FCA BS - Identifying Client Needs Flashcards
Suitability Obligation
Firms providing IA or PM services are required to assess suitability for all retail / professional and EC
Suitability assessment should be used for all decisions on whether to trade (buy /hold/sell)
Suitability Assessment
- Objectives and risk tolerance
- Financial situation and ability to bear losses
- knowledge and experience in specific instrument or service
Suitability and Type of Client
Knowledge and experience can be assumed for professional clients
Financial situation can be assumed for ‘per se professional clients’ when ‘receiving investment advice’
(This cannot be assumed for retail clients who have opted to professional or any client when receiving PM services
Suitability Report to Retail Client examples when required
- buys or sells shares in CIS or investment trust saving scheme
- alters personal or stakeholder pension
- enters into pension transfer or opt out
- enters into short term annuity
- enters into life policy or related transactions
Report should be ASAP after the transaction and when related to investment not mentioned above, down to clients best interest rule if an explanation on suitability is required
Insistent Clients Timeline
- Firm has given client a personal recommendation
- Client wishes to enter into transaction different to that personally recommended by firm
- Client wishes the firm to facilitate transaction
Dealing with Insistent Clients
- must inform client that transaction is not in accordance with personal recommendation
- the risks of proposed transaction
- the reasons why the firm did not recommend the proposed transaction
- obtain final acknowledgement from the client and keep records
Churning and Switching
Relates to the deliberate overtrading of client accounts to generate commission
Churning - relates to investments generally
Switching - overtrading within and between packaged products
Appropriateness Obligation
Firms are required to test ‘appropriateness’ when providing other services than investment advice or discretionary PM
Typically non-advised, therefore since no personal recommendation, suitability does not apply
Clients must provide information of knowledge and experience of investment field and firm assess appropriateness of product or service
Appropriateness - Client Warnings and Scenarios
If the client can not provide enough information for assessment and still wishes to do business, the firm must warn the client it is unable to judge appropriateness
If a client demands a product assessed as inappropriate, must give client a ‘warning’
If client still wishes to proceed, firm should consider if it’s in clients ‘best interests’
Appropriateness for Client Types and NCFIs
Professional clients can be assumed to have knowledge and experience
The appropriateness obligation does not apply to any client type for ‘non-complex financial instruments’
NCFIs are non-derivatives which can be traded easily, does not involve obligation that exceeds cost of acquiring and understandable info and value are publicly available
Independent advice
- Consider broader range of products (retail investment products)
- Unbiased and unrestricted advice based on a comprehensive analysis of market
- Inform clients they are independent before providing advice
Retail investment products
Wider than ‘packaged products’
Also includes structured investment products, all investment trusts, UCIS
Any investment that offers exposure to underlying financial assets, but in a packaged form which modifies that exposure
Does not include stock and shares or structures deposits
Restricted Advice
A firm which advises on a limited number of providers or certain products
Must disclose in writing and orally before giving advice and explain nature of restriction
