Chapter 4

Question 1

COBS designated investment business

Answer 1

• Dealing, broking, advising and managing designated investment business.
• Designated investment business can be split into MiFID and Non-MiFID
  MiFID
• Shares, Bonds, derivatives
  Non MiFID
• Packaged products, retail investment products

Question 2

Electronic media communications - websites

Answer 2

• Applies to all clients:
  Firms can communicate with clietns via a website if:
• There is evidence the website is an appropriate method of communication
• the client has consented to the method of communication
• client is notified of the web address electronically
• ifnormation is kept up to date
• the information must be continuously accessible for as long as the client needs it

Question 3

Electronic media communications - voice recordings (phone calls) and otehr electronic comms - when they are needed, products in scope, methods of comm in scope

Answer 3

Must be good quality and kept for 5 years when relating to:
* receiving/executting Client orders
* arranging for a client order to be executed
This is form wuaifying investments that trade on a prescribed mkt.

• includes communications via fax, email, instant messaging etc
• applies to comms with any client or eligible coutnerparty

Question 4

MiFID Client categorisation - professional clients

Answer 4

• Either a per se professional or an elective professional (opt up/down)

To be a per se professional clients must:
* Be an authorised/regulated firm
* government, central bank, supranationals
* other institutional investors (SPVs)
* Large undertakings

large undertakings must satisfy 2 of the below
* Balance sheet of EUR20 million
* Net turnover of EUR40 million
* Own funds of EUR2 million

Question 5

MiFID Client categorisation - elective professionals tests - quant, qual and procedure

Answer 5

Qualitative test
* Required for all business
* Firms must assess expertise, experience and knowledge to provide reasonable assurance around a person’s capacity/understanding.

Quantitative test
2 of the following must be met
* Avrg trade frequency of 10 trades per quarter over the previous 4 quarters
* Portfolio value of more than EUR 500K
* works/worked in fin. svs. sector for 1 or more years in a professional capacity.

Procedure for classification
* Written intent from the client to be classed as a professional
* written warning to the client that they will lose certain protections
* written client consent to lose the protections.

Question 6

MiFID Client categorisation - eligible counterparties

Answer 6

• Eligible counterparty is either a per se eligible counterparty or an elective eligible counterparty
• The classification can only be given to parties dealing ontheir own account and/or executing orders on behalf of clients

Per se eligible counterparties
Certain per se professional can conduct ECP business:
* Authorised/regulated firms
* Govts, central banks and suprantionals

Question 7

MiFID Client categorisation - recategorising clients as elective eligible counterparty

Answer 7

• Only can be done by per se professional clients (that are not individual investors).
• The firm must obtain client confirmation to be treated as an eligible counterparty

Question 8

Classifying agents acting on behalf of client for MiFID

Answer 8

• Where the firm is dealing with A and A is acting on behalf of B (who is another person employing A to act for them) then A should be treated as the client.

Exceptions:
* there is a written agreement between the firm and the agent (A) to treat B as the client
* the purpose of using the agent is to avoid duties owed to B - ie get access to MiFID prods if B is a retail client.

Question 9

Reliance on information provided by other organisations

Answer 9

When firms need to rely on info provided by another organisation:
If the info is received from a MiFID firm:
* a firm may rely on the info and recommendations

If the firm is a non-MiFID firm the firm receiving the info can only rely on it if:
* teh info is in writing
* the non-MiFID firm is independant
* the non-MiFID firm is competent (is MiFID accountable)

Question 10

Financial promotions - what are they + regs of when they can be communicated

Answer 10

• Fin promo= invitation/inducement to engage in nvestment activity communicated in the course of business
• S21 of FSMA 2000 states firms must not communicate a financial promotion unless:
  1. They are an authorised person
  2. the content has been approved by an authorised person (who takes responsibility for the promotions)

Question 11

Approval and exceptions to financial promotions - 3 things to ensure a fin promo is allowed, exemptions

Answer 11

approval of fin promotions
* Before approving a fin. promo. firms must confirm that it meets the relevant regs.
* Firms communicating fin promos produced by a third party won’t breach the rules if:
1. an authorised person has approved the promotion
2. communicates the promo only to the intended audience
3. prmotion has not ceased to be fair, clear and is not misleading

Exceptions
* exempt under the financial promotions order (FPO)
* from outside the UK and cannot have an effect within the UK
* subject to takeover code or any other code
* personal quotes or illustrations
* one-off promotions that are not cold calls

Question 12

Communicating with clients - comm types, rules on what they must contain

Answer 12

Types of communication:
* Communication media:
1. non-written communications - (real time)
2. Written communications - (non-realtime)

Communications with clients:
* Must be fair, clear and not misleading
* Must identify financial promotions clearly
* Some exceptions exist if the fin. promo is made solely to a professional client/eligible counterparty.

Question 13

Communicating with retail clients must contain these 5 things

Answer 13

Firms must ensure that:
* Name of the firm is included on the fin promo
* details are accurate and fair
* the promotion is comprehensible and clear
* the promo doesn’t obscure important items, statements or warning
* Parrticular focus on capital at risk products

Fair, clear and not misleading - amplifies business principles 6 and 7

Question 14

Past performance details when communicating with clients

Answer 14

• Must not be the most prominent feature on the promo
• cover at least 5 years (or life of the investment) in complete 12-month periods
• reference periods and sources must be shown
• State that the past performance is not an indicator of future performance
• Currency is stated and warning of currency risk if applicable
• disclose the commissions/fees and their impact on gross performance shown

Question 15

Simulated past performance details when communicating with clients

Answer 15

• Must be based on actual performance of a similar investment/index
• comply with the rules of past performance

Question 16

Future performance details when communicating with clients

Answer 16

• Must not be based on simulated past performance
• assumptions must be reasonable
• disclose effect of fees and commissions on return
• warn that forescasts are not a reliable indicator of future performance.

Question 17

Direct offers (AKA invitations) for retail clients - must contain info about…,

Answer 17

• Defined as a fin promo containing a method of response for the client to invest in a product (fill out a slip and post it etc).
• Must contain sufficient information to enable the investor to make an informed decision

Must contain information about:
* The firm and it’s services
* Safekeeping of client investments and money #
* costs and charges
* additional info to help the investor understand potential risks/natue of inv for no-mifid business only

Links to the Distance Marketing Directive

Question 18

Unwritten financial promotions

Answer 18

Requirements for all unwritten promotions, regardless of whether they are solicited or unsolicited:
* Fair, clear and not misleading
* Asl whether the client wishes to continue the call and if not, end it.
* provide clients with an appointment with a point of contact in the event of a cancellation
* communicate at an appropriate time of day.
Must identify the following at the start of the relationship/promotions (call):
* the caller (name)
* their employer
* the purpose of the call

Question 19

Unwritten promotions - cold calling

Answer 19

Cold calls =
* An unwritten promotion which is not expressly requested or initiated by the client.

Cold calls are permitted when:
* an exisiting client envisages a call
* all retail clients when the promotion relates to a:
1. Generally marketable packaged product (not a high volatility/unauthorised fund)
2. services relating to readily realisablle securities otehr than warrants (stocks/bonds with a liquid mkt)

Question 20

Information disclosures a firm must make to a client - when communicating with them, what doc will the info be provided in, client agreement

Answer 20

All clients must be provided with the following general information (when relevant):
* Name + address of the firm
* method and language of communication
* name and contact details of the competant authority they are registered with.
* whether the firm is acting through an appointed represntative
* nature frequency and timing of performance reports
* conflicts of interest policy (common pplatform firms)

Usually produced and shared with clients in a standardised form. The info will be provided in an initial disclosure document (IDD) before engaging in business.

All customers must be provided with a client agreement to set out their essential rights, their obligations and the firm’s oblugations.

Question 21

Info disclosure rules for advisers of retail clients - what must the firms be?, remuneration and disclosure rules

Answer 21

• The retail distribution review covers retail investment products
• Firms making personal recommendations to retail clients must either be independant (give full view of mkt) or restrcited.

Renumeration:
* Adviser charges are agreed in adcance with the client as early as is practicible in a durable medium (or website)
* No commisions from the product provider are allowed.
* clients can chose to either pay the adviser chareg upfront or have it deducted from their investments over time

Disclosure:
* Advisers must disclosue their status and costs of service before providing a service or the clietn is bound bu an agreement.

Question 22

Disclosure documents for retail clients

Answer 22

Purpose
* Provide client with enough info about the nature and risks of a prod so they can make an informed decision.

Types of doc
* Key Information Document (KID) - Packaged retail and insurance based inv. prods. (PRIIPS)
* Key investor information document (KIID) - for UCITS schemes
* Key features document (KFD) - any non PRIIP packaged product like pension annuities, ISAs

Question 23

Post sale cancellation rights for retail clients - time periods, prods in scope

Answer 23

Providers of PRIIPS, UCITS and other non PRIIP packaged products must give the client an opportunity to change their mind under the Distance Marketing Directive (cooling-off period).

Cooling off period for:
* Life products and pensions - 30 days
* Other products (ISAs) - 14 calendar days

Question 24

Disclosures relating to inducements

Answer 24

Applies to all customers. Strengthened by MiFID II to reduce risk of conflicts of interest.

For MiFID business:
* a firm must not pay to or accept from a person other than the direct customer, anu fee/commission/non-monetary benefit UNLESS:
1. the fee is designed to enhance the quality of service to teh customer
2. the fee does to impair the firm’s duty to act in the best interest of the client.

Disclosure:
* firms must disclose the exisitence, nature and amount of the fee to the customer before providing the service

• Fees that are proper and necessary for the provision of the business (custody costs, legal fees, etc) are allowed.
• Prohibition doesn’t apply to minor non-monetary benefits.

Question 25

Information disclosure of paid for research - research payment acc, what forms must disclose

Answer 25

• Firms must charge when providing research to other firms.
• teh receiving firm can only use the research if they paid for it with either direct payments to the provider out of it’s own resources or payments from a seperate research payment account controlled by the provider.

research payment account
* Account can only be funded by a specific research charge agree with and charged to the customer

The firm must disclose:
* The budget and charges before providing the svs.
* Annua information on the total costs that each customer has incurred for the research.
* The firm must also regularly assess the quality/effectiveness of the research.

Question 26

Avising and sellling standards - suitability

Answer 26

• applies to all customers
• requires firms to obtain sufficeint info abou a client to give them advice regardless of whether they are retail/MiiFID
• Done during the aplication process (acting as an investment manager for discretionary services or under personal recommendation for advisory services)
• ‘Fact finding’ used to find relevant personal info.
• give suitable advice based on the info found about the client in order to:
  1. meet inv objectives (pro and retail clients)
  2. ensure the client can bear the risks and losses for pro and elective clients
  3. the client has the neccessary knowledge and experience to understand the risks (retail only).

Curning and switching are considered unsuitable

Question 27

Avising and sellling standards - suitability report

Answer 27

• For retail clients
• Purpose= to confirm why the firm believes the reccomendation is suitable and should be provided for both Non-MiFID and MiFID investments.

the form should
* specify the client’s demands and needs
* explain why the firm believes the transaction meets the needs
* explain any possiblle disadvatnages of the transaction

Details on issuing hte form:
* Provided in a durable medium before the contract is conlcluded
* timing can be delayed if the agreement is concluded at ditance and the client agrees to the delay.

Question 28

Appropriateness tests - MiFID or non MiFID

Answer 28

• applies to all customers
• purpose = ensures the firm obtains sufficient information to assess if a product is appropriate for the customer - applies to MiFID business (for retail and pro clients) and direct offers (retail clients)
• before acting, firms must asses whether a client can bear the fin. risk and potential loss in relation to the prod/svs and that they understand the risks (retail clients only)
• Warnings must be provided if the firm believes the prod is inappropriate for the client or the client hasn’t provided sufficient info for the firm to draw a conclusion.

Not required for execution only business involving non-complex financial instruments

Question 29

Suitability and appropriateness flow chart on phone - CHECK IT

Question 30

Conflicts of interest

Answer 30

• Applies to all clients
• apply to services provided by firms irrespective of client or counterparty
• conflicts must be indentified and managed effectively - principle 8
• A firm must develop systems and controls to manage/disclose conflicts (SYSC)

Conflicts policy
* Prepare maintain and implement a conflicts policy
* in writing
* must identify potential conflicts revelenat to the firm
* specifies procedures to managed conflicts
* provide retail clients and potential retail clients with a copyy

Managed used organisation controls like chinese walls.
Breaches must be disclosed in a durable medium - this is a last resort

Question 31

Chinese walls

Answer 31

• internal arrangements t restrict the flow of confidential information internally.
• Not mandatory but if used, they must be monitored and effective

Surprised they’re allowed to call it this…

Question 32

Independant investment research - exemption and rules

Answer 32

• Applies to all clients
  When a firm publishes research to clients it must ensure:
• that it does not receieve inducements from those with material interest
• not to promise issuers favourable coverage in the research
• issuers covered are not permitted to review drafts of the research
• An FCA firm must not knowingly deal for it’s own account until the clients who are meant to revieve the research have tome to react to it.
• Exemptions are if the firm is a market maker dealing in normal course of business and for unsolicited client orders

Question 33

Personal account dealing

Answer 33

Purpose
* to prevent inappropriate dealings which are prohibited under the mkt abuse regulation, involve misuse or disclosure of confidential info or conflict with the firm’s oblogations to the client

Arrangements:
* relevant persons are aware of the restrictions (nofications/permissions)
* relevant persons inform the firm of their dealing
* firms record all notifications, including copies of transaction confirmation

Question 34

Personal accoutn dealing exemptions

Answer 34

Following are exempt from PAD:
* independantly managed funds
* shares in certain classes of fund (big ETFs, etc)
* life policies

Question 35

Best execution

Answer 35

purpose
* firms must take all sufficinet steps to obtain the best possible result for it’s clients, taking into accountt the execution factors

Execution factors
* price, costs, speed, lilihood of execution and settlement + any other relevantt consideration

Criteria:
* Client catagorisation
* order type
* type of instrument being traded
* characteristics of execution venues

Question 36

Order executtion policy - purpose, info for retail clients, written 2 way agreements, specific client instructions

Answer 36

Used to practically achieve best execution

purpose
* ensuer firms obtain the best possible result for the client. Policy must be sent to the client before providing services

Prescribed information (retail)
* list of execution venues
* factors affecting a firm’s choice of venues
* warning about specific client instructions

Written 2 way agreements - for all clients:
* monitored and reviewed annually
* notify clients of any material changes

specific client instructions
* When acting on specific client instructions - a firm will have met best execution if it follows those instructions exactly

Question 38

Client order handling

Answer 38

Purpose
* promot, fiar and expeditious execution of all client orders

in general orders should be:
* promptly recorded and allocated
* carried out sequentially (first in, first out)

exceptions (notify retail clients of these)
* it is in the best interest of the client not to trade
* material difficulty on executing

Question 39

Best execution: agregation

Answer 39

Agregation is permitted when:
* it is unlikely to disadvantage the client
* disclose (orally or written) that on some occasions aggregation may be a disadvantage to the client

order allocation policy must be in place to outline how how aggregated transactions are managed

Question 40

Allocation rules for agregation

Answer 40

• must be allocated in a timely manner and in accordance with the order allocation policy
• clients must take priority and execution be allocated to client trade execution first

Exemption:
* the firm has reasonable grounds to allocate the executtion proportionally as it will materially benefit the client

Question 41

Limit order rules

Answer 41

• Limit orders that the firm cannot immediately execute must be made public immediately so another provider can potentially fill the order to meet best execution

Exemptions:
* client instructed not to make the trade public
* the limit order is greater (big fuck off trade) than the normal market size

e.g. client wants to buy 1000 shares @ £450 and mkt price is £500.

Question 42

Reporting to clients - transaction confirmations - exemptions for MiFID and non MiFID business, purpose and how/when should it be confirmed

Answer 42

• applies to clients

purpose:
* ensures clients are advised of the essential details of a transaction

requirements of confirming a transaction:
* must be in a durable medium
* must be done promptly no later than the next business day

Exceptions:
* for mifid business - no need to confirm
* for non-mifid business - only required if requested

Question 43

periodic statements

Answer 43

• Must be provided at suitable intervals
• Must be provided if the portfolio gets claarted (depreciated notice of a 10% or < fall in value)

Should include:
* portfolio value
* portfolio composition
* total dividends and interest earned
* total fees and charges deducted

Timings:
* general rule - prepared and sent out promptly every 3 months. (clients can ask for additional annual statements)
* Derivatives/leveraged portfolios - prepared and sent out promptly every month. Clients must also be notified if the portfolio/a position falls below a certain threshold.

Question 44

Purpose of client money and custody rules

Answer 44

• Applies to all clients
• Provides protection to client assets/money in the eventt the bank/firm hlding them goes bankrupt
• Cass 6 - custody rules - applies to MiFID and Non-Mifid business
• Cass 7 - client money rules - applies to MiFID business and non MiFID business can Opt-in
• Assets must be segregated from the firms to protect the mn the event of liquidation
• client money can be held in an approved third party bank and indentified as seperate to the firm’s cash

Question 45

Reconciliation - timeframe, shortfall process, what happens if a firm cannot reconcile

Answer 45

Reconciliation requirements:
* Reconcile records of client asset balances as often as necessary
* shortfalls must be corrected ASAP - i.e. close of business on teh same day of reconciliation for client money held by the firm
* A firm must write to the FCA if they are unable to reconcile

Question 46

Reconciliation exemptions

Answer 46

• ICVC and UCITS schemes
• incoming EEA firms (except insures who remain inscope)
• BCD credit institutions
• Coins held for the value of their metail (i.e. gold coins)
• miney held for deliver vs payment must be settled in 3 days max
• money due and payable to teh firm

Question 47

Enhancing the CASS regime - 4

Answer 47

CASS audit
* required to auddit CASS annually and report finding to the FCA within 4 months of the audit
* client assets assurance standard set the the financial reporting council
* firms must explain any breach indetified

rights of use
(where the right to use the client’s assets is transfered to a firm)
* Rehypothecation
* right to use clause (signs the assets over to the firm)

Cass resolution pack
* specific documents and info relatingg to client money and assets
* should be able to get hte info within 48 hours
* must be available to the regulator on request

Mandate accounts
* where a client gives the firm control over their assets/liabilities (direct debits, paypal, etc)
* firms ust establish and maintainadequate records and controls

Question 48

Record keeping - notes on phone

Answer 48

• If a client does not recieve the info being recorded - must be stored from the creation of the firm’s record
• if the doc, etc doesn’t create a contract/relationship with a client the doc must be stored from the day of dispatch
• if the doc DOES create a contract/relationship with a client the doc must be stored from the end of the contract/relationship

Question 49

record keeping time limits

Answer 49

General rule from the date of dispatch
* 3 years for noon mifid business
* 5 years for Mifid business
Assumes COBS is MiFID business

Pension contracts, stakeholder pensions and life assurance (long term - non MiFID)
* 5 years

pension transfers and opt-outs, free standing additional voluntary contributions (FSACs) [occupation pension schemes]
* indefinitely

recordings of phone communications regarding executtion of client orders
* 5 years from the creation of the record

records kept offsite must be readily accessible

Question 50

COBS/CASS sumary card

Answer 50

Rules applicable to all clients (retail, pro and eligible):
* Client catagorrisation
* most info disclosure rules
* conflicts of interest rules (inc. chinese walls, inv. research and PAD)
* occasional and periodic reporting rules
* client assets/money

rules only applicable to retail clients
* fin promotions rules
* Suitability reports
* tetail inv. prod disclosures (KFDs, KIIDs and KIDs

everything else applies to retail and pro clients

Question 51

Done!

Question 52

Durable medium

Answer 52

Paper, floppy disks, CDs, DVDs, emails (or hard drive if recipient’s computer)

WEBSITES ARE NOT DURABLE MEDIUMS