Chapter 4 Flashcards
COBS designated investment business
- 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
Electronic media communications - websites
- 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
Electronic media communications - voice recordings (phone calls) and otehr electronic comms - when they are needed, products in scope, methods of comm in scope
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
MiFID Client categorisation - professional clients
- 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
MiFID Client categorisation - elective professionals tests - quant, qual and procedure
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.
MiFID Client categorisation - eligible counterparties
- 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
MiFID Client categorisation - recategorising clients as elective eligible counterparty
- 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
Classifying agents acting on behalf of client for MiFID
- 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.
Reliance on information provided by other organisations
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)
Financial promotions - what are they + regs of when they can be communicated
- 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)
Approval and exceptions to financial promotions - 3 things to ensure a fin promo is allowed, exemptions
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
Communicating with clients - comm types, rules on what they must contain
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.
Communicating with retail clients must contain these 5 things
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
Past performance details when communicating with clients
- 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
Simulated past performance details when communicating with clients
- Must be based on actual performance of a similar investment/index
- comply with the rules of past performance
Future performance details when communicating with clients
- 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.
Direct offers (AKA invitations) for retail clients - must contain info about…,
- 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
Unwritten financial promotions
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
Unwritten promotions - cold calling
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)
Information disclosures a firm must make to a client - when communicating with them, what doc will the info be provided in, client agreement
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.
Info disclosure rules for advisers of retail clients - what must the firms be?, remuneration and disclosure rules
- 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.
Disclosure documents for retail clients
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
Post sale cancellation rights for retail clients - time periods, prods in scope
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
Disclosures relating to inducements
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.