FCA BS - Financial Promotions

Question 1

FPO 2005 (Under the FSMA)

Answer 1

Part IV - exemptions for all controlled activities

Part V - for controlled activities concerning deposits and insurance (other than life)

Part VI - for all other types of controlled activities

Question 2

FPO 2005 - Main Exemptions Part IV

Answer 2

Overseas recipients

Follow up FPs

Introductions

Exempt Persons

Generic promotions

Investment professional recipients

Journalists - cannot advise or enable persons to buy securities or investments

Question 3

FPO 2005 - Part VI Exemptions

Answer 3

1. High Net Worth individuals

2. Sophisticated investors

Question 4

COBS - FP’s exempt from Fair, Clear and Not Misleading rule

Answer 4

Excluded Communication

• e.g. a one off communication that is not a cold call

FP communicated to Investment Professionals or Eligible Counterparties

• however comms in relation to designated investment business is both comms to a professional client and a FP, so the FCM rule applies

Question 5

Communication with Retail Clients

Answer 5

Information:
- uses equal font size for all sections

Tax Treatment
- displays that tax treatment is subject to change

Past Performance

• cannot be most prominent feature and must warn not a reliable indicator
• must be immediate 5 years or whole duration
• gross performance, fees and charges must be disclosed

Simulated Past Performance
- based on actual performance of an instrument and is substantially the same as the instrument concerned

Question 6

Direct Offer Financial Promotions

Answer 6

Offer by the firm to enter into controlled agreement with any person who responds to communication

Or

Invitation to any person who responds to communication to make an offer to the firm to enter into controlled agreement (specifies the manner of response or includes firm)

A controlled agreement is an agreement to carry on an ‘ancillary service’

Question 7

Colds Call Definition

Answer 7

A FP via visit, telephone etc which:

• was not initiated by recipient
• is not in response to an express request from the recipient
• is not clear that communications about investments would be made when visit was requested

Question 8

Allowable Cold Calls

Answer 8

Existing client relationship where recipient expects cold calls

Relates to a marketable packaged product (apart from higher volatility funds or life policies with potential links to HVFs)

Relates to regulated investment business carried out by an authorised or exempt persons and involves regulated investments (readily realisable securities or marketable non-geared packaged products)

Question 9

Communicating a Non-Written Financial Promotion

Answer 9

Appropriate time of day

Purpose of communication stated from outset

Clarify if client would like to continue and terminate at clients request

Contact point given so that any further appointment can be cancelled

Question 10

FP through Social Media

Answer 10

• Promotion is a promotion
• stand alone compliance (e.g. each tweet)
• image advertising (FCA remind firms that image advertising can get past character limits)

Question 11

Distance Marketing Communications

Answer 11

A firm must provide distance marketing communication in ‘good time’ before the consumer is bound by the offer

Question 12

Record Keeping

Answer 12

• indefinitely for pension transfer, opt out or FSAVC
• 6 years for life policy, occupational, personal and stakeholder pension and SSAS
• 5 years for MiFID and equivalent third country business
• 3 years for other cases

Question 13

Investment Adviser Charging and Types of Advice

Answer 13

A firm making a personal recommendation to a retail client to invest in a ‘retail investment product’ cannot accept commission / remuneration or any benefit

Firm is instead paid an ‘adviser charge’ agreed with client in advance

Applies to independent and restricted advice, but not ‘basic’ advice (e.g. advice on stakeholder products using prescripted questions) where advisers can still earn commission on sales

Question 14

Investment Advice Charging - Retail Investment Products

Answer 14

Broader than packaged products

Does not include advice on stocks and shares

Or structured deposits

Question 15

Investment Adviser Charging - Product Providers Facilitation

Answer 15

PP are prohibited from offering or paying commission of any kind in connection with advice

However, PP can ‘facilitate’ the payment of adviser charges and platform service

Adviser charges can not be ‘varied inappropriately’ according to product / provider, therefore cannot charge more for recommending one product over a substitutable product

Question 16

Investment Adviser Charging - Product Providers advising on their own products

Answer 16

PP must ensure the adviser charge is ‘reasonably representative’ of the advice service provided

Not the costs of manufacturing and administering included

Question 17

Investment Adviser Charges - paying the charge

Answer 17

Clients can pay upfront or have it deducted from investment

Payment can be made in instalments for an ongoing service or the client makes regular contributions

If deducted from investment, PP must obtain clear instructions from client

Question 18

Ban on Inducements and Independent Advice (inducements is Advice as whole, investment Adviser Charging is for personal recommendation)

Answer 18

MiFID II introduces a ban on inducements

Professional Clients - applies to firms providing independent investment advice and PM

Retail Clients - applies to ‘restricted and independent’ advice and PM

Ban is on investment advice as a whole, rather than a particular recommendation

Question 20

Acceptable inducements for Portfolio Management services

Answer 20

Minor non-monetary benefits that:

• enhance the quality of service provided
• still allow firm to act in best interest of client
• clearly disclosed

Question 21

Research and Inducements

Answer 21

Research provided to investment firm will not be an inducement:

• if it is paid out of firms own resources
• or paid out of a special ‘research payment account’

Question 21

Research Payment Account

Answer 21

RPA must be funded by a ‘research charge’ agreed with the client (not third parties), in accordance with the ‘research budget’ set by the firm’s ‘research needs’

Research charges must be separated from transaction costs

RPA can not be used for internal research

Question 22

Fund Manager Charges

Answer 22

MiFID II requires fund managers to disclose full, ‘unbundled’ charges

Total cost given instead of OCF, including trading costs and platform charges

Total costs given in £ and p instead of %

(Managers who run discretionary client portfolios must notify investors with 24 hours if portfolio falls by 10%)

Question 23

FCA rules to improve competition in Asset Management industry

Answer 23

• Assessment of Value, where the charges taken are justified by overall value provided
• independent directors make up 25% of AFM board (at least 2 directors)
• new prescribed responsibility for FM on SMCR
• prevents FM retaining risk free profits (profits from matching buy or sell orders, with no transaction costs)
• make it easier for FM to convert investors to cheaper share classes when in their interests