Chapter 4: Conduct of Business Sourcebook (COBS) Flashcards
What is a main regulation that was implemented within COBS?
MiFID
Which firms does COBS apply to?
UK firms acting in the UK with UK clients
MiFID rules
No longer firms acting in the EEA
When is there an exception on who COBS applies to?
On a home state basis - COBS applies to all unless PAD
Which activities are eligible COBS (authorised activities)?
Long term insurance contracts, such as life insurance, designated investment business and when accepting deposits.
What is an appointed representative?
A firm that provides services to an FCA authorised firm.
How is COBS applicable to appointed representatives?
Appointed representatives are exempt from COBS as they are acting as a principal firm which can have a range of responsibilities. Firms must ensure appointed reps are in lien with COBS when communicating financial promotions.
How has the FCA updated its rules in relation to the movement of communication from a physical medium?
The FCA has defined durable medium as either through paper or where information can be stored as a durable medium.
What does the FCA require in relation to communication via a website?
Websites must have up to date information.
Websites must be used in suitable context - clients must have access to websites permanently
Clients must provide consent to receive information in website form
What are the client categorisation rules within MiFID?
Clients must be categorised as either a retail client, professional client or an eligible counterparty.
What is the difference between client categorisation in MiFID and non-MiFID business?
Same terminology is used for clients, but there are different categorisation criteria.
How are firms categorised if they complete a mix of MiFID and non-MiFID business?
MIFID categorisation takes precedent.
What is the definition of a client within COBS?
A firm that does or will potentially provide services to an entity currently or at a future date.
How is a (per se) professional client defined within MiFID?
Professional clients are defined as any client who acts in financial markets. For professional clients, they can also be defined as a firm with large undertakings?
For MiFID and Non-MiFID business, how are firms categorised with large undertakings?
MiFID Business:
20 million balance sheet
40 million turnover
2 million in funds
Non-MiFID Business:
Earnings have in the past 2 years been 5 million
12.5 million balance sheet
25 million turnover
Average 250 employees
What is the difference between a professional client vs ECP in COBS?
ECPs are not qualified as firms with large undertakings. ECPs are the highest ranking of clients and can only be qualified when active in the financial markets. Companies qualify as ECPOs when:
Executing orders
Deal on their own account
Receive and transmit orders
Who is treated as the client when an agent is being used?
The agent is treated at the client unless agreed otherwise.
What is an elective professional client?
Retail clients can be treated as an elective professional client. This occurs when:
The firms has assessed the clients expertise and knowledge and believes they can understand rissk involved (qualitiative test)
Client has carried out 2 of the following
10 significant transactions ion relevant markets
portfolio is greater than 500000 euros
Client has worked in finance for a year which requires knowledge of transactions envisaged
What is an elective eligible counter party?
Professional client can be treated as an EECP if it is a per se professional client and tehy request to be treated as an ECP unless they are an instiutional investor.
When is a client recategorised?
When a client requests to be recatgorised or a firm recategorises a client on their own initaitive. Recategorisation can be for a clients whole book, or handpicked trades
What provisions are lost for a client who is an elective professional client rather than being classified as a retail client?
Communicatign with clients
Info about the firm
Suitability
Appropriateness
Dealing and executing orders
Client reporting
What are the rules for notifications of client categorisation?
New clients must be made aware of their categorisation and be made aware they can request to recategorise.
When does to the requirement to enter into a client agreement apply? How must a client agreement be documented?
When a firm is undertaking designated investment business for a retail client and for MiFID business and ancillary services. It does not apply to insurance firms offering life insurance policies.
Client agreement with retail clients, it must be documented on paper or a durable medium.
Must be done for retail and professional clients.
What should a firm offering services do before a client is bound by a client agreement?
Clearly lay out the terms of the agreement and details about the firm and the services offered by the firm.
How long must a client agreement be maintained?
The longest of:
5 years
duration of relationship with the client
in pension transfer, pension opt outs and additional voluntary contributions indefinitely
What information must be disclosed as a result of COBS rules on MiFID business?
Firm and its services
Designated investments, proposed strategies and warnings on associated risks with these
Execution venues
Costs and associated charges
These requirements are required for professional and retail clients.
When must firms conducting Non-MiFID business disclose the same information as firms conducting MiFID business to clients?
When providing information to a client in relation to derivatives, warrants or stock lending.
What information about the firm must be given to retail, and professional clients as well as ECPs?
Address
Languages used for communication between the parties
Methods of communication
A statement that the firm is authorised
A statement if the firm is acting as an appointed rep
Nature and frequency of reports
Info on conflict of interest policy of the firm
Firms which hold client money or investments are required to provide what information to the client?
money may be held by a third party on the firms behalf
firms responsibility in case of omission of that hird party
what would happen if teh third party became insolvent
teh risks if teh money cannot be separately hel;d / designated by the firm
if teh investment are subject to non-UK law, what this means for the client
…
If a firm manages investments for a retail client, what info must be provided?
Method and frequency of valuating investments on clients portfolio
Details of delegation of discretionary management
specification of any benchmark used
types of investments and transactions used in the portfolio
objectives and level of risk
What must a firm disclose about costs to retail clients?
Total price and all related fees
Itemised charges by the firm
If paid in foreign currency, what rate is to be used when converting
When should client information be provided by?
Within good time, or immediately after provision of services if the clients request the info and could not receive the info previously or if the firm complies with the rule of telephone communication.
What are the FCAs 6 consumer outcomes related to Fair Treatment of Customers (FTOC)?
Firms centralise fir treatment
Products and services are designed to meet the need of customers
Customers re informed at all points of sale
Advice is suitab;le
Products perform as customers expect
Customers do not face unreasonable post sale barriers
How should firms manager their treatment of customers?
Through MI and they must be able to demonstrate they treat customers well
What general obligation did MiFID introduce?
Firms act fairly, honestly, professional and in best interest of the customer
When is it an offence under FSMA to market a financial promotion?
when the person is an unauthorised firm or the financial promotion has not been approved by an authorised firm
What exemptions apply to financial promotions?
Qualifying credit, or a home purchase plan
Promotion for non-investment insurance contracts
Unregulated CIS
Credit agreement / credit regulated activity
In short, financial promotions do not include mortgage related activity, credit related activity, insurance related activity or unregulated CISs - these exemptions apply mainly for delegated investment business
When do financial promotion rules generally not apply?
To clients who are ECPs.
Which principles are the financial promotion rules consistent with?
Principle 6 - treating customers fairly
Principle 7 - ensuring clients have correct info
Which firms are subject to consumer duty (principle 12)?
ARs, outsourced services and unregulated wholesale and lending firms.
How can the FCA remove financial promotions?
Give direction to remove with reasons to authorised firms
Firm can appeal
If this is unsuccessful, the FCAs decision is published with reasoning
How must communications and promotions be Fair, Clear and Not Misleading?
It must be clear that the clients capital is at risk
Those quoting yields must give a balanced overview of short, medium and long term prospects
On complex products, all incomes must be clear
If some areas of an authorised firms are not FCA regulated, this must be made clear
Packaged products by other firms must be made clear.
What does the FCA recommend when firms are drafting promotions for deposit accounts?
Code of Conduct for the Advertising of Interest-Bearing Accounts
Who produced the Code of Conduct for the Advertising of Interest-Bearing Accounts?
The Building Societies Association
What does the FCA require to prevent greenwashing?
Any claims made in promotion are made consistently with sustainability characteristics and are fair, clear and not misleading
What are the exemptions to the financial promotion rules?
Excpetions for UHNWI and sophisticated investors
Financial Promotion Order (FPO) - if promotion is from outside Uk and has no affect on UK investors
Subject to takeover code
One off promotion that are not cold-calls
What are the thresholds for a HNWI to be exempt from the financial promotion rules?
Income of at least £170000
Net assets of at least £430000
How was the criteria amended for the self-certified sophisticated investor?
Requirement for investment into an unlisted company within last 2 years was removed
Company turnover criteria increased £1.6 million
Requiring businesses to provide details of themselves
updated title of certified HNWI to remove certified
Updating HNWI and certified sophisticated investor statements
Applied these changes to relevant equivalent for CISs
What are the types of communication?
Real time
Unsolicited real time (cold calls)
Non real time
Direct offer financial promotions
What do Prospectus Regulation Rules apply to?
Admission to trading, transferable securities when a prospectus is required under FSMA and when an election to produce a prospectus has been made
What rules must firms follow when communicating with a retail client?
Firms name
Indformation is accurate
Information is sufficient
Information
When do COBS suitability requirements apply?
Making personal recommendations on designated investments
Managing investments
Managing the assets of an occupational pension scheme
What is churning and switching?
Churning is the process of over dealing, driving up charges. Switching is the act of selling one investment, and replacing it with another
