EXAM PAPER QUESTIONS Flashcards
3 types of client categorisation under MiFID
Professional clients
Eligible counterparties - per se or elective
Retail clients
What is the role of the MLRO?
Financial crime is dealt with under SYSC 6.3 with firms to ensure they have policies and procedures in place to identify, assess and manage money laundering risks which are comprehensive and proportional to a firm’s risk profile
Firms other than sole traders are required to appoint a MLRO to oversee compliance with the FCA rule on systems and controls against money laundering
The Principal functions are
- receive reports of transactions and give rise to suspicious transactions
- to determine whether a suspicious transaction should be filed
- Report a suspicious transaction to the NCA
The 6 types of conduct that used to constitute market abuse under MAR in the UK under s118
118 FSMA was replaced by MAR 2014 which came into effect 3 July 2014 and implemented under FSMA 2000 2016.
Market abuse under s 118 covered the following
- dealing on the basis of inside information (insider dealing)
- disclosing inside information to another person (unlawful disclosure)
- effecting transactions by giving a false impression as to the supply, demand or price of qualifying investments (market maipulation)
- effecting transactions using any forms of deception (market deception)
- disseminating information to provide a false impression (disemmination)
- acting in a manner that would give a regular user of the market a false or misleading impression (misleading behaviour) or distorting the market (market distortion)
What does MAR 2014 now apply to?
a) engaging or attempting to engage in insider dealing
b) recommending another engages in insider dealing
c) unlawfully disclosing inside information
d) engaging or attempting to engage in market manipulation which includes
i) false or misleading behaviour
ii) securing the price of financial instruments at an abnormal level
iii) deceptive behaviour
iv) disseminating false or misleading information through media including the internet
v) benchmark manipulation
What is the general purpose of the CASS sourcebook?
The Client Assets sourcebook which contains the requirements concerning the holding of client assets and client money.
Specific provisions for
APPLICATION AND CLASSIFICATION (CASS 1 & 1A)
COLLATERAL (CASS 3)
CLIENT MONEY:INSURANCE MEDIATION ACTIVITY (CASS 5)
CUSTODY RULES (CASS 6)
CLIENT MONEY RULES (CASS 7)
CLIENT MONEY DISTRIBUTION (CASS 7A)
MANDATES (CASS 8)
INFORMATION TO CLIENTS (CASS 9)
CASS RESOLUTION PACK (CASS 10)
DEBT MANAGEMENT CLIENT MONEY (CASS 11)
COMMODITIES FUTURES TRADING COMMISION PART 30 EXEMPTION ORDER (CASS 12)
CLAIMS MANAGEMENT: CLIENT MONEY (CASS 13)
Explain the different ways firms can manage conflicts of interest
Firms must manage conflicts of interest fairly between themselves and customers and between customers under FCA PRIN 8.
Can be dealt with by
declining to act
firewalls
information barriers
maintaining and independent policy and disclosure
Specifically dealt with under SYSC 10 requiring firms to identify conflicts between the firm and a client or between clients. Types of conflicts set out in SYSC 10.1.4R.
Firms must maintain and operate effective organisational and administrative arrangements to prevent conflicts creating a MATERIAL RISK of damage to clients
common platform firms and management firms must maintain an effective conflicts of interest policy
Outline 6 principal means which regulatory authorities are held accountable under the Financial Services and Markets Act
- HM Treasury appointments
- Public general meeting to discuss the annual report
-Judicial review - Maintenance of Internal Governance Structure
- Upper Tribunal (Tax and Chancery Chamber)
- Consultation with Consumer Panel
- Conduct of formal Treasury Enquiry
- Consultation with Markets Practitioner Panel
Explain the purpose and content of the offence of causing a financial institution to fail imposed under section 36 of the Financil Services Act 2013
s36 causes a new offence of causing a financial institution to fail
It applies where a senior manager in relation to an institution and takes a decision and was aware this would cause the failure of the institution.
the conduct falls below the level of what would what be reasonably expected
the offence carries a conviction of up to 12 months imprisonment or seven years indictment or a fine or both
What is the role and function of the Financial Policy Committee?
It was set up under section 9B of the Banking Act 1998 (amended by s 4 of Financial Services Act 2012)
Court of Directors able to determine the Bank’s Financial Stability Strategy
Interim Financial Policy Committee set up in February 2011 with the creation of the permanent FPC with BoE, the PRA and the FCA
Comprises the DEPUTY GOVERNOR, GOVERNOR, FCA CEO, one member appointed by the Governor
four members appointed by the Chancellor and the Treasury representative
Responsible for MACRO PRUDENTIAL POLICY
monitoring of banks RISKS AND EXPOSURES across FINANCIAL SYSTEM AS A WHOLE
Statutory objectives are to exercise its functions with a view to contributing to the Bank of England’s FINANCIAL STABILITY OBJECTIVE
taking action to remove SYSTEMIC RISKS and ENHANCE THE RESILIENCE OF THE UK FINANCIAL SYSTEM
Also supports the economic policy of her Majesty’s Government
first meeting 16th June 2011 with a record of the FPC meetings published after each meeting
CISI FOUR KEY VALUES
CLEAR
IMPARTIAL
STRAIGHTFORWARD
INFORMED
What is the FCA’s supervision model?
PROACTIVE - preventative work through conduct assessment of firms
- includes model analysis and drivers of culture
REACTIVE
- dealing with problems that are emerging or have crystallised, and securing customer redress
- other remedial work
THEMATIC
- looking at sectors of the markets or products within a sector that put consumers at risk
- wider diagnosis or remedy work where there is harm
SUPERVISION BY DEPARTMENTS
SUPERVISION BY PORTFOLIOS
SECTION 19 FSMA
Any person must be authorised or exempt under Section 19 FSMA and the general prohibition in s19
Authorised persons listed in section 31
- anyone holding a part 4a permission
- EEA passport firms
- Treaty firms
- a person otherwise authorised under FSMA
Authorised constitutes a form of STATUS or CONDITION for the carrying out of regulated activity
SECTION 20 FSMA
Authorised persons must hold the relevant PERMISSION to carry out the specific regulated activity or activities conducted in the UK
Applications for permission are made under 55A and Part 4A generally.
Breach is not an offence but it is subject to disciplinary action.
Permission is concerned with the specific LEGAL RIGHT, AUTHORITY OR ENTITLEMENT to undertake the financial activity
SECTION 21 OF FSMA
Section 21 FSMA requires that any financial promotion, in the form of an invitation or inducement to engage in investment activity may be issued to or be approved by an authorised person
all financial promotions must be clear, fair and not misleading
PRA FUNDAMENTAL RULES
Act with honesty
Act with due skill care and diligence
Act in a prudent manner
Maintain adequate financial resources
Have effective risk management strategies and risk strategies
Deal with regulators in an open court way
Prepare for resolution
Organise and control affairs responsibly
Explain the general purpose of SM&CR
Objective is to ensure that senior managers are held ACCOUNTABLE for any MISCONDUCT within their areas of speciality.
Firms have to prepare RESPONSIBILITY MAPS to allocate relevant SMF functions with each manager having a STATEMENT OF RESPONSIBILITY
Authorised persons must vet candidates before putting them forward for approval to ensure they are FIT AND PROPER
- they need to have the relevant qualifications, training and experience
Conditions and time limits are attached to approvals
Also the certification regime - for certified individuals performing functions that may pose a risk to the business such as the client dealing function or significant management function
also conduct rules which apply to all employees in the business apart from cleaners
THE REGULATORY PRINCIPLES
Section 3B FSMA
Efficient and economic use of resources
Proportionate restrictions
- desirability of sustainable growth
- consumer responsibility
- senior management responsibility
The regulatory authorities take into account the differences in the nature and objectives of seperate business carried out by persons
Information disclosure
Transparency
Explain the general purpose and content of the Capital Requirements Directive 4 requirements within the UK.
General purpose of the CRD is to reinstate the core European measures for banks and investment management.
It is supported by MiFID II for investment firms
contains all provisions for capital, freedom of establishment, prudential supervision, disclosure and ancillary provisions
CRD specific objective was to impose higher requirements for credit risk, liquidity and leverage following the financial crisis
provisions implemented under BASEL 3 adopted by the Basel Committee on Banking Supervision.
CR4 increased capital requirements
- CORE TIER 1 capital
- systemic risk buffer
- short month liquidity coverage ratio
CAPITAL REQUIREMENTS DIRECTIVE 5
Finalisation measures were adopted by the Committee in 2017 implemented under CRD 5
Measures clarify the application of supervisory requirements and guidance under Pillar 2
renumeration policy obligations, governance requirements applied to firms
REGULATORY GUIDELINES
a) COLLECTIVE INVESTMENT SCHEME INFORMATIVE GUIDE
b) ENFORCEMENT GUIDE
c) FINANCIAL CRIME GUIDE
d) FINANCIAL CRIME THEMATIC REVIEWS
e) PERIMENTER GUIDANCE MANUAL
f) RESPONSIBILITIES OF PROVIDERS AND DISTRIBUTORS
g) UNFAIR CONTRACT TERMS IN CONSUMER NOTICES REGULATORY GUIDE
h) WNDING DOWN PLANNING GUIDE
i) MiFID II GUIDE
SECTIONS 89 AND 90 FSA 2012
Financial Services Act 2012 creates two offences on making misleading statements and misleading impressions
It replaced the earlier miscellaneous offences on misleading statements and practices
s89 with regard to the making of a statement that is misleading in a material respect or being reckless
s90 applies where a person acts or engages in any course of conduct that creates a false or misleading impression as to the market or the price of value of a relevant investment
person guilty of it is liable of a summary conviction for up to 12 months or up to seven years on indictment
3 FORMS OF COLLECTIVE INVESTMENT SCHEME
PART 17 FSMA
- Authorised or unauthorised unit trust schemes
- Open-ended investment schemes
- Recognised overseas scheme
Other EEA constituted schemes
Designated country
Individually recognised overseas scheme
What is the function of the financial stability board?
It was established at the G20 Summit following the financial crisis
Replaced the financial stability forum
Contains representatives from national finance ministries
- BCBS
- International Organisation of Securities Commission
- Committee on Payments and Market Infrastructure
Purpose is to coordinate the work of financial authorities and national standard agencies and to promote implementation of effective regulatory, supervisory and other financial sector policies.
FSB has produced a large amount of important reports in various policy areas since the global financial crisis began
Published a online or virtual compendium of standards which is a global financial rulebook
CISI CODE OF CONDUCT
CLEAR - have I told no lies or half-truths to any party involved in reaching my decision?
IMPARTIAL - is everyone affected by my decision aware of the consequences
STRAIGHTFORWARD - have I made sure my action or decision will not result in any party being unknowingly disadvantaged or unduly advantaged?
INFORMED - have I considered the interests of my potential stakeholders and not been misleading when making my decision?
WHAT ARE THE CONDUCT RULES?
- Act with integrity
- Act with due skill care and diligence
- Must be open and cooperative with the FCA and the PRA
extra 2 for when working with retail clients
4. Pay due regard to the interest of customers and treat them fairly
5. Must observe proper standards of market conduct
PRUDENTIAL CATEGORIES OF FIRMS REGULATED BY THE FCA
P1 - firms whose failure would cause lasting damage and widespread financial and reputational damage to their customers, client assets, the marketplace and beyond
P2 - firms who disorderly failure who damage consumers and client assets but are more easily dealt with than the failure of a P1 firm
P3 - firms whose failure, even if disorderly, would be unlikely to cause significant harm to consumers or market integrity
the categories
Other overall responsibility for SM&CR
Intended to cover individuals with overall responsibility for one or more key functions or identified risks, those who perform a function not caught by an SMF
Overall function on SM&CR
Created to allow firms to designate senior executives who have ultimate responsibility for functions but would not be part of the SMF structure
12-week rule for individuals who cover for an approved person (SMF) if the absence is less than 12 consecutive weeks
What SMFs are required for Branches of Foreign Banks
PRA Function
SMF 2 - Chief Finance function
SMF 4 - Chief Risk function
SMF 5 - Head of Internal Audit Function
SMF 7 - Group Entity Senior Manager
SMF 19 - Head of third country branch function
FCA Functions
SMF 3 - Executive Director
SMF 16 - Compliance oversight function
SMF 17 - Money Laundering Reporting officer
SMF 22 - Other local responsibility function
WHAT ARE THE PRESCRIBED RESPONSIBILITIES FOR UK BANKS?
Firm’s performance of its obligations under SMF regime - FCA/PRA
Responsibility for performance of obligations under the certification regime - FCA/PRA
Responsible for the compliance of requirements of the regulatory system about the responsibilities map - FCA/PRA
Responsible for the firm’s policies and procedures for countering the risk the firm might be used to further financial crime - FCA prescribed
Responsible for allocation of prescribed responsibilities - PRA prescribed
FCA PRESCRIBED RESPONSIBILITIES FOR LARGER FIRMS
- leading the development of
- monitoring the effective implementation of policies and procedures FCA/PRA Prescribed
- Overseeing the adoption of the firm’s culture in day to day management of the firm is PRA prescribed
- Leading the development of the firm’s culture is PRA Prescribed
- Responsible for developing and overseeing the firm’s renumeration policies in accordance with SYSC 19D is FCA and PRA Prescribed
- Firms compliance with CASS is FCA prescribed
- Firm carrying out propriety trading, being responsible for the oversight is a PRA function
- Firm’s recovery procedure and resolution pack is a PRA prescribed function
- Responsible for firm’s obligations under F&P is a PRA prescribed function
- Treasury management function - PRA prescribed function
What is the ‘overlap rule’
It applies when a firm is seeking approval from the PRA for a candidate to perform a PRA-designated SMF and this individual also intends to act as a FCA SMF, once the PRA gives approval
It only applies to the FCA governing functions
Solvency II firms require what Senior Insurance Management Functions?
One or more persons must perform the following
- Chief Finance Function
- Chief Executive Function
- the Chairman
FCA Applied “Overall responsibility” to Solvency II firms
Firms must have a senior manager for every activity, business area and management function in the firm
What is the Conduct risk oversight officer function?
Applies to Lloyds market
Consistent with the underwriting risk function which is also exclusively only applied to Lloyd’s
The senior manager will also be accountable for monitoring agents compliance with Lloyds conduct of business standards
SM&CR for Solo Regulated firms
Applied in a different manner than banks and deposit takers, due to the nature and impact these firms have on financial markets
Lighter touch/more appropriate approach adopted by FCA for these firms
SM&CR Limited Scope firms
- limited permission consumer credit firms
- all sole traders
- authorised professionals whose regulated activity are non-mainstream activities
- oil market participants
- service companies
- energy market participants
- subsidiaries of local authorities
- insurance intermediaries
- authorised internally managed AIFs
What are Core SM&CR Firms?
firms that have a baseline of SM&CR requirements applied
Enhanced Firm
Small proportion of solo-regulated firms that will have to apply extra rules
SMF functions for CORE and ENHANCED FIRMS
SMF 1 - CEO
SMF 3 - EXECUTIVE DIRECTOR
SMF9 - CHAIR
SMF16 - COMPLIANCE OVERSIGHT
SMF17 - MLRO
SMF 18 - OTHER ENHANCED RESPONSIBILITY (ENHANCED)
SMF27 - PARTNER
What are the three sections of the Handbook for Complaints Redress?
DISPUTE RESOLUTION: COMPLAINTS (Disp) - detail about complaints and the FOS arrangements
CONSUMER REDRESS SCHEMES SOURCEBOOK - contains conditions and guidance on how to establish a redress scheme
COMPENSATION (Comp) - rules governing eligibility and under FSCS
What are the four committments of the FCA?
Putting consumers needs first
Strengthening the UK’s position in wholesale markets
Preventing Financial Crime
Preparing financial services for the future
What are the three objectives in the FCA Business Plan?
Setting and testing higher standards
Promoting competition and positive change
Reducing and preventing serious harm
What is COBS 1?
It is APPLICATION
What is the aim of COBS?
To move the regulatory approach forward towards a better focus on outcomes rather than compliance with detailed and prescriptive rules
Implements MiFID and MiFID II
firms are subject to COBS if they carry out designated investment business from an establishment maintained by them or an appointed representative - this is called the GENERAL APPLICATION
What COBS rules are disapplied for eligible counterparty business?
Firms carrying out eligible counterparty business
COBS 2 - conduct of business on inducements
COBS 4 - communicating financial promotions
COBS 6 - Provisions about information on the firm and renumeration
COBS 8 - Client arrangements
COBS 10 - appropriateness requirements
Part of COBS 11 - such as best execution
Part of COBS 12 - labelling of non-independent research
How is the general application for COBS modified?
- rules in COBS that derive from MiFID apply to UK MiFID firms carrying on MiFID business from a UK establishment
- Non-uk MiFID investment firm
- from January 2021, EEA firms operating a branch in the UK are now classified as ‘third country’ branches
What are the consumer duty cross cutting rules?
Act in good faith towards retail customers
- standard conduct - open, honest and fair dialogue
- Acting consistently with expectations of retail customers
- consider this rule at product design stage
Avoid foreseeable harm
- Firms must understand that retail customers accept the inherent risk in products
Firms dont have a responsibility to protect customers from all foreseeable harm
- understand and accept risks with products
- proactive steps to avoid forseeable harm when you can
- do not exploit customers vulnerabilities
Enable and support retail customers to pursue their financial objectives
- Support customers to ensure they have the right information and understanding to make their own decisions
- firms need to establish an environment where customers have trust and faith in the firm and the products they are purchasing
- firms can assume the information provided to them by the retail customer as part of that due diligence where advisory or discretionary services are provided
COBS 2 CONDUCT OF BUSINESS OBLIGATIONS
Client Best Interest Rule
- firms must act honestly, fairly and professionally in accordance with best interests of its clients
FAIR TREATMENT OF CUSTOMERS
- fits in with the consumer duty rule
REQUIREMENT FOR FAIR AGREEMENTS
UNFAIR CONTRACT TERMS LEGISLATION
What is the FAIR TREATMENT OF CUSTOMERS?
It fits in with the Consumer Duty Rule and is embedded in Principle 6 of the FCA Principles
- “A firm must pay due regard to the interests of its customers interests and treat them fairly”
Often important imbalance between the firm and its customers
SIX OUTCOMES TO EXPLAIN FAIR TREATMENT OF CUSTOMERS
1. consumers can be confident they are dealing with firms where fair treatment of customers is central to culture
2. Products and Services are designed to meet the needs of consumer groups
3. Consumers are provided with clear information and are kept appropriately informed before/during and after point of sale.
4.when consumers receive advice, it is suitable and takes account of their circumstances
5. consumers provided with products that perform as firms lead them to expect
6. consumers do not face unreasonable post-sale barriers imposed by firms to sell, change products
COBS 2 REQUIREMENT FOR FAIR AGREEMENTS
- applies to designated investment business carried out for retail and professional clients in relation to MiFID
Does not apply to INSURANCE FIRMS issuing life policies as principal - firms must provide this investment agreement
- information about the firm and its service relating to that agreement, or information required by COBS 6
- agreement needs to be provided in a durable medium
firm may provide the agreement and information immediately after the client is bound by any agreement only in the following circumstances
- firm unable to comply with the requirement to provide the agreement in good time prior to carrying out investment business
- rule on telephone voice communications does not apply - firm complies with that rule
MUST BE MAINTAINED FOR
- 5 YEARS
- Duration of relationship with client
- case of pension transfer, pension opt-outs, additionl voluntary contributions to private pension, pension contract indefinitely
WHAT IS UNFAIR CONTRACT LEGISLATION?
Provides a guide on how the FCA will use powers under CONSUMER RIGHTS ACT 2015
The FCA will consider fairness contract terms and consumer notices issued by authorised firms or appointed representatives
Under the CRA, a contract term or notice is considered unfair if contrary to the requirement of good faith - it causes a significant imbalance in the parties’ rights and obligations to the detriment of the customers.
FCA may consider the fairness of a term or notice within the meaning of the CRA if it receives a complaint from a customer
Different ways the FCA can deal with unfair terms or notices when a firm has breached a principle, rule or breach of financial promotions rules
- The FCA can take action under FSMA
FCA does not have the powers to redress BUT when the use of an unfair term amounts to the breach of an FCA rule, the FCA can apply to the courts for restitution
Please outline the inducement rules
taking steps to identify, prevent and mitigate conflicts of interests that arise
An investment firm must not pay/provide, accept/receive from any party other than its client a commission or minor non-monetary benefit with the provision of any investment or ancillary service.
does not apply when
- it is designed to enhance the quality of the service and does not impair the firm to act in the best interests of the client
- enables the provision of an investment service of the firm such as custody costs or exchange fees
does not apply when it is a minor non-monetary benefit
Outline a minor non-monetary benefit
- clearly disclosed prior to the provision of the relevant service to the client
- capable of enhancing the quality of the service
- scale/nature that could not impair the firm to act honestly, fairly and professionally
- reasonable, proportionate to ensure the firm does not act in any way that is detrimental to the interests of the relevant client
- consists of:
hospitality of de minimis value such as food/drink in a business meeting
participation in conferences, seminars and other training events
written material from a third party that is commissioned and paid for by the corporate issuer
information about a financial instrument or investment service that is generic in nature
INDUCEMENTS AND RESEARCH UNDER MiFID II
The UK had to onshore and scrap their own legislation
ANY regulated firm that
- provides investment advice
- restricted advice
- portfolio management services
prohibited from receiving research for free, they need to pay for the research
Firms can pay from their own resources or from a research payment account
Do not apply to non-UK regulated bodies that produce research and non-UK regulated firms that consume research
It constitutes research if
- concerning more than one financial instrument
- concerning issuer or potential issuers of financial instruments
- closely related to specific industry or market such that it informs views on financial instruments
- specifically recommends an investment strategy
PROVIDED EXEMPTION FOR AIFs and CISs whose core investment policy is not MiFID financial instruments
- Private Equity and Real Estate not captured
FCA CHANGES TO THE INDUCEMENT RULES
2021 consultation
Policy statement 2021 NOVEMBER
- Equity research on small and mid cap companies with market capitalisation of below £200 million are exempt from the inducement rules
- brokers could provide it to asset managers on a bundled basis
Third party research on fixed income currencies and commodities instruments will be exempt from inducement rules allowing it to be bundled
‘Independent’ research providers will be exempt when they do not provide execution services
Openly available research does not apply
How should a firm deal with unrequested research that is provided FREE OF CHARGE?
See if it is exempt under the Inducement Rules
If it is not exempt - firms need to take steps to ensure that they do not read/benefit/have access to the research
What is the view on macro-economic research regarding the inducement rules?
The general view is that macroeconomic analysis is likely to suggest an investment strategy whether it is explicit or implicit (providing views on curve growth/economic growth/currency rates)
If it is not considered research (vague/general by nature) - does not automatically classify as a minor non-monetary benefit.
Portfolio managers and independent advisors would need to make a commercial decision on whether to pay for it or not
One exception is if the macro-economic analysis is made open to the public on a website. It could then be justified as a minor non-monetary benefit
RESEARCH PAYMENT ACCOUNTS
One of the ways you can pay for research under Inducement Rules
- may only be funded by a specific charge to clients, agreed with clients and developed by the firm as its research budget
firms must provide clients
- information about the budgeted amount
- annual information for the total costs
firms must make sure the budget amount does not fund in-house research
it may cover the following however
- post-trade analysis
- price feeds
- seminar feeds
- corporate access services
- administration of an RPA
How do Asset Managers approach the Research rules on Inducements?
2019 FCA review
- most asset managers absorb the costs themselves
- still able to access the research they need. No evidence of material reduction in research coverage including for SMEs
- wide range of sell side pricing levels
- firms were uncertain how the new rules apply
What is the AGENT AS CLIENT AND RELIANT ON OTHERS?
If a firm (F) is aware one person (C1) is acting as agent for another person (C2) then C1 is the client, not C2
Under MiFID a business acting for another person in investment or ancillary services and the other firm is a MiFID firm they can rely on
- information shared to the client
- recommendations that have been provided by the third-party firm
If a firm relies on information provided by a third party, this should be given in writing
This should not occur when C1 has agreed in writing that it should treat C2 like the client instead
Large Undertaking Requirements for Per se Professional (MiFID)
Balance sheet - 20 million euros
Net turnover - 40 million euros
own funds - 2 million euros
Large Undertaking Requirements for Per se Professional (non-MiFID)
Balance sheet - 12.5 million euros
Net turnover - 20 million euros
average 250 employees over the year
How can a retail client be treated as an elective professional client?
- if the firm has assessed its expertise, experience and knowledge and believes it can make its own investment decisions
- portfolio that exceeds 500,000 euros
- client works or has worked as in financial services as a professional for at least a year
firm must follow certain procedures to give a clear written warning to the client of the lost protections to which the client must agree in writing - it wishes to be treated as a professional
MiFID business - if the client meets the qualitative/quantitative test it can be treated as an ECP
If the person no longer meets those requirements the firm must take action
Professional clients can be ECP if they are
- a company
- per se professional client
- requests to be classified as an ECP
What investor protections are lost by a Retail client when they are reclassified as an ‘elective professional client?’
For Suitability - firms servicing professional clients assume the client has the knowledge and experience for the product.
For Appropriateness (when it is not investment advice or discretionary portfolio managed services) retail clients have to undergo appropriateness tests - for professional clients a firm is entitled to assume the individual has the knowledge and expertise
Dealing and carrying out orders
- Range of factors can be considered for professional clients to carry out best execution. But for retail clients, the total consideration representing the price of the financial instrument and the costs relating to execution but be the overriding factor.
- for order execution, firms may not have to report difficulties in the execution of the order to professional clients
REPORTING INFOMATION
- For transactions, where the firm does not provide discretionary management services, the timeframe for providing confirmation is more rigorous for retail clients
Remuneration - it is the same for all clients, do not be remunerated to take risks for products that do not suit them.
CLIENT REPORTING
- Investment firms that hold a retail client account that includes positions in leveraged financial instruments or contingent liability transactions shall inform the retail client when the instrument depreciates by 10% - reports do not have to be produced for
INVESTOR COMPENSATION
Eligibility for compensation from FSCS is dependent on the institution and NOT client categorisation
FOS may not be available to professional clients unless they are consumers or small businesses
EXCLUSION OF LIABILITY
FCA rules restrict firms ability to exclude or restrict duty of liability - stricter for retail than professional
SHARE TRADING OBLIGATION
For shares admitted to trading on a regulated market, or a trading venue, the firm may only arrange for such trades to be carried out on a regulated market such as an MTF, a regulated market
TRANSFER OF FINANCIAL COLLATERAL ARRANGEMENTS
A firm may conclude title transfer financial collateral arrangements for the purpose of securing or covering present or future obligations
CLIENT MONEY
Client money is more prescriptive for retail clients than professional clients
What is the main purpose of the HIGH LEVEL STANDARDS in the SYSC Sourcebook?
The main purpose of the requirements are to:
1. Encourage firms directors and senior managers to take responsibility for their firm’s arrangements on matters to be of interest to the FCA and the PRA
- amplify FCA Principle 3 of organising and controlling affairs efficiently
- encourage firms to vest responsibility for an effective and responsible organisation in specific directors and managers
- Create a common platform of organisational systems and controls for firms subject to the Capital Requirements Directive and MiFID - known as ‘common platform firms’
requirements have been extended to firms that are not subject to either MiFID or the CRD. - called non-scope or non common platform firms
Application of SYSC Handbook
FOR INSURERS, UK INSURANCE SPVs - 2,3,11 to 18, 21 to 28
MANAGING AGENTS - 2,3,12,18, 19F and 21-28
SM&CR Firm - 4-12,18,19D,19F,19G,21-28
BUILDING SOCIETIES - 2,3,12,18 19F and 21-28
For every other firm - 4-12-18,19, 19G, 21-28
SYSC 10
CONFLICTS OF INTEREST
SYSC 4
General organisational requirements
SYSC 3
systems and controls (for limited time only)
SYSC 19E
UCITS Renumeration Code
SYSC 8
Outsourcing
SYSC 6
Compliance, internal audit and financial crime
SYSC 7
Risk Control
SYSC 2
Senior Management Arrangements
the FCA and PRA require firms to take reasonable steps to maintain a clear and appropriate apportionment of significant responsibilities among their directors and senior managers
- it is clear who has those responsibilities
- the business and affairs of the firm can be monitored and controlled by the directors
firms must make a record of the arrangements they have made to satisfy the FCA and the PRA requirement to apportion responsibilities
SYSC 3
systems and controls for a limited time only
only applies to
- insurers
- UK insurance special purpose vehicles
- managing agents
- building societies
Firms systems and controls need to be appropriate for their business
Reporting lines should be clear and appropriate, having regard to the nature/scale and complexity of the business
Firms cannot contract out their regulatory obligations
Firms carrying out designated investment business for retail or professional clients
- need to ensure someone is overseeing compliance
- reporting to the governing body in respect of this responsibility
Compliance means in accordance with
COBS
COLL (CIS sourcebook)
CASS
AUDIT COMMITTEE
MANAGEMENT INFORMATION
INTERNAL AUDIT
What are firms systems and controls expected to do regarding financial crime?
Firms must take care to establish and maintain effective systems and controls for compliance with requirements and standards under the regulatory system
Ensuring the systems and controls:
- enable the firm to identify, assess, monitor and manage money laundering risks
- comprehensive and proportionate to the nature, scale and complexity of the activities
firms are expected to carry out regular assessments of the systems and controls
SYSC 4
GENERAL ORGANISATIONAL REQUIREMENTS
applies to common platform firms
Investment firm or management company under MiFID must establish and implement/maintain systems and procedures that are adequate to safeguard the security and integrity of information
Must establish and implement accounting policies that enable at the request of the regulators to be delivered in a timely manner - must reflect true financial position
Must monitor the adequacy and effectiveness of the systems, internal control mechanisms
Firms must take reasonable care to maintain a clear and appropriate apportionment of significant responsibilities among their directors and senior managers
