Chapter 4: The FCA’s Conduct of Business and Client Assets Sourcebooks Flashcards
What is the main approach of COBS?
To focus on outcomes rather than compliance with detailed rules
When does COBS apply?
to UK firms conducting MiFID business for UK clients within the UK
From the UK
Overseas firm carries business in UK with client
What happened with COBS post brexit?
COBS Handbook no longer applies to MiFID business of a UK MiFID firm carried on from an establishment in an EEA member state
What is the exception regarding investment research and personal account dealing for COBS?
Rules apply on a home state basis only. This means COBS applies to UK firms, regardless of where they are conducting business
What are the 3 main activities subject to COBS?
investment business
long-term insurance (life policies)
accepting deposits
Do COBS rules apply to eligible counterparties?
No some are excluded
Why are appointed representatives exempt?
They can carry out a range of regulated activities under the umbrella of the principal firm
What do firms need to be cautious of with representatives and promotions?
They are responsible for any promotions that the appointed representatives do, and they must be in line with COBS.
What must a firm make sure if storing information on a website?
Client has access to internet
Consent to having it stored on website
notified of address and where it is stored
must be up to date
needs to be accessible continuously
If a firm carries MiFID and non-MiFID business, by how must it categorise its clients?
In accordance with MiFID standards
What are the 3 client categories?
Retail
Professional
Eligible counterparty
What are the two types of professional client?
Per se and elective
What is a Per se Professional client
And entity required to be authorised to operate in the financial markets
Company with a large balance sheet
(MiFID EUR 20m balance sheet, turnover 40m or own funds of 2m)
Governments, central banks, supranational bodies
Institutional investors
What is defined as a large undertaking for non-MiFID business?
£5m share cap
EUR12.5m balance sheet or 25m turnover or 250 employees
net assets of >£5m (partnership)
had assets of >£10m in last two years (trust)
50 members, >£10m assets (pensiosn)
For what business can a client be categorised as an ECP?
executing orders
dealing on own account
receiving/transmitting orders
What are the two exceptions to the agent rule?
If firm has agreed the underlying client should be treated as a client
If the agent in place is mainly for reducing the firms duties to the underlying client, they should be treated as a client
When can a retail client be treated as an elective professional client?
Qualitative test - Firm assessed the expertise, experience, knowledge and understand risks involved
and for MiFID - Quantitative test (any two are true)
10 significantly sized transactions over last 4 quarters
port exceeds 500k EUR
worked in financial services sector for at least a year
When can a professional client be treated as an elective ECP?
It is a per se professional client (unless inst investor)
Request to be treated as an ECP
What are local authorities/municipalities treated as by default
Retail clients
Need to be pass qualitative and quantitative to be treated as professional
When do client agreements not apply?
For insurance firms issuing life policies as principal
When must firms provide a client agreement?
In good time before client is bound by agreement or before the provision of investment services (whichever is earlier)
How long must client agreements be maintained for?
Whichever is longest of
5 years
duration of relationship
for pension transfers, pension opt-outs or voluntary contributions INDEFINITELY
When must firms doing non-MiFID business provide information about the risk and nature of investments to retail clients?
When doing business in relation to derivatives, warrants or stock lending activity
When must a firm provide a benchmark to a client?
When it manages an investment for a client, it must provide a comparison to a meaningful benchmark based on their investment objectives
What is the difference for ECPs and professional clients when it comes to requesting details on costs and charges?
There is no regulatory obligation to do so
When can information be provided AFTER the provision of services?
if the agreement was concluded using distance communication
firm complies with voice telephone communications
What is a firm obligated to do in regards to compensation?
Make available to client the information of the compensation scheme.
What is restricted advice?
Where an adviser can only select instruments from a small range of instruments
Who can advisers be remunerated by?
Only the consumers, cannot be by the product provider
If a firm is relying on a third party for information or recommendations who is responsible for the completeness and accuracy or appropriateness of recommendations?
The third-party firm
What are the exemptions for financial promotion?
home purchase or reversion plans
non-investment insurance contract
unregulated CIS
credit agreements
When do financial promotion rules apply in general?
firm that carries on business with, or communicates a financial promotion to, a client in the UK (including where this is done from an establishment overseas).
Are HNWI exempt from financial promotion rules?
Yes
What defines a HNWI?
income of 170k or net assets of 430k
What are the four methods of communication?
real time - face-to-face meetings, calls, presentations
unsolicited real time - cold calls
non-real-time - emails letters websites
direct offer financial promotions - enter into agreement for responses
What is a prospectus advertisement?
Any type of communication that specifically promotes the offer to acquire securities
What four requirements must a prospectus advertisement have?
prospectus needs to be accessible by investors
clearly recognisable as an advertisement
accurate information
consistent with the information of the prospectus
What new rules did the FCA add in 2020 for illiquid securities?
mini-bonds and preference shares cannot be marketed to retail investors
How long should risk summaries take to read?
No more than 2 mins
Can firms coach investors to pass the appropriateness tests?
No
What is a qualifying crypto asset?
Any cryptographically secured digital representation of rights/value that si transferable and fungible
Does not include “electronic money”
What is the bespoke exemption for cryptoasset businesses?
Firms registered with the FCA under MLRs (Money Laundering) but are not authorised persons can communicate financial promotions to UK consumers
What is the minimum time that past performance must be covered?
5 years, or entire lifespan if less than 5 years
must show complete 12-month periods
What must simulated past performance be based off?
Investments/indices that are the same as the investments being simualted
What must be mentioned in direct offers with more that two investments or services?
If risk is increased holding both, this must be mentioned in the offer
When can an unwritten promotion be done?
Appropriate time of day
Identifies themselves and the firm
Clarifies is client would like to continue with communication
Firms must not cold call, unless;
existing client relationship with firm
general marketable product - not high vol or life policy linked to high vol fund
relates to a controlled activity other than warrants
What must be included on overseas promotions that are communicated by UK firms
investor protection does not apply
if UK compensation will apply
details on overseas compensation
What will happen once the “gateway” comes into effect?
All firms that want to be able to approve financial promotions for third parties will need to apply to the FCA for permission to do so
What must an authorised firm do when approving a financial promotion from an unauthorised person?
Firms must confirm that it complies with the financial promotion rules
If it no longer applies, they must advise anyone impacted
Can firms approve real time financial promotions?
For example a cold call or a in person visit they cannot approve these
When do COBS rules on suitability apply?
Personal recommendations relating to designated investments
Managing investments for retail clients
Managing assets of pension
What is churning?
The act of over-dealing or trading more frequently for a client to generate additional fees for firm
What is switching?
Selling one investment and replacing it with another
Why do suitability rules exist?
To ensure that authorised firms take reasonable steps to ensure recommendations are suitable to client needs
What information is needed to assess suitability?
knowledge/experience in investment field
financial situation
investment objectives and risk profile
What must a firm provide to a client when making a personal recommendation?
A suitability report
What are the exceptions to provide a suitability report?
regulated CIS
outside the UK
small life policy, premium not over £50 a year
if increasing premiums on an existing contract
When must a suitability report be provided?
Life policy - before contract concluded
Pensions - within 14 days of concluding contract
Anything else - before contract concluded
What must the suitability report of a sale of life policy by telephone have?
- comply with the Distance Marketing Directive (DMD) rules
- be provided immediately after conclusion of the contract, and
- be in a durable medium.
What is fact-finding?
A firm gathering the information about a client to assess suitability
What happens if a firm does not obtain the information it needs to assess suitability?
It must not make a personal recommendation
How is suitability assessed for professional clients?
A firm can assume that professional clients have all required knowledge
A per se professional client can be assumed to financially bear any investment risks
You cannot make the same assumption for elective professional clients
What is an insistent client?
Going against a personal recommendation
What needs to be done before an insistent clients order is executed?
Gain acknowledgement from client
What is the purpose of appropriateness test?
To provide a degree of protection for non-advised transactions
To what firms do rules on non-advised sales apply?
providing MiFID investment services, aside from personal recommendations
arranging deals in warrants and derivs for retail clients in response to direct offers
What must a firm do when providing a non-advised sale?
It must ask the client for information about their knowledge and experience in relation to the field of the product
When are firms not required to assess appropriateness?
execution only, for the receipt and transmission of client orders
client informed that firm is not required to do so
client will not get the benefit of the protection
What must authorised fund managers who manage UCITS do?
Produce a KIID Key Investor Information Document
What are the exceptions for producing KIIDs?
another firm is preparing
KIIDs are not needed for certain types of schemes
reinsurance/pure protection insurance
For what products is a Key Feature Document prepared for?
each packaged product
* cash deposit ISA
* cash deposit child trust fund (CTF), and
* a key features illustration for each packaged product it produces.
What is independent advice?
a personal recommendation to a retail client
what must a form ensure it has to give independent advice?
a large range of products so that
meet varied investment objectives
not limited to its own products, or ones it has relationship with
What are the four groups of Packaged Retail and Insurance-based Investment Products (PRIIPs)
investment funds
insurance-based investment products
retail-structured securities
structured term deposits
What is a PRIIP manufacturer required to do?
- prepare a KID for each PRIIP that they produce, or
- publish each KID on their website.
What is the max length of a KID?
3 A4 pages
What is PRIIPs being replaced by in the UK?
‘Consumer Composite Investments (CCIs)
FCA supervision instated
What are cancellation rights?
Provided to retail customers when they do investment business with a firm
Customers can reconsider their decisions within a certain period of time and can cancel the transaction
To which firms do cancellation rules apply to?
firms providing products based on investments or deposits
firms entering into distance contracts with consumers for the same
What are the cancellation rights periods?
life and pension products – 30 calendar days
* cash deposit Individual Savings Accounts (ISAs) – 14 calendar days
* non-life and pensions products – 14 calendar day
What is the record keeping policy for cancellation?
indefinitely for pension transfers or opt outs and voluntary contributions
five years for life policy, pension contract, personal pension schemes
at least 3 years for anything else
Cancellation rights must be provided to retail customers when they transact investment business
5.2 Cancellation and the Right to Withdraw
What can inducement rules be seen as?
Payment rules, as they prohibit any payment unless permitted.
Which firms do inducement rules apply to?
Firms carrying on designated investment business, MiFID or non-MiFID
Which clients do inducement rules apply to?
Professional and Retail, not ECPs
What is a minor non-monetary benefit?
disclosed prior to provision of service
capable of enhancing the quality of service provided to the client
will not impair firms duty to act in best interests of all clients
is reasonable
can be information, conferences, training, hospitality
What are the only allowed fees and commissions?
fees, commissions or non-monetary benefits paid to or by the client, or someone on their behalf (eg, management fees)
* proper fees which are necessary for the provision of the service (eg, custody costs, legal fees, settlement fees) and which cannot, by their nature, give rise to conflicts, or
* fees, commissions or non-monetary benefits paid to or by a third party (or someone on their behalf ).
When are fees permissible?
do not impair compliance with the firms duty to act in clients best interests
enhance the quality of the service to the client
are disclosed in accordance with set standards
What must any regulated firm that produces research now apply?
A separately applicable charge for research
Is a person acting through an agent considered a client?
No, The agent is considered to be the client of the firm unless agreed otherwise.
What is the difference between a general and special defence for insider trading?
Special is for particular circumstances, e.g. price stabilisation
General is everything else
What type of client would BoE, IMF and pension providers be classified as?
Per se professional clients
What does UK MAR cover?
UK MAR covers financial instruments, commodity derivatives and auctioned products based on emissions allowances
Are life assurance products covered by UK MAR?
It does not cover life assurance products such as endowments, whether secondary market traded or not.
Is general office equipment allowed as per inducement rules?
General office equipment is specifically prohibited by FCA regulations.
A firm wishes to apply for Part 4A permission to gain authorisation to conduct regulated activities. Due to the size and nature of a firm, it needs to become a dual-regulated firm. What does this process look like?
The firm will apply to the PRA who will consult with the FCA before granting Part 4A permission
Under PRIIPs which products require KIDs?
Investment funds, insurance-based investment products, retail structured securities and structured term deposits all require KIDs.
What are the cancellation periods for products?
life and pension products - 30 days
cash deposit ISA - 14 days
non-life and pensions products - 14 days
When does the cancellation period start?
From the day the contract concludes or from the day client receives information
When must firms advise consumers of their cancellation rights?
In good time before, or immediately after the consumer is bound by the contract
What is the record keeping policy for cancellation of different schemes?
indefinitely for pension transfers/opt-outs/voluntary contributions
five years for life policy, pension, personal pension or stakeholder
3 years for anything else
Do clients get all their investment back if they cancel?
No will be impacted by market price of product
Where do PAD rules on designated investment business apply?
authorised firm in relations to activities it carries from UK establishment
To which firms do the SYSC conflict of interest rules apply to?
Common platform firms, MiFID business and non-MiFID business
What must firms that produce externally facing investment research be careful to have in regards to conflict of interest rules?
Information systems and controls
Barriers to stop information flowing to other areas
What must a firm do if a conflict arises?
Disclose the interest to the client before doing business
Must be on durable medium and sufficient detail
Firms arrangements must be set up to prevent these
What is a chinese wall?
An arrangement where information is withheld from other areas of the business
When should conflicts of interest be disclosed to client?
As last resort if internal controls have not been sufficient enough to manage them
What is specifically not permitted for SYSC conflicts of interest controls?
Over-reliance on disclosure, controls should be in place before this
What should a firm look to do in conflicts of interest policy if they are part of a larger group?
Take into account any conflicts arising from the structure of the business
What must be appropriate to scale and nature of business, per SYSC?
Specifically, the rules require firms to have a written conflicts of interest policy which is appropriate to the scale and nature of their business activity
What particular circumstances must be paid attention to in conflict of interest policy?
Where a person performs two or more roles
What should the conflict of interest policies cover (3)?
Control of information
Separate supervision of persons whose clients interests may oppose
Remove remuneration links to activities which may cause conflicts
When can firms in investment research undertake personal account transactions in the investments they have researched
With prior approval from compliance and only in exceptional circumstances
What is non-independent research considered as?
Marketing communication
Treated as a financial promotion under COBS 4
What must be done when producing non-independent research?
Identify and manage conflicts of interest
What must be on research reccomendations?
fairly presented
firm and regulator
name and title of person who prepared
facts distinguished from opinion
What must be included in a fair presentation?
Sources indicated
Valuation metrics
risk warnings
any difference from previous recommendation
What are the standards for disclosure of conflicts of interest in an investment report?
all relationships that may impact objectivity
remuneration linked to affiliated company
if shareholdings >5% in issuer
if firm is market maker/lead manager etc for issuer
if researcher has shares then the price and date of acquisition
What should the firm do if the disclosure of interests is larger than the research?
Can specify where full disclosure can be found
What information needs to be published quarterly by research firms?
Proportion of buy/hold/sell
Proportion of investments issued by issuers that the firm has done IB for
What must a firm do when disseminating 3rd party research?
identity of firm and regulator
describe any amendments from orig frim
where they can access original information
To which clients do inducement rules apply to?
Retail and professional
Where do inducement requirements apply?
Where a firm provides independent, restricted advice and portfolio management services to a client
How can a regulated firm pay for research (2)?
Directly from its own resources
From a resource payment account controlled by the firm funded by clients
What is a gold-plated requirement?
One that the FCA goes beyond MiFID requirements
Where do research payment provisions not apply to research firms?
To those that produce research to those outside the UK/EU
Why did FCA not apply research payment rules to some AIFs/CISs?
If their core investments do not generally involve in investing in MiFID instruments
E.g. private equity or commercial property
What are the new rules for research inducement payment?
Research on <200m mkt cap is exempt, can be free
Research on FICC
Independent research providers, where they do not offer investment services
Openly available research
What is the Research Payment Account?
It is something that is funded by a specific research charge to clients, agreed
What can be paid from the Research Payment Account?
Strictly only research
below does not count
post-trade analytics
* price feeds or historical price data that have not been analysed or manipulated in order to present
the firm with meaningful conclusions
* seminar fees
* corporate access service
* order and execution management services, or
* administration of an RPA.
What is the best execution rules?
under COBS require firms to execute orders on the terms which are most favourable to their client
How do requirements for AIFMs and residual CIS operators differ in regards to best ex
reasonable steps instead of sufficient
To which clients does best ex apply?
prof and retail
not eligible cp
What are the tests in the four fold test for best execution?
did investment firm initiate transaction
does the client ask only you for a quote
will teh client be able to see different price levels
has the client said they place reliance on the firm
Should the firms own commissions in a venue be used as a best ex decision maker
No
Do firms need consent from clients on best ex policy?
Yes
Provided to client at onboarding and if they agree they will proceed with relationship - this counts as consent
How often must order execution policy be assessed?
Annually, or when material event occurs
Does a firm need to update clients of order ex policy updates?
Yes
What must an order ex policy include for each product?
Different execution venues
Factors that will affect venue choice
Do transactions passed to 3rd parties have to follow bst ex
Yes
What must a firm do if receiving specific instruction from a client?
Order as instructed
this is the best possible result, even if alternate venue provides better price
Can firms induce clients on where to instruct?
No, if they know it will affect them from getting best ex
How should comparable client orders be executed?
In the order they were received, unless impractical
What should firms ensure regarding client order handling?
Retail clients are informed of any difficulty in order execution
assets or money must be settled promptly
Must not!! misuse client order information to abuse
When can firms aggregate client orders?
if won’t cause disadvantage
if aggregation disadvantages clients it is disclosed
order allocation policy has been established
What must the order allocation policy cover?
How partial allocations are dealt with.
What must firms prioritize if it has own account orders along clients’?
It cannot allocate in a way detrimental to clients
Must allocate them in priority over their own
How can firm make client limit order public if they can’t execute it
transmitting order to a regulated MTF/market
Who must be notified of any personal transactions?
The relevant firm
Even if outsourcing takes place
Where do the rules on PAD no apply?
deals under a discretionary management service
deals in units etc UCITS OEIC UNIT TRUSTS, where person not involved in fund management
life policy
What must client reporting contain?
Associated costs
What is specific about reports for derivs or options
Must be in durable medium
When must firms send a notice confirming deal details?
As soon as possible but no later than the next business day
How long does a firm have to pass on confirmation from a third party?
no later than next business day
How long must firms keep confirmations for UK MiFID biz?
at least 5 years from date of dispatch
How long must firms keep confirmations for non - UK MiFID biz?
at least 3 years from date of dispatch
What must firms include when calculating unit price in confirmations?
Price of each tranche, or average price
Which clients receive periodic reporting?
Retail and professional
Not ECP
How often must periodic statements be sent to clients?
At least quarterly
Does reporting requirements differ if clients asks for deal by deal reporting?
No
What must a firm do if managing investments for retail clients, regarding reporting
Report any losses over a pre-agreed limit to client
How long do firms have to report any breaches to clients?
End of business day
When must a portfolio management company report losses to clients?
If falls more than 10% since last valuation, and each 10% thereafter
How should SYSC records be kept?
Reproduced in English, and in a hard copy paper format
What is the retention policy for SYSC records?
The general principle in relation to retention periods states that data should only be retained for as long as is relevant to the purpose for which the record was made.
Retention periods for MiFID and non-MiFID biz?
5 years and 3 years resp
Which clients does CASS apply to
Professional, retail and ECPs
What is CASS client money rules set up to ensure?
Money will not be used to repay creditors
How is client money segregation usually achieved?
Place in a separately designated client account with a bank
What must a firm do when depositing client money with a bank
The bank treats this separately from the firms own funds
How does a firm get a bank to treat client money deposits separately?
Client money in a statutory trust
CASS 6?
Custody rules when holds asset
CASS 7?
Client money rules
What must firms register client assets as?
In the legal title of the client
What happens if a bank does not acknowledge trust status?
20 days to withdraw and move to another account
How often should internal reconciliations be performed?
As frequently as necessary
How long can pass between each external reconciliaton?
no longer than one month
What must a firm do if cannot comply with reconciliation requirements?
Notify the FCA
How often must firms who hold client assets and money be audited?
Annually, by external auditor
How long does auditor have to send report to FCA?
4 months from date of completion
How must a firm that uses the normal approach ensure client money is paid?
Into client bank acc rather than firms own account then segregated
What is the alternative approach?
Where client money is received into firms own bank account then paid to client account. Firm should reconcile every day.
Should firm use ledgers or statements to rec client accounts?
Ledgers
What is an external reconcilliation?
Cross-checking internal accounts against the records of third parties, where money is held.
What is a resolution pack?
Enables firms to have certain documents relating to client assets in the event of a crisis
How long do firms have to retrieve resolution pack?
48 hours
How long after change of procedures must the resolution pack be updated?
5 days
Are collateral postings client assets?
No, not subject to CASS
Unless retail clients to do CFDs or rolling forex contract
What is used by firms to manage collateral cash?
Title Transfer Collateral Arrangements (TTCAs)
What is a mandate
‘any means that give a firm the ability to control a client’s assets or liabilities’.
When is a mandate required?
When a client is giving the firm control over their assets
When do CASS rules not apply in regards to a mandate?
When a clients assets are held at a third party
What kind of mandate records does a firm need?
lost of all mandates
record of mandate transactions
controls to ensure accordance
Mandate records retention period for non-MiFID business?
one year
What are the new CASS rules?
Increased reporting for PB clients, know where assets are
restricted group bank holdings
senior individual responsible for client money and assets
What are the two CASS audit reports?
‘reasonable assurance client assets report’
‘limited assurance client assets report
When is a reasonable vs limited client asset report done
A reasonable assurance client assets report is completed where the firm holds client assets.
Limited is when they didn’t during the period
What happens if a firm is permitted to hold client assets but claims not to do so?
Auditor must do limited assurance report
Which body is responsible for setting CASS audit standards?
Financial Reporting Council
developed Client Asset Assurance Standard
What duties to the FCA do CASS auditors have?
Reporting FCA breaches
