Chapter 7 - Regulatory Advice Framework

Question 1

KID & KIIDS - what are they, what providers must do for new and existing products and what KIID document must include (7)

Answer 1

KIIDS - Explain to customers the main features of any financial product in a format that is easy to follow.

Providers must produce and information pack for each of its products and must be given to client before application completed. If variation made to product, they must be supplied with sufficient information about change. And if sold without written app, must be given a KIID straight after sale.

KIID must include;

• Nature of investment
• Aims of investment
• Risk factors
• Principle terms of the investment
• Cancellation or withdrawal rights
• Compensation arrangements
• Complaints procedures
• Info required to Solvency II Directive (life policies only).

Question 2

Solvency II Directive includes the following (life policies only)(15)

Answer 2

• Name of life insurer
• Address of head office or branch
• Solvency and financial condition information.
• Definition of each benefit and option
• Policy Term
• Means of termination
• Means of payment of premiums and duration
• Calculation and bonus distributions
• Surrender and paid up values + if guaranteed
• Premiums
• Unit linking details
• Cancellation rights
• Tax arrangements
• Complaints arrangements
• Law

Question 3

Product information disclosure - Projections - what they must be based on (3) - (think projections from work)

Answer 3

Projections must be based on;

• Reasonable assumptions which are supported by objective data.
• Risk warning explaining examples + not reliable indicator of future performance.
• If gross figures used, effect of charges must be included.

Question 4

Product info disclosure - Pure protection life policies - what info must they send to client and how long do they keep record, pure protection policies - what are they (Think protection, 3) and what policies does it mainly apply to.

Answer 4

Providers must send client info required by Solvency II Directive and a record of this must be kept for 6 years.

Pure protection policies:

• Benefits payable on death or incapacity due to illness etc
• No or little surrender value
• No conversion or extension options

Mainly applies to term assurance and income protection.

Question 5

Product information disclosure - With-Profits - what must they have and outlines?

Answer 5

Must have PPFM document which sets out how they manage their with profits business.

Question 6

Product information disclosure - guidance - two categories, why bigger focus on guidance? (2) and what lead creation of what and what do they do?

Answer 6

Provider guidance - product information supplied by provider and given directly to client.
Generic guidance - generic information on type of product.

Greater focus on better guidance due to advice being unaffordable and greater pension choice. Lead to creation of MAPS who aim to help individual manage personal circumstances as well as they can.

Question 7

Product info disclosure - guidance - Pension Wise (what is it and what they can enquire about, 3), Money Advice Service (why set up?) & The Pensions Advisory Service (TPAS) (role and what it covers)

Answer 7

Pension Wise - free Gov service that allows those over the age of 50 to enquire about:

• what they can do with their pension pot.
• different types of pension and how they work
• what is and isn’t tax free.

MAS - was set up to enhance public knowledge about their finances. Provides clear impartial information on financial products and services.

TPAS - role to deliver information and guidance on pensions. It covers state, company, personal and stakeholder schemes.

Question 8

Fair treatment of clients - Six outcomes to ensure fairness and what should they do to deliver these outcomes (2)k

Answer 8

Six outcomes to ensure fair outcomes for clients;

• Clients confident that fair treatment is central to firms culture.
• Products and services are designed to meet target market
• Clients provided with clear information before, during and after sale.
• Advice is suitable and takes into account their circumstances.
• Products and services are as client has been led to expect.
• No unreasonable post sales barriers when changing product, switching provider, submitting a claim or complaint.

Firms must look to deliver these six outcomes and record evidence of them doing so. Therefore, firms should;

• identify which of the six outcomes are relevant to them.
• ensure they have appropriate systems in place to measure if they are meeting these outcomes.

Question 9

Stakeholder products and basic advice - why basic advice rules were introduced, what stakeholder products are included, what client must be given when given basic advice(4), fact find and what needed instead (4) and max charges for medium term investment.

Answer 9

Basic advice rules introduced to enable firms to provide simpler and lower-cost advice to consumers for stakeholder products via pre-scripted questions.

Stakeholder products include;

• Short term deposit based products
• Medium term collective or life products
• Long term stakeholder pension scheme

Client must be given explanation on why product was chosen for them, list of products if asked for them, initial disclosure information, how it will be paid for and commission details.

No need for full fact find but questions asked around debt levels, investment objectives, tolerance of risk and pension.

Medium term investment - max 1.5% AMC and reduces to 1% after ten years.

Question 10

Communicating with clients inc financial promos - COBS comms rules (3) and who they don’t apply to (5), what they don’t apply to (4) and real time financial and non real time + written

Answer 10

Under COBS, communications must be fair, clear and not misleading but these rules do not apply for;

• deposits
• general insurance
• home finance business
• pure protection policies
• reinsurance

Aimed at advertisements and promotions but do not apply to

• communications to one recipient
• specific products for specific person
• personal quotes or illustrations
• promotion containing only - name of firm, contact, logo, brief description, fees and products.

Real time financial promotions - those done during visit or conversation.Non-written financial promos fall into this category.
Non real time - all others e.g. static promotions & written financial promos.

Question 11

Non real-time financial promotions - Approval, how long records must be kept for what product, content of promo must be (4)

Answer 11

Approval - Compliance Department or officer checks that promotion meets rules. Promos with extended shelf life need to be checked regularly to ensure they remain compliant.

Records for non real time promos must be kept;

• Indefinitely for a pension transfer, opt-out or FSAVC
• six years for life and pension contracts
• five years for all other cases (3 for non MiFID firm)

Content - fair, clear and not misunderstanding, comparisons must be quoted objectively and on a like-for-like basis, promo purpose not disguised and must state capital at risk.

Question 12

Non-real time financial promotions cont - past performance and promos (easy, 4) & referring to tax (what must it state)

Answer 12

Past performance - must state not an indication of future performance, data used must be relevant and sufficient period (should be 5 years), needs to reference period of time it relates to and hypothetical past performance must meet certain conditions and only used if data not available.

Tax - must state tax treatment depends on individual circumstances and can change in the future.

Question 13

Real-time financial promotions - must ensure they are done… (5)

Answer 13

Must ensure real time promos are done;

• in a way that is fair, clear and not misleading
• purpose of promo is made clear at the start
• check that the recipient wishes to proceed with communications or stop if not.
• gives them a contact point
• does not communicate without permission, at unsocial hours and unlisted telephone number.

Question 14

Direct offer financial promotions - what they must include in promotion (6) and what they should receive (3)

Answer 14

They must include;

• sufficient information to make informed decision.
• confirmation of authorisation or regulation from FCA.
• Name and address of firm or person offering and approving the promotion.
• Name of the person whom payment should be made.
• details of charges and expenses.
• Details of commission or renumeration payable to another person.

And should receive, where relevant, the following;

• Confirmation that firm can be contacted for advice.
• Description of risk involved
• Summary of taxation (investment & consequences)

Question 15

Unsolicited real-time financial promotions (cold calling)- can be done when (2) & adviser must offer client…

Answer 15

Must not be done unless already established relationship with client or general marketable packaged product (not high volatility fund).

Cold call properly made they must offer client opportunity to terminate call.

Question 16

E-commerce - E-commerce Directive Rules (6)

Answer 16

If firm does business or advertises online they are subject to E-Commerce Directive rules which are;

• Minimum information must be easily, directly and permanently accessible.
• FCA status & Financial Services Register number must be disclosed.
• Clear information on services provided.
• Clearly guided how to place order.
• Must have means of correcting input errors.
• Orders must be acknowledged without delay.

Question 17

Know Your Customer (KYC) - what to do when client declines details & record keeping.

Answer 17

If client declines to give details on any given subject then adviser should record this on fact find and suitability report. Depending on amount and nature of information withheld, the adviser should not provide recommendation and consider if appropriate to do business or not.

Record keeping - must be kept for standard times.

Question 18

Suitability Report - when to do one (think job, 7), what it must include (3) and what FSAVC must include (not 100% necessary)

Answer 18

Must provide a suitability report if recommending that client;

• invests in collective investment schemes or ISA
• make any adjustments to premiums or contributions to a personal or stakeholder pension contract.
• makes income withdrawals or lump sum payment.
• purchases short-term annuity
• pension transfer, opt-out or conversion
• life policy recommendation

Must;

• Specify clients demands and needs
• explain why recommendation is suitable
• explain any disadvantages of the transaction.

SR & FSAVC - should explain why it is considered as suitable as a stakeholder pension and explain why as suitable as an in-house AVC.

Question 19

Suitability Report Cont - when they must provide SR to client (life policy , personal pensions and all others)

Answer 19

Must provider SR to client;

• Life policy - before contract is concluded
• Personal or Stakeholder Pension - no later than 14th day after contract concluded.
• Others - when transaction is effected or executed.

Not required for Friendly Society life policies when premiums are below £50 per annum or increase premiums to an existing product.

Question 20

Suitability of advice - Existing investments - majority of the time and what adviser must explain if stopping long term contract.

Answer 20

In the majority of occasions, adviser should recommend continuation of existing policy unless unsustainable or merit replacement with new contract - term assurance = can usually get better contract with alternative insurer. If they do recommend relinquishing long term contract, must explain implications to the client such as surrender value.

Question 21

Suitability of recommendations - guidelines (think work, 5)

Answer 21

Guidelines to be followed when making suitable recommendations are;

• considered advice that has been arrived at conscientiously with clients best interests in mind.
• Needs quantified and shortfalls identified.
• Find most suitable product based on clients needs and circumstances.
• Must ensure that client understands disadvantages as well as benefits.
• Past performance not indication of future performance.

Question 22

Suitability of advice - Unsuitable transactions - disagreement (rule), example of when best to avoid instruction and records.

Answer 22

Client may disagree with recommendation and instruct adviser to do a transaction that isn’t suitable - no rule detailing that they can or cannot do what the client asks.

Sometimes better to avoid e.g pension transfer from good occupational scheme with large employer contributions to a personal pension with no contributions.

Good to get record of any disagreement and get the client to counter sign for protection.

Question 23

Suitability of advice - Application forms - who should complete and why important for life assurance and signing

Answer 23

Client should complete where possible and especially for life assurance so as to not make a misrepresentation.

Application form should always be signed by the client and signature should never be forged.

Question 24

Suitability of advice - Understanding of risk - what SR should explain (2), ensuring understanding of risk allows… (3), risk profiles & existing policies.

Answer 24

The suitability report should explain any risks involved with an investment and why the recommendation is suitable against clients attitude to risk and understanding of risk. Ensuring this understanding will allow firms to make appropriate recommendations, improve quality of advice and reduce risk of complaints.

Risk profiles - adviser needs to explain what their risk profile means to them and could cover - capital security, shortfall risk, interest rate risk, inflation risk amongst a number of other things.

Need to take existing policies into consideration

Question 25

Markets in Financial Instruments Directive II (MiFID II) - why was it put in place, who it applies to, what are article 3 firms and what req are they subject to

Answer 25

MiFID II - put in place to improve functioning of financial markets and strengthen investor protection. It’s scope is broad and applies to firms providing investment services and MiFID financial instruments (shares, bonds etc).

Financial advisers - many who do not hold client assets or money and only do business in the UK are exempt from MiFID 2. Known as Article 3 firms and subject to requirements including range of authorisations, conduct of business and organisational requirements.

Question 26

MiFID II - Main changes for retail investment firms

• disclosure of costs and charges
• product governance (distributors and manu)
• Describing advice services (indie)
• Structured Deposits (regulation)
• Suitability (financial instruments and periodic reviews)
• Recording conversations
• Inducements (what MiFID intro’d and what they can accept)

Answer 26

Disclosure of costs and charges for recommendations - Indication of costs and charges need to be provided pre sale and actual needs to be provide post sale and where applicable, on an annual basis. Expressed as cash and percentage.

Product Governance - advisers need to consider rules around information sharing between distributors and manufacturers. E.g can feedback to manu on how product is meeting target market.

Describing advice services - basically refers to independent financial advice.

Structured Deposits - If they wish to carry out advice or carry out regulated activity for structured deposits, need to add to regulatory permissions.

Suitability - Recommendation to hold MiFID financial instrument is subject to suitability rules and requires suitability report. If offering periodic assessment of suitability, must be done at least once a year.

Recording conversations - All MiFID firms must keep a record of all communications.

Inducements - MiFID II introduced inducement bans for independent investment advice and portfolio management services. Can only accept minor non-monetary benefits and does not include sporting and cultural events.

Question 27

The Insurance Distribution Directive (IDD) - aims, what it covers (7), alignment

Answer 27

Aims to enhance client protection when buying insurance and support competition between insurance distributors through creating a level playing field. Some aspects that apply to insurance intermediary and investment firms.

It covers initial authorisation, pass-porting arrangements, ongoing regulatory requirements, organisation requirements, conduct of business requirements, product oversight and governance requirements and enhanced conduct rules for insurance-based investment products (IBIPs).

Intention is to more closely align customer protection with MiFID II rules.

Question 28

Client relationships and adviser responsibilities - types of client - investment business - 3 types of client, retail client (who & req), pro client (per se who & elective who and what qual assessment needed (3) + if MiFID, what quan analysis (3)).

Answer 28

Investment business - need to categorise investment business into three types of client - retail, professional and eligible counterparty.

Retail client - Not eligible counterparties or pro clients. Requirements for disclosure and protection are significantly higher for these.

Professional clients - either be per se or elective.

• Per se clients - credit institution, investment firm, other auth or reg financial institutions, insurance company, collective investment scheme, pension fund, commodity or commodity derivatives dealer, a local authority and any other institutional investor.
• Elective Professional - Client who does not satisfy above criteria but treated as a pro client. In order to be classified as such, firm must conduct qualitative assessment of expertise, experience and knowledge to ensure they are capable of making own decisions + risks. If firm is subject to MiFID, may have to do quant analysis of customer, previous investment transaction history and value of investment held by client.

Question 29

Client relationships and adviser responsibilities - Eligible counterparty - what does it include (2), per se eligible counterparts (who, 9) and adviser likelihood of EC’s

Answer 29

Applied to clients in respect of eligible counterparty business which includes;

• Dealing on own account (e.g. firm buys blocks of shares then sells them on to clients)
• Arranging, execution, or receipt or transmission of orders (e.g firms carrying out deals at request of client).

Per se eligible counterparts;
- Investment firm, credit institution, insurance company, collective investment scheme, pension fund, EU/EEA auth financial institution, governments, central banks and supranational organisations.

Advisers unlikely to classify any clients as EC’s since services provided are unlikely to be limited to EC business.

Question 30

ICOBS client categories & Home finance business (MCOB)

• Consumer
• Commercial customer
• Customer (both)

Answer 30

Consumer - normal person acting outside trade or profession.
Commercial customer - customer who is not a consumer.
Customer - refers to both.

MCOB only has one class of clients - customers.

Question 31

Fiduciary relationships

• Fairness to clients
• Relationship with Provider
• Conflict of interest/material interest - what they must do and what falls under this (4)

Answer 31

Fairness to clients - have duty to act honestly, fairly and professionally to clients above all others.

Relationship with provider - provides advice on providers products and acts as an agent for the client not for the provider.

Conflict of interest and material interest - any conflict of interest must be disclosed in writing to client before any transaction arranged. Includes dealing as principal, as agent for more than one party, recommending transaction if already done transaction in same investment and acting as a broker fund adviser.

Question 32

Fiduciary relationships

• Exclusion of liability
• Clear, fair and not misleading comms
• Independent firms
• Inducement and Commissions
• Charging for complaint handling (think previous chapter)

Answer 32

1 - must not seek to exclude or restrict any obligation they have to client when they are communicating with retail client unless reasonable to do so.

2 - self explanatory - requirement under COBS, MCOBS and ICOBS with the latter two being more prescriptive about terms they can and can’t use.

3 - must not claim to be acting independently unless they actually are.

4 - firms must ensure that they are not conducting business that conflict with duty to clients.

5 - Unjustifiable as could deter clients from complaining or referring to FOS. Unfair under Consumer Rights Act 2015 and breaches Principle 6.

Question 33

Status disclosure - what firm must disclose to client (7), what they must do with commission (3), range of product & initial disclosures (what is it and when do they not have to do it, 3)

Answer 33

Firm must provide information about themselves and relationship with client which includes;

• Regulatory status
• Firms status as Independent etc
• Details of services provided
• Details of how the firm is paid
• Details of loan and ownership
• How to complain
• Coverage by FSCS

If there is any trail commission taken by the firm it must be used for reducing fee, increasing investment or direct payment to client. Can agree if commission is relatively small, disproportionate for firm to include this therefore they keep.

Firms must produce record of investment products they have at request.

Initial disclosures - above information confirmed in writing but they do not have to if;

• Info already given to client and is still valid
• where initial contact is over the phone
• execution only transactions in non-life packaged products.

Question 34

Client Agreement - when not required (2), details of… (straightforward, 15), how long record kept (3) and objective of these rules (3)

Answer 34

They are not required for direct offer financial promotions and life offices selling life and pension policies as a principal.

Client agreements must have details of commencement, regulation details, investment objectives, restrictions, services, payment, status, giving of instructions, accounting, withdrawal rights, conflicts of interest, risk warnings, complaints, compensation and termination.

Record must be kept whichever the longest out of;

• five years
• duration of relationship with client
• indefinitely for pension transfer, opt-out of FSAVC

Objective of these rules is to ensure the client knows the firm they’re dealing with, services provided and likely procedures and costs.

Question 35

Types of service - best execution (who does it/not apply to, aim + stockbroker)

• Execution only - what is it, when do they have to consider it more and factfinding
• Limited advice - what is it, recording and FOS

Answer 35

Best execution - mainly applies to firms dealing with stock and shares and doesn’t apply to life/pension and collective investment schemes. Firm must take all steps to ensure best possible result for client order. Stockbroker obtains highest price for selling and lowest for buying client.

Execution only - Investor states what they want and does not seek advice. Common in stocks and shares, less common elsewhere. If it relates to complex financial instrument, then they have to assess appropriateness of transaction for client. Fact finding and suitability rules not relevant thus client loses the ability to refer to FOS.

Limited advice - possible for firms to make limited advice rather than full review. Short be recorded somewhere they client only sought advice on particular subject. Firms should be wary due to no in between for FOS i.e. either no advice or duty bound.

Question 36

Types of service

• non-advised sales - what is it & examples
• Insistent clients - what is it, need to ensure (3), what sent after SR and what to do if they still want to proceed against advice.

Answer 36

Non-advised sales - no personal recommendation on product but still given sufficient information to make informed decision. Examples include; clients knows what product they want or firm offers info on range of products for client to make their own decision.

Insistent clients - when a client doesn’t want to go with recommendation and wants firms to facilitate transaction against advice. If firms have an insistent client they need to ensure;

• provide advice that is suitable
• explain risks of alternative action
• be clear that actions are against the firms advice.

After suitability report and client not agreeing, second letter reiterating the advice should be sent. When issuing second letter firm should not add any product material. If client still wishes to proceed then they can and best practice to obtain client written doc instructing the firm to do so. And should also confirm that transaction has been arranged on specific instruction, contrary to firms advice and highlight implications of this transaction (may not be suitable etc).

Question 37

Client relationships - Limitation and referrals

• Reliance on others - conduct of business rules & when can they rely
• Reliance on information
• Insufficient information
• Execution-only transactions - obtaining info and what checks

Answer 37

1- Conduct of business rules indicate extent that firms can rely on others when meeting Principle 2 requirements of due skill, care and diligence. Can rely on other competent person if firm shows its reasonable to do so and firm may send information to third party on instruction of the client.

2- firm can rely on information provided by client unless aware that it is out of date, inaccurate or incomplete.

3- If they cant get enough info to assess suitability then they must not make personal recommendation or trade for them. Can carry out execution-only trades if instructed.

4- Not required to obtain personal or financial information but may be required to do money laundering checks and provide demands and needs statement for life policy business.

3-

Question 38

Introducer organisations

• Authorised by FCA
• Regulated by Designated Professional Body (DPB)
• Exempt firms
• Not FCA-authorised

Answer 38

1- subject to same rules and need to establish who is responsible for compliance.

2- As above but similar rules instead.

3- typically appointed reps of other firms.

4- Includes firms that have chosen not to be authorised or not regulated by professional body. Not subject to FCA rules.

Question 39

Clients’ cancellation rights - 14 day period (6), *for which ones and why & 30 day (4)

Answer 39

14 day - cash ISA, units in collective investment scheme, transferring a child trust fund, opening or transferring an ISA, enterprise investment scheme (EIS) & designated investments when sold at a distance.
*Rights apply to these where personal recommendation has been made and sale face to face.

30 day - life policy, personal or stakeholder pension, pension transfer and variations of existing personal or stakeholder pension when taking income withdrawals.

Question 40

Clients cancellation rights - exemptions and variations (8)

Answer 40

• Second ISA or EIS entered into with same manager on same terms as product from previous tax year.
• pension annuities or pension transfer they can offer pre-sale right to withdraw rather than post.
• EIS or ISA in which it has been explained no cancellation rights apply.
• EIS or ISA where right to cancel replaced by pre contract right to withdraw.
• SIPPs where client has elected to waive their cancellation rights.
• some specific pension contracts.
• some units in collective investment scheme.
• traded life policies sold on non-distance basis.

Question 41

Clients cancellation rights - when does period begin, when written notice of CRs given, what must it state (4), what happens if not sent and pension transfer and open market cr’s.

Answer 41

Cancellation period begins on conclusion of contract or when client receives pre contractual information.

Must give written notice of right to cancel before agreement has been concluded. It must state right to cancel, specific duration, steps they need to take and any consequences. If they do not send this, client can cancel at any time and not be liable for shortfalls.

Pension transfer and open market cases have reflection period of 30 days before being processed and they provide cancellation doc that includes key features and states what to do if they wish to proceed or not.

Question 42

Exercising cancellation right - when valid, record keeping, annuities not accepting, refunds and shortfalls.

Answer 42

Only valid if in specified time period and provider must keep records of this for standard times. Firm for annuities does not have to accept notice of cancellation if recipient died before notice is given.

If cancelled, provider must refund any payments but can deduct any payments they have made and shortfall amounts. Shortfall is a market loss produced by drop in unit prices.

Question 43

Clients cancellation rights - record keeping

Answer 43

Provider must keep adequate records for cancellations and withdrawals for;

• indefinitely for pension transfers, opt outs and FSAVC
• at least 5 years for life policies, pensions, personal and stakeholder pensions.
• at least 3 years for everything else.

Question 44

Ongoing monitoring and reviews - MiFID II rules (how often), rules?, sole advice, reviewing fact find

Answer 44

Under MiFID II, if firms offering periodic assessment of suitability of advice, this should be done at least annually. Other than this, no rules to relate to frequency of reviewal and is generally down to service offered by firm in their client agreement.Some firms state sole advice to remove liability of providing ongoing advice.

Must review fact find and record any changes and events that may have significant impact on advice (list is self explanatory).

Question 45

New tax-year opportunities - end (3) & new (3)

Answer 45

End

• use up ISA and pension allowances
• make use of CGT annual exempt amount
• make use of IHT annual exemption

New

• Using new ISA allowance
• increased pension contributions
• changes to capital gains, inheritance and income tax rates may provide new financial opportunities.

Question 46

Ongoing monitoring and reviews cont… - changes in environment (3)

Answer 46

Developments in fiscal, investment and economic environment can affect clients, examples:

• Tax changes mean new problems or opportunities and change of Gov may have an effect via tax liabilities or new tax reliefs.
• Investment developments can create or reduce opportunities e.g. increased % rates mean borrowing more expensive, depressed shares and bonds and makes annuity rates better.
• Introduction of new products provides clients with greater choice in financial planning.