Chapter 3: CIFs and Banks

Question 1

Who is responsible where investment advice or portfolio management services are provided in whole or in part through an automated or semi-automated system?

Answer 1

The responsibility to undertake the suitability assessment remains with the investment firm and it is not reduced by the use of an electronic system.

Question 2

What conditions should be applied where any indications of past performance may not be the most prominent feature?

Answer 2

Indications must include the appropriate performance information covering at least the preceding five years.

Question 3

What comprehensive information should a firm provide to Clients?

Answer 3

Costs and associated charges in a standardized and easy to understand format.

Question 4

What is a firm’s obligation if it applies different fees depending on the execution venue?

Answer 4

The firm shall explain these differences in sufficient detail in order to allow the client to understand the advantages and disadvantages of the choice of a single execution venue.

Question 5

What is a firm’s responsibility when it provides investment advice?

Answer 5

Firms need to explain in a clear and concise way whether and why investment advice qualifies as independent or non-independent and the type and the nature of the restrictions that apply.

Question 6

What are the requirements for large undertaking in order to be considered as a professional client?

Answer 6

They have to meet two of the following:
• Balance sheet total at least 20 million euros.
• Net turnover at least 40 million euros.
• Own funds at least 2 million euros.

Question 7

What should be reviewed periodically?

Answer 7

Periodically on at least annual basis, the firm shall review the conflicts of interest policy.

Question 8

What should a CIF do in order to comply with the regulations if it is possible to resolve a conflict of interest?

Answer 8

Effective procedures to prevent or control the exchange of information between relevant persons engaged in activities and the separate supervision of relevant persons whose principal functions involve carrying out activities on behalf of, or providing services to clients whose interests may conflict.

Question 9

What would constitute a conflict of interest?

Answer 9

Firms shall take into account whether the firm, a relevant person or a person (in)directly linked to the firm:
• It is likely to make a financial gain, or avoid a financial loss, at the expense of the client.
• Receives or will receive from a person other than the client an inducement in relation to a service provided to the client in the form of monetary on non-monetary benefits or services.

Question 10

When outsourcing critical or important operational functions, who is responsible for the firm’s obligations and what conditions should be met?

Answer 10

When outsourcing, the firm remains fully responsible for discharging all of their obligations. The firm shall ensure that:
• The relationship and obligations of the investment firm towards its clients is not altered.

Question 11

List the general organizational requirements of an Investment Firm (IF).

Answer 11

Ensure that the performance of multiple functions by their relevant persons does not and it is not likely to prevent those persons from discharging any particular function soundly, honestly and professionally.

Question 12

Which conditions must CIFs ensure that are satisfied in order to enable the compliance function to discharge its responsibilities properly and independently?

Answer 12

That the compliance function has the necessary authority, resources, expertise and access to all relevant information.

Question 13

What needs to be informed to a client by the firm that holds his assets?

Answer 13

Whether it is not possible for client’s assets, which are held by third parties, to be identified separately from the instruments of the firm or other clients (and the risks involved).

Question 14

What are the provisions to ensure Investor’s Protection:

Answer 14

Past performance:
• Must include the appropriate performance information covering at least the preceding 5 years.

Simulated past performance:
• Needs to be based on the actual past performance of one or more financial instruments which are the same as the
instrument concerned and satisfy the same conditions as an actual performance.

Future performance:
• Needs to be based on positive and negative performance scenarios in different market conditions and reflect the nature
and risks of the specific types of instruments included in the analysis.

Question 15

What are examples of an execution venue?

Answer 15

• A regulated market
• An MTF (Multilateral Trading Facility)
• An OTF (Organised Trading Facility)
• A systematic internaliser
• Market maker
• Liquidity provider

Question 16

Which obligations should Ifs offering both independent and non-independent investment advice meet?

Answer 16

The IF shall not allow a natural person to provide both independent and non-independent advice.

Question 17

Which steps shall Ifs take in order to ensure that the information collected about their clients is reliable?

Answer 17

Ensuring that all tools employed in the suitability assessment process are fit-for-purpose.

Question 18

Who is responsible for the client in the event of a firm receiving instruction to provide investment services on behalf of a client through another firm?

Answer 18

The instructing firm will be responsible for the suitability of the recommendations or advice provided to the client.

Question 19

Which characteristics of the client must a firm take into account when executing client orders?

Answer 19

The characteristics of the client’s order.

Question 20

What is the purpose of the suitability assessment?

Answer 20

To enable the firm to act in the client’s best interest.