT imposition and amount of penalties and interview conduct
Block 5 - Redress
Dispute Resolution: Complaints (DISP) - contains rules and guidance relating to a FS firm’s internal handling of complaints and the operation of the Financial Ombudsman Service (FOS)
Compensation (COMP) - R&G governing eligibility under the FSCS, funding of FSCS and its operations
Block 6 - Specialist sourcebooks
Collective investment schemes (COLL) - provides info for invest companies with variable capital (ICVCs) and authorised unit trusts (AUT) in relation to the process of auth and their constitution and management
Block 7 - Listing Prospectus and Disclosure - sets out reqs for issuers listed on/seeking admission to UKLA, Transitional Provisions (TR) rules that apply to a sponsor and a person applying for approval as a sponsor along with the Prospectus rules (PR) and disclosure document requirements( DTR)
FCA regulatory guides
Enforcement guide - FCAs approach to enforcement powers
Perimeter Guidance Manual - contains guidance about circumstances in auth is required
Financial Crime
PRIN
3.3.3 Identify the FCA’s PRIN 2.1 & 4.1 and explain their application and purpose (PRIN 1.1.1 & 1.1.2)
11 Principles Integrity Skill, Care and diligence Management and control - organise and control affairs effectively, adequate risk managemt Financial prudence - adequate financial resources Market conduct Customers’ interests Communications with clients Conflicts of interest Customers - relationships of trust Clients assets Relations with regulators
3.3.4 Explain the consequences of breaching the FCA’s PRIN 1.1.7 to 1.1.9 and DEPP 6.2.14 & 6.2.15
Breach taken into account by FCA for purposes of its disciplinary and intervention powers
Breaching Principles may call into question whether an authorised firm is still fit and proper
Onus is on regulatory proving firm is at fault - fault varies between principles
PRIN provides basis for FCA to apply to a court for an injunction or restitution order - firm no private person
Senior Management Arrangements, Systems and Control
3.3.5 Explain the purpose and scope of the FCA’s rules regarding SMA, SYSC
Purpose of SYSC are to encourage firm senior management to take responsibility of a firm’s arrangements on matters of interest to FCA, increase certainty with principle 3, encourage firms to vest responsibility for effective and responsible organisation in Sen Man and create a common platform of organisations and SYSC reqs for all firms
Common platform - unified org reqs in SYSC 4 - 10 which applies to all firms except insurers, managing agents and Society of Lloyds.
SYSC 2-3 do not apply to common platforms but all authorised firms that fall outside the scope of common platforms
SYSC 4: General Organisational requirements - this relates to:
A firm’s governance, internal controls and organisation, accounting controls and audit committee
A firm’s business continuity
The persons controlling the firm
Sen Man responsibility
A firm’s management body should have clear allocation of responsibility
SYSC 5: Employees, agents and other relevant persons - relate to:
Skills, knowledge and expertise
Segregation duties
Awareness of procedures
General requirements
SYSC 6: Compliance, internal audit and financial crime:
firm must ensure effective compliance with regs. Must appoint a compliance officer who is responsible for compliance oversight and reporting to the governing body of the firm
SYSC to ID, assess, monitor and manage money laundering risk
A firm should appoint sen man to have overall resp on anti-ML SYSC. A firm must appoint MLRO (can be the same person) to act as a focal point for activities relating to anit-ML
SYSC 7: Risk Control - policies and procedures that ID and set tolerable level of risk
SYSC 8: Outsourcing - provisions req firms to outsource important operation function to retail responsibility for discharging their responsibility under the regulatory system - Sen Man must not delegat resp
SYSC 9: Record-Keeping - firm must arrange orderly records of its business and internal org - must be sufficient for FCA to monitor the firms reg compliance
3.3.6 Explain the purpose of the purpose of the principles and rules on conflict of interest, including; identifying, recording and disclosing CoI and managing them to ensure the fair treatment of clients (PRIN 2.1.1, Pinciple 8 and SYSC 10)
SYSC 10 operationalises principle 8 (CoI) and requires a firm to:
take appropriate steps to ID CoI
Maintain effective org and admin arrangements to prevent CoI resulting in risk to damage client interests
A firm must maintain an effective CoI policy which is set out in writing - it must include the following:
ID specific services and activities carried out by/ on behalf of the firm, the circumstances that constitute or may give rise to a CoI causing material risk of damage to the interests of clients
It must specify procedures and measures to be followed/adopted to manage CoI
SYSC 11 - 17 - cover risk management and prudential reqs relating to banks and insurance companies
SYSC 18: Whistle blowing
The Public Interest Disclosure Act 1998 (PIDA) establishes framework for protecting employees in case of whistle blowing
FCA encourages firms to have internal whistle blowing by their employees and that they have protection if they WB to FCA or PRA
Put in place written procedures on whistleblowing
Respect whistleblowers confidentiality
Assess and evaluate WB reports appropriately, where necessary informing regulators
Track outcome of reports and the WB themselves
Ensure no-one in the firm victimises WB
Firms should also protect WBs, appoint a WB champion who oversees effectiveness of firms WB policy, prepares annual report for the board regarding the operation of the policy and reporting to the FCA if an employment tribunal is in favour of the WB over the firm
If firm caught acting to the detriment of an employee who has made a protected disclosure - call into question fitness and propriety of firm and staff
SYSC 19: Remuneration Codes - ensures pay practices do not encourage inappropriate risk taking
Applies to all Sen man, risk takers and staff in control functions = ‘code staff’
FCA takes into account institutions size, internal org, nature and complexity of activities. Main provisions are on page 105
Applying for Permission to Carry on Regulated Activities
3.3.7 Explain, in outline, the procedures for authorisation of firms, including knowledge of threshold conditions, and liaison with the PRA where relevant
A person wishing to conduct regulated activity needs to authorised unless they are exempt
Exempt persons include those from professional firms E.G solicitors or accountants - main business is not reg activity
UK investment firm needs to apply to the FCA for Part 4A permission - only granted once
Applicant needs to know what scope to apply for regarding specific activities
FCA will specify in Part 4A what activities they can conduct
FCA may impose requirements in connection with P4A - E.G more frequent financial returns
In order to obtain P4A permission, applicant must satisfy threshold conditions
COND outline threshold conditions or minimum standards for being/remaining authorised
FSMA 2000 re-distributed responsibility for CONDs between FCA and PRA (see table 3.1 page 106)
Some FCA CONDs apply to all firms, including Dual-reg.
PRA CONDs only apply to banks, insurance firms and PRA-auth invest firms
See Fig 3.2 page 108 for decision tree
Exempt persons - most important are:
Appointed reps of an authorised person
RIEs and RCHs
Members of the profession (as above)
Members of Lloyds
Approved Persons and Controlled Functions
3.3.8 Define an approved person, and explain the application and purpose of the Statements of Principle and Code of Practice for Approved Persons (APER)
Under APER - individuals wishing to perform controlled function with an authorised UK firm need approval from the FCA or PRA - grant approval for two types of person:
Those who deal with customers or their property
Those who have significant influence in a financial org
Persons who have been granted approval to undertake controlled function = approved persons
APERs replaced by Sen Man Certification Regime for banks, building societies, credit unions and PRA-reg invest firms
3.3.9 Identify the main assessment criteria in the FCA’s ‘fit and proper test’ for approved persons (FIT)
FCA only grants approval if person deemed FIT
Honesty, integrity and reputation
Competence and capability
Financial soundness
- 3.10 Explain the application procedure for an approved person (SUP 10A) and how the PRA may also be involved
- 3.11 Explain the procedure for an approved person moving within a group and how the PRA may also be involved (SUP 10A)
Dual-reg SIFs split between PRA and FCA - minimise duplications of approvals from both regulators
If an individual conducts both PRA and FCA SIFs only needs to apply to PRA
Where an application is made to PRA for both a PRA/FCA SIF, PRA needs FCA consent before granting approval
Either reg may withdraw approval from a person who is conducting SIF with a DR firm. If the approval was given by the other regulatory, it must consult that reg first
A firm has 7 business days to inform the regulator if person no longer performing CF
3.3.12 Define an controlled function and identify the types of controlled functions defined within the FCA handbook (SUP 10A)
Firms only reg by FCA, 5 categories of controlled functions. All those except customer functions = significant influence functions (SIFs)
Governing functions: Chief exec and directors
Required functions: apportianate and oversight func, compliance func, money laundering reporting func
SYSC function: person responsible for reporting to governing body in relation to its financial affairs etc.
Significant management function: only relevant in large firms where SMF is allocated to a sen man
Customer dealing functions: giving advice on, dealing and arranging deals in and managing invests
Two new functions introduced in 2013 - CF40/50 cover submission and admin of BMs
7 statements of principle - first 4 for approved persons addition 3 for persons with SIF.
An APERS must act with integrity in carrying out their CF
An APERS must act with due skill, care and diligence in carrying out their CF
An APERS must observe proper standards of market conduct in “ “ CF
An APERS must deal with the FCA and with other regulators in an open and coop way, and must disclose appropriately any info of which the FCA would reasonably expect notice
An APERS performing a SIF must take reasonable steps to ensure that the business of the form for which they are responsible in their CF is organised, so that it can be controlled effectively
An APERS carrying out a SIF must exercise due skill, care and diligence in managing the business of the firm for which they are responsible in their CF
An APERS performing a SIF must take reasonable steps to ensure tht the business of the firm for which they are responsible in their CF complies with the relevant reqs and standard of the reg system
The APERS regime allows individuals who breach statements of principle to be disciplined without firmas a whole being disciplined
FSA 2012 - SofP relate to any other functions and APERs performs within the firm they hold their approval with
Senior Managers and Certification regime
3.3.13 Explain the regulatory requirement son individual accountability under the Banking Reform Act 2013: Senior Manager Regime, Certification Regime, COnduct rules (SUP 10C and COCON)
SMCR replaces APERS for UK banks building societies, credit unions and PRA-design invest firms from Mar 16
FCA and PRA - believe individuals should be held accountable for effective regulation
Senior Managers Regime (SMR) - indv subject to reg approval - firms allocate responsibility and monitor fitness to these indiv
Applies to a narrower range of individuals than APER
FCA and PRA have different approach to allocating important functions/responsibilities to indiv
3 main types of responsibility:
Senior Management Functions (SMF) - replace SIF - person conducting function must be approved by regulators
Prescribed Responsibilities - IFs other than SMFs - each of which must be allocated to one of the existing SMFs where the responsibility is associated closest
Key Functions - IFs other than SMFs - each of which must be allocated to a significant responsibility SMF
A Certification Regime - firms must assess fitness and propriety of certain employees who could pose a risk to the firm or customers
Conduct Rules - replacing the statement of principle and approved person code, which are applicable to all staff, except a few specific roles such as security, catering and cleaning
SMF replace APERSs SIF in certain firms
Involve a risk of serious consequence for the auth-pers, or for the business or other interests in the UK
PRA SMFs FCA SMFs Executive Non-Executive Executive Non-Executive Chief executive function Chief financial function
Chief risk function
Head of internal audit
Head of key business area Group entity senior Chairman Chair of the risk committee Chair of the audit committee Chair of the remuneration committee Senior independent director Executive director Significant responsibility senior manager Money Laundering and reporting Non-Executive director Chair of the nominations committee
Prescribed responsibilities - assigned to one of the existing SMFs
Significant responsibility SMF - applies to induv who has delegated responsibility for a KF or ID risk (not already under the definition of another SMF) they must report to the board about the KF or risk
KF must be allocated between Sig SMFs
For Sen Man approvals for SMFs similar to SIF APER - can perform multiple SMFs but require separate approvals but can be combined in a single application
Firm applying for invid approval will need to submit:
A statement of responsibility - responsibilities as part of CF
Responsibilities Map - sets out allocated respon
Other info (CV etc.)
Certification Regime - level below SMR
Cover a wider range of indiv than APERs and covers significant harm funtions - regulated activies that pose harm to customers
Indiv caught by the CR no subject to reg approval - firm has to certify
FCA CR will apply to
Functs previously SIFs under APER, but not under SMR
Customer facing roles
Anyone (not an SMF) who supervises or manages a Cert Pers
Conduct Rules - new rules for banks, building societies and PRA-auth firms - under handbook COCON
Training and Competence
3.3.14 Explain the requirements relating to training and competence (TC 1-3)
All staff in a reg invest firm are required to be competent. The firm must ensure the employee:
Has been assessed as competent in that activity
Is supervised
Where a firm permits an employee to give advice on packaged products to retail client it must ensure that:
The supervisor has passed an appropriate exam
Employee has adequate level of knowledge and skill
The firm must ensure employee has passed the appropriate qual where the employee is permitted, under supervision to engage in
Advising on investments, dealing with clients in securities and/or derivatives
The activity of a broker fund raiser
Advising on syndicate participation at lloyds
The activity of a pension transfer specialist
Maintaining competence - firm makes sure an employee takes into account matters such as:
Tech knowledge and its application
Skills and expertise
Changes in market products, legislation and regulation
Professionalism Requirements for Retail Investment Advisers
3.3.15 Explain the professionalism requirements that have to be met by retail investment advisers and investment managers (TC 1-3, inc. appendices)
Retail Distribution Review (RDR) 2013 - Advisors must (enforced by FCA):
Subscribe to a code of ethics
Hold an appropriate qual, inc any qual gap-fill
Carry out at least 35 hours of continuing professional development (CPD) a year
Hold a statement of professional standing (SPS) from an accredited body
Firms submit info about advisors inc complaints involving that advisor in a 12 month period
If they don’t meet standards can’t make recommends to retail clients
Ethical standards - FCA sees as central in increasing professionalism
FCA amended APER to emphasis personal accountability - apply to all approved pers not just RDR
Modernised Quals - listed in FCA handbook
Keeping knowledge up to date - 35 hours CPD PA - inc seminars, lectures, conferences, workshops etc.
Accredited Bodies - responsible for
All advisors who use their services are subscribing to code of ethics - statements of principles for APERs
“” hold an appropriate qual - inc verifying 100% of their gap-fill
Carry out random 10% CPD sample heck
Recognise CPD activity from a range of providers
The role of an investment exchange
- 4.1 Explain the role of an investment exchange
- 4.2 Explain the need for, and relevance of, investment exchanges needing to be recognised by the FCA
FCA supervises a number of RIE under the FSMA - this gives exemption from authorisation
To be recognised RIE must comply with recognition requirements laid out in FSMA 2000
RIE may operate regulated markets and MTFs
FCA recognises multiple exchanges inc. LSE , NEX, LME and ICE futures europe.
RIE being recognised allows it to develop own means of fulfilling regulatory objectives and obligations
RIE required to deliver high standards of investor protection. (page 1116)
Transparency requirements under MiFID are:
Pre-trade transparency - obligation to publish current orders/ quotes
Post-trade transparency- price, volume and time of trans and execution venue (as close to real time)
MiFID harmonised commodity derivative trading regime, key changes include:
Limit on the size of positions that can be held (set by FCA)
Daily reporting to the regulator by trading venues
FCA power to request info to ensure position limits are being complied with
3.4.3 Explain how the BoE regulates clearing houses in the UK
FSA 2012 - BE responsible for regulating settlement systems, RCHs
and recognised payment systems under Banking Act 2009
RCH and payment systems = financial market infrastructures
BoE recognises multiple CHs inc. ICE CLEAR Europe, LME Clear, LCH.Clearnet and CME Clearing Europe
RCH being recognised allows it to develop own means of fulfilling regulatory objectives and obligations
London Stock Exchange and Ice Futures Europe
3.4.4 Identify and distinguish the roles of the London Stock Exchange (LSE), ICE Futures Europe and ICE Clear Europe
LSE is authority for admitting public companies for listing
Companies wanting to be on official list must meet requirements for listing set out by UKLA
If not but want to be on an exchange - AIM (lighter requirements)
LSE is also a RIE
IFE is a RIE where financial futures and options are traded using an electronic order matching system
Only IFE members cna trade and clear contracts
Two types who execute business IFE:
Trader - own trades or on their companies behalf
Broker - acting on someone else’s behalf
Regulation of Derivatives Market
3.4.5 Identify the features of trading systems for derivatives
Derivatives can be trading on organised exchanges or OTC markets
Exchange-traded markets, derivatives contracts are standardised with specific delivery/settlement terms
Electronic main trading system
ET derivs publicly reported and cleared through a CH - CH honors trade if seller defaults
OTC derivs negotiated between parties
3.4.6 Identify the main features of the regulation of derivatives
In europe MiFID II/MiFIR and EMIR are key initiatives
In UK all deriv exchanges are RIE - regulation of market largely carried out by the exchange
Trading derivs on an exchange, MTF or OTF requires subject to MiFID II transparency rules pre/post trade
3.4.8 Explain the arrangements for market transparency and transaction reporting in the main derivative markets
Trading derivs on an exchange, MTF or OTF requires subject to MiFID II transparency rules pre/post trade
OTC no requirement for transparency
EMIR does require entities who enter into a deriv contract to:
Report every deriv contract they enter into a trade repository
Implement new risk standards, inc op processes and margining, for all bilat OTC DERIVS
Clear via a CCP, those OTC derivs subject to a mandatory clearing obligation
Public register for the Clearing obligation IDs the classes of OTC derivs that CCPs are auth to clear - there are 8 depositories registered by ESMA
Clearing and Settlement on UK Derivatives Markets
- 4.7 Identify the main features of clearing and settlement for trading on derivatives exchanges, and when trading OTC
- 4.9 Explain the impact MiFID II/MiFIR and International Accounting Standards on the regulation of derivative markets
Deriv trading on IFE or LME - once trade matched it is registered with a CH which becomes the central counterparty to the contract
IFE = ICE Clear europe, LME = LME Clear
IFE member trading on behalf of a client - back to back contract established between member and client; therefore, IFE member acts as principles not agents for clients ICE Clear Europe not counterparty to member - client relationship
Hold position in an IFE/ LME future/ option - obligation to lodge initial margin = amount of cash or liquid asset set down by the CH sufficient to ensure customer can satisfy contract conditions
Profits/ loss paid into traders margin account - CH will require account to be topped up if account drops below margin level - this addition payment = ‘variation margin’
IFE/LM contract undergoes daily revaluation until delivery/offset
To offset contract - equal and opposite position must be entered into - CH notified that is closing a trans. Margin then returned
Clearing OTC moved mainly to central counterparty clearing following EMIR - implemented by UK through FSMA which imposes 3 requirements
To clear OTC derivs that have been declared subject to the clearing obligation through a (CCP)
To put in place certain risk management procedures for OTC derivs transaction that are not cleared
To report derivs to a trade repository
Clearing requirements -
Clearing thresholds
€1bn gross notional value for OTC credit and equity derivs (indv thresholds)
€3bn gross notional value for interest rate and foreign exchange (indv threshold)
€3bn in gross notional value for commodities and others (combined thresh)
Trans designed to reduce risk to commercial activity or treasury financing do not count in the above
ESMA decides which classes of OTC derivatives must be cleared
Risk management Obligation - Both financial and non-financial counterparties that enter into an OTC deriv that is not cleared by a CCP must have procedures in place to monitor mitigate the operational and credit risk
Reporting Requirement -
Concluded, terminated or modified contract must be reported to a trade repository the next working day
Title Transfer Collateral Arrangements (TTCAS)
3.4.10 Explain the rules relating to the title transfer collateral arrangements
TTCAS used by deriv firms that enter into margined transactions with clients
TTCAS allows them to treat margin (amount paid by client as collateral) as their working capital rather than client money which must be segregated
In insolvency margin money that fell under a TTCA would be recoverable only on an unsecured creditor basis - may be irrecoverable if firm has no assets
MiFID II and FCA Client Asset rules prohibit use of TTCA with retail clients due to obligations
Additionally a firm can use a TTCA with non-retail clients where the firm has:
Disclosed risk involved with a TTCA and the effect of the TTCA on client assets/money
Assessed the appropriateness of the TTCA for the client - firm should consider connection between clients liability to the firm and the need to use TTCAs and the extent by which the amount of client money/ assets subject to the TTCA exceed the client’s liability to the firm
Accepting customer for business (client categorisation)
3.5.1 Explain the purpose of client categorisation
Client categorisation - FCA handbook defines as a person whom the firm provides, intended to provide, or has provided a service in the course of a regulated activity or in the course of MiFID or equivalent 3rd country business, an ancillary service
FCA handbook definition of client also includes a potential client, in the case of financial comms by a firm to a client - the client is a client of the firm and the client of a rep appointed to act in the course of business with the firm is also a client
3.5.2 Distinguish between a retail client, a professional client and an eligible counterparty (COBS 3.4, 3.5 &3.6)
Retail clients - afforded most reg protection. Note: under MiFID II, a local authority is considered a retail client - can opt up to professional status if they are investing on behalf of a local gov pension scheme (LGPS)
Professional Clients - considered more experienced, knowledgeable and sophisticated - assess own risk; therefore, afforded fewer regulatory protections
Eligible counterparties - are investment firms, credit institutions, insurance companies, UCITS and their management companies, other regulated financial institutions and other undertakings.
A ‘per se’ professional client is essentially one of the following (unless a ECP)
An entity required to be auth or reg to operate in financial markets
In rel to business not MiFID or equiv 3rd country business a large undertaking that meets the following conditions
Corporate body that has called up share capital of at least £5mil
Large undertaking meeting two of the following balance sheet of €12.5m; net TO €25m; average number of employees during the year of 250
A national or regional gov, a public body that issues debt, central bank or an international or supranational body
Another inst inv whose main activity is to invest in FIs
3.5.2 Apply the rules relating to treating a client as an elective professional client (COBS 3.5.3)
A firm may treat a client as an elective prof if it complies with point 1 and 3 and where applic 2:
1) Firm undertakes an adequate assess of the expertise, experience and knowledge of the client that gives reasonable assurance, in light of the nate of the transactions or services envisaged, that the client is capable of making their own inv decisions and understanding risk involved
2) In relation to MiFID or equiv 3rd country business in the course of that business at least two of the following are satisfied
Client has carried out trans, in sig sixe, on the relevant market at an average freq of 10 per Q over the previous 4Qs
Size of the client’s financial instrument portfolio exceeds €500,000
The client works/has in the financial sector for at least 1 year in a professional position that requires knowledge of the trans or services envisaged
3) The following procedure is followed:
Client must state in writing to the firm that it wished to be treated as a PC, either generally or in respect of a particular service or trans, or type of trans or product
The firm must give the client a clear written warning of the protection and investor compensation rights the client may lose
THe client must state in writing, in a separate document from the contract that it is aware of the consequences of losing such protections
3.5.4 Apply the rules relating to treating a client as an elective eligible counterparty (COBS 3.6.3 to 3.6.6)
An EC is a client that is either a per se ECP of an elective ECP client.
Entities automatically recognised as per se CPs = IFs, Credit inst, UCITS and their management companies, PFs and their MCs,govs, central banks and supranational inst.
A firm may treat a party as an Elective CP if:
The client is an undertaking and is a per se prof client or request such categorisation
The firm has in rel to MiFID or 3rd country business, obtained express confirmation from the prospective counterparty that is agrees to be treated as an ECP
3.5.6 Apply the rules relating to client agreements (COBS 8A.1)
Client agreements - MiFID II requires firms to enter into a basic written agreement with prof and retail clients for each invest or ancil service (not just new clients) This agreement should cover:
The terms of any such agreement
Info about the firm and its service
Financial Promotions and other Communication with Customers, Including Information about the Firm
3.5.6 Explain the purpose and scope of the financial promotions rules and the exemptions from them (COBS 4.1)
Financial promotion is an invitation or inducement that aims to persuade the recipient to engage in investment activity.
Promotion of controlled activity and controlled invest - schedule 1 FSMA Financial Promotion Order 2005 (FPO)
FPO relates to invitations or inducements about providing/advising following products
Stakeholder pensions
Personal pensions
Investment such as: bonds/gilts, shares/stocks, units in CIS, endowment plan, options, futures and contracts for differnces, ISAs, stakeholder/non-stakeholder investment child trust, funeral plan contracts
Cash saving and bank account
Insurance
Under section 21 FSMA an non-authorised person cannot communicate a financial promotion in the UK, unless:
Its contents are approved for the purposes of s.21 by an auth person
It is subject to an exemption under the FPO
Fin Promo not restricted in terms of the media of communication. Rules apply to printed advertising, radio, personal visits, telephone calls, emails and internet and digital interactive TV
Exemptions under the FPO are split into 3 categories
Exemptions applicable to all controlled activities (Part IV of the Order) including:
Financial promotion to overseas recipients - made to persons outside of uk or directed at them
Follow-up financial promotions
Introductions
Exempt persons
Generic promotions - not relate to a controlled investment
Investment professionals
Journalists - to any non-real time financial promotion when it is a journalist medium, info service or TV/radio broadcast that doesn’t lead/enable people to buy or sell securities
Exemptions applicable only to controlled activities concerning deposits and contracts of insurance other than life policies
Exemptions applicable to any other types of controlled activity (Part VI of the order)
Exemptions under Part IV of the order: certified high net worth indv and sophisticated inv.
3.5.8 Explain the ‘fair, clear and not misleading’ rule (COBS 4.2)
Principle 7/ COBS for comms = comms is fair, clear and not misleading - this rule doesn’t apply to
An Excluded communication - ‘one-off’ promotion that isn’t a cold call
Financial promotions communicated only to investment professional or eligible counterparties - however, comms in relation to a designated investment business is still subject to fair, clear not misleading
To comply with the rule Firms must ensure:
Make clear fact that clients capital at risk
Quote yield figure that gives balanced short and long term prospects of the invest
An investment with Complex charging structure, contains sufficient info and takes into account recipient needs
Offers non firm products/ packages - fair and not misleading impression of the producer/ manager of the underlying investments
3.5.9 Explain the rules relating to communications with retail clients (COBS 4.5A)
Except for excluded comms and image advertising the firm should ensure the info:
Includes the name of the firm
Is accurate and always gives a fair and prominent indication of relevant key risks when ref pot benefits
Is sufficient for, and presented in such a way that it is likely to be understood by the average TA member
Does Not disguise, diminish or obscure important items, statements or warnings
Uses a font size for indicated risks that is equal to predominant font throughout ad and prominent layout
Consistently presented in the same language throughout all forms of info and marketing materials
Is up to date and relevant to the means of communication being used
Comparison should be clear, fair and not misleading
MiFID or equivalent third party country business - sources of info must be specified and key facts/assumptions included
Where info contains past performance indications - it must satisfy the following
1) Past perf cannot be prominent feature of communication
2) Info must include appropriate perf info in complete 12 month periods
3) Ref period and source info clearly stated
4) Info must contain a prominent warning that figures relate to the past
5) Indication relies on figures from a non EEA currency or that the retail client is in - currency must clearly be stated together with a warning that the return may increase of decrease due to currency fluctuations
6) If the indication is based on gross performance, the effect of commissions m fees or other charges must be disclosed
3.5.10 Explain the rules relating to past, simulated past and future performance (COBS 4.5A)
The following conditions should be satisfied:
Simulated past perf is based on actual past perf of one or more FI or fin indices which are the same as/similar to the FI concerned
In respect to the past perf above conditions in bullets 1 to 3 and 5 to 6 are satisfied
The info contains a prominent warning that the figures refer to simulated past perf and that past perf is not a reliable indicator of future perf
3.5.11 Explain the rules relating to direct offer promotions (COBS 4.7)
Direct offer is one that contains:
An offer by firm/ person to enter a controlled agreement with a respondent to the communication
Invitation by any person who responds to the communication to make an offer to the firm or another person to enter into a controlled agreement and specifies the manner of response or includes a form which any response may be made
A direct offer aimed at or addressed to a retail client contains:
Infor referred to in the rules on info disclosure relevant ot that offer or invitation
If it doesn’t relate to MiFID or quiv 3PB, addition appropriate info about the rel business and investments, so the client is able to understand the nature and risks
3.5.12 Explain the rules to cold calls and other promotions that are not in writing (COBS 4.8)
A cold call = financial promotion in the course of a personal visit, telephone convo or other interactive dialogue which:
Wasn’t initiated by recipient
Does not take place in response to an express request from recipient of financial promo
Cold call related to a marketable package product that is not a highly volito fund or a life policy linked to a highly volatile fund
The cold call relates to regulated investment bus conducted by an auth firm and involves reg invest that are readily realisable securities or marketable non-geared package products
Where a firm communicates a non-written financial promo:
It should do so at an appropriate time of day
The purpose of the coms should be stated from the outset
Clarify if the client wishes to continue or terminate communication - and at any time
A contact point should be given - appointments can be cancelled
3.5.13 Explain the rules relating to systems and controls in relation to approving and communicating financial promotions (COBS 4.10)
Financial promotion through social:
Should be fair, clear and not misleading
Fin Promo - consumers are made aware of potential benefits and relevant risk
FCA advice includes
Promo for investment products - make clear a promo is a promo
Stand-alone compliance - each post must be considered
Risk warnings and other required statements - rules are media neutral and apply to social
Image advertising
3.5.14 Explain the record keeping requirements relating to financial promotions (COBS 4.11)
SYSC require a firm that comms with client needs adequate systems and controls, policies and procedures
FP rules also include detailed authorisation and record-keeping details
A firm must make an adequate record of any Fin Promo it approves/comms. The record must be retained:
Indefinitely for a pension transfer, opt-out FSAVC (FSAVCs are similar to personal pension policies - but can be used by members of an occupational pension scheme to increase their pension provision.)
6 years for a life policy, occ pension scheme, small self-admin scheme (SSAS), pers pension or SH pen
5 years for MiFID or 3CB
3 years for other cases
3.5.15 Explain the rules relating to distance marketing comms (COBS 5.1 & 5.2)
A firm must provide the distance marketing info in good time before a consumer is bound by a distance contract offer - this includes firm info, FS, contract and redress - clear and comprehensible
3.5.16 Explain the rules relating to providing information about the firm and compensation info (COBS 6.1ZA)
A firm must provide a client with the following general info:
Contact details of the firm
the methods of communication to be used between the firm and client
statement of the fact that the firm is authorised the name of the component of authority that has authorised it
the firm is acting through an appointed representative statement of this fact
the nature frequency and timing of the reports on the performance of the service provided by the Firm to the client
the complex of Interest policy of the firm
if the Firm closer to manage Investments for a client the following info is applicable:
Information on the method and frequency of evaluation of the designated investments in the client portfolio
details of any delegation of the discretionary management of all or part of the designated investment of funds in the client portfolio
A specification of any benchmark against which the performance of the client portfolio will be compared
the types of designated Investments that may be included in the client portfolio and types of transactions that may be carried out in those designated Investments including any time limits
the management objectives level of risk to be reflected in the managers exercise of discretion and any specific constraints on that discretion
3.5.17 Explain the rules on inducements (COBS 2.3A and 2.3B)
MiFID introduced a ban on inducements - firms providing independent investment advice and portfolio management services to professional clients
For retail it applies to restricted/independent advice
Commision/ benefits rather than acceptance and retention prohibited
Research is not considered an inducement so long as it is paid for by the firm out of its own resources or form a special research payment account which is funded by charges to clients - not by 3rd parties
3.5.18 Explain the rules on adviser charging and remuneration (COBS 6.1A & 6.4)
No longer charge a retail client commission but the firm is paid an adviser charge
Applies to independent/restricted advice but not basic
Product providers prohibited from offering or paying commision, remuneration or any kind of benefit in connection with advice given
COBS 6.1B.9 - a firm that offer to facilitate, directly or through a third party, the payment of adviser charges, including by means of a platform service must:
Obtain and validate instructions from a retail client in relation to an advisor charge
Offer sufficient flexibility in terms of the adviser charge it facilitate
Not pay out or advance adviser charger to the firm to which the adviser charge is owed over a materially different time period, or on materially different basis to that in which it recovers the advisers charge from the retail client
Fees can be fixed (price list) or tailored presented in good time in clear language- must always act in the clients best interest
Fund manager charges
MiFID II requires fund managers to disclose full charges
your requirement to have an unbundled charge for research is part of a wider moved to provide more transparency of costs for consumers
ongoing costs figure (OCF) = the industry’s standard measure of running costs is no longer sufficient
Asset Managers and fund distributors must give the total cost
cost must be in pounds and pence not percentage
investment managers who run portfolios appliance on a discretionary basis must notify investors within 24hrs if the portfolio falls by 10% or more
FCA rules to remedy the lack of competition include:
fund managers to assess annually whether the charges taken from a fund are justified - assessment of value
Independent directors make up at least 25% of an authorised fund managers board
introducing a new prescribed responsibility for fund managers which will take effect alongside the wider extension of the senior managers and certification regime
preventing fund managers from retaining risk free box profits ( profits from matching buy and sell orders = they do not incur transaction costs)
guidance to make it easier for fund managers to convert investors to cheap share classes where this is in their interests
Identifying client needs ( suitability and appropriateness)
3.5.19 explain the rules relating to assessing suitability (COBS 9A.2 and 9A.3)
Firms providing investment advisory or discretionary portfolio management services; must assess the suitability of both retail and professional clients - vital for making recommendations or taking decision
to make an assessment of suitability the Firm must obtain the necessary information
investment objectives including risk tolerance
financial situation incredibility to bare losses
knowledge and experience relevant to the specific instrumental service
Should make suitability assessments on all decisions on whether to trade
a famous provider suitability reports and a durable medium to retail clients to Firm makes a personal recommendation and the client:
sell shares or units in a regulated collective investment scheme
sell shares for Investment Trust savings scheme
buys sells surrenders or cancels rights in a personal stakeholder pension scheme
Elects to make income withdrawals from a short-term annuity
entera into a pension transfer or pension opt-out
enters into any transaction in relation to a life policy
other changes to suitability Rules introduced by MiFID II are:
a firm And should assess suitability of an overall package where advice is provided on a package of bundled products or services
a firm remains responsible suitability assessment provided through an automated or part automated system
a firm should ensure information collected about clients reliable
a firm should ensure information about the client is up to date if the firm is providing ongoing advice for discretionary management services
A firm should conduct periodic suitability reports for discretionary management
9 Where a firm decides the services or Investments is not suitable for the clients then no personal recommendation should be made or decisions to trade
when advice or discretionary management involves switching Investments the firm should collect information on existing Investments it cost of benefits of the switch can be analysed
when a service of periodic suitability assessment and reports is provided if reports that are produced can be limited to any charges
3.5.20 explain the rules relating to assessing appropriateness (COBS 10A.2)
churning and switching related to deliberate over trading of client accounts for the purpose of generating commission
Churning relates to Investments generally
switching refers to overtrading within and between packaged products
Firms are also required to test appropriateness where they provide investment services other than investment advice or discretionary portfolio management - typically non-advised services
they must ask the client to provide information about their knowledge and experience in the Investment field relevant and specific type of products or services offered or demanded
firms offer only those products that are inappropriate, if the client demands a product that has assessed to be inappropriate, the Firm must give a warning which can be in standard form that the product is inappropriate
The client wants to crack on regardless of the warnings and it is not in the appropriateness of the client the Firm must warn the client but is unable to judge appropriateness before doing business
3.5.21 explain the rules relating to warning a client (COBS 10A.3)
Insistent clients are those who wish to proceed with the transaction against the advice of an investment firm
FCA States a client should be considered in insistent client where:
the Firm has given the client a personal recommendation
I can’t decide to enter into a transaction which is different from the recommendation
The client wishes the Firm to facilitate that transaction
the Firm should communicate with the insistent client in a way that is fair, clear and not misleading, This should include
the Firm has not recommended transaction and that it would not be in accordance with the firm’s personal recommendation
the reasons why the transaction will not be in accordance with the recommendation
the risks of the transaction proposed by the insistent client
the reasons why I did not recommended transaction
3.5.22 identify circumstances when assessing appropriateness is not required (COBS 10A.4 & 10A.6)
The appropriateness obligation does not apply to a client and non-complex financial instruments
non-complex financial instruments is one that is not a derivative
- 5.23 identify circumstances where own authority or expertise is limited and there is a need to refer to a specialist
- 5.24 distinguish between independent advice and restricted advice (COBS 6.2B)
Independent advice - if a firm claims to be independent it must:
consider a broad range of products
provide unbiased and unrestricted advice based on a comprehensive and thorough analysis of the relevant market
the body advice, inform its clients that it provided independent advice
The FCA has introduced the term ‘retail investment product’
this is wider than packaged products, it includes structured investment products, all investment trusts, unregulated collective investment schemes(UCIS) and any other investment that offers exposure to underlying financial assets but in packaged form
restricted advice - if you don’t give us advice and products from a limited number of providers or only consider certain types of products it will be described as restricted.
firms must disclose in writing and orally before providing advice that they are restricted and explain the nature of the restriction
Dealing and Managing
3.5.25 explain the rules relating to best execution (COBS 11.2A)
best execution = this must contain the process by which firms will obtain the best results for clients this must be kept up to date
when determining the best possible result, the Firm must take into account price, cost, speed, likelihood of Execution and settlement, size, nature or any other consideration as relevant to the order
firms must provide clients with information on their policy and obtain their consent
to trade outside a regulated market or an MTF they must get client consent
firms must be able to demonstrate at the request of the currently executing the orders in accordance with the policy
notion of reasonableness - The Firm should assess and compare the results for the client that would be achieved by executing the order on each of the executed venues listed in the firm’s order execution policy that is capable of executing that order
order execution policy - this allows the Firm to obtain the best possible results for its clients. the Firm must provide the following details on its execution policy in good time:
an account of the relative importance the firm assigns to the execution Factors in accordance with the exclusion criteria, all the process by which the Firm determine the relative importance of those factors
a list of the execution venues in which the Firm places significant reliance in meeting its obligation to take all reasonable steps to obtain on a consistent basis the best possible result for the execution of client orders
a clear and prominent warning that any specific instructions from a client may prevent them from taking the steps that has the and implemented in its execution policy
a firm must review its execution policy annually
3.5.26 explain the rules relating to client order handling (COBS 11.3)
a firm must satisfy the following conditions when carrying out client orders:
the Firm must ensure that all orders are executed on behalf of clients are promptly and accurately recorded and allocated
the Firm must carry out comparable orders sequentially and promptly unless the characteristics of the order or prevailing market conditions make this impracticable
the Firm must inform a retail client about any material difficulty relevance of the proper carrying out of orders promptly upon becoming aware of the difficulty
a firm is not permitted to carry out a kind order or transaction for their own accounts in aggregation with another client order unless the following conditions are met:
it must be unlikely that the aggregation of orders and transactions will work overall to the disadvantage of any clients whose order is to be aggregated
it must be disclosed each clients whose order is the aggregated of the effect of aggregation rework to its disadvantage in relation to a particular order
and all the allocation policy must be established and implemented providing sufficiently precise terms for the fair allocation of aggregated all in Productions including how the volume and price of order determines allocations in the treatment of partial excuses
3.5.27 explain the rules on personal account dealing (COBS 11.7A)
Personal Account dealing - arrangements aimed at preventing conflict of interest and insider dealing by a relevant person - this is defined by the market abuse regulator - this includes:
entering into a personal transaction that meet at least one of the following criteria:
the person is prohibited from entering into it under the market abuse regulation
the transaction involved the misuse or improper disclosure of that confidential information
the transaction conflicts with an obligation of the Firm to a customer under the regulatory system, or any other obligation of the Firm under MiFID
advising of curing other than the proper course of their employment any other person to enter into a transaction and designated Investments which every person transaction of the relevant person would be covered by why the first point or relevant provision
disclosing other than the normal course of his employment any information or opinions or any other person of the relevant person knows that as a result of that disclosure that the other person will or would likely take either of the following steps:
transfer transaction in designated investments would be covered by the first point or relevant provision
to advise a particular another person to enter such a transaction
the firm:
informed promptly of any personal transactions entered into by a relevant person
in the case of outsourcing arrangements must ensure that the service provided to which the activity is outsource maintains a record of personal transactions entered into by any relevant person and provide the information to promptly on request
a record must be kept on personal transactions notified to the firm or identify buy it
these rules do not apply to personal transactions:
effective under discretionary portfolio Management Service
in units of shares in collective undertakings
in life policies
Investment Research
3.4.28 explain the rules relating to investment research produced by a firm and disseminated to clients (COBS 12.2)
nvestment research research or other information recommending or suggesting and investments, concerning one or several financial instruments or issuers of financial instruments, Intended for distribution channels or for the public, and in relation to which the following conditions are met
is labelled on described as investment research or is otherwise presented as an objective independent explanation of the matters contained in the recommendation
if the recommendation in question would be made an investment firm to clients it would not constitute the provision of a personal recommendation
Generally produced by a financial analyst - not inv research unless recommending an investment strategy
When producing IR, a firm should ensure:
No ‘front running’ (dealing ahead) until the recipients have had time to act. Exceptions:
Market maker acting in good faith and in the ordinary cause of market making
in the execution of an unsolicited client order
Firm/employees do not accept inducements with those who have a material interest in the subject matter of the IR
financial analyst remuneration is not been linked to specific recommendations and those who publish investment research which are not supervised by investment banking or sales and trading personnel
3.5.29 explain the rules relating to the publication and dissemination of non-independent research (COBS 12.2)
A firm that disseminates IR produced by another person to the public/clients is exempt from complying with the requirements on IR if the following is met
The person producing the IR is not a member of the group the firm belongs to
The firm does not substantially alter the recommendations within the IR
The firm does not present the IR as having been produced by it
The firm Verifies the producer of the Investment research subject to the Investment research requirements in relation to the production of that investment research or has established a policy setting out such requirements
3.5.30 explain the requirements relating to the production and dissemination research recommendations (COBS 12.4)
Research recommendation produced by a firm must disclose clearly and prominently the identity of the person responsible for reproduction and in particular :
the name job title of the individual prepare the research recommendation
the name of the firm
when is Amazon investment firm a credit institution, disclose the identity of the competent authority of the firm
I must take reasonable care to ensure that
backs in the research recommendations are clearly distinguished from interpretations estimates opinions and other types of non-factual information
its sources for a research recommendation reliable, or if there is a doubt as to whether the source reliable, that is clearly indicated
all projections, forecast and price targets in a research recommendation or clearly labelled as such and the material assumptions made in producing or using them are indicated
the substance of its research recommendations can be substantiated as reasonable upon request by the FCA. a thermostatic and retain sufficient records describe the basis of this substantial
these requirements do not apply in the case of non written research recommendations
Product Governance and Disclosure Requirements
3.5.31 Explain the rules relating to product governance (PROD 3)
Product governance = creation and management of products throughout the life cycle
MiFID II proposals relevant to manufacturers and distributors
Under MiFID II, the obligation to manufacturers are:
Product design including product charges should meet the needs of the target market and firm should identify groups for whom the product is unlikely to be suitable
Firms consider the impact of new products and orderly func on market
Products should be stress-tested
The charging structure should be assessed to ensure it is appropriate
Distribution strategy should meet the needs of the target market
Firms working together to develop a single product should have a written agreement setting out their share of these responsibilities
Compliance function at the firm should monitor product governance, and firm management boards should have effective control and oversight over the process
Firms should provide relevant information distributors
The obligations for distributors are:
Before distribution, firms should consider the target market it is likely to be suitable and any groups for whom it is unlikely to be suitable
Firms should Gather relevant information from manufacturers
distribution strategy should meet me to the target market
product review regularly confirm they remain consistent with target market needs, and make changes to the distribution strategy or other processes if they have ID problems
Firms should provide manufacturers with info on sales and regular reviews mentioned earlier
the firm’s compliance function should monitor product governance
Firms management boards should have effective control and oversight over the process
firms working together to distribute a single product to share information with other firms in the chain
- 5.32 Explain the obligations relating to preparing product information (COBS 13.1 & COLL 4.7)
- 5.33 Explain the FCA’s approach to temporary product intervention (PROD 2)
137D of the FSMA tackle issues relating to specific products, prod feature or marketing practices relating to specific prods.
FCA powers = requiring certain prod feat to incl, exclude or changed, impose restrictions on sales or marketing of the prod, ban on sales or marketing of a prod in relation to all or some types of customer
FSA 2012 - Temporary Intervention Rules (TPIRs) = delay in complying with requirements for public consultation would prejudice the interest of consumers
Allow FCA to take action, inc restricting the use of certain prod feat and requiring that a prod will not be promoed to some or all types of customers
Can prevent prod being sold all together
TRIPs last no longer than 12 months
TRIPs when product is mis-sold.
TRIPs sit alongside reg tools
- 5.34 Explain the rules relating to the form and content of a key features document, key information document (PRIIPS) and key investor information document (COBS 13.2, 13.3, 14.2 & COLL 4.7)
- 5.36 Distinguish between packaged products and retail investment products
Packaged Retail and insurance-based investment products = PRIIPs
PRIIPS covers investments where the amount repayable to the retail invest is subject to fluctuations due to exposure to reference values or to the perf of one or more asset that is not directly purchased by the RI.
PRIIP
Non PRIIP
Packaged retail producsts
Alternative investment funds inc un reg CIS
Unreg CIS that is not AIF
AIFs that are not CIS
Insurance-based invest, structured products, derivatives, and investments issued by some special purpose vehicle
Investment trust saving schemes
Non-life insurance products
Deposits (except structured deposits)
Pensions
Annuities
Debt Securities
ISAs
PRIIP applies only when a PRIIP is being offered
A PRIIP manufacturer is required to
Prepare a KID per PRIIP product
Publish KID on their website
KID - stand-alone, standardised document for each investment (3 sides A4)
KID should contain the following info:
What is the product?
what are the wrists and what could I get in return?
What happens if ( name of the PRIIP manufacturer) is unable to payout?
What’s the cost?
how long should I hold it and can I take money out early?
How can I complain?
other Relevant info
UCITS schemes are PRIIPS - PRIIPS reg not applied until 31 Dec 19 - until then, need to apply KIID
KIID - aimed at RIs, must provide info on the following essential elements in respect of the UCITS scheme
identification of the scheme
A short description of its investment objectives and Investment policy
past performance presentation or performance scenarios
cross and associated charges
it risk/ reward profile of the investment, including previous guidance and warnings in relation to the risk associated with investments in the scheme
KIID updated as freq as the UCITS req - but must after any material change or at least annually and within 35 business days of each calendar year
3.5.35 Explain the rules relating to cancellation rights (COBS 15)
RI right to cancel a packaged product within 14 days, except for life policies or pension schemes where the period is 30 days
Firms must keep records concerning the eright to exercise cancellation/ withdrawal right and must retail them:
Indefinitely - pension transer, pension opt-out or FSAVC
5 years - life police, pension contract, personal pension scheme, or SH pension scheme
Record Keeping and Reporting Information
3.5.37 apply the rules relating to record-keeping for client orders and transactions (COBS 11.5A)
IF records to comply with FCA rules, E.G
Client categorisations with supporting info
Suitability records
IF must keep detailed records for 5 years of every order received from a client and for portfolio management services of every dealing decision
3.5.38 apply the rules relating to occasional reporting to clients (COBS 16A.3)
If IF conducted order on behalf of od client, it must
Promptly provide info concerning the exec of the order
For a RI/RC send a notice confirming the execution of the order - ASAP NLT 1 BD after Exec, if confirmed by 3rd party NLT 1 BD after that receipt
Supply client with order status
For deriv transactions
Maturity, delivery and expiry date of the deriv
If an Option - ref to last exercise date
All essential details req in respect of each contract comprised in the open position and each contract by which it was closed out and the profit/ loss to the client arising out of closing out that position
For exercising an option
Date of exercise - the time of exercise or that client will be notified of hat time on request
Whether the exercise creates a sale or purchase in the underlying asset
3.5.39 play the rules relating to periodic reporting to clients (COBS 16A.4)
Where a firm manages investments on behalf of a client:
RI/RC must provide a periodic statement every 6 months except when - RC requests for every 3 months or on a transaction by transaction basis
If the agreement between a firm and a RC for the managing of invest authorises a leveraged portfolio, the PS must once a month
A firm must inform a RC if they have the right to request 3 month PS. If a firm manages investments for a RC or operates a RC account that includes an uncovered open position in a contingent liability transaction
The firm must report
No later than the end of the business day in which the threshold exceeded or
If the threshold is exceeded on a non-business day, close of the nex BD
A firm must make a copy of any occasional/periodic statement:
For MiFID/3PCB at least 5 years from the date of dispatch
Non-MiFID/3PCN at least 3 years from DoD
3.5.40 Explain the rules relating to reporting on the progress of an authorised fund to unitholders (COLL 4.5)
IOT provide unitholders with relevant info, the Fund manager must:
Prepare a short report and a long report ½ yearly and annually
Send the short report to all unitholders
Make the long report available to unitholders on request
A short report for an authorised fund must contain for the relevant period:
Name of the scheme or sub-fund
Its stated investment objectives and the policy and strategy pursued for achieving those objectives
A brief assessment of its risk profile
For UCITS - the figure for the synthetic risk and reward indicator disclosed in its most up-to-day KIID
Name and address of the authorised FM
A review of the scheme or sub-funds investment activities and investment perf during the period
A perf record
Sufficient info to enable unitholders to form a view on where the portfolio in inv at the EOT period
Any sig info enabling the unitholders to make an informed judgement in the activities of the sch or sub-fund during the period
A statement that the latest long report is available on request.
Client Assets and Client Money Rules
3.5.41 Explain the concept of fiduciary duty
Fiduciary duty = obligation to act in the best interest of another party
The client places special trust upon one person, the fiduciary, to exercise their discretion/expertise when acting for the client
Client Asset Sourcebook (CASS)
Firm Type The highest amount of client money held over last year (or projected to hold over next year) The Highest amount of safe custody assets held over last year (or projected to hold over next year) CASS Large firm CASS Medium firm CASS Small More than £1bn =or> £1m and £10mil and
- 5.42 Explain the application and purpose of the rules relating to the custody of client asset held in connection with MiFID business (CASS 6.1)
- 5.43 Explain the rules relating to the protection of clients assets and having adequate organisational arrangements (CASS 6.2)
- 5.44 Explain the rules relating to depositing assets with third parties (CASS 6.3)
- 5.45 Explain the of the rules relating to the use of clients assets (CASS 6.4)
Client asset custody rules (CASS 6) - firm arrange adequate protection for client assets
Custody rules restrict co-mingling or client and firm assets and minimise the risk of client asset use without the consent
Must not enter into an arrangement for securities-financing transactions unless:
The client has given prior consent to the use of the FIs on specified terms
Use of the client’s FI is restricted to the specified terms which the client has consented to
3.4.46 Explain the rules relating to records, accounts and reconciliations of clients assets (CASS 6.6)
All firms must perform internal custody record checks as regularly as necessary - at least monthly
Record checks must be carried out by one of two methods:
Internal custody reconciliation method - comparison on a particular date between two separately maintain records
Internal system eval method - evaluates the completeness and accuracy of the firm’s internal records/ accounts held for clients
Whether the firm’s SYSC ID and resolve discrepancies in its internal records/accounts of custody assets for its clients
All firms that physically hold custody assets must undertake physical asset reconciliation as often as necessary - at least every 6 months. Performed by one of two methods
Total count method - the count of all physical assets held by a firm on a particular date
Rolling stock method - the count of all physical custody assets held by the firm being undertaken in more than one stage, with each stage referring to a count of a line of stock or group of stock lines
When firm deposits CCA with 3P, the requirements for external reconciliation are:
At least monthly
Between firms internal records and those provided by 3P
3p records may comprise of any appropriate info
Where firms hold physical custody assets, such as paper stock, they are not required to undertake external custody reconciliations in respect of the relevant assets. However, firms would be expected to carry out periodic spot checks on whether the title to an appropriate sample of custody assets they hold is registered in accordance with the CASS rules.
Discrepancies must be rectified immediately
- 4.47 Explain the application and purpose of the rules relating to the treatment of client money (CASS 7.11)
- 4.48 Explain the rules relating to the protection of client money and having adequate organisational arrangements (CASS 7.12)
- 4.50 Explain the rules relating to the segregation of client money (CASS 7.13)
Apply to a firm who receives or holds money from a client in the course of MiFID or desig invest business
Protect investor money in the event of insolvency - must keep client money separate from own
On receipt of client money, a firm must place this money in one or more account opened with a ‘client bank account’ which is any of the following:
Central bank
A Banking Consolidate Directive (BCD) credit institution
A bank auth in 3rd country
A qualifying money market fund
A firm must hold records for the reason it chose the institution for 5 years after ceasing using the institution
All client must be received directly into a client account and not via the firms - unless the alternative approach
Alternative approach = a firm sends written confirmation sent to FCA from firms audito that the firm has SYSC which are adequate to enable to operate another approach effectively
In the course of business if the AP no longer appropriate must cease within 6 months
3.4.49 Explain the riles relating to the depositing of money with third parties (CASS 7.14)
The firm must exercise due skill, care and diligence in the selection, appointment and period ic review of the 3P and arrangements for the holding and safekeeping of those safe custody assets
A firm must ensure any client safe custody assets are identifiable separately from the FIs belong to the firm and from the those belonging to the 3P
Must take into consideration to expertise and market rep of the 3P and any legal reqs or market practises related to holding those FIs
Must make records of the grounds it satisfied itself on the appropriateness of its selection of the 3P
Enters a written agreement with any person with who it deposits clients safe custody assets at a min:
Set out bingin terms of the arrangement
Be in force for the duration of the arrangement
Clearly set out the custody service that the 3P is contracted to provide
3.4.51 Explain the rules relating to records, accounts and reconciliations of clients money (CASS 7.15)
Carried out each business day
External reconciliation if using a 3P who hold client money
A firm may use standard or non-standard methods
Standard methods are:
Individual client balance - calculation of clients money requirements by reference to how much the firm should be holding in total for each of its indv clients, with a positive balance in respect of the non-margined transaction, margined transactions and certain other matters.
Net negative add-back - Firm calculates its client money requirement by reference to the balances in each client bank account, adding any individual clients net position in a specific client bank account that is negative and certain other matters
Non-standard methods of internal client money reconciliation do not meet the reqs placed on firms undertaking one of the standard methods of internal client money reconciliation
3.4.52 Explain the rules relating to mandate accounts (CASS 8)
Mandates give the firm the ability to control a clients assets or liabilities which meet the following conditions
They are obtained by the firm from the client, and with the client’s consent
They are retained by the firm
They put the firm in a position where it is able to give any or all of the types of instructions in (a) to (d)
a) instructions to another person in relation to the client’s money that is credited to an account maintained by that other person for the client
Instructions to another Person in relation to any money to which the client has an entitlement whether another person is responsible to the client for about entitlement
instructions to another person in relation to an asset to the client that person is responsible for the client for holding that asset
instructions to another person such that the client has a debt or other liability to the other person or any other person
Circumstances are such that the clients further involvement would not be necessary for the firm’s instructions described in A to D to give it effect
Mandate can take any written form and need not state that it is a mandate
Supervision and Enforcement Powers of the FCA
3.4.1 Explain the FCA’s risk based approach to supervision and the enforcement and disciplinary powers of the FCA
Supervision model consists of 3 pillars:
Firm systematic framework (FSF)- preventative work through structured conduct assessment of firms - assesses firms conduct risk, checkinging whether interests of customer and market integrity are central to how the firm runs (business model and strat analysis)
Event driven work - dealing with emerging/ happened problems, securing customer redress where req. Outside of the firm assessment cycle
Issues and products - intensive campaigns on sectors of the market or products within a sector that are or may put consumers at risk
Authorised firms two categories = fixed portfolio or flexible portfolio (maj of firms)
Fixed Portfolio firms - have a named supervisor and are proactively supervised using firm-specific continuous assessment.
Flexible Portfolio firms - supervised through thematic and market-based work
If FCA has concerns on a firm’s conduct can cancel the firm’s Part4A
Firm can appeal to the Tax and Chancery Chamber of the Upper Tribunal (independent body of the FCA)
FSA 2012 gives FCA power to ban products after consulting with the market and misleading financial promos.
FCA must follow the procedures when using this power
Give direction to an auth firm to remove its own fin promo or one it approves on behalf of an unauth firm, setting out its reasons for banning it
Firms can make representations to the FCA if they think it is making the wrong decision
The FCA will decide whether to confirm, amend or revoke its decision. If confirmed, the FCA will publish it, along with a copy of the promo and reasons behind its decisions
Following last point firms can appeal to the Upper Tribunal above
FCA can prosecute a number of offences through criminal court including:
carrying on a regulated activity without auth/exemption
making false claims to be auth/exempt
comms an invitation to engage in invest activity in breach of the restrictions on fin promo
Failing to coop with/giving false evidence to an FCA investigator
Misleading the FCA
Insider dealing
Breaches of the money laundering regs
Complaints and Financial Ombudsman Service
- 6.2 Complaints handling, the FOS and the Financial Compensation scheme
- 6.3 Explain the FCA rules relating to handling complaints (DISP 1.3)
FCA has a system for the consideration of complaints against a firm by customers who feel aggrieved and entitled to seek redress
A firm must have effective procedures in place for handling complaints - must be written down
A firm who receives a complaint must send the complainant within 8 weeks of receiving complaints;
A final response; or
A written response that explains why it isn’t in a position to make a final response and indicates when it could provide one
informs the complainant that he or she may now take complaint to fos
encloses a copy of the standard explanatory leaflet
A firm must retail complaint records for 5 years for MiFID business and 3 years for other business
A firm must provide FCA with a biannual complaints report
3.6.4 Explain the role of FOS (DISP introduction and DISP 2) and the Pension Ombudsman
Operates a scheme to facilitate settlement of disputes between a customer and a firm where it hasn’t been resolved
Firm must cooperate with FOS - if no chance of mediated settlement will investigate the complaint
Max award by FOS is £150,000, firm is invited to pay excess but not compelled to do so
FOS direction are legally binding
The Pension Ombudsman
Deals with complaints relating to personal or occupational pension scheme - how they are run
An application to PO needs to be made within 3 years of when an event occurred, if later, within 3 years of when the complainant first knew about it
Legal powers to make decisions that are final, binding and enforceable in court
- 6.5 Apply the rules relating to the determination by the FOS (DISP 3.6)
- 6.7 Explain the procedure and time limits for the resolution of complaints (DOISP 1.4 - 1.6)
Operates a scheme to facilitate settlement of disputes between a customer and a firm where it hasn’t been resolved - can be used by complainant when not resolved within 3 months (must be within 6 years of event or 3 years of the customer knowing the problem and six months after firms final response max)
3.6.6 Distinguish between compulsory and voluntary jurisdiction (DISP intro)
FOS two jurisdictions
Compulsory Jurisdiction - automatically covers firms regulated by the FCA for certain complaints
Voluntary Jurisdiction - covers firms for certain types of complaints not auto covered by law under compulsory jurisdiction. Firms sign up to join the volu juris
Financial Services Compensation Scheme
- 6.8 Apply the rules relating to record keeping and reporting concerning complaints (DISP 1.9 & 1.10)
- 6.9 Explain the purpose of the Financial Services Compensation Scheme (FSCS)(COMP 1.1.7 & 1.1.10A)
- 6.10 Identify the circumstances under which the FSCS will pay compensation (COMP 1.3.3, 3.2.1, 4.2.1 & 4.2.2)
- 6.11 Identify the limits on the compensation payable by the FSCS (COMP 10.2.1, 10.2.2 and 10.2.3)
FSCS deals with complaints against authorised firms that are insolvent or no longer trading
If still trading redress through FOS
Only certain kinds of claim are eligible for comp, in relation to Invest business these are know as protected investment business and are defined as:
Desig IB carried on by the relevant person with the claimant or as agen on their behald
The activities of the manger or trustee of an AUT, provided that the claim is made by a unit holder
THe activities of the auth corp director (ACD) or depositary of an ICVC (open ended investment company (OEIC)) provided that the claim is made by a SH
Claim within 6 years of the date on which the event causing claim occured.
£50K max payout
Money Laundering and Terrorist Financing
3.7.1 Explain the various sourced of money laundering and counter-terrorism regulation and legislation ( FCA rules, SYSC 6.3 Money Laundering Regulations, Proceeds of Crime Act 2002)
Money laundering = criminals disguise source of proceeds of crime
Provide a safe haven for proceeds and financial return on proceeds
Proceeds of Crime Act 2002 (POCA) - covers ML of all criminal activity
It is a criminal act to be suspicious of ML and not reporting it
Terrorism act 2000 - specific obligation to combat terrorist financing
The Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 (MLR 2017) - replaced (MLR 2007) 4th EU directive on ML
Impose on firms a risk based approach to combat ML - breaks down to 4 questions:
What are the firms ML and TF risks
What steps could be taken to reduce this risk
What policies and procedures therefore need to be adopted in light of those risks
What procedures are appropriate
Firms required to conduct customer due diligence (CDD)required to take simplified (SDD) or enhanced DD (EDD) in certain circumstances:
PEP = politically exposed person
FCA rules require firms to appoint a Money Laundering Reporting Officer (MLRO)
3.7.4 Explain the three stages involved in the Money Laundering Process
Placement - physical injection into the financial system of cash or proceeds obtained from criminal activity
Layering - separation of proceeds from source by creating complex layers of financial transactions designed to disguise the audit trail
Integration - the provision of apparent legitimacy to criminally derived wealth - integration schemes place the laundered proceeds back into the economy in such a way that they appear to be legitimate investment funds
Investment services likely a secondary/ tertiary stage
Joint Money Laundering Steering Group (JMLSG)
3.7.2 Explain the role of the Joint Money Laundering Steering Group
JMLSG guidance approved by HM Treasury
JMLSG made up of the leading UK trade associations in the financial services industry
Promotes good practice in countering ML and assistance in interpreting UK ML regs
3.7.3 Explain the main features of the guidance provided by JMLSG
Main requirements are:
Internal Controls, policies and procedures
Identification Procedures
Record-keeping - at least 5 years after completion of business
Recognition and reporting of suspicious transactions - suspicious transaction is one that is inconsistent with an investors known legitimate business or personal activities
Training
3.7.5 Explain the 5 offence categories under UK ML legislation
Assistance - anyone assisting ML punishable by a max of 14 years imprisonment, fine or both
Tipping-off - max 5 years, fine or both
Failure to report - max 5 years, fine or both
Failing to comply - max 2 years, fine or both
False or misleading statement - max 2 years, fine or both
Insider dealing
3.7.6 Explain the meaning of ‘inside information’ covered by the Criminal Justice Act (CJA) 1993
Inside info = non-public info which is price-sensitive info of a specific and precise nature
3.7.7 Explain the offence of insider dealing covered by the CJA 1993
ID is the dealing of public company stock/ securities by individuals with access to material non-public info about the company
Prevent unfair advantage
Three principal ID offences:
Dealing while in possession of inside info
Encouraging another to deal, or knowing that the deal will occur - includes communication that refers to a security that a person may hold and encourages them not to sell
Disclosing info to another other than in the proper performance of one’s duties.
CJA defences to ID
Info passed in the proper performance of duties and recipient not expected to deal
Deal was not done to make a profit or avoid loss
New issue was stabilized under the strict terms of the FCA stab rules
Market maker has inside info in the course of their business but acted genuinely for that business
The person dealing only has the info that certain securities were to be or had been issued, acquired or disposed of, and it was therefore a reasonable deal
Chinese walls = info barrier to prevent CoI between institutional divisions
3.7.8 Identify the penalties for being found guilty of insider dealing
If found guilty of ID:
On summary conviction (in a magistrates court) to a fine not exceeding the statutory maximum or imprisonment for a term not exceeding 6 months or both
On conviction or indictment (in a crown court) to a fine or imprisonment for a term not exceeding 7 years, or both
3.7.9 Explain the FCA’s powers to prosecute market abuse (EG12.3)
FCA has power to investigate and prosecute the criminal offeces of ID and market manipulation.
Part 11 FSMA 200
Failure to provide info to fca = contempt of court
FCA has power to interview suspects under caution and apply for a warrant to enter premises for purpose of search and seizure
Market Abuse
3.7.10 Describe the behaviours defined as market abuse (MAR 1.3-1.9 and the Market Abuse Regulation)
FSMA implemented the EU Market Abuse Regulation - MAR
Extended scope of MAR to MTFs, OTF and certain OTC activities
Prohibition in engaging in market manipulation
Modifying some of the Disclosure and Transparency rules
Provisions of criminal law run in parallel to the Markets Abuse Regime.
Sec 401, 402 of FSMA give FCA power to prosecute a number of offences under FSMA and other law
Most important offences are
Breaches of the FCA listing rules, inc the offering of new security to the public in the UK before publishing a prospectus if req by rules
Making misleading statements and market manipulations
Misleading the FCA
Insider dealing under part V of the CJA
Breaches of prescribed regs relating to ML
Types of behaviours that can constitute market abuse:
ID
Unlawful disclosure - insider discloses inside info to another, other than proper exercise of employment, profession or duties.
Manipulating transactions - false or misleading impression of the price of demand of an investment
Manipulating devices - effecting transactions or orders to trade which employ fictitious devices or other forms of deception
Dissemination - dissem of info which gives false/misleading impression as to a qualifying investment
3.7.11 Describe the enforcement powers of the FCA relating to market abuse (DEPP 6.5C)
FCA can impose a fine for ID or make a statement to the effect that a person has engaged in market abuse and so issue a sanction in the form of a physical penalty.
Market abuse is therefore a civil offence, and does not replace or modify any existing criminal legislation
UK Bribery Act 2010 and Criminal Finances Act 2017
3.7.12 Explain the main features of the Bribery Act 2010 and the UK Criminal Finances Act 2017
BA contains 4 offences
Paying bribes - for a relevant function or activity and improperly awarding them for doing so
Receiving bribes
The bribery of foreign public officials
Failure of commercial organisations to prevent bribery
Birbes to gain business advantage
Cannot show adequate procedures in place to prevent bribes being paid
Relevant Function or activity influence any function of a public nature and activity connected with a business.
CFA raised minimum jail time for bribery from 7 to 10 years
CFA targets corruption, ML and tax evasion - the act makes the following changes
Improved ability to investigate the proceeds of crime
Reform the Suspicious Activity Reports (SARs) regime
Improved civil powers to recover proceeds of crime
Measures to combat terrorist financing
New corporate tax offences to prevent the facilitation of tax evasion - the act creates two new offences within this
Failure to prevent facilitation of UK tax evasion aimed at catching corporations facilitating the evasion of UK taxes
Failure to prevent facilitation of foreign tax evasion
