COB Rules Flashcards
What is the IF authorization regime based on?
The nature of the client and intensity of reliance on investment firm discretion
This distinction is important for tailoring conduct-of-business rules.
When is authorization required to establish an investment firm?
Authorization needed for both stand-alone firms and subsidiaries
This includes licensure and meeting specific conditions.
What is required for authorization of subsidiaries?
- Creates new IF with own legal personality
- NCAs of host and home countries sould consult before a subsidiary is authorized
Refer to Art 5 MiFID II.
What are the conditions for refusal authorization?
Refusal of authorization can occur if
(1) sound management is not ensured or
(2) if the ability to exercise investment services is not ensured
Verification of conditions is crucial.
What does the geographical scope of authorization allow?
It allows banks and investment firms to provide services throughout the Union under mutual recognition
Refer to Art 6(3) MiFID II.
What is a branch according to MiFID II?
A place of business without legal personality providing investment services
This is distinct from the head office.
What is required for establishing first branch?
Prior notification to host NCA w/in 3 months of request and
business can commence within 2 months of notification
Host Member States cannot impose additional requirements.
What is the classification of clients under MiFID II?
- Retail clients (residual category)
- professional clients, and
- eligible counterparties
Each classification has different protection levels.
Why might professional investors opt for lower protection regimes?
(1) To reduce compliance costs or
(2) access financial instruments only available to professionals
This requires written agreement.
Who are considered retail clients?
Clients that are not professional or eligible counterparties, deserving maximum protection
This includes individuals and certain legal entities.
What defines professional clients?
Clients with experience, knowledge, and expertise to assess risks and make investment decisions
This includes investment firms and certain large undertakings.
What must investment firms inform professional clients about?
- That they are deemed professional clients unless agreed otherwise
- Resp. of PC to ask for more protection
Clients should be aware of the protections they may lose.
What are the minimum conditions for reclassification (up) to professional clients?
- Significant transactions (10 per quarter)
- Financial instrument portfolio exceeds EUR 500,000
- Worked in the financial sector for at least one year
2 of 3
These criteria ensure clients have adequate experience.
What is the suitability test?
An assessment of client’s experience, financial situation, investment objectives, and sustainability preferences
Required for fiduciary-based investment services.
What information must firms gather for the suitability test?
- Client’s experience and knowledge
- Financial situation
- Investment objectives
This is crucial for ensuring suitable advice.
What happens if an investment is not suitable according to the suitability test?
It should not be recommended or purchased
Firms must provide a suitability report outlining the advice.
What are sustainability preferences in investment?
Client’s choices regarding the integration of environmentally sustainable investments
These preferences are considered in investment advice and portfolio management.
What is the role of sustainability preferences in the suitability test?
They are assessed alongside investment objectives to determine suitability
They are not relevant for transactional services.
What must investment firms do regarding sustainability preferences?
Help clients determine how much of their portfolio should include sustainable investments
This involves assessing how ‘green’ the financial instruments should be.
What is the elevator mechanism in client classification?
Allows clients to opt for maximum protection or lower protection based on their request
This mechanism facilitates movement between classifications.
How important is sustainability in investment objectives?
Not as much as the other elements defining investment objectives.
What happens when clients do not share their sustainability preferences?
Clients are classified as ‘neutral’ when silent.
Can sustainability preferences trump other investment objectives?
No, sustainability preferences can never trump other investment objectives.
What must investment firms ensure before assessing sustainability profiles?
Only investments/portfolios suitable under any other respect can be assessed for their sustainability profile.
Can investment firms change clients’ profiles to recommend investments?
No, investment firms cannot change the clients’ profile to ensure they can recommend an investment/portfolio.
What may a client decide if no financial instrument meets their sustainability preferences?
The client may decide to adapt its own sustainability preferences by scaling them down.
What is the appropriateness test?
a test that determins whether FI is appropriate for C
For Transactional services
What information must firms gather for the appropriateness test?
Firms must obtain information on clients’ experience and knowledge, including:
* Types of financial service, transaction and financial instruments familiar to the client
* Nature, volume and frequency of the client’s transactions
* Level of education, profession or former profession of the client.
What are the outcomes of the appropriateness test?
Investment firms assess whether the investment service or product envisaged is appropriate for the client.
When must investment firms warn clients?
(1) When a financial instrument or service is deemed inappropriate or
(2) when the client did not share required information.
What can a client do if the investment firm warns them of inappropriateness?
The client may still confirm the transaction; the investment firm shall perform it.
What presumptions may investment firms rely on for professional investors?
Rebuttable presumptions regarding the ability to understand risks involved.
What is the status of appropriateness tests for eligible counterparties?
No appropriateness (and no suitability) test is required for eligible counterparties.
What principles apply to eligible counterparties?
General principles that apply across the board remain:
* Act honestly, fairly and professionally
* Communicate fairly and clearly
* Identify + manage or disclose conflicts of interest.
What are execution only services?
Services where an online trading platform runs an appropriateness test for every order received.
What does MiFID II provide for in the context of transactional investment services?
MiFID II provides for derogations for non-complex financial instruments only upon request.
What tests are not required for non-complex financial instruments under MiFID II?
No appropriateness (and no suitability) test is required.
Factors that NCAs use to evaluate IF entering the market
- fit & proper board
- Initial capital endoument
- reputable and financially found shareholders
- registered office/head office in the same country
- Adequate organization
What does adaquate organization mean when evaluating new IF
- product governance
- operational risk
- Transaction records
- asset separation
In order for IF to provide services in another MS
- Home NCA notice host NCA w.in 1 mo
- provision can start immediately upon notice
Allocation of supervision for a branch
- Conduct: Host NCA
- Org. rules: Home NCA
records of services and/transaction follows rules by host
Allocaton of supervision for provision of services
Reclassification Formalities (reclassifying up)
2 written docs:
* K specifing the terms of the reclassification
* C states they are aware of the protections they are losing
When reclassifying a C up to PC what must IF evaluate
asses C’s expertise, experience and knowlege
C must:
* be capable of making investment decisions
* understand the risks
How are COB rules structured?
Conduct rules are tailored based on
(1) client classification
(2) nature of services
Elements of professional conduct
- Loyalty
- Informed Consent
- Know Your Customer Rules
- Know Your Products Rules
Baseline duties IF owes to all clients
- Fair, professional, and honest behavior
- Clear and fair communication
- COI management
What are fiduciary services
- Investment services
- Portfolio Management
Info to gather for KYC for Fid. Services
- C’s experience and knowlege
- C’s financial situation
- C’s Investment objectives
What are the consequences of being classified as a PC in the suitability test?
Two rebuttable presumptions:
* C can understand the risks involved
* C can bear losses
What are transactional services?
- receive and transmit orders,
- execute orders,
- deal on own account,
- underwrite and place financial instruments.
Info to gather for appropriatness test
C’s experience and knowlege
