Chapter 4 The FCA Conduct of Business and Client Asset Sourcebooks Flashcards by Simran Cheema

Who does COBS apply to

Directly to firms conducting designated investment business or insurance business

Designated investment business includes dealing, broking, advising and managing MIFID instruments (shares bonds derivatives) and non MIFID instruments (packaged products, retail investment products etc)

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How long should recording voice or electronic communications be kept for

5 years

Applies to communications with any client, or eligible counterparty

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How does COBS apply to appointed representative

Indirectly. They are tied agents

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Describe Retail Clients

Little knowledge/experience. Can opt up to be a elective professional client.
Has to take qualitative test and quant test (if its a MIFID business)

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What are customers

NOT eligible counter parties

RC and PC only

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Describe quant test for RC to opt up

Meet 2/3

-Portfolio> 500k EUR

-Average trade frequency 10 per quarter over previous 4 quarters

Works or worked in financial sector for >1 year

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Describe per se professional clients

Per se
-Authorised/ regulated firm

Government, CB, Supranational
Other institutional investors eg SPV
Large undertaking

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Conditions that large undertaking needs to satisfy

Balance sheet 20mEUR
Net turnover 40mEUR
Own funds 2mEUR

Above is for MIFID business. Non MIFID is different

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Difference between per se and elective PC

Per se is normal

Elective professional client is retail client who opted up

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Describe per se eligible counterparties

When per se professional clients deal amongst themselves they are treated as equals and known as per se eligible counterparties.

Can be
- Authorized/ regulated firm
- Gov, CB, Supranational

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Describe elective eligible counterparties

Professional client who has opted up to be EEC

Available to any large undertaking (per se pc)

No available to other institutional investors eg SPVs

Procedure is you just have to obtain client info

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What does FSMA 2000 say about promotions

Must not communicate a financial promotion unless

It is an authorised person
Content has been approved by an authorised person

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Exceptions on FCA rules on communications of financial promotions

Communications

Exempt under FPO
From outside UK
Subject to takeover code or similar
Personal quotes
One-off promo thats not cold call
Image advert

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Where do COBS communication rules apply

Retail clients only

written and unwritten comms

Fair, clear, not misleading

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Main rules when showing past performance

Cover at least 5 years (or life of investment) in complete 12-month periods

State that it is not an indicator of future performance

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Describe Distance Marketing Directive cancellation

Generally right to cancel OTHER PRODUCTS (eg ISAs) 14 calender days

30 calender days for life and pension products

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Direct offer

Type of financial promo. Eg do application form

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Permitted cold call features

Existing client envisages call
Marketable packaged product not highly volatile

Services related to realizable securities e.g. shares and bonds in liquid market. NOT WARRANTS

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Suitability vs Appropriateness rules

Appropriateness rules apply to execution only business. Applies to MIFID business (RC and PC) and direct offers (RC only)

Suitability rules apply to both retail (MIFID AND NON MIFID) and professional clients (MIFID) for discretionary and advisory services

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Suitability rules for retail clients

Meet the customers objectives

The customer is able to bear financial risks

Customer has necessary knowledge and experience to understand those risks

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Suitability rules for elective PC

Meet the customers objectives

The customer is able to bear financial risks

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Suitability rules for per se PC

Meet customers investment objectives

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Where does appropriateness rule NOT apply

Execution only business with non complex financial instruments- shares/bonds/ units in UCITS scheme

If direct offer for professional client

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Aims of appropriateness rules

Able to bear financial risks
Has knowledge and experience (retail clients only)

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Execution factors

Price Costs Speed Likelihood of execution Settlement

Best execution criteria

Customer categorization Type of order Type of financial instrument traded Characteristics of execution venues

Features of order execution policy

Prescribed info - list of execution venues and factors affecting firms choice of venues Written 2 way agreement - monitored and reviewed annually. Notify customer of material changes Special customer instructions count as best result

Client order handling rules

Prompt and sequential Except - interest or customer/ material difficulty

Aggregation allowed when

Order allocation policy in place Timely allocation Fair allocation

Limit order not executed immiediately must be made public unless

Customer instructs otherwise Limit order greater than normal market size

Exceptions to transaction confirmation to clients

Non mifid business can request not to receive mifid business has no exception - has to be sent by next business day

Periodic statement contents

Client portfolio Value and comp Total fees Total dividends and interest

Depreciation notice

If 10% fall

How often periodic statements sent

general - every 3 months and clients can ask for annual derivatives - every month

Exception to personal dealing rules

Life policies Shares in certain class of fund like CIS Funds managed independently

Who does CASS 6 custody rules apply to

Mifid and non-mifid businesses

Who does CASS 7 client money rules apply to

MIFID businesses but opt in available to non-MIFID business

How often should reconciliations take place

As often as necessary

When should shortfall be corrected

FOR CLIENT MONEY held by firm,close of business on the day of reconciliation

WHo/what does CASS not apply to

-ICVC and UCITS schemes -Incoming EEA firms -BCD credit institution -Coins held for value of metal -Money due and payable to firm -money held for delivery vs payment but max 3 days

When can firm use clients assets

Right to use clause

Describe CASS audit

Required annually and submitted to FCA within 4 months of audit. Standard set by Financial Reporting Council

Mandate accounts

Client gives control of assets or liabilities eg direct debit

what is a CASS resolution pack

Specific documents and info relating to client money and assets

COBS / CASS quick reference

Record keeping general rule for MIFID business from date of dispatch

5 years

General rule for non MIFID business

3 years

General rule for pension contracts, stakeholder pensions, life assurance

5 years

Pension transfers and opt outs, free standing additional voluntary contributions (FSAVCs)

Indefinitely

Recording of telephone communication

5 years from creation of record

Keeping records offsite

Must be readily accessible

Rules that apply to retail clients only

Financial promo Retail investment product disclosures (KID, KIID, KFD) Suitability report

What is churning

Churning is the practice of over-dealing in a client's securities in an attempt to generate fees.

When is the FCA's Conduct of Business Rule relating to suitability required? When the firm is performing

Discretionary MiFID services on behalf of retail and professional clients The rule covers 'all customers' for MiFID business

Financial advisers acting for retail clients must not accept commission for their services, but a fee instead. Which piece of regulation stipulates this rule?

The Retail Distribution Review

Which of the following is not defined as a packaged product according to COBS?

A government or public security

Where an investment bank is providing research to a fund manager a firm must apply a separately identifiable charge for this research. The FCA implemented changes under UK MiFID that fund managers do not have to pay if the research provided relates a company with a market market capitalisation below:

£200 million Research on companies with a market capitalisation of below £200 million will be exempt – meaning that UK-based fund managers do not have to pay for this research. UK asset managers can continue to pay for this research if they so wish – due to operational limitations.

The COBS relating to financial promotions require an individual with appropriate expertise to check that the promotion is fair, clear and not misleading. For which of the following types of financial promotion is such a confirmation exercise required before issue?

Non real-time financial promotions

An analyst at an authorised firm makes a trade for their personal account in the units of a UCITS collective investment scheme. According to the FCA rules, how soon should they contact their compliance team to inform them of any increase in the number of units they hold?

There is no need if the analyst has no management relationship with the CIS

The firm is holding money belonging to clients. When would it NOT need to comply with the client money rules? If the money is:

Coins held for the value of their metal

When a firm trades with an eligible counterparty, which one of the following rules does not apply?

Selling and advising

If a firm is aware that Bob is acting as an agent for Bill, then Bill will be the firm's client if:

Bob and the firm have agreed in writing to treat Bill as the client

To whom should a firm produce a document about compensation claims when carrying on MiFID business?

All clients

Under the COBS, a professional client or an eligible counterparty can ask for a re-categorisation in which of the following cases?

IIt is permitted on a trade by trade basis IIIt is permitted in general for all trades IIIIt is permitted on individual instrument classes

A firm that manages a client's investments must ensure that which of the following occurs?

They specify any index against which performance will be compared

When carrying out client orders the firm must ensure:

Retail clients must be informed of problems Orders must be promptly and accurately recorded - there is no specific timeframe given. Ie not necessarily 1 business day Comparable orders must be carried out sequentially except in specific conditions

Which of the following best describes the cancelation period offered to a client of the firm?

Compulsory for certain products

Which of the following sets of information is NOT required in a direct offer financial promotion to a retail client?

Execution venues where trading will occur Execution venues will be in an order execution policy. Following is required in direct offer: The firm and its services Costs and charges Safekeeping of client money

Which of the following statements complies with the inducements rules?

An acceptable commission is one that has been paid to a client In relation to designated investment business or, in the case of MiFID business, another ancillary service, a firm must not pay to, or accept from, a person other than the client any fee or commission (or provide or receive any non-monetary benefit).

A client approaches your firm wishing to engage you to provide a discretionary service on his account. In order to trigger the requirement to provide a client agreement before providing services the client must be:

Either a retail client or professional client, as both are protected by this rule

Under the regime created by the retail distribution review, which of the following is TRUE?

The charge can be ongoing and based on a percentage of the funds invested Advisers must move to fee-based charging. This can be an upfront fee or an ongoing fee based on a percentage of the funds invested (as long as an on going service is provided). Fees should be itemised and disclosed up front, but this should be based on the service provided not the product.

If an independent financial adviser (IFA) passes on the business of a client to a life assurance company, which of the following would be true? The life assurance company:

Can rely on the information about the client provided by the IFA