Chapter 4: The FCA Conduct of Business and Client Assets Sourcebooks

Question 1

What is COBS?

Answer 1

• Contained in Business Standards block of
  the FCA Handbook and contain rules focused on outcomes.
• Implemented provisions of MiFID realating to conduct of businesses
• Also contains provisions for investment firms that are not subject to MiFID.

Conduct of Business Sourcebook (COBS)

Question 2

What is the general application rule of COBS?

Answer 2

• COBS applies to UK Firms carrying out MiFID activities for a UK Client within the UK.
• Does not apply to UK MiFID firms carrying out UK MiFID activity in an EEA member state
• Applies to Non-UK MiFID firms who have branches that are locate within the UK (classifed in COBS as third-country firms) .
• Firms where their appointed representative carries out certain regulated activity (although does not apply to the appinted representative)

Question 3

What activities are subject to COBS

Answer 3

1. Designated Investment Buisnesses
2. Long-term Insurances businesses (i.e. life insurance)
3. Deposit Accepters

Question 4

Are Appointed Representatives of a firm subject to COBS?

Answer 4

No. Appointed Representatives are exempt from COBS and dont need approval as they carry out activity on behalf of a firm where the firm accepts responsability.

Firms need to enforce COBS on their representatives to ensure compliance, specifically for financial promotion content.

Question 5

What does COBS say about website promotion to a client?

Answer 5

1. Client needs to consent to receiving it in the type of electronic form
2. Need to evidence access to internet i.e cleint provided email
3. Website information needs to be up to date
4. Information is accessable for a resonable period for client inspection
5. Client needs to know how to where and how to access it

Question 6

What are three 3 catagories of clients under COBS?

Answer 6

• Retail Client
• Professional Client
• Eligible Counterparty.

Classification determines the level of protection the client receives. Retail has the most, eligible counterparty the least.

Question 7

Under COBS client catagories. Who might “per se professional clients” be referring to?

Answer 7

• An entity required to be authorised or regulated to operate in the financial markets.
• Large Undertaking Companies

Credit institution, insurance companies, institutional investor, national/regional governments, certain public bodies.

Question 8

Under COBS client catagories. Who would fall under eligible counterparties (ECPs)?

Answer 8

A client can only be categorised as an ECP for the following types of business:
* Executing orders, and/or
* Dealing on own account, and/or
* Receiving and transmitting orders.

Same list as per se professional clients (without Large undertakings).

Many COBS rules do not apply when a client is an ECP. These ECP firms tend to be large players and dont need COBS rule protection.

Question 9

Under COBS Client Classification, if an agent is acting on behalf of a client where the entity using the agent is simply reducing its duties. Who should be treated as the client?

Answer 9

The entity hiring the agent.

Question 10

Under COBS Client Classification, if an agent is acting on behalf of a client where there is no written exception or reduction in dutuies through the use of an agent. Who should be treated as the cleint?

Answer 10

The agent.

Question 11

Under COBS classification what is an elective professional client?

Answer 11

A retail client that is classed as professional only if a firm has assesed the clients competancy through qualitative testing (needs 2/3):
1. Client carried out >10 transactions of similar size in similar market within the last 4 quarters
2. Their portfolio >$500k
3. Works/Worked as a professional in finanical services >1year.

.

Client needs written evidence that they want reclassed, then the firm must provide warning of risks to them and the cleint must reply that they are aware of this.

Question 12

Under COBS classification what is an elective eligvile Counterparty client?

Answer 12

A professional cleint who meet ECP qualitative test criteria, are a
per se professional client and requests to be ECP.

Criteria:
* Portfolio >£10mn
* 10 transaction over the last 4 quarters of same size in similar market.
* Is the administering authority of the Local Government Pension Scheme
* Authorised to act on behalf of a firm who meets the above conditions.

Question 13

Under COBS Client Agreements. Who to and when must a firm provide an agreement?

Answer 13

In good time before the below retail client is bound by the agreement

It does not apply to insurance firms issuing life policies as principal.

Question 14

Under COBS what information must the frim produces for its clients?

Answer 14

• Information about the firm (address, contact details, authorisation, report frrequency…)
• Information Relating to Managing Investment (valuation frequency, benchmark against performance, type of investments incl limits…)
• Information on Safeguarding Investments/Money (money held with third part, subject to interest…)
• Disclosure of Costs (fees, expensives, ADLs, tax, FX on cash flow, compensation schemes, charges not covered by the firm).

Question 15

What are the 6 consumer outcomes of the FCA’s Fair Treatment of Customer inniative?

Answer 15

1. Consumers can be confidend that they are dealing with a firm where FOTC is central
2. Products and Services marketed and sold in the retail market are designed to meet the needs of the consumer.
3. Consumers get clear information and are appropriately infromed
4. Advise given is suitable and take account of their circumstances
5. Service is as expected.
6. Consumers dont face unresonable post-sale barriers imposed by firms to change product, switch provider, submit complaints.

Question 16

What are the 2 main offences under finanical promotion?

Answer 16

1. The person is not an authorised person or firm
2. The financial promotion has not been approved by an authorised firm.

Question 17

What products are typically exempt from financial promotion rules under COBS?

Answer 17

1. Qualifying credit, a home purchase plan or a home reversion plan
2. Non-investment insurance contract
3. Promotion of an unregulated CIS (these arent allowed to promote)
4. Promotion that relates to a credit agreement, a consumer hire agreement or a credit related regulated activity.

Most dont apply to an ECP

Financial Promotion Rules are consistant with PRIN 6 & 7.

Question 18

If a firm is subject to PRIN 6 & 7 but also Consumer Duty. What PRIN supersedes this?

Answer 18

PRIN 12 Consumer Duty

Question 19

Can the FCA remove financial promotions?

Answer 19

Yes. Immeditely without needing to go through the FCA enforcement process. they can also stop finanical promotion from launching/being used in the first place.

Question 20

What is the purpose of the anti-greenwashing rule?

Answer 20

To ensure that sustainability characteristics of the product are fair, clear and not misleading.
Are consistant with the characteristicts of the products to the service.

Question 21

What are the 4 exceptions to financial promotion rule are there noted in the Financial Promotion Order, FPO?

Not in relation to products.

COBS 4

Answer 21

1. Promotion to high-net worth individuals and sophisticated investors
2. Promotion that cannot have an effect within the UK or happen outside the UK.
3. From outside UK but would be exempt under FPO.
4. One off promotions that are not cold calls
5. Subject to Takeover Code

This does not typically apply to UK MiFID.Businesses

Question 22

What is a direct offer financial promotion?

Answer 22

Promotions which make an offer to any person to enter into an agreement and include a form of response or specify the manner of responding.

For retail client targeted promotions, it must contain:
* Information about firm, services and management of investments
* Safekeeping ofcleint investments and money
* Costs and charges
* Risks and tax information where relavent.
* Mention of Prospectus and where to get it

Can include ads in newspaper, trade magazines, direct mail

Question 23

What must prospective advertising do to remain compliant?

Answer 23

1. States a prospectus and where to get it
2. Recognisable as an investment
3. Not inaccurate or misleasding
4. Consistant information with prospectus.

needs to be bold and prominenet in he advert.

Question 24

What set of rules dont apply when prospectus regulation rules (PRR 3.3) apply?

Answer 24

COB 4 - financial promotion rules

Question 25

When does PRR 3.3 Apply?

Prospectus Regulation Rules for Financial Promotion

Answer 25

Prospectus Regulation Rules PRR 3.3 applies to offers, or admission to trading, of transferable securities where a prospectus is required/produced under FSMA

This refers to finanical promotion

Question 26

What are considered high-risk financial promotions?

Answer 26

1. Non Mass Market Investments (NMMI)
2. Restricted Mass Market Investments (RMMI)

Question 27

When firms reference thier past performance, what considerations must be met under COBS 4?

Answer 27

1. Past performance is not the most prominent feature
2. Covers performance over 5 years, or period where it has been offered when and only when its over 12 months.
3. Reference periods and relevant sources are shown
4. Indication that it is showing past performance.
5. Any currency figures quoted other than GBP highlight FX fluctuation risks
6. If performance is gross, all associated fees, commission and tax are disclosed.

Question 28

When firms use simulated past performance to promote a product what must it do?

Simulated performance can be used for new products, or one that doesnt have a track record yet

Answer 28

1. Use an financial index
2. Based on actual past performance of simiar products
3. Meet past performance rules with exceptions
4. Contains a warning that it is not a reliable indicator

Question 29

When firms use future performance to promote a product what must it do?

Answer 29

1. Not based on simulated past performance.
2. Be based on resonable assumptions with objective data evidenced.
3. Disclose all additonal costs if gross.
4. Contains warnings that future performance is not a reliable indicator

Question 30

What requirements are needed for approving financial promotions on behalf of a unauthorised firm?

Answer 30

1. Authorisation/Approval (Part 4A).
2. Gateway Approval

The firms approving also need to ensure the promotion meet the COBS 4/FPO/PRR 3.3 requirements

Question 31

What are some risk warnings requirements that are to be included in retail investor promotions?

Answer 31

1. Stating that they could lose money
2. Risk Summaries
3. Banning of Incentives to Invest
4. Cooling Off Priods
5. Personalised Risk Warnings
6. Client Cataogrisation
7. Appropriate tests
8. record keeping requirements
9. Displaying name of approver and date promo was approved.

Question 32

What is a qualifying crypto asset?

COBS

Answer 32

Any ‘cryptographically’ secured digital representation of value or contractual
rights that is transferable and fungible, but does not include cryptoassets which meet the definition of electronic money or an existing controlled investment.

Activities in scope of FPO incl: dealing in securities and contractually based investments, arranging deals in investments, managing investments, advising on investments, and agreeing to carry on specified kinds of activity.

Question 33

What are the legal ways to promoto cryptoassets?

Answer 33

1. By way of an authorised person (either they are or it is approved by them)
2. On behalf of an FCA registered crypto business under MLR
3. By way of another FPO exemption

Question 34

What does it mean from a promotional standpoint if an asset/product is classed as a Restricted Mass Market Investment (RMMI)?

Answer 34

“Restricted Mass Market Investments”, meaning that they would be permitted to be mass marketed to UK consumers subject to certain restrictions.

Restrictions incl: Clear risk warnings, incentives to invest, cooling off period ect.

Question 35

For Unwritten Financial Promotions, what requirements must be met?

Answer 35

1. Appropriate time of day
2. Identifies what firm they represent at the beginning
3. Confirmation if client wants to continue after the above
4. Provide contact details

Question 36

What are some code calling rules in financial promotion?

Answer 36

1. Only promote to existing clients or ones that would expect a call
2. The product relates to non-high-risk, marketable products not linked to life insurance
3. Is a controlled finanical activity

Question 37

Can a UK firms typically communicate promotions from overseas firms?

Answer 37

No. Unless the promotion has its approver name, states that protections wont apply and details of the oversea compensation and protections schemes.

Question 38

If a non-MiFID business communicates a financial promotion that has been produced by another party?

Answer 38

No as long as they have confirmed it was approved by an authorised firm , communicates it to the intended recipeint and is not misleading.

Question 39

COBS 1-22 Overview

Reminder (dont need to answer)

IOC Covers: 1-4, 6, 8-16,

Answer 39

COBS 1: General Application
COBS 2: Conduct of Buisness Obligations
COBS 3: Client Catagorisation
COBS 4: Communicating with Clients (incl financial promos)
COBS 5: Distance Communication
COBS 6: Information about the Firm, its Services anad Remuneration
COBS 7: Insurance Distribution
COBS 8: Client Agreements
COBS 9: Suitability
COBS 10: Appropriateness
COBS 11: Dealing and Managing
COBS 12: Investment Research
COBS 13: Preparing Product Information
COBS 14: Providing Product Information to Clients
COBS 15: Cancellation
COBS 16: Reporting Information to Clients
COBS 17: Claims Handling for Long-Term Care Insurance
COBS 18: Specialist Regimes
COBS 19: Pensisons Supplementary Provisions
COBS 20: With Profits
COBS 21: Premitted Links and Conditional Permitted Links
COBS 22: Restrictions on Distribution of Complex Investment Products

For IOC, dont learn COBS 5, 7, 17, 18, 19, 20, 21, 22

Question 40

What is MiFID II?

Answer 40

Regulatory frameworks implemented in the European Union (EU) to govern financial markets and provide investor protection.

Firms need to adhere to this to acccess and trade in EU Products, reagrdless of where they are.

It mainly differs from MiFID as it now applies to all types of securities and derivatives where before it was mainly just equities.

Question 41

What are some examples of when COBS (9) rules on suitability apply to a MIFID firm?

Additonal, how does non-MiFID suitability differ?

Answer 41

1. Give Investment Advice related to designated investments
2. Managing investments on behalf of a retail client
3. Managing assets of certain pension schemes

Non-MiFID COB 9 rules apply to retail clients, and certain pension schemes

Question 42

What does the term Churning mean in relation to a MiFID firm managing a retail clients portfolio?

COBS 9

Answer 42

Churning’ is the activity of over-dealing and/or trading more frequently for a client in order to generate additional fees and/or commissions for the firm.

Question 43

What does the term Switching mean in relation to a MiFID firm managing a retail clients portfolio?

COBS 9

Answer 43

‘Switching’ is the activity of selling one investment and
replacing it with another.

Think of security turnover/activity

Question 44

What do the COBS (9) suitability rules do?

Answer 44

Ensure that authorised firms take reasonable steps to ensure that personal
recommendations (or decisions to trade) are suitable for their clients’ needs