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UK Financial Regulations > Conduct of Business > Flashcards

Conduct of Business Flashcards

1
Q

When is a firm permitted to communicate via a website? (5 conditions)

A
  1. Evidence that it is appropriate method
  2. Client has specifically consented to this method
  3. Client is notified of website address electronically
  4. Information is kept up to date
  5. Information is continuously accessible for as long as the client requires it
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2
Q

How long should recordings be kept for client orders and what are the 3 specific purposes these recordings should be kept for?

A

5 years
Receiving client orders, executing client order, arranging for a client order to be executed

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3
Q

List some communications that client recordings should be kept for (4pts)

A
  1. Fax
  2. Email
  3. Instant messaging
  4. Mobile phones
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4
Q

Who does recording of voice/electronic communications apply to? (2pts)

A

With any client.
Any eligible counterparty

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5
Q

Who do the COBS apply to?

A

Directly to firms conducting designated investment business.
Applies to firms conducting insurance business from an establishment maintained by them/appointed reps in the UK

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6
Q

Who do COBS indirectly apply to and what is another name for these persons?

A

Indirectly apply to appointed representatives (aka tied agents)

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7
Q

What does the Fair Treatment part of COBS detail?

A

All firms must ensure they act honestly, fairly and professionally - clients’ best interests rule.

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8
Q

What are the two types of professional clients?

A
  1. Per se professional client
  2. Elective professional client
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9
Q

What are 4 types of per se professional clients?

A
  1. Authorised/regulated firm
  2. Govt, central bank, supranational
  3. Other institutional investors e.g. special purpose vehicles
  4. Large undertaking (e.g. large business company level - MiFID)
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10
Q

What is the criteria to be a large undertaking at a company level?

A

Has to satisfy at last 2/3:
1. Balance sheet €20mn
2. Net turnover €40mn
3. Own funds €2mn

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11
Q

What is an elective professional client?

A

When a retail client opts up to a professional client

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12
Q

What is the qualitative test to be an elective professional client and who does it apply to.

A

Applies to all businesses.
Firm to assess expertise, experience and knowledge to provide reasonable assurance about capability and understanding

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13
Q

What is the quantitative test to be an elective professional client and who does it apply to.

A

For MiFID businesses only. Have to meet 2/3 of following conditions:
1. Avg trade frequency 10 per quarter over previous 4 quarters
2. Portfolio > €500k
3. Works or worked in financial sector for >= 1 year in professional capacity

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14
Q

What are the 3 steps for process of retail client opting up to be elective professional client?

A
  1. Written intent from client to be classified as a professional
  2. Written warning to client explaining lost protection
  3. Written client consent to lost protection
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15
Q

Two types of Eligible Counterparties? (ECPs)

A

Per se ECP or elective ECP

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16
Q

If you want to opt up to be a professional client but not to MiFID business, what test/s do you need?

A

Qualitative test only however in exam, assume that if not specified, we are assuming MiFID business and so 2 tests needed (qual and quant)

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17
Q

What does classification of ECP businesses only relate to?

A

Related to ECP businesses dealing on their own account and/or executing orders on behalf of clients

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18
Q

What are examples of some certain per se professional clients conducting ECP business (therefore assumed per se ECPs)?

A

Authorised/regulated firm
Government, central bank, supranational

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19
Q

Who is able to become an elective ECP?

A

Any undertaking that is a per se professional client (except an individual investor)

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20
Q

Procedure to become an elective ECP?

A

Obtain client confirmation to be treated as an ECP

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21
Q

Can you opt down protections for ECPs and PCs, how does this happen?

A

Yes - per se ECP can be treated as PC or RC and per se PC can be an RC.
This happens either on the firm’s own initiative or at the request of a client.

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22
Q

If a person is acting as an agent, what does this mean - who should be treated as a client?

A

Where the person with whom the firm is dealing with (A) , is acting as an agent of another person (B) , then (A) should be regarded as the client.

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23
Q

What are the exceptions to acting as an agent rule (2pts)

A

Written agreement between firm and the agent to treat B as the client.
Purpose of the agency is to avoid duties owed to B.

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24
Q

When firms rely on info provided by other organisations, when can firms fully rely on this? If they can’t fully rely, what are the 3 conditions so that they can rely on info.

A

If info is from a MiFID firm then they can fully rely on info.
If not MiFID firm, 3 conditions are:
1. Info is in writing
2. Non-MiFID firm is independent
3. Non-MIFID firm is competent - held accountable

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25
Q

What is law S21 FSMA 2000?

A

Must not communicate a financial promotion unless:
1. It is an authorised person; or
2. The content has been approved by an authorised person

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26
Q

If firm approves financial promotion approved by a 3rd party, what are the 3 conditions so that it would never be in breach of rules?

A
  1. Established that an authorised firm has approved the promotion
  2. It communicates the promotion only to those it was intended
  3. The promotion has not ceased to be fair, clear and not misleading
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27
Q

What are exceptions on the FCA’s rule on communications? (5pts)

A
  1. Exempt under the financial promotions order (FPO)
  2. From outside the UK, and cannot have effect within UK
  3. Subject to takeover code or any similar code
  4. Personal quotes or illustrations
  5. One-off promotions that are not cold calls
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28
Q

4 rules for communications with retail clients?

A
  1. Name of firm is included
  2. Details are fair and accurate
  3. Promotion is comprehensible
  4. Promotion doesn’t obscure important items, statements or warnings (particular focus on ‘Capital at risk’ products)
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29
Q

On past performance communications, what are the exact time frames that it must show and also, what are key bits of info that must be disclosed?

A

Cover at least 5 years (or life of investment) in complete 12-month periods.
Reference periods and sources must be clearly shown
Must be stated that this isn’t an indicator of future performance.
If relevant: must show currency stated and warning of currency risk
Disclose effect of fees and commission if gross performance shown.
In general must not be most prominent feature

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30
Q

Rules on simulated past performance communications - what must the simulation be based on?

A

Based on actual performance of a similar investment/index.
Must comply with the rules for past performance too.

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31
Q

Future performance communications - what must it not be based on and what else must be disclosed?

A

Must not be based on simulated past performance.
Must disclose effect of fees and commissions.
Must warn that forecasts are not reliable indicators.

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32
Q

What are direct offers or invitations and which clients are these for?

A

This is a financial promotion that contains a method of response for the client to invest in a product e.g. an application form.
This is for retail clients only.

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33
Q

For direct offers, what are 3 areas of info that it must contain?

A
  1. Info on firm and its svcs
  2. Info on safekeeping of client investments and money
  3. Info on costs and charges
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34
Q

For direct offers, when must a firm also include additional appropriate info to allow an understanding of the nature and risks of an investment?

A

When it is a non-MiFID business only

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35
Q

In terms of rights to cancel, what is the general time frame and what case is there an exception for this?

A

Generally c.14 days
Life + pension products is usually c.30 days

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36
Q

Unwritten promotions - what are 3 things that must be stated at the start of either a solicited or unsolicited unwritten promotion?

A
  1. The caller
  2. Their employer
  3. The purpose of the call
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37
Q

When are cold calls permitted to retail clients?

A

When it is about generally marketable packaged product (not a high volatility fund)
Services relating to readily realisable securities (shares, bonds etc) other than warrants.

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38
Q

Info disclosure wrt to the firm - what type of info is given to all clients (6 pts)

A
  1. Name and address of firm
  2. Method and language of communication
  3. Name and contact details of competent authority
  4. Whether the firm is acting through an appointed rep
  5. Nature, frequency and timing of performance reports
  6. If a common platform firm, the conflicts of interest policy
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39
Q

What is a common platform firm?

A

Firms subject to either Capital Requirements Directive (CRD) or the Markets in Financial Instruments Directive (MiFID)

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40
Q

What is the Retail Distribution Review (RDR)

A

For retail clients.
States that firms making personal recommendations to retail clients must be either independent or restricted.

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41
Q

In terms of the RDR and what it states for remuneration (from both product provider and the adviser)?

A

No commissions from the product provider are permitted.
From the adviser - adviser charges are agreed in advance. Clients can choose whether to pay the adviser charge upfront or have it deducted from their investment over time.

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42
Q

Product disclosure: when would a KID be used (Key Information Document)

A

For packaged Retail and Insurance-based investment products (PRIIPS)

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42
Q

Product disclosure: when would a KIID be used (Key Investor Information Document)

A

For UCITS schemes

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43
Q

MiFID business, inducements: What fees are permissible for a firm to take?

A

Proper fees necessary for the provision of the business.
E.g. custody costs, settlement fees, legal fees, etc.

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43
Q

What are two conditions for when receiving firm can use research from other firms?

A
  1. If the receiving firm pays for it with direct payments out of its own resources
  2. If receiving firm pays for it with payments from a separate research payment account controlled by the firm.
43
Q

For MiFID business, Inducements: what are the two exceptions where a firm can pay to/accept from a fee/commission/non-monetary benefit from someone other than the customer?

A

When the fee is designed to enhance quality of service to the customer.
When the fee does not impair firm’s duty to act in best interest of the customer.

44
Q

Product disclosure: when would a Key Features Document be used?

A

Any non-PRIIP packaged product eg. pension annuities.

45
Q

Paid for research: what must a firm disclose if it uses a research payment account

A

The budget as well as the charges before providing services.
Annual info on the total costs that each customer has incurred for 3rd party research.

46
Q

When do the rules of suitability apply? (COBS 9)

A

Applies to a firm that makes a personal recommendation in a designated investment or which manages investments.

47
Q

Definition for scope of MiFID

A

A firm conducting any activities in investments within the scope of the MiFID directive is considered to be doing MiFID business.

48
Q

What are examples of MiFID activities - the “core” activities (7 pts)

A
  1. Reception and transmission of orders in relation to 1/more financial instruments
  2. Execution of orders on behalf of clients
  3. Dealing on own account
  4. Portfolio mgmt
  5. Investment advice
  6. Underwriting and placing of financial instruments
  7. Operation of multi-lateral trading facilities (MTFs) or organised trading facilities (OTFs)
49
Q

Examples of MiFID instruments? (8pts)

A
  1. Transferrable securities eg. shares, bonds and CFDs
  2. Money market instruments
  3. Units in collective investment scheme
  4. Derivatives relating to securities, currencies, interest rates or yields
  5. Commodity derivatives
  6. Credit derivatives
  7. Financial contrasts for differences
  8. Other derivs relating e.g. climate variables/other stats
50
Q

Difference between MiFID and range of activities in the RAO (regulated activities order) - what activities are not included in one/the other?

A

MiFID business can be seen as subsection of businesses covered in RAO.
Notable omissions from MiFID business is that of retail prods: mortgage business, insurance business, pension business all not considered MiFID business.

51
Q

Suitability - in case of non-MiFID business, when are 2 exceptions when rules apply?

A
  1. Client is a retail client
  2. Firm is managing the assets of an OPS, stakeholder pension scheme or personal pension scheme
52
Q

When does suitability always apply?

A

When the service provided is management or advice.

53
Q

Suitability - “the client has necessary knowledge and experience to understand those risks” - which type of clients does this apply to?

A

Just RC

54
Q

Suitability - “the client is able to bear financial risks” - which type of clients does this apply to?

A

Elective PC and RC

55
Q

Suitability - “the firm has to meet the client’s investment objectives” - which type of clients does this apply to?

A

PC and RC

56
Q

What is the suitability report (3pts) and what type of investments should it provided for?

A

Purpose is to confirm why the firm believes the rec is suitable: (1) specify client demand & needs, (2) explain why transaction meets those needs, (3) explain possible disadvantages of transaction.
Should be provided for both MiFID and non-MiFID investments

57
Q

Appropriateness - what is the purpose of this rule and who does it apply to?

A

To ensure firm obtains sufficient info to assess if a product is appropriate for a customer.
Applies to MiFID business (both for RC and PC)
Applies to direct offers (RC only)

58
Q

Suitability and appropriateness: If an investment is not a complex product, what applies?

A

Neither apply

59
Q

Suitability and appropriateness: If an investment is a complex product, but it is not promoted through a direct offer, what applies?

A

Just appropriateness

60
Q

Suitability and appropriateness: If an investment is a complex product, and it is promoted through a direct offer, what applies?

A

If for a RC then appropriateness applies.
If not for an RC then neither suitability or appropriateness applies.

61
Q

What is defined as a complex product

A

Derivatives, structured products, warrants

62
Q

What is defined as a non-complex product

A

Shares, bonds, MM instruments, etc

63
Q

Conflict of interest - what principle is this in the Principles for Business

A

8

64
Q

Investment research: when can firm knowingly deal on its own account when there is not much reasonable time for clients to react after a publication is released?

A
  1. Firm is a market maker dealing in normal course of business - acting in good faith
  2. Unsolicited client order
65
Q

When do the rules on personal account dealing not apply in certain personal transactions:

A
  1. Funds managed independently
  2. Shares in certain classes of fund (e.g. registered CIS - collective investment scheme)
  3. Life policies
66
Q

Which document is the conflict of interest included in?

A

The initial disclosure document (IDD) of a firm.

67
Q

What is the last resort for a firm if they cannot manage a conflict of interest themselves?

A

Going to a durable medium.

68
Q

Who does COBS apply to and when would a firm be subject to this.

A

Applies to all clients - 3 categories, PC, RC, ECP.
Conflict of interest is when a firm trades for itself but also for clients.

69
Q

What are execution factors that firm has to take into control to obtain best possible result for clients? (4 pts)

A

price, costs, speed, likelihood of execution and settlement

70
Q

What is the best execution criteria for firms (4 pts)

A
  1. Client categorisation
  2. Type of order
  3. Type of financial instrument being traded
  4. Characteristics of execution venues
71
Q

What is durable medium?

A

Paper
Any form that can be stored by the client in an unchanged format
This doesn’t include websites

72
Q

Order execution policy - when should this info be provided?

A

Should be provided before providing services

73
Q

Order execution policy - what is prescribed info and given to which clients?

A

Prescribed info includes a list of execution venues and factors that will affect the firm’s choice of venues.
Given to retail clients

74
Q

Order execution policy - what is the written two-way agreement and who is it given to and how often is it reviewed?

A

Monitored and reviewed annually
Notifies clients of any material changes
Is for all clients

75
Q

Client order handling - generally how should orders be handled (2pts) and what are the exceptions (2pts)

A

Should be recorded promptly and allocated promptly
Should be carried out sequentially
Exceptions must notify the RC and should only be if in interest of the client or if there is material difficulty.

76
Q

What is aggregation

A

When a firm combines its own orders with those of client.

77
Q

When is aggregation permitted?

A

When unlikely to operate to disadv of clients
When disclosed (oral or written) that on some occasions it may operate to the disadv of clients
The firm must have in place an order allocation policy, providing precise term for the allocation of aggregated orders

78
Q

What happens when a limit order cannot be executed by a firm immediately?

A

It must be made public

79
Q

Exceptions to when a limit order doesn’t need to be made public?

A

Even if it cannot be executed immediately, it doesn’t have to be made public if under specific client instructions or if it is a large order -greater than normal market size.

80
Q

What does fair allocation mean?

A

Firm must allocate to clients first, unless the firm has reasonable grounds to allocate proportionally (this means that the client will receive a material benefit)

81
Q

COBS 16 reporting info to clients - occasional reporting - timing of dispatch, what reporting includes?

A

When firm has carried out order on behalf of client, it must promptly provide the client with essential info concerning the execution.
For an RC this must be sent no later than the next business day after execution.
In a durable medium

82
Q

Exceptions to the requirement of occasional reporting rule for MiFID and non-MiFID businesses?

A

MiFID - no exceptions.
Non-MiFID - if the firm has agreed with the client or if the investment is a life policy or personal pension scheme.

83
Q

Reporting - periodic statements - what does it include?

A

Client portfolio info - total fees and charges.
Value and composition - total dividends and interest

84
Q

Reporting - periodic statement - suitable interval for general rule?

A

Every 3 months
Sent out promptly
Clients can ask for annual statements

85
Q

Reporting - periodic statement - suitable interval for derivatives/leveraged products?

A

Prepared every month
Sent out promptly
If a position falls below a specified point then they must notify client e.g. margin call

86
Q

Purpose of client money and custody rules for all clients?

A

Fiduciary duty to provide adequate protection for client money and assets

87
Q

CASS 6 what is this and who does it apply to?

A

Custody rules
Applies to MiFID and Non-MiFID business

88
Q

CASS 7 what is this and who does it apply to?

A

Client money rules
Applies to MiFID business but opt-in available for non-MiFID business

89
Q

What does segregation of assets mean?

A

Segregation of assets from the firms
For client money held in an approved bank and identified as separate from the firm’s money
To protect in case of liquidation of the firm

90
Q

Reconciliations - how often must reconcile records given?

A

Reconcile records of client asset balances required as often as necessary

91
Q

Reconciliations - what happens if there is a shortfall?

A

Shortfalls should be corrected as soon as possible - close of business on the day of reconciliation (i.e. the same day)
This is for client money held by the firm

92
Q

What happens if firm cannot reconcile?

A

Firm must write to the FCA

93
Q

Who is exempt from reconciliations?

A

ICVC and UCITS schemes
Incoming EEA firms (other than insurers)
BCD credit institution

94
Q

What type of activity is exempt from reconciliations?

A

Coins held for the value of the metal
Money held for delivery versus payment (DvP) - settlement max of 3 days.
Money due and payable to the firm.

95
Q

CASS audit - when is this required and timeline for this, what does it include?

A

Annual requirement
Submitted to FCA within 4 months of the audit
Firm has to explain any breach identified

96
Q

CASS audit - who are the client asset assurance standards set by?

A

The Financial Reporting Council

97
Q

Right of use - what does this include?

A

When the right to use a clients assets is transferred to the firm due to:
- rehypothecation
- right-to-use clause

98
Q

CASS resolution pack - what does this include?

A

Specific docs/info relating to client money and assets
Must be available to regulator on request

99
Q

CASS: Mandate accounts - what does entail for a client and what must a firm do?

A

Client gives firm control over their assets or liabilities e.g. direct debits, pre-approved companies with PayPal
Firms must establish and maintain adequate contracts and records

100
Q

Record keeping time limits for MiFID and non-MiFID business (from date of dispatch)? General rule

A

3 years (non-MiFID)
5 years (MiFID)

101
Q

For long-term non-MiFID business e.g. pension contracts, stakeholder pensions and life assurances, what is record keeping time limits from date of dispatch?

A

5 years

102
Q

For pension transfers & opt-outs, free-standing addit. voluntary contributions (FSAVCs) - occupational pension schemes, what is the record keeping time limits from date of dispatch?

A

Indefinitely

103
Q

If telephone communications occur regarding execution, what is record keeping time limit?

A

5 years from creation of record

104
Q

Knowing the start date for record keeping: in what case is the time limit from the creation of the record?

A

When the client does not receive the information

105
Q

Knowing the start date for record keeping: in what case is the time limit from dispatch?

A

The client has received the information, but it does not create a contract/relationship

106
Q

Knowing the start date for record keeping: in what case is the time limit from end of contract/relationship?

A

The client has received the information, and it has created a contract/relationship

107
Q

COBS/CASS: which rules apply to RC’s only?

A

Financial promotion rules
Retail investment product disclosures incl. KFDs, KIIDs, KIDs

108
Q

What rules include eligible counterparties i.e. all clients (RC, PC, EC)

A

Client categorisation
Most info disclosure rules
Conflict of interest rules
Periodic/occasional reporting rules
Client assets

109
Q
A

UK Financial Regulations (6 decks)

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