Chapter 6: Regulatory framework Flashcards
What does the rolling stock method allow firms to do?
Check investments throughout the year, as opposed to having to count everything at the same time.
The audit committee are what line of defence in the model?
Third line
Information disclosure to clients before providing services.
- The firms and it’s services
- Designated investments and proposed investment strategies
- Execution venues
- Costs and associated charges
Information about the firm and compensation arrangements COBS 6.1
• Name and address of firm and contact details
• Method and language of communication
• Statement that the form is authorised, and the competent authority
• Nature, frequency and timings of performance reports
• Information about the conflicts of interest policy
• Any compensation scheme available
(FSCS)
Order execution policy two rules
- Two way policy to be sent to clients
- Monitor effectiveness of order routing system to ensure they get the best execution
Timely execution is?
Orders executed promptly and sequentially.
What is the purpose of transcation confirmations?
Ensure clients are advised of the essential details of transaction. E.g. Contact note
When are transaction confirmations not required?
• If the client receives the information from another person
• The investments are in discretionary account
What is included in Periodic information? (Periodic statements)
Client portfolio - total fees and charges
Value and composition- Total dividends and interest.
When are periodic statements sent?
General rule- prepared every 3 months
Derivatives- Prepared every month
Both sent out promptly
CASS purpose
Adequate protection for client assets by platform operators as custodians
Permissible reconciliation methods for physical assets held are? (rare for a platform)
• Total count method - a single process
• Rolling count method - a phased approach
Permissible reconciliation methods (internal + external)
• Internal - comparing the aggregated internal position to the individual client positions
• External- compared to internal records
What is target market analysis?
Firms need adequate and appropriate product oversight and governance processes.
What 4 factors are part of target market analysis?
• Target market analysis
• Stress testing and scenario analysis
• Information sharing and disclosure
• Proportionality
KID, KIID, KFD
• KID (PRIIP)
• KIID (UCITS scheme)
• KFD (Non-PRIPP) e.g. personal pension plan
What is the pre investment disclosure document?
•Requirements in FCA fund sourcebook.
• They tend to be more details then the other types of docs.
• More specific risks associated with these funds
Factors of Complaints
• Procedures must be in place
• Record keeping
• MIFID business
• UCITS
• Non-UCITS
For client money and asset reporting what must happen? ( for medium and large firms)
• Complete Client money and asset return (CMAR)
• Send this using GABRIEL
Where are requirements of CMAR contained?
SUP (supervision sourcebook) NOT in the CASS
What are the data protection principles?
• Lawfulness, fairness and transparency
• Purpose limitation
• Data minimisation
• Accuracy
• Storage limitation
• Integrity and confidentially
• Accountability
If a data controller identifies a breach, who must be informed and when?
The ICO and within 72 hours.
What are the three categories of information security controls?
• Physical
• Logical
• Encryption
What is the required frequency for physical assets reconciliation
As often as necessary but at least once every 6 months
What is CASS 6 ?
Client safe custody assets
Restricts the way in which a firm can register ownership of client assets.
What two methods can the firm choose from for Internal Custody record check?
• Internal custody reconciliation method (ICRM)
• Internal system evaluation method (ISEM)
FCA 3 standard rates of investment growth are? Tax-exempt wrappers
Lower rate: 2%
Intermediate rate: 5%
Higher rate: 8%
FCA 3 standard rates of investment growth are? Other products
Lower rate: 1.5%
Intermediate rate: 4.5%
Higher rate: 7.5%
What does the FCA DISP rule require?
Requires that every six month each firm provide the FCA with reporting on all complaints receive from Eligible complaints.
What are the three lines of defence:
• First line: Business operational management
• Second line: Risk management and Compliance functions
• Third line: Internal and External Audit
what does Client assets sourcebook do?
Sets out methods and controls to minimise risk that investors money or assets could be lost.
What does COBS do?
Sets out obligations on a firm when providing services to its clients. Includes: promotions, performs transactions, defines and explained its services, and reports activity to its customers.
What is ‘root cause analysis’?
Standard for firms to conduct this to determine whether individual breaches are isolated cases or have arisen because of broader weaknesses within the control mechanisms in place within the firm.
What is COBS 2.2 and 2.2A regarding?
Information disclosure before providing services
Appropriate information that should be provided to the investor before providing service?
• firm and it’s services
• designated investments and proposed investment strategies, including appropriate guidance on warning/risks associated with those investments
• execution venue
• cost and associated charges
What does COBS 6.1 specify?
Certain disclosures must be made in good time before the provision of investment business to the client.
What does COBS 16 and 16A do?
Rule requires that the firm provides to its client adequate reports on the services provided by the firm. Rule also contain requirements for reporting following events/actions.
What reports come under COBS 16?
• occasional reporting
• periodic reporting
• statement of client financial instrument or client money
Elements that come under ‘ Trade Confirmation Information
• identification of the UCITS scheme
• date of execution
• Number of units involved
• the unit price at which the units were subscribed or redeemed.
What does SYSC 4 set out?
Sets out a number of general requirements that the FCA expects any ‘common platform firm’ to implement.
What does SYSC 7 set out?
This rule requires that various types of firms- such as banks and designated investment firms establish, implement and maintain adequate risk management policies and procedures.
For an Internal custody record check, the firm can choose from what two methods:
• Internal custody reconciliation method (ITRM)
• Internal system evaluation method (ISEM)
What is required frequency for internal custody record check and for the external custody reconciliation?
As often as necessary but at least once a month.
For physical asset reconciliation, the firm can choose between what two methods?
• Total count method
• Rolling stock method
For physical asset reconciliation, what is the required frequency?
As often as necessary but at least once every six months.
What’s the difference between Total count method and Rolling stock method?
The total count method requires all vault assets to be counted in a single process, while the rolling stock method allows this to occur in phases.
A “short fall exist” where the firms holdings?
Are not sufficient for its obligations to its clients.
For shortfall, what is different for asset positions?
The firm might conclude there is no need to take such action if the custodian is still working to achieve market settlement of a trade.
Each firm must determine how often it carries out reconciliation checks and must take into account:
• the frequency, number and value of transactions that the firm undertakes in respect of clients safe custody assets, and
• the risks to which clients safe custody assets are exposed, such as nature, volume and complexity of the firms business and where and with whom the safe custody assets are held.
For CASS 7, the firm must ensure it has established.
‘ Adequate organisational arrangements to minimise the risk of loss or diminution or client money’.
Where client money is held with an associated company of the firm (known as ‘relevant group entity’), the total amount held by group entities must not at any point exceed?
20% of the total client money held in the firm.
What nine elements make up the CMAR return? Client money asset returns
- Information about the firm
- high/low balances
- Client money segregation structure
- Resource and requirement
- Client money reconciliations
- Segregation of safe custody assets
- Safe custody asset record checks and reconciliations
- Record keeping and breaches
- Outsourcing and offshoring
What are the seven principles of data protection?
- Lawfulness, fairness and transparency
- Purpose limitation
- Data minimisation
- Accuracy
- Storage limitation
- Integrity and confidentiality
- Accountability
When breaches have been identified for data protection, in what time must the ICO be notified?
Within 72 hours of the breach being identified.
Failing to notify the ICO for any breaches can result in a fine of ..?
Greater of £10m or 2% of the data controllers global turn over from the previous financial year.
Any data breaches relating to infringements of the data’s subject individual privacy rights can results in a fine of up to?
Greater of £20m or 4% of the data’s controllers annual global turnover.
Platforms operators need to consider a range of practical issues concerning protection of their own data, as well as their clients and employees data:
• security culture
• physical security
• encryption
• password protection
• data segregation
• portable devices
• outsourcing arrangements
• reconciliation
What does the first line of defence consist of?
Consists of various controls an firm implements to deal with day to day business operations and transactions.
What functions in companies are linked to risk management and compliance roles?
• enterprise risk management
• quality monitoring
• compliance
• IT security
• legal
• health and safety
• environmental
What is the third line of defence?
This is the independent assurance provided by the firms audit committee and the internal audit function that reports to that committee.
What level of cover do banks, building societies and credit union deposits have?
100%, £85,000 per person per firm or £170,000 in cases of joint accounts with two names.
What level of cover do authorised investment businesses and pension and annuities have?
100%
What level of cover do insurance contracts have and what is the maximum payment?
Either 90% or 100% depending on the contact and the payment is unlimited.
How frequently are transaction reports sent to the FCA?
Daily
To whom is the CMAR submitted and how often?
FCA, monthly
The CASS rules require a platform that never hold assets on it own premises to perform which of the custody checks and reconciliations of customer assets?
• Internal custody record check
• external custody reconciliation
FSCS is available to retail customers defined as:
• private individuals
• small charities/businesses
- To qualify must have assets of less than £5.1m, 50 employees or fewer and a turnover of less then £10.2m pa.
What aspect of regulation is addressed by CASS 6.3?
Selection and appointment of a custodian
What is effectively keeping segregated data an example of?
Managing information security risks
How does the cumulative effect of charges for investment services differ from the level of charges?
Only cumulative effect figures demonstrate the reduction in growth
The cumulative effect of charges is the difference between what?
Gross performance of the fund and the net performance after charges, illustrating the reduction in growth resulting from charges.
A platform firm’s monthly client money and asset return showed three items in the 30-59 days category. What does this reflect?
The number of unresolved reconciliations from that period
What must the CMAR include ?
The number of unresolved client money reconciliation items records, split according to the age of the exception item: e.g. 6-29 days / 30-59 days / 60-90 days / over 90 days.
A client has been provided with a ‘cumulative effect’ illustration. How will this help them to understand the effect of charges on their investment?
By showing the difference between gross performance and net performance
A platform firm has acquired an updated sanctions list. This will primarily allow it to identify:
Individuals with whom it should not start a business relationship
In order to assess the adequacy of their financial resources, regulated platform firms are required to submit detailed financial returns to the FCA at what prescribed frequency?
Monthly
CASS rules specify that client money should be ??
Deposited in a qualifying money market fund or authorised bank
A coupon rate is what?
Percentage of the bonds face value
CASS rules specify that client money should be ??
Deposited in a bank or money market selling fund
The maximum amount of the firms client money that can be held by an associate company of the firm must not exceed what percentage?
20% - for any third party not of the firms corporate group this is unlimited
What are the rules associated for COBS:
• COBS 2.2 and 2.2A
• COBS 3
• COBS 6.1
• COBS 11.2 and 11.2A
• COBS 16 and 16A
• information disclosure before providing service
• client categorisation
• info on firm and compensation arrangements
• best execution
• reporting information to clients
What is the difference between COBS 2.2 and 2.2A?
2.2 related to Non MIFID while 2.2A is for MIFID business
Who does COBS 11.2B apply to?
UCIT fund managers
What is more important A) the total consideration for completing the trade(I.e settlement value once all associated transaction costs have been included) or
B) the price alone?
A
What is an example of occasional reporting and when must this be sent?
An example is a contract note and this must be provided no later then T+1 after transaction is priced.
Who does the requirement of. T+1 for occasional reporting not apply to?
Firm that is managing investments
When does a firm not need to provide a periodic statement:
if info can be accessed via online portal in durable medium and firm can provide evidence that client accesses this at least once during relevenat three months
what does COBS 16 and 16A provide information on as they differ?
16- trade confirmation information
16A- MIFID firms with essential information about transaction
What are the SYSC for
• SYSC 4
• SYSC 7
• SYSC 9
• general organisational requirements
• risk control
• record keeping
Does use of a nominee company comply with CASS 6?
Yes
CASS 6.3 requires firms to exercise all due skill, care, diligence in selection and appointment of third party custodian. What should the reviews take into account?
• expertise and market reputation of third party
• any legal requirements or market practises related to holding of those assets that could adversely affect client rights.
For client money how often must a firm perform internal money reconciliation?
Daily
In terms of target market analysis, what must product manufacturers do?
Provide the platform with their target market analysis to reduce the risk that the platform considers the target to be somewhat different then the manufacturer.
What disclosure document is required for alternative investment funds?
Pre investment disclosure document
A reportable asset is what?
An asset that is available to trade subject to a relevant market listing or is a available for trading on OTF or MTF.
When a firm deals in a traded asset it must report the trade to the FCA when?
Following day
Regulated firms are required to send WHAT to the FCA each month?
Detailed financial returns show that the regulator can monitor if the firm has adequate financial resources.
All CASS medium and large firms are defined as:
Firms that hold either client money with a total value of over £1 million or custody assets with a total value of over £10 million.
The payment services regulation defines the law relating to what?
Banking and credit card matters, including how unauthorised banking and card transactions must be dealt with.
The payment services regulations apply to when?
Platform operators accept debit cards as a method of payment.
Before any assets are traded what is the adviser required to do in terms of MIFID II Costs & Charges Disclosure?
Provide retail clients with details of all the expected costs affecting the client as a result of the overall advice being given (Ex Ante)
What does ex ante costs include (fixed and estimates)
• the cost of the advice itself
• cost of opening the platform account
• brokerage costs related to expected number of equity transactions
• recognition of the annual management charges applied with the relevant UCITS fund
• any initial (or exit) charges applicable when trading UCITS funds with the AFM concerned.
What does the annual ex post reporting confirm?
The actual charges incurred throughout the investors holdings and transactions during the past year.
How are the ex ante and ex post disclosures to be provided?
In cash and percentage terms
What is the intention of cumulative effect?
The this is merely an illustration to help the client understand this relationship - the difference between net performance and gross performance.
What is the difference between ex post disclosure with cumulative effect?
The ex is based upon actual activity undertaken by while cumulative effect information is only provided as an illustration.
When must the CMAR be completed?
Monthly but it will be submitted within 15 business days from the end of reporting period.
Value assessment will include:
• the costs incurred by the firm in providing its products/services
• whether the firms prices would be considered an outlier if compared with general rates/charges in market
• whether the charges applied for one of the firms products differ from those similar offered by the firm
When must the value assessment be performed?
While product/service is being designed, but should be reviewed regularly.
Four key drivers of Vulnerable customers:
•Health conditions
•Life events
•Resilience
•Capability
