Conduct of Business

Question 1

What is BCOBS?

Answer 1

Banking: Conduct of Business Sourcebook.Rules governing deposit-takers, eg banks and building societies.

Question 2

What is MCOB?

Answer 2

Mortgages and Home Finance: Conduct of Business Sourcebook.Rules governing the provision of advice relating to mortgages and home finance, including equity release.

Question 3

What is ICOBS?

Answer 3

Insurance: Conduct of Business Sourcebook.Rules governing the provision of advice on general insurance and protection products.

Question 4

What are the three types of client as set out by COBS?

Answer 4

• Eligible counterparties.- Professional clients.- Retail clients.

Question 5

What does Eligible counterparties, as defined by COBS, include?

Answer 5

Includes governments, central banks and financial institution authorised by an EEA state.Due to the assumed level of knowledge and experience, clients in this category receive the lowest level of investor protection.

Question 6

What does Professional clients, as defined by COBS, include?

Answer 6

This category includes all the bodies that would otherwise be eligible counterparties, except for the fact that they require a higher level of service than would apply to ‘eligible counterparty business’ - for example, they require advice, in addition to execution of transactions.When dealing with professional clients, advisers can assume an adequate level of experience and knowledge and an ability to accept financial risks.

Question 7

What does Retail clients, as defined by COBS, include?

Answer 7

This category provides the highest level of investor protection and comprises customers who do not fall into eligible counterparties or professional clients.8

Question 8

What are the criteria a firm must meet to be classified as independent advice?

Answer 8

• Be sufficiently diverse with regard to their type and issuers or product providers, to ensure that the client’s investment objectives can be suitably met.- Not be limited to relevant products issued or provided by the firm itself or by entities having close links with the firm.

Question 9

What are the categories of adviser?

Answer 9

Advisers are grouped into one of two categories: independent advisers and restricted advisers.

Question 10

Define Panel in relation to conduct of business requirements.

Answer 10

A selection of providers who are known and trusted, based on their product range, charges and service level.

Question 11

What is Restricted advice?

Answer 11

Restricted advice could be summarised as anything that is not independent advice of basic advice.Basic advice means providing advice on stakeholder products using a process that involves putting scripted questions to a retail client.

Question 12

Define Execution only.

Answer 12

A transaction executed upon a client’s specific instruction, where the firm gives no advice and the rules on assessing the appropriateness do not apply.

Question 13

What is qualified investment advice?

Answer 13

Where an adviser makes a recommendation based on a full analysis of a customer’s needs and circumstances.

Question 14

What is simplified advice?

Answer 14

Where a streamlined or automated process is used to gather the personal and financial information on which advice is given.

Question 15

Define Financial promotion?

Answer 15

An invitation or inducement to engage in investment activity.

Question 16

What are the rules relating to Comparisons of financial promotions?

Answer 16

• Comparisons with other products must be meaningful, and presented in a fair and balanced way.- Markets in Financial Instruments Directive (MiFID) firms are subject to additional requirements to detail the source of information and the assumptions made in the comparison.

Question 17

What are the rules relating to Unsolicited promotions (ie non-written ‘cold calls’).

Answer 17

• Permitted only in relation to certain investments, including packaged products, such as life assurance policies and unit trusts. Not permitted in relation to higher-volatility funds (which use gearing) or life policies with links to such funds, due to the increased investment risk involved. Cold calls are not permitted in relation to mortgage contracts.- ‘Appropriate time of day,’ usually between 9am and 9pm Mon to Sat.- Caller must check the recipient is happy to proceed with the call.- The caller must also give a contact point to any client with whom they arrange an appointment.

Question 18

What aspects laid down by the Advertising standards authority are particularly relevant to financial services?

Answer 18

• Legal, ie containing nothing that breaks the law.- Decent, ie containing nothing that is likely to cause serious or widespread offence.- Honest, ie not exploiting inexperience of customers.- Truthful, ie not misleading or inaccurate.

Question 19

What are the rules relating to adviser charges?

Answer 19

Since 1 January 2013, a firm advising on investment business must only be remunerated for its services by adviser charges; it is no longer allowed to receive commission from the product providers for the products it recommends.

Question 20

What is Designated investment business?

Answer 20

Dealing in investment assets directly on behalf of a client.

Question 21

What is the timescale for providing a suitability report?

Answer 21

When providing investment advice to a retail client and in the case of life policies, a firm must, before the transaction is concluded, provide the client with a suitability report.

Question 22

What does the contents of a key features document include?

Answer 22

• A brief description of the product’s aims.- A brief description of how the product works.- They key terms of the contract, including any consequences of failing to maintain the commitment or investment.- The material risks involved.- The arrangements for handling complaints about the product.- That compensation is available from the FSCS.- That a right to cancel or withdraw exists (or does not exist).

Question 23

What is the cooling off period for life and pensions policies?

Answer 23

For life and pensions policies, and contracts of insurance that are, or have elements of, a pure protection contract or payment protection, the period is 30 days.

Question 24

What is the cooling off period for investments or deposits and other insurances?

Answer 24

The period is 14 days.

Question 25

When an adviser transacts designated investment business for a client, the basis or amount of the charges would normally be disclosed in which document?

Answer 25

The client agreement letter.

Question 26

Define First Charge.

Answer 26

If a lender has to take possession of a property and sell it as a result of the borrower defaulting on the loan, the holder of a first-charge loan has the right to be repaid ahead of other chargeholders from the proceeds of the sale.

Question 27

Define Second Charge.

Answer 27

In the event of a property being possessed

Question 28

Define Consumer buy to let.

Answer 28

A transaction where the mortgage has not been entered into wholly or predominantly for the purpose of a business carried out by the borrower.

Question 29

What is covered in MCOB I: Application and purpose?

Answer 29

Explains the scope of the rules, ie to whom they apply and for what types of mortgage.

Question 30

What is covered in MCOB 2: Conduct of business standards: general?

Answer 30

Includes:- The use of correct terminology (‘early repayment charge’ and ‘higher lending charge’);- The requirement for communications with customers to be ‘clear, fair and not misleading’;- Rules about the payment of fees/commission and the accessibility of records for inspection by the FCA.

Question 31

What is covered in MCOB 3A: Financial promotions and communications with customers?

Answer 31

Distinguishes between ‘real-time’ promotions (by personal visit or telephone call) and non-real-time (by letter, email, or advert in newspapers, magazines, or on television radio or the internet).- Unsolicited real-time promotions are not permitted.- Non-real-time promotions must include the name and contact details of the firm. They must be clear, fair and not misleading. If comparisons are used, they must be with products that meet the same needs. They must state that ‘your home may be repossessed if you do not keep up repayments on your mortgage’. Records of non-real-time promotions must be retained for one year after their last use.

Question 32

What is covered in MCOB 3B: MCD general information?

Answer 32

Specified the requirements relating to information that must be provided to customers, for lenders who make mortgage advances regulated under the Mortgage Credit Directive.

Question 33

What is covered in MCOB 4 and 4A: Advising and selling standards?

Answer 33

It must be clear whether advice is based on the products of the whole market, a limited number of home finance providers, or a single lender.- Independent advisers are not required to be able to access all products from all providers: they can source products from a panel of lenders as long as the panel is representative of the market.- Any mortgage recommended must be suitable for the customer and appropriate to their needs and circumstances; records to demonstrate this must be kept for three years. However, there is no requirement to issue a suitability report to the client.- Special requirements apply if the mortgage will be used to consolidate existing debts.

Question 34

What is covered in MCOB 5 and 5A: Pre-application disclosure?

Answer 34

Details the information that must be provided at the point at which a personal recommendation is made and before an application is submitted to the lender. This must include:- The annual percentage rate of charge (APRC), which shows the interest rate with any fees added;- The amount of the monthly installment; and- The amount by which the installment would increase for each 1% rise in interest rates.The required information must be provided via a European Standardised Information Sheet (ESIS).

Question 35

What is covered in MCOB 6 and 6A: Disclosure at the offer stage?

Answer 35

If a mortgage offer is made, the lender must provide a detailed offer document. This is based on the information given at the pre-application stage, subject to any changes between application and offer illustration. The offer is binding on the lender but can be made conditional on the confirmation of certain details. The offer must also:- state how long the offer will remain valid;- point out that there will be no right of withdrawal- include or be accompanied by a tariff of charges.The borrower must be granted a period of reflection of at least seven days to consider whether to accept the offer or not.

Question 36

What is covered in MCOB 7 and 7A: Disclosure at the start of contract and after sale.

Answer 36

Before the first mortgage payment is made, the lender must confirm:- details of amounts, dates and methods of payment;- details of any related products such as insurance;- (for interest-only mortgages) the responsibility of the borrower to ensure that a repayment vehicle is in place; and- what the customer should do if they fall into arrears.Annual statements must be issues, showing:- the amount owned and remaining term;- what type of mortgage it is;- for interest-only mortgages, a reminder to check the performance of the repayment vehicle;- interest, fees or other payments made since the last statement;- any changes to the charges tariff since the last statement.

Question 37

What is covered in MCOB 8 and 9: Equity release - advising and selling standards, and product disclosure?

Answer 37

Details the FCA’s requirements in respect of lifetime mortgages and home reversion schemes. Special rules apply to equity release in relation to advising and selling standards, and to product disclosure. The FCA Training and Competence rules require that anyone giving advice on equity release must hold a specialist qualification in this area of business.

Question 38

What is covered in MCOB 11 and 11A: Responsible lending?

Answer 38

Lenders must put in place a written responsible lending policy, and must be able to show that they have taken into consideration a customer’s ability to pay when offering a mortgage.

Question 39

What is covered in MCOB 12: Charges?

Answer 39

Excessive charges are not permitted. Early repayment charges must be a reasonable approximation of the costs incurred by the lender if the borrower repays the full amount early. Similarly, arrears charges must be a reasonable approximation of the cost of additional administration as the result of a borrower being in arrears.

Question 40

What is covered in MCOB 13: Arrears and repossessions?

Answer 40

Firms must deal fairly with customers who have mortgage arrears or mortgage shortfall debt. This includes:- trying to reach an agreement on how to repay the arrears, taking into account the borrower’s circumstances;- liaising with third -party sources of advice;- not putting unreasonable pressure on customers in arrears;- repossessing a property only when all other reasonable measures have failed;- only applying arrears charges that are a reasonable reflection of the costs of the work involved in dealing with the arrears.

Question 41

What info must customer in arrears be provided within 15 working days of the lender becoming aware of arrears?

Answer 41

• The Money Advice Service information sheet ‘Problems paying your mortgage’;- The missed payments and the total arrears including any charges incurred;- The outstanding debt;- Any further charges that may be incurred unless arrears are cleared.