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UK Regulation > FCA Conduct Of Business & client assets > Flashcards

FCA Conduct Of Business & client assets Flashcards

1
Q

What is COBS?

A

Conduct of Business Sourcebook

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2
Q

What is aim of COBS?

A

Move towards outcomes focused approach rather than compliance with detailed and prescriptive rules

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3
Q

Which firms are subject to COBS?

A

Based on geography, e.g. with a link to UK through location or UK client

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4
Q

Activities subject to COBS?

A

Designated investment business
Long term insurance business
Accepting deposits

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5
Q

Do the COBS rules apply to appointed reps?

A

Firms must ensure appointed representatives comply with COBS rules when they communicate financial promotions

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6
Q

Rules for firms using electronic media to communicate with customers?

A

Allowed, but must be up to date and client must consent to that method and evidence they have access to internet

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7
Q

What is the COBS definition of a client?

A

Client is someone the firm provides or intends to provide, or has provided a service in course of regulated activity (and ancillary MIFID business)

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8
Q

3 classifications of clients?

A

Retail
Professional
Eligible counterparty

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9
Q

What are per se professional clients?

A

Regulated entities
Large companies
National and regional governments
Institutional investors

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10
Q

What are the balance sheet requirements to be a per se professional client for MIFID?

A

2 of the 3:

20M EUR balance sheet
turnover 40M
2M Own funds

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11
Q

What are the requirements to be a per se professional client for non-MIFID?

A

-Net assets (or share capital) of £5M in last 2 years
- 2/3 of 12.5M EUR balance sheet, 25M turnover and average 250 employees
- Trustee of trust or pension scheme with assets £10M+

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12
Q

Difference in eligible counterparties and per se professional client list?

A

Large undertakings not on the eligible counter parties list

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13
Q

What type of business allows for eligible counter party classification?

A

Executing orders
Dealing on own account
Receiving and transmitting orders

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14
Q

Risk from being a ECP (eligible counterparty)?

A

Many of the COBS rules do not apply (although not a huge issue given these are large firms familiar with the rules)

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15
Q

Who is the firms client if an agent is being used?

A

Firm should consider the person to whom it is providing services it’s client, even if they are an agent unless agreed in writing otherwise

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16
Q

When can a retail client be treated as an elective professional client?

A
  • Qualitative test (assess their knowledge)
  • 2/3 are true;
  • an average of 10 significant transaction in last 4Qs
  • portfolio over 500k EUR
  • client works in FS for a least year covering these types of transactions
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17
Q

What steps must be taken to reclassify retail as elective professional?

A

Client must put in writing their wish to be reclassified and firm respond with clear written warning. Client to respond and confirm acceptance of risks

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18
Q

How long must client agreements be retained?

A

Whatever is longest from
- 5 years
- Duration of the relationship
- indefinitely for pensions

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19
Q

6 consumer outcomes from FTOC?

A
  • Fair treatment central to firms philosophy
  • products designed for clients needs
  • clear information
  • suitable advice given
  • acceptable standard of service
  • no unreasonable barriers to switch or complain
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20
Q

What should financial promotions contain?

A
  • warning on capital being at risk
  • balanced short, medium and long run yields shown
  • clear on info and remuneration
  • clear which bits are regulated
  • clear if the product is a 3rd party product
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21
Q

Examples of excluded communications?

A
  • exempt under FPO e.g if it’s not related to the UK
  • subject to takeover code
  • one off, non cold calls
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22
Q

Types of communication methods covered under COBS?

A

Real time
Cold calls
Non real time communications
Direct offer promotions

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23
Q

What must an adviser do to be considered independent?

A

Only recommendations given are based on comprehensive and fair analysis of the financial markets

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24
Q

What is a restricted advisor?

A

Don’t recommend instruments from the whole market

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25
Q

How can advisors gets paid?

A

Must charge consumer for the advice (can pay directly or deduct from investment amount)

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26
Q

Is trail commission allowed?

A

No, not since 2016

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27
Q

If a firm relies on a 3rd party for instruction how should the instruction be given?

A

In writing

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28
Q

What is the purpose of the financial promotion rules?

A

Ensure promotions are identified as such and are fair, clear and not misleading

29
Q

What is the process for the FCA to ban a financial promotion?

A
  • FCA give direction to remove promotion including reasons for ban
  • Firm can make representations if they think FCA is wrong
  • FCA can then confirm, amend or revoke their ban
  • if confirmed FCA will publish the direction with reasoning
30
Q

What is a prospectus advertisement?

A

Any type of communication (Tv, Letter, brochure etc) which promotes the offer to subscribe or acquire securities

31
Q

4 rules on advertising offer or admissions to trading?

A
  1. Gives details on prospectus
  2. Clearly a AD
  3. Accurate info
  4. Consistent with prospectus
32
Q

If investment business is advertised to a retail client, what are the COBS rules for the communication?

A
  • Firms name is included
  • accurate info, clear on benefits / risks
  • info is sufficient and likely to be understood
  • clearly sets out warnings / statements
33
Q

Rules on including past performance details in advertising?

A
  • past performance not too prominent
  • covers 5 years and complete periods
  • references given
  • warning included, on past performance and currencies
  • charges clear
34
Q

Rules on unwritten promotions

A
  • appropriate time of day
  • identifies themselves at outset
  • gets clarification if client wishes to continue
  • contact point given
35
Q

Firms must not cold call unless…

A
  • existing client relationship
  • relates to generally marketable product or investments
36
Q

When do the COBS suitability rules apply?

A
  • Giving investment advice
  • managing retail investments
  • manage assets of occupational pension schemes
37
Q

What is Churning?

A

Activity of over dealing and trading more frequently to generate additional fees

38
Q

What is switching with regard to investments?

A

Selling one investment and replacing it with another

39
Q

Why do the suitability rules exist?

A

Make sure personal recommendations are suitable for the clients needs

40
Q

What details should a firm obtain prior to giving investment advice?

A
  • clients knowledge and experience
  • financial situation
  • investment objectives and risk profile
41
Q

Do the suitability rules apply to professional clients?

A

Firms can assume they have knowledge and are able to bear any risks (except for elective professionals)

42
Q

What is a KIID?

A

Key investor information documents

43
Q

What products need a Key Features Document?

A

Each packaged product
Cash ISA
Child Trust Fund

44
Q

What is a PRIIP?

A

Packaged retail and insurance based investment product

45
Q

4 types of PRIIPs?

A

Investment funds
Insurance based investment product
Retail structured securities
Term deposits

46
Q

Maximum length of a KID?

A

3 sides of A4

47
Q

Cancellation period for life and pension products?

A

30 days

48
Q

Cancellation periods for ISAs?

A

14 days

49
Q

Cancellation periods for non-life and pensions products (advised and distance)?

A

14 days

50
Q

What are the 6 COBS rules on dealing and managing?

A

Best execution
Client order handling
Client limit orders
Record keeping
Personal account dealing
Recording communications

51
Q

When should conflicts be disclosed to clients?

A

If arrangements are not sufficient to prevent damage to clients interests - this is a last resort and shouldn’t be a preferred option

52
Q

With regard to research recommendations what does a firm have to monitor quarterly?

A
  • Portion that recommend buy v hold v sell
  • Portion that the firm provides material banking services to
53
Q

How must a firm charge for research?

A

Separate charge for research must be outlined

54
Q

2 ways firms can pay for research?

A

From own resources
From a research payment account funded by a specific charge to clients

55
Q

What exemption from research rule exists for SMEs?

A

Research on companies with a market cap of £200m are exempt

56
Q

What exemption from research rule exists for FICC?

A

Fixed income, currency and commodity research of the instruments is exempt

57
Q

What is the rule on charging for openly available research?

A

Can be provided for free if available to all firms / general public etc

58
Q

What are the best execution rules?

A

Firms must execute orders on the terms most favourable to their client

59
Q

What are the execution factors?

A

Price; cost, speed, likelihood of execution, size

60
Q

What is an order execution policy?

A

Firms policy on how they seek to obtain the best possible results for clients when settling orders

61
Q

What is the rule on specific client instructions?

A

Must execute according to their specific instructions, even if they think a different method may have produced better results

62
Q

Can a firm aggregate orders?

A

Yes, if not to disadvantage the client and it is disclosed. Order of allocation policy must be in place

63
Q

When must a client limit order be made public?

A

If it cannot be immediately executed on a regulated market

64
Q

What are PAD rules?

A

Personal account dealing rules

65
Q

What reporting must a client receive after a firm carries out an order?

A
  • Essential info in a durable medium
  • Status on their orders
  • Notice confirming deal details
66
Q

How quickly must a notice report be sent to clients?

A

ASAP, no later than the next business day

67
Q

How often must periodic reporting be sent?

A

Quarterly is standard
- monthly if leveraged
- if deal by deal is sent, then can just send an annual report

68
Q

What are the CASS 6 rules?

A

Custody rules when a firm holds financial instruments of a client

UK Regulation (6 decks)

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