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CISI: UK Regulation > Chapter 4: The FCA Conduct of Business and Client Asset Sourcebook > Flashcards

Chapter 4: The FCA Conduct of Business and Client Asset Sourcebook Flashcards

1
Q

When is a Firm Subject to COBS?

A

When they carry out the scoped activities, from an establishment operating (maintained by them) in the UK

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2
Q

What is the provision of COBS under MiFID?

Do they still apply?

A

COBS no longer apply to MiFID business of a UK MiFID firm, carried on from another EEA (post brexit)

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3
Q

What are the Activities under COBS?

A
  • Designated investment business
  • Long-term life insurance business
  • Accepting deposits
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4
Q

Are appointed representatives exempt from COBS?

A

Yes

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5
Q

What is COBS 2?

General……

A

General conduct of business obligations (such as inducements)

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6
Q

What is COBS 4?

FO?

A

Communicating with clients (including financial promotions)

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7
Q

What is COBS 6.1?

CIO?

A

Provision of information about the firm, its srvices and its remuneration.

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8
Q

What is COBS 8?

Handshakes?

A

Client agreements

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9
Q

What is COBS 10?

Appropriatness requirements?

A

Appropriateness requirements

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10
Q

What is COBS 11?

BE?

A

Best execution and client order handling

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11
Q

What is COBS 12?

A

labelling of non independent research

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12
Q

What is COBS 14.3?

A

Information relating to designated investments

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13
Q

What is COBS 16?

Reporting……

A

Reporting of information to clients

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14
Q

Why are appointed representatives exempt from COBS?

Who is ulimatley responsible.

A

Because they carry out a range of regulated activities under the umbrella of the principal firm, who has accepted responsibility for the activity.

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15
Q

Why are durable mediums mandated?

A

Due to the fact most firms communicate electronically, this is so the FCA can keep track and file communications.

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16
Q

What does the FCA classify as “Durable Mediums”?

A
  • Paper
  • Any instrument that enables the recipient to store information in a way accesable for future reference.
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17
Q

What conditions must be met to allow communication, via a website?

A
  • Information in that specific medium must be appropriate
  • Client must specifically consent
  • Client must be emailed to notify the location of said web adress
  • Information must be up to date
  • Information must be continuously availible
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18
Q

Are website a durable medium?

A

No, but they can be if certain conditions are met.

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19
Q

What is SYSC10A and what does this mean?

TeleMessage

A

Telephone conversations and electronic communications must be recorded.

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20
Q

Where does SYSC10A apply?

A
  • Receiving / executing / arranging client orders on prescribed markets
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21
Q

How long does the recording of telephone converstaions and electronic communications need to be kept for?

A

5 years

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22
Q

Who are customers under client categorisation?

Which parties?

A
  • Professional clients
  • Retail clients
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23
Q

Who is deemed to have the most knowledge of all the clients (categories)?

A

Eligible counterpaties

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24
Q

What is the relationship between protection and experience, for clients?

Correlation?

A

As knowledge increases, protection dereases.

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25
Q

What are “Tier 1” Per Se Professional Clients?

What does this mean and who are they?

A

Entitites that require authorisaton and regulation.
* Credit institutions
* Investment firms
* Insurance companies
* CIS
* Pension funds
* Other institutions authorised or regulated in the EEA
* Local derivative dealing firms

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26
Q

What are the “Tier 2” Per Se Professional Clients?

Worldwide?

A
  • National governments
  • Central banks
  • Supranational organisations
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27
Q

What are the “Tier 3” Per Se Professional Clients?

These are the most important…….theeeee undertaker!

A
  • MiFID Business large undertakings
  • Non-MiFID Business large undertakings
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28
Q

What classifies as a MiFID Business large undertaking?

A

Meet at least 2 of the following
* 20m EUR balance sheet
* 40m EUR turnover
* 2m EUR own funds

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29
Q

What classifes as Non-MiFID Business Large undertaking?

A

Meet either of the following
* Called up share capital or net assets at least £5m or
* Two of the following 3
* 12.5m EUR balance sheet total
* 25m EUR turnover
* 250 average number of employees

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30
Q

What is an Elective Professional Client?

Opt up?

A

A retail client that has “opted up” to be a professional client, usually for ease of dealing.

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31
Q

In relation to the “Elective Professional Clients” what is the Qualitative test?

What does it assess and why?

A

Assess expertise, experience and knowledge. Gain assurance that the client is capable of making his own investment decisions and understanding the risks involved.

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32
Q

For MiFID business, in relation to the “Elective Professional Clients” what is the Quantitative test?

A

To meet at least 2 of the following 3 criteria,
* At least 10 transactions per Q on the relevant market, over the last 4 Qs
* Client portfolio exceeds 500,000 EUR
* At least 1 years professional work in the financial services sector

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33
Q

If a soon to be “elective professional client” has passed the tests (if required) for opting up, what are the next steps?

3 parts

A
  • Client must agree in writing to be classified as a professional client
  • Firm must give written warnings of protections lost
  • Client must state speratly in writing, that they are aware of the consequences
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34
Q

Can individual elective professional body opt up to be an eligible counterparty?

A

No.

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35
Q

Who are examples of Per Se eligible counterparties?

Think tier 1 and 2

A
  • Entities that require authorisation and regulation
  • National governments
  • Central Banks
  • Supranational organisations
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36
Q

What must Per Se eligible counterparties conduct?

A

Eligible counterparty business.

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37
Q

What is considered eligible counterparty business?

A
  • Dealing on own account
  • Executing orders on behalf of clients
  • Reception and transmission of orders
  • Arranging orders
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38
Q

What is not classified as eligible counterparty business?

A

Not advice or fund management

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39
Q

When might a firm treat an undertaking as an elective eligible counterparty?

what do they have to be first?

A

If the client is a:
* Per Se professional client (unless institutional investor)
* Is an elective professional client and requests categorisation.

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40
Q

If a professional client wants to “Opt up” to be an eligible counterparty, what do they need to file?

A

Express confirmation

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41
Q

If a retail client, choses to opt up to a professional client, what protections do they lose?

A
  • Comms with clients (including financial promotions)
  • Information about the firm, remuneration will be lost
  • Suitability
  • Appropriateness
  • Investor compensation FOS & FSCS
  • Transfer of financial collateral arrangements
  • Client money (some limitations will apply)
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42
Q

If a professional client, choses to opt up to a eligible counterparty, what protections do they lose?

A
  • Client agreements
  • Appropriateness
  • Best execution
  • Order handling
  • Disclosure on financial instruments, costs and charges
  • Package products
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43
Q

Can you opt down for a higher level of protection?

A

Yes

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44
Q

What is a Client Agreement for Customers?

Agreement, Form, Timing and Record Keeping?

A

This is the agreement required when conducting designated business for a:
* Retail or Pro client (MiFID business)
* Retail client (Non-MiFID business)
* Form: Durable Medium
* Timing: Before the provision of services
* Record Keeping: 5 years or the duration of the relationship (which ever is longer)

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45
Q

What is the puropse of information requirements?

A

High level disclosure requirements to ensure retail and professional clients
* Understand the nature of the risk and investment services
* Make decisions on an informed basis

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46
Q

In regards to informatin requests, what must a firm provide appropriate information to its clients on?

A
  • The firm and its services
  • Designated investments and proposed investment strategies (inc risks)
  • Execution venues
  • Costs and charges
47
Q

When communicating with clients under FSMA, what is considered an offense?

When isnt it?

A

To communicate a financial promotion, unless:
* The person is an authorised firm
* The financial promotion has been approved by the authorised firm.

48
Q

What must firms have in order to comply with the financial promotion rules?

SYSC?

A

Systems and controls that:
* Approving a promotion issued by an unauthorised person
* Confirm compliance with financial promotion rules
*

49
Q

What in a nut shell is non real time communication?

A

Something that is written down e.g. emails, letters etc

50
Q

What in relation to communcating with clients is not subject to the approval requirement?

A

Real time financial promotions i.e. phone call or a site visit.

51
Q

What are the FCA communicating with clients rule?

A

Applies to firms communicating with clients regarding thier designated investment business, and communicating / approving a financial promotion.

52
Q

What is the purpose of the financial promotion laws?

A

To ensure that promotions are clearly identified, fair and not misleading.

53
Q

What principles are the rules of financial promotions consistent with?

Still pullin up no messing

A
  • Principle 6 - pay due regard to the interests of customers and treat them fairly
  • Principle 7 - pay due regard to the information needs of clients and communicate in a way that is clear, fair and not misleading.
54
Q

What is the FPO?

A

Financial promotions order

55
Q

What are exemptions from the Financial Promotion Rules?

A
  • Exempt under the FPO
  • Originate outside the UK and cannot have an effect within the UK
  • Subject to the takeover code
  • Personal quotes or illustrative forms
  • One-off promotions that are not cold calls
56
Q

What are the rules around past performance within financial promotions?

Re. marketing

A
  • Should not be the most prominent feature
  • Should cover at least the immediatley proceeding 5 years (or if the product life is less)
57
Q

What are the rules around future performance within financial promotions?

Re. marketing

A
  • Must not be based on simulated past performance
  • Must be based on reasonable assumptions (supported by objective data)
58
Q

What are the rules around future performance within financial promotions?

A
  • Includes a clear and prominent warning that past/future data is not a reliable indicator of actual future performance.
  • If cited gross, the effects of commissions, fees, taxes and other charges should be disclosed
59
Q

When marketing a financial promotion directly to a retail client, what must this contain?

A

Prescribed information about:
* The firm and its services
* Management of client investments
* Safekeeping of client investments and money
* Costs and charges
* The nature of risks and investments
* Any third party guarantees

60
Q

What are the provisions that allow a firm to initiate an Unwritten Promotion?

Soft factors, like time etc….

A
  • It is an appropriate time of the day
  • The individual identifes themselves, their firm and the reason for their contact
  • Clarification as to whether the client would like to proceed
  • A contact point is given
61
Q

What are the provisions that allow a firm to initiate a Cold Call?

A
  • Existing relationship and would envisage a call
  • The call relates to a generally marketable packaged product which is not linked to a higher volatility fund
  • The call relates to a limited range of investments, including deposits and readily realisable securities other than warrants or generally non-geared packaged products
62
Q

Under the Advising and Selling Standards, what is the purpose of “Suitability”?

Simple……come on joey

A

To ensure that personal recommendations are suitable for the clients needs.

63
Q

When advising or selling, what should the suitability assesment take into account?

What should firms establish and account for?

A
  • Knowledge and experience (assumed for all professional clients)
  • Financial situation (assumed for Per Se pro clients, not elective)
  • Investment objectives (assumed for Per Se pro clients, not elective)
64
Q

What is a Suitability Report?

Who is it intended for?

A

A report that a firm must provide a RETAIL client with after making a specific set of transactions?

65
Q

What activities would prompt a Suitability Report for Retail clients?

Mostly pensions and CISs

A
  • Buys/sells part or all of a CIS holding
  • Buys, sells, surrenders, converts or cancels rights under a pension
  • Makes income withdrawals from or purchses a short term annuity
  • Enters into a pension transfer or opt out
66
Q

What activities did MiFID II add to the requirements of a Suitability Report?

Which actions and products

A
  • Equities
  • Derivatives
  • Structured products
  • Unregulated CIS
67
Q

What is the timing for Suitability Reports regarding life policies?

When must it be issued to retail clients?

A

BEFORE the contract is concluded (unless the info is provided orally or cover is required immediatey after the contract is concluded)

68
Q

What is the timing for Suitability Reports regarding Pensions?

FORTNITE

A

Within 14 days of concluding the contract

69
Q

What is the timing for Suitability Reports regarding any other case?

Besides pensions and life policies

A

ASAP after the transaction

70
Q

What is Churning?

A

Over trading a product for the sake of earning commission.

71
Q

What is Switching?

A

The switching out of investments with the pure intention ofearning commission.

72
Q

What is the application for non-advised sales rules for pro clients?

When would this concern everyone involved?

A

Execution only services provided to clients

73
Q

What is the application for non-advised sales rules for RETAIL clients?

When would this concern everyone involved?

A

Derivatives or warrants when in direct response to a financial promotion

74
Q

What are the obligations for a firm when assessing appropriateness for Non-advised sales?

What questions must a firm ask?

A

About the clients knowledge and experience.
* Types of service / transaction / investment with which they are familiar
* Volume, frequency and period of investment
* Education, profession or relevant former profession

75
Q

When do firms have an obligation to warn the client about investment risks?

A
  • The firm believes the product is not appropriate
  • Or the client declines to provide the information
76
Q

When is the assessment to warn the clients about an investment unessecary?

Execution on which asset is ok? Non complex

A
  • Listed shares
  • Debt securities
  • UCITS funds
  • Other “non complex investments” : Liquid, not a derivative, not contingent liability, comprehensive info availible
77
Q

What is a contingent liability?

A

An investment when you can lose more than what you have invested

78
Q

What is a KIID and when is it required?

When retail clients invest in what?

A

A Key Investor Information Document
* required to be produced by fund managers when retail clients invest in UCITS funds

79
Q

What is a KFD and when is it required?

Retail clients invest in vhoaaaa look at my

A

Key Features Docment
* Required for packaged product providers when retail clients invest in packaged products

80
Q

What do firms providing advice to Retail Clients need to consider?

Which types of advice?

A

Whether the advice is independant or restricted.

81
Q

What is the Normal Cancellation period?

To ensure clients have the right to reconsider?

A

14 days

82
Q

What is the Life and Pension products cancellation period?

Life is looooong

To ensure clients have the right to reconsider?

A

30 days

83
Q

For the conflicts of interest rule, which principle does this align with?

A

Principle 8: Conflicts of interest

84
Q

Where can conflicts of interest arise?

Between what parties?

A

Firm vs Client
Client vs Client

85
Q

When dealing and managing conflicts of interest, what must a firm consider?

There are 5 main rules, think controls governance, your job!!!

A
  • Maintain organised and admin arrangements, designed to prevent conflicts of interest
  • For research, have controls to stop info leaking to the rest of the firm
  • Prepare COI policy
  • When COI arises, ensure disclosure is made on a durable medium, before business is conducted
  • Keep records of where conflicts have arisen
86
Q

What are the rules surrounding inducements?

What are firms prohibited from doing or receiving, what are the exceptions?

A

Firms are PROHIBITED from paying or accepting any fees or commissions, or providing or receiving non-monetary benefits other than:
* Fees paid by the client
* Proper fees paid by the firm (legal, settlement, custody)
* Non-monetrary benefits paid to or by a third party

87
Q

What are examples of reasonable non-monetary benefits that may be provided?

A
  • Conferences, seminars and other training events
  • Hospitality of reasonable de minims value
88
Q

What are the MiFID II rules on how firms consume and pay for research?

A

Any UK or EU firm, may only receive (consume) research if it pays for it using one of two methods:
* Directly from its own resources
* From a research payment account (RPA) funded by a specific charge to it clients.

89
Q

What is an RPA?

A

Research payment account

90
Q

What under MiFID is not deemed as research and therefore cannot be funded by an RFA?

A
  • Price feeds and historic price data
  • Seminar Fees
  • Order and execution services
91
Q

What is an Order Execution Policy?

A
  • Firms are required to establish an order execution policy to obtain, and demonstrate to clients how they obtain the best possible trading results for thier clients
92
Q

Do clients need to provide consent before an order execution policy is drafted?

A

Yes

93
Q

What information is to be included in an Order Execution Policy?

A
  • Factors considered when choosing an execution venue
  • How price, cost, speed and likelhood of execution is considered
  • A clear instruction that if a client has a specific instruction, it may impact the firms ability to have the best possible results
94
Q

When should an Order Execution Policy be reviewed?

A

Whenever a material event occurs (but at least annually)

95
Q

What must a firm ensure when handling client orders?

A

Firms must ensure prompt, fair and expedious execution of client orders.

96
Q

What are the details of a client order than must be considered by a firm?

A
  • Executed client orders are promptly and accuratley recorded and allocated
  • Comparable orders execute sequentially and promptly
  • RETAIL clients are informed of any material difficulty in the prompt execution of their order
  • Settlement assets or money are delivered promptly and correctly
97
Q

When is aggregation of orders permitted?

A
  • When it is unlikely to disadvantage the client
  • The fact that aggregation may be disadavtageous, is disclosed to clients
  • An order alloaction process is established
98
Q

What is the rule surrounding Client Limit Orders for a firm?

A

Firms have an obligation to make an unexetcuted client limit order public for listed shares on a regulated market public.

99
Q

What does “Public” mean in relation to markets?

A
  • Transmit the order to a regulated market or MTF operating an order book trading system.
100
Q

What are the expceptions for listing a Client Limit Order on a public exchange?

A
  • Orders are over regular market size (could disrupt market)
101
Q

When reporting to clients, what is the confirmation of transactions reports for dealing services rules?

What must firms ensure, and when by?

A

Firms must provide details of a transaction “promptly” (No later than the next business day for a retail client T+1)

102
Q

How often do firms need to submit periodic statements for investment management?

A

At least quarterly

103
Q

What are the exceptions for quarterly periodic statements for investment management?

A
  • Where the client receives deal by deal confirmations, monthly statements may be sent annually
  • **MONTHLY **statements must be sent for leveraged portfolios
104
Q

How often must perodic statements be sent for leveraged portfolios?

A

Monthly

105
Q

What is the General Keeping requirement for MiFID business?

duration

A

5 years

106
Q

What is the General Keeping requirement for Non-MiFID business?

duration

A

3 years

107
Q

What is the General Keeping requirement relating to “Client Classification”?

A

The relevant period after the firm caeses to carry on business.

108
Q

What is the General Keeping requirement relating to “Client Agreements”?

A

The relevant period or the duration of the client relationship

109
Q

What is the General Keeping requirement relating to “Trade Confirmations”?

A

The relevant period from the date of the dispatch.

110
Q

What is the Purpose of the Client Money and Custody Rules?

2 parts

A
  • Restrict the co mingling of clients and firms assets
  • Minimise the risk of client assets being used in the event of a firms insolvency
111
Q

What are the main 4 things to think about when looking at CASS?

A
  • Safety
  • Segregation
  • Recording
  • Reconciliation
112
Q

When are client money rules not applied?

When is client money not classed as client money?

A
  • DVP transactions (up to T+3)
  • Money “due and payable to the firm”
113
Q

When are reconcilliations made in relation to CASS?

How often?

A
  • As often as nesseccary
  • Make discrepancies immediatley

CISI: UK Regulation (6 decks)

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