Conduct of Business Sourcebook Flashcards
Who is the scope of COBS?
COBS applies to all authorised firms or their appointed representatives doing the following regulated activities in or into the UK:
Who does ICOBS cover?
General Insurance
Who does BCOBS cover?
Bank deposits
Who does MCOBS cover?
Property finance
What are the majority of COBS rules for?
Consumer protection
How do some COBS rules change for corporate finance businesses?
Certain COBS rules do not apply
What are three three types of client under COBS?
Eligible counterparty
Professional client
Retail client
In terms of knowledge base, how do the three types of client covered by COBS relate?
Retail has most regulation and the lowest knowledge, while ECP has lowest regulation and the highest knowledge
Under COBS, what is opting up?
Individuals and small businesses can ‘opt up’ to be treated as an elective professional client.
What tests does someone have to complete when ‘opting up’ under COBS?
They need to pass two tests: one quantitative, one qualitative. They are assessed by the person providing the service to see if they are eligible and likely to understand the product they want to have professional service for. Qualitative is a ‘fit and proper’ examination.
Under COBS, what is the difference between per se and elective?
Per se is default/automatic position, whereas elective is opted up.
Can you change mind if you have opted up under COBS?
You can change mind; if you opted up before, you can opt down
What is the difference between eligible counterparty and professional?
Business that they are engaging in.
Eligible counterparties are things like dealing and market making. Receiving or transmitting orders, execution of trades, arranging deals, dealing on own account. Summarised by market making or brokerage
What is the definiton of a Per Se Professional client?
- An entity authorised to operate in financial markets.
- Includes:
o National or regional governments, central banks, international;/supranational institutions, and any other institutional investors whose main activity is to invest in financial instruments
What are the quantitative qualifications for both MiFID and non-MiFID businesses to meet COBS ‘per se professional client’?
Mifid Business qualfiications:
- €20m balance sheet total
- €40m net turnover
- €2m own funds
- Need to meet two out of three
Non-MiFID Business qualfications:
- €12.5m balance sheet total
- €25m turnover
- 250 average employees in year
- Any 2 of 3 of the above OR
- £5m share capital/net assets
- Non-MiFID: can also include ancillary investment services
Under COBS, how can you define a retail client?
Retail Client:
- Any client which is not:
o A professional client
o An eligible counterparty
- OR the firm re-categorises (or the client requests) to treat an eligible counterparty or professional client as a retail client as unable to assess or manage risks
How does one become an elective professional client?
Elective Professional client
- A firm may treat a retail client as an elective professional client on two tests:
o Qualitative test
Based on knowledge, experience, and expertise
o Quantitative tets (2 out of 3):
10+ significant transactions per quarter over past year
Portfolio worth > €500,000
Worked in sector for greater than one year
When becoming an elective proffesional client, what protections are lost that are available to retail clients?
o Client agrees in writing with warning of protections lost
Cant claim on financial ombudsmen act
Neither Financial Services Compensation Scheme
Neither financial promotion order
What are the Obvious ECP only clients?
locals and insurance firms
What are ‘locals’ in the context of ECPs?
Local: Own-account traders dealing in financial futures or options or other derivatives and on cash market for the sole purpose of hedging positions on derivates
How can you be an elective eligible counterparty?
Elective eligible counterparty:
- A firm may treat the following as elective eligible counterparties:
o Per se professional clients (except institutional investors)
o An elective professional client on request for those areas it has elected up to
How long should records be kept for MiFID and Non-MiFID firms?
- Records must be made of all notices and agreements on client categorisation for 5 years for MiFID and 3 years for non MiFID
What is the application of COBS to corporate finance business?
A few rules are disapplied, but should be aware that financial promotions may still need to be enforced if the promotion could end up on a retail clients desk
What is the rule of clients best interests?
Must act honesty, fairly, and professionally in accordance with the best interests of all its client. For non-MiFID business, this only applies to retail clients.
How does the clients best interests rule apply to non-MiFID firms?
For non-MiFID business, this only applies to retail clients.
In the context of payments for services, what are inducements?
Inducements: A firm must not pay/accept any fee/commission or provide/receive any non-monetary benefit other than:
- That paid by or provided to the client
- Proper fees which are necessary for the provision of business
- Paid by or provided to a third party if:
o They do not impair compliance with firms’s duty to act in client’s best interent
o They enhance the qulatiy of service to client – only applicable for MiFID business
o Disclosed to client prior to provision of service – only applicable for MiFID business
When can a firm rely on the information provided by another party?
Reliance on others: Firm is required to obtain information, it is allowed to rely on written information from others if reasonable i.e.
- Other party is competent/professional
- Other party is not connected.
What is a financial promotion?
Invitation or inducement to engage in investment activity communicated in the course of business
What is covered by the FSMA Section 21?
Financial promotions must be issued or approved by an authorised firm. Penalty for breach is two years in jail and/or an unlimited fine.
Covered by FCA Principles for Businesses
What are the three financial promotion order exemptions?
Financial promotion order exemptions:
- Those made only to investment professionals
- Those subject to the takeover code or corporate sales rules
- Communications made by journalists, governments, and central banks
What financial services are covered by the financial promotion rules?
Financial promotion rules cover all non-exempt communications for any financial service/activity other than:
- Qualifying credit or home purchase/reversion plans
- Non-investment insurance contracts
- Unregulated CIS
What are the situations for when firms can conduct cold calls?
A firm must not make a cold call unless:
- There is an existing relationship where recipient envisages the call
- It relates to a generally marketable packaged product
- It relates to a controlled activity carried out by an authorised firm / exempt person involving
o Readily realisable securities (other than warrants)
Who do suitability tests apply to?
- Applies to all retail clients, professional clients (MiFID only) and pension fund management
How do you ensure suitability of investment advice?
To ensure suitability of advice obtain necessary information regarding the client:
- Relevant knowledge and experience
- Financial situation and hence level of risk acceptable
- Investment objectives
Will have to decline if you cant obtain the information; suitability report may be required for a retail client
What are common platform firms?
Another name for MiFID firms
How do MiFID firms manage their conflict of interests?
MiFID firms must establish, implement and maintain an effective conflicts policy to identify and prevent conflicts damaging client interests.
What things are included in a conflict of interest policy?
- In writing
- Appropriate to the size, nature, scale, and complexity of the business
- May manage conflicts by:
o Information barriers (e.g. Chinese Walls)
o Policy of Independence
o Segregation of duties and supervision
o Remuneration policy - If conflict cannot be managed away, use disclosure as a last resort
- Soft commissions are prohibited (e.g. on research reports)
Are chinese walls mandatory?
Chinese Walls: Not obligatory, but if you don’t have them you cant use them as a safe harbour
How can chinese walls be used as a defence and safe harbour?
- Defence against ‘Misleading Statements and Impressions’ (FSA 2012 Part 7)
- Behaviour does not amount to market abuse
- Defence for firm against S 138D action
What does best execution mean?
- When executing orders a firm must take account of all execution factors (price, costs, speed, likelihood of execution, size, and nature or order) to obtain the best possible result
- Importance of these factors depends on client categorisation and client orders; must execute according to specific client instructions, even if does not achieve the best possible result
How should client orders be handled?
- Prompt, fair, and expeditious
- Comparable orders to be executed sequentially
When does personal account dealing rules not apply in the context of discretionary managed funds?
Rules do not apply to discretionary managed funds if managed on your behalf with no input from yourself; no direct investments
Why are there personal account dealing rules?
- Applies to employees who are involved in activities that could lead to conflicts of interest, or who have access to inside info, or other confidential client info
How do the client categorisation rules apply when a person is acting as the agent of another person?
Treats the agent as the client, as long as there is no alternative agreement
You can provide services at the level of the agent, and assume that the agent can determine products suitability for a client
What is a corporate finance contact?
For most purposes, a corporate finance or venture capital contact is not a client, because a firm does not provide a service to such a contact.
However, it will be considered a client for purposes of financial promotion
Which one of the following is exempt from regulations covering financial promotions?
- Promotion to a company with net assets of £100,000
- Promotion to investment professionals only
- Promotion to a professional client in relation to MiFID business
- Promotion to a retail client
Promotion to investment professionals only
A financial promotion made only to investment professionals is given an exemption from financial promotion rules under the financial promotions order
Under section 21 of FSMA, which requires a promotion in relation to securities to be issued or approved by an authorised firm, is an unregulated collective investment scheme exempt?
Yes, an unregulated CIS is exempt, but a regulated CIS is not.
What does the POCA do?
Legislation that punishes those who assist, fail to report, or tip-off a money launderer.
What is the JMLSG?
The Joint Money Laundering Steering Group issue guidance notes on preventing money laundering.
Do the financial promotion rules apply to non-independent research?
Yes, although there is no need to disclose this fact on the document
What are the criteria in the qualitative test for elective professional clients?
Experience, Expertise, and Knowledge
Who takes the responsibility for financial promotion?
The authorised firm without exception
Can an overseas individual who regularly deals off-exchange be classified as a per se eligible counterparts under the Client Categorisation Rules?
No - the overseas individual would need to be aurhtoised or regulated under the law of the EU or an EEA state.
When writing to a retail client, what is the requirement that suggests the level of understanding for retail clients?
Should be likely to be understood by the average member of the group, NOT likely to be understood by every member
When does the COBS rule on suitability apply?
When a firm makes a personal recommendation in relation to a designated investment
Does a financial promotion need to be approved by the FCA?
No - the promotion needs to be approved by the firm itself, in accordance with FCA requirements, but the promotion does not need to be approved by the FCA itself.