FCA Conduct of Business Fair Treatment and Client Money Protection (18/80)

Question 1

What activities are subject to COBS?

Answer 1

• designated investment business
• long-term insurance business in relation to life policies, and
• activities relating to the above.

Question 2

What is the geographic scope of COBS?

Answer 2

COBS applies to a firm carrying on the following activities from an establishment maintained by it in the UK, or from an establishment maintained by its appointed representative in the UK.

Question 3

What is a “Durable Medium”?

Answer 3

• Paper.
• Any instrument which lets the recipient store the information so that they can access it for future
reference, for an appropriate time and on an unchanged basis. It includes storage on a PC but
excludes internet sites, unless they meet the requirement for storage and retrieval. So, for example,
information conveyed on a website page will not automatically meet the requirements for a durable
medium.

Question 4

Which activities require voice recording?

Answer 4

• receiving client orders
• executing client orders
• arranging for client orders to be executed
• carrying out transactions on behalf of the firm, or another person in the firm’s group, and which are
part of the firm’s trading activities or of another person in the firm’s group
• executing orders that result from decisions by the firm to deal on behalf of its client
• placing orders with other entities for execution that result from decisions by the firm to deal on
behalf of its client
• discretionary investment managers.

Question 5

What do voice recording requirements not apply to?

Answer 5

• activities carried out between operators, or between operators and depositaries, of the same
collective investment scheme (CIS)
• corporate finance business
• corporate treasury functions.

Question 6

What is the base principle of Inducements under COBS?

Answer 6

An investment firm must not pay to/provide or accept/receive from any party other than its client, or a
party acting on behalf of its client, any fee, commission or non-monetary benefit in connection with the
provision of any investment or ancillary service.

Question 7

What is the rule on charging for Research?

Answer 7

From 3 January 2018, firms which produce research must apply a separately identifiable charge to
the research when providing it to EU-regulated firms that provide portfolio management services or
independent financial advice.

Question 8

How can relevant EU-regulated firms receive (consume) research?

Answer 8

Paying for it using one of two methods:
1. directly from its own resources, or
2. via payment from a research payment account (RPA) controlled by the firm funded by a specific
charge to its clients.

Question 9

What triggers a communication to be considered “Research”?

Answer 9

• concerning one or several financial instruments or other assets
• concerning the issuers or potential issuers of financial instruments, or
• closely related to a specific industry or market such that it informs views on financial instruments,
assets or issuers within that sector, and
• which explicitly or implicitly recommends or suggests an investment strategy and provides a
substantiated opinion as to the present or future value or price of such instruments or assets, or
otherwise contains analysis and original insights and reaches conclusions based on new or existing
information that could be used to inform an investment strategy and be relevant and capable of
adding value to a client’s decisions on behalf of their clients.

Question 10

Can a firm accept Research provided for free?

Answer 10

Firms should not accept Research for ‘Free’.

Where a firm does not want to accept research material, they should take reasonable steps to cease
receiving it or avoid benefitting from its content, for example, by automatically blocking or filtering
certain senders/materials where practicable, and/or requesting a provider to stop providing research,
and/or using the compliance function of the firm to monitor, assess and determine whether the material
can be accepted before it reaches those parts of the firm that would make use of it.

Question 11

Is Macroeconomic Analysis considered Resarch?

Answer 11

To be Research, the following two conditions need to be met. The material or service:
1. must concern one or several financial instruments or other assets, or current or potential issuers of
financial instruments, or be closely related to a specific sector or market such that it informs views
on financial instruments, assets or issuers within that sector or market, and
2. explicitly or implicitly recommends or suggests an investment strategy and provides a substantiated
opinion as to the present or future value or price of such instruments or assets, or contains analysis
and original insights and reaches conclusions based on new or existing information that could
be used to inform an investment strategy and be relevant and capable of adding value to the
investment firm’s decisions on behalf of clients being charged for that research.

Question 12

What does it mean for Research to be made openly available?

Answer 12

The industry view is that ‘openly available’ research in the context of written material would mean that
there are no conditions or barriers to accessing it (for example, a necessary log-in or sign-up, or the
submission of user information by a firm or a member of the public) in order to access the material.

Question 13

What conditions apply to a Research Payment Account (RPA)?

Answer 13

The RPA must only be funded by a specific research charge to clients, agreed with clients, developed
by the firm as its research budget for the purpose of establishing the amount needed for third-party
research in respect of investment services provided to its clients.

The RPA must not be linked to the volume or value of transactions executed by the firm on behalf of its
clients.

Question 14

What information must firms provide to clients in respect to an RPA?

Answer 14

• information about the budgeted amount for research and the amount of the estimated research
charge for each client
• annual information on the total costs that each client has incurred for third-party research.

Question 15

What would NOt be considered research ((and cannot be paid for by an RPA)?

Answer 15

• post-trade analytics
• price feeds or historical price data that have not been analysed or manipulated in order to present
the firm with meaningful conclusions
• seminar fees
• corporate access service
• order and execution management services
• administration of an RPA.

Question 16

What is a Financial Promotion?

Answer 16

A financial promotion is an invitation or an inducement to engage in investment activity. The term,
therefore, describes most forms and methods of marketing financial services. It covers traditional
advertising, most website content, telephone sales campaigns and face-to-face meetings.

Question 17

What is the scope of the Financial Promotion rules?

Answer 17

In general, these rules apply to a firm which carries on business with, or communicates a financial
promotion to, a client in the UK (including when this is done from an establishment overseas); they do
not apply to communications made to persons inside the UK by EEA firms.

Question 18

What do the rules of Retail promotions require?

Answer 18

These rules state that:
• the firm’s name is included on the communication
• the information is accurate and does not emphasise potential benefits, without also giving fair and
prominent indication of any relevant risks
• it is sufficient for, and presented in a way likely to be understood by, the average member of the
group at whom it is directed or by whom it is likely to be received
• it does not disguise, diminish or obscure important items, statements or warnings.

Question 19

What is the basic purpose of the Financial Promotions rules?

Answer 19

To support:
• Principle 6 – the interests of its customers and treat them fairly.
• Principle 7 – the information needs of its clients and communicate information to them in a way
which is clear, fair and not misleading.

Question 20

Can an unauthorised person communicate a Financial Promotion?

Answer 20

No - breach means 2 years in prison

Question 21

What must be included in the discl;aimer for a Financial Promotion?

Answer 21

• those which deal with products or services when a client’s capital may be at risk make this clear
  • those quoting yields give a balanced impression of both the short-term and long-term prospects for
  the investment
  • if an investment product is, or service charges are, complex, or if the firm may receive more than
  one element of remuneration, this is communicated fairly, clearly and in a manner which is not
  misleading and which takes into account the information needs of the recipients
  • the FCA is named as the firm’s regulator and that any communication refers to matters not regulated
  by the FCA (making it clear that those matters are not regulated by the FCA)
  • those relating to packaged or stakeholder products not produced by the firm itself give a fair, clear
  and non-misleading impression of the producer or manager of the product.

Question 22

What is the definition of Prominence in regards to Financial Promotions?

Answer 22

The FCA defines prominence as ‘the state of being easily seen’, ie, in terms of a statement within a financial promotion and likely to be seen by virtue of its size or position.

Question 23

What is the general rule for communicating with retail clients?

Answer 23

The FCA’s general rule in communicating with retail clients requires firms to ensure that information
does not emphasise any potential benefits, without giving a fair and prominent indication of any
relevant risks. It must also not disguise, diminish or obscure important items.

Question 24

What is the process for banning a Financial Promotion?

Answer 24

1. The FCA will give a direction to an authorised firm to remove its own financial promotion or one it
   approves on behalf of an unauthorised firm, setting out its reasons for banning it.
2. Firms can make representations to the FCA if they think they are making the wrong decision.
3. The FCA will decide whether to confirm, amend or revoke the direction. If it is confirmed, the FCA will
   publish it, along with a copy of the promotion and the reasons behind the decision.

Question 25

What exemptions apply to the Financial Promotion Rules?

Answer 25

• exempt under the financial promotion order (FPO). This is an order which makes certain sorts of
promotion exempt from the regime if it is communicated by an unauthorised person, or originates
outside the UK and cannot have an effect within the UK
• from outside the UK, and would be exempt under the FPO if the office from which they are
communicated were a separate unauthorised person (even though it is not)
• subject to (or exempted from) the Takeover Code, or similar rules in another EEA state
• personal quotes or illustration forms
• one-off promotions that are not cold calls.

Question 26

Is a firm in breach if it communicates a promotion produced by a 3rd party which breaches the rules?

Answer 26

Not so long as:

• takes reasonable care to establish that another authorised firm has confirmed that the promotion
complies with the rules
• takes reasonable care that it communicates it only to the type of recipient it was intended for at the
time of the confirmation
• as far as it is (or should be) aware, the promotion has not ceased to be fair, clear and not misleading
and the promotion has not been withdrawn.

Question 27

What must be included in a direct offer to retail clients?

Answer 27

• prescribed information about the firm and its services
• when relevant, prescribed information about the management of the client’s investments
• prescribed information about the safekeeping of client investments and money
• prescribed information about costs and charges
• prescribed information about the nature and risks of any relevant designated investments; when
an investment is the subject of a public offer, any prospectus published in accordance with the
Prospectus Regulation must be made available
• if a designated investment combines two or more investments or services, so as to result in greater
risk than the risks associated with the components singly, an adequate description of those
components and how that increase in risk arises
• if a designated investment incorporates a third-party guarantee, enough detail for the client to
make a fair assessment of it.

Question 28

How far back should Past Performance indicators go?

Answer 28

At least 5 years

Question 29

In what circumstances is Cold Calling acceptable?

Answer 29

Firms must not cold call unless:
• the recipient has an existing client relationship with the firm and would envisage receiving such a
call
• the call relates to a generally marketable packaged product which is neither a higher-volatility fund,
nor a life policy linked to such a fund, or
• it relates to a controlled activity relating to a limited range of investments, including deposits and
readily realisable investments other than warrants or generally marketable non-geared packaged
products.

Question 30

What is the definition of a client in COBS?

Answer 30

COBS defines a client as someone to whom a firm provides, intends to provide or has provided a service
in the course of carrying on a regulated activity and, in the case of MiFID or equivalent third-country
business, anything which is an ancillary service.

Question 31

What are the 3 client categorisations under COBS?

Answer 31

• retail clients
• professional clients, or
• ECPs.

Question 32

What is a Retail Client?

Answer 32

A ‘retail client’ is any client who is not a professional client or an ECP. The term ‘customer’ means retail
clients and professional clients.

Question 33

What is a Professional Client?

Answer 33

‘Professional clients’ may be either elective professional clients, or per se professional clients. An elective professional client is one who has chosen to be treated as such.

Question 34

Who would be a Per-Se Professional Client?

Answer 34

An entity required to be authorised or regulated to operate in the financial markets.

Large undertakings – companies whose balance sheet, turnover or own funds meet certain levels

Governments, certain public bodies, central banks, international/supranational institutions and
similar, and

Institutional investors whose main business is investment in financial instruments.

Question 35

What is an Eligible Counterparty (ECP)?

Answer 35

• a credit institution
• an investment firm
• another financial institution authorised or regulated under the EC legislation or the national law of
an EEA state (that includes regulated institutions in the securities, banking and insurance sectors)
• an insurance company
• a CIS authorised under the UCITS Directive or its management company
• a pension fund or its management company
• a national government or its corresponding office, including a public body that deals with the public
debt
• a supranational organisation
• a central bank
• an undertaking exempted from the application of MiFID under either Article 2(1)(k) (certain own
account dealers in commodities or commodity derivatives) or Article 2(1)(l) (locals) of MiFID.

Question 36

How would you classify a Local Authority under MIFID II?

Answer 36

They are retail clients unless they meet the following:

The qualitative test as per COBS 3.5.3(1):
the firm undertakes an adequate assessment of the expertise, experience and knowledge of the client
that gives reasonable assurance, in light of the nature of the transactions or services envisaged, that the
client is capable of making their own investment decisions and understanding the risks involved (the
‘qualitative test’).

The quantitative test (as per COBS 3.5.3B(2):
• The size of the authority’s financial instrument portfolio defined as including cash deposits and
financial instruments exceeds £10 million, and
• either:
• it has carried out transactions, in significant size, on the relevant market at an average frequency
of ten per quarter over the previous four quarters (quantitative test)
• the person authorised to carry out transactions on behalf of the authority works or has worked
in the financial sector for at least one year in a professional position, which requires knowledge
of the provision of services envisaged (quantitative test)
• the authority is an ‘administering authority’ of the Local Government Pension Scheme, and is
acting in that capacity.
• The local public authority or municipality is established in an EEA state and the EEA state has
adopted alternative or additional criteria.
• It would not be able to be ‘opted’ up to an elective eligible counterparty.

Question 37

Under what circumstances may a retail client be treated as an Elective Professional Client?

Answer 37

A retail client may be treated as an elective professional client, both for MiFID and non-MiFID business,
only if:
• the firm has assessed its expertise, experience and knowledge and believes it can make its own
investment decisions and understands the risks involved (this is called the qualitative test) and
• any two of the following are true (this is called the quantitative test)
• the client carried out, on average, ten significantly sized transactions on the relevant market in
each of the past four quarters
• the size of the client’s financial portfolio exceeds €500,000 (defined as including cash deposits
and financial instruments)
• the client works, or has worked, as a professional in the financial services sector for at least a year
on a basis which requires knowledge of the transactions envisaged
• the firm must follow certain procedures, including giving a clear written warning to the client of
the lost protections, to which the client must agree in writing. In particular, the client must state in
writing to the firm that it wishes to be treated as a professional client, either generally or in respect
of a particular service or transaction or type of transaction or product.

Question 38

Under what circumstances may a Professional client be treated as an Elective Eligible Counterparty?

Answer 38

A professional client may be treated as an elective eligible counterparty if it is a company and it is:
• a per se professional client (other than one which is only a professional client because it is an
institutional investor), or
• it expressly agrees with the firm to be treated as an ECP.

Question 39

Can a client be classified down?

Answer 39

Yes. Recategorisation can be on a general basis, or on single transactions only

Question 40

What does the FCA conisder as “Traeting Customers Fairly”?

Answer 40

1. Consumers can be confident that they are dealing with firms where the fair treatment of customers
   is central to the corporate culture.
2. Products and services marketed and sold in the retail market are designed to meet the needs of
   identified consumer groups and are targeted accordingly.
3. Consumers are provided with clear information and are kept appropriately informed before, during
   and after the point-of-sale.
4. When consumers receive advice, the advice is suitable and takes account of their circumstances.
5. Consumers are provided with products that perform as firms have led them to expect, and the
   associated service is both of an acceptable standard and as they have been led to expect.
6. Consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch
   provider, submit a claim or make a complaint.

Question 41

What must a firm provide its clients with ahead of any binding agreement?

Answer 41

• the terms of any such agreement, and
• the information about the firm and its services relating to that agreement or those services required
by COBS 6.1.4 (information about a firm and its services), including authorised communications,
conflicts of interest and the firm’s authorised status.

Question 42

How long must client agreements be held?

Answer 42

The records must be maintained for at least the longer of:
• five years
• the duration of the relationship with the client, or
• in the case of a records relating to pensions transfers, pension opt-outs or additional voluntary
contributions to a private pension/pension contract from an occupational pension scheme,
indefinitely

Question 43

If a firm manages investments for retail clients what must it provide on request?

Answer 43

• information on the method and frequency of valuation of the investments in the client’s portfolio
• details of any delegation of the discretionary management of all or part of investments or funds in
the client’s portfolio
• specification of any benchmark against which performance of the portfolio will be compared
• the types of investment that may be included and the types of transaction that may be carried out,
including any limits
• objectives, the level of risk to be reflected in the manager’s exercise of discretion, and any specific
constraints on that discretion.

Question 44

What information must be disclosed on costs and charges to ALL clients?

Answer 44

• the total price to be paid, including all related fees, commissions, charges and expenses and any
taxes payable via the firm
• if these cannot be indicated at the time, the basis on which they will be calculated so that the client
can verify them
• the commissions charged by the firm must be itemised separately in every case
• if the above are to be paid in a foreign currency, what currency is involved and the conversion rates
and costs
• if other costs and taxes not paid or imposed by the firm could be applicable, the fact that this is so;
• how the above items are to be paid/levied
• information about compensation schemes.

Question 45

Under what circumstances can a firm disclose information to a client AFTER a binding agreement has been made?

Answer 45

a. at the request of the client, the agreement was concluded using a means of distance
communication which prevented the firm from providing the information before the provision of a
designated investment business or ancillary services, and

b. the firm complies with the rule on voice telephone communications, which applies to services
provided to consumers (ie, the firm should treat the retail client as a consumer).

Question 46

Under what circumstances can a firm use a website for information disclosure to a client?

Answer 46

1. There is evidence that the client has regular access to the internet, such as the provision by the client
   of an email address for the purposes of the carrying on of that business.
2. The client must specifically consent to the provision of that information in that form.
3. The client must be notified electronically of the address of the website, and the place on the website
   where the information may be accessed.
4. The information must be up to date.
5. The information must be accessible continuously by means of that website for such period of time as
   the client may reasonably need to inspect it.

Question 47

What behaviour should a “good conduct” firm refrain from?

Answer 47

• prioritising profits over ethics and commercial interests over consumer interests
• a tick-box and overly legalistic approach to compliance
• the idea that disclosure at the point of sale absolves the seller from responsibility for ensuring that
a product/service represents a good outcome for the customer (note the erosion of caveat emptor),
and
• complying with only the letter (rather than the spirit) of laws and regulations.

Question 48

What must a firm consider in regards to Conflicts of Interest?

Answer 48

They require that firms take all reasonable steps to identify, prevent and manage conflicts of interest
between:

• the firm, including its managers, employees, appointed representatives/tied agents and parties
connected by way of control and a client of the firm, and
• one client of the firm and another.

Question 49

What are common types of Conflicts of Interest?

Answer 49

Those where the firm:

• is likely to make a financial gain, or avoid a financial loss, at the expense of the client
• has an interest in the outcome of a service provided to the client, or of a transaction carried out on
behalf of the client, which is different to the client’s interest in that outcome
• has a financial or other incentive to favour the interest of another client or group of clients over the
interest of the client
• carries on the same business as the client
• receives, or will receive, from a person other than the client an inducement in relation to a service
provided to the client, in the form of monies, goods or services, other than the standard commission
or fee for that service.

Question 50

What must firms include for their controls around Conflicts of Interest?

Answer 50

Firms will require the following processes and procedures in order to manage conflicts of interest to
ensure the fair treatment of clients:
• information barriers, such as reporting lines
• remuneration structures
• segregation of duties
• policy of independence.

Question 51

What must a firm do if the arrangements that a firm puts in place to prevent or manage potential conflicts of interest are not sufficient to ensure, with reasonable confidence, that the risk of damage to the interests of a client will be prevented?

Answer 51

The firm must clearly disclose the general nature and/or source of conflicts of interest and the steps taken to mitigate those risks before undertaking business for/on behalf of the client.

Question 52

If a firm (other than one managing investments) carries out an order for a client what must it do?

Answer 52

It must:
• provide the essential information on it, promptly, and in a durable medium (if the transaction relates
to derivatives and options)
• provide clients with information about the status of their orders on request, and
• send a ‘notice’ confirming the deal details as soon as possible (but no later than on the next business
day); when the confirmation is received from a third party, the firm must pass the details on no later
than the business day following receipt.

Question 53

How frequently should firms provide periodic statements for retail clients?

Answer 53

Every three months, with the following exceptions:

a. Where the investment firm provides its clients with access to an online system, which qualifies as a
durable medium, where up-to-date valuations of the client’s portfolio can be accessed and where
the client can easily access the information required and the firm has evidence that the client has
accessed a valuation of their portfolio at least once during the relevant quarter.

b. If the client receives deal-by-deal confirmations, and certain higher-risk investments are excluded,
the statement may be sent every 12 months.

c. If the client has authorised that their portfolio be leveraged, the periodic statement must be
provided at least monthly.

Question 54

What are the Best Execution rules?

Answer 54

The best execution rules under COBS require firms to execute orders on the terms that are most
favourable to their client. Broadly, they apply if a firm owes contractual or agency obligations to its client
and is acting on behalf of that client.

Question 55

What is the 4-Fold test

Answer 55

• the client initiated the transaction
• the client does not shop around for quotes
• the client is not able to identify the relative levels of price transparency within a market
• review information provided by the firm and any agreement reached.

Question 56

What are the factors which inidcate best execution?

Answer 56

• price
• costs
• speed
• likelihood of execution and settlement
• size
• nature or any other consideration relevant to the execution of an order.

Question 57

Under what circumstances can a firm aggregate own-account deals with those of clients?

Answer 57

Only if:
• this is unlikely to disadvantage any of the aggregated clients
• the fact that aggregation may work to their disadvantage is disclosed to the clients
• an order allocation policy has been established which provides (in sufficiently precise terms) for the
fair allocation of transactions. This must cover how volume and price of orders will affect allocation;
it must also cover how partial allocations will be dealt with.

Question 58

What are the accepted exceptions to the PAD rules?

Answer 58

The rules on personal account dealing are disapplied for:
• deals under a discretionary management service, if there is no prior communication between the
portfolio manager and the relevant person (or any other person for whose account the transaction
is being executed) about the deal
• deals in units/shares in certain classes of fund, if the relevant person (and any other person for
whom the deals are effected) is not involved in the management of the fund.

Question 59

What is Churning?

Answer 59

Churning is the activity of dealing overly frequently for a client, in order to generate additional fees/
commissions for the firm. It is relevant when, for example, a firm manages a client’s portfolio on a
discretionary basis. Switching is the activity of selling one investment and replacing it with another.

Question 60

When do suitability rules apply?

Answer 60

The COBS rules on the suitability requirements apply when firms:
• make personal recommendations (investment advice) relating to designated investments
• manage investments.

Question 61

Waht criteria must be satisfied to cofnirm suitability?

Answer 61

a. it meets the investment objectives of the client, including client’s risk tolerance
b. the client is able financially to bear any related investment risks consistent with the investment
objectives
c. the client has the necessary experience and knowledge in order to understand the risks involved in
the transaction or in the management of their portfolio.

Question 62

For suitability, what must be taken into account regardiong a client’s knowledge/experience etc?

Answer 62

a. the types of service, transaction and financial instrument with which the client is familiar
b. the nature, volume, and frequency of the client’s transactions in financial instruments and the
period over which they have been carried out
c. the level of education, and profession or relevant former profession of the client or potential client.

Question 63

Does suitability apply to Professional Clients?

Answer 63

A firm is entitled to assume that a professional client (per se and elective professional clients) in respect
of MiFID has the necessary experience and knowledge in that area. A firm is entitled to assume that a per se professional client is able to financially bear any related investment risks consistent with their
investment objectives.

A firm, however, is not permitted to make this same assumption for elective
professional clients.

Question 64

What is a “non-complex” financial instrument for the purposes of appropriateness?

Answer 64

A financial instrument is classified as ‘non-complex’ if:
• it is not a derivative
• there is sufficient liquidity in it
• it does not involve liability for the client that exceeds the cost of acquiring the investment, and
• it is publicly available and comprehensive information is available on it.

Question 65

In what circumstances is a firm, not required to assess a product’s appropruiateness to a client?

Answer 65

Firms are not required to ask clients to provide information or assess appropriateness if:
• the service is execution-only or, for the receipt and transmission of client orders, in relation to
particular financial instruments (see below) and at the client’s initiative
• the client has been clearly informed that the firm is not required to do so in this particular case, and
that they will, therefore, not get the benefit of the protection under the rules on assessing suitability,
and
• the firm complies with its obligations regarding conflicts of interest. Principle 8 of the Principles
for Businesses states that ‘a firm must manage conflicts of interest fairly, both between itself and its
customers and between a customer and another client’.

Question 66

Does the firm need to reassess appropriateness each time a client trades?

Answer 66

Firms do not need to reassess appropriateness each time, if a client is engaged in a series of similar
transactions or services, but they must do so before beginning to provide the service.

Question 67

What are Key Investor Information Documents (KIIDs)?

Answer 67

In respect of non-MiFID requirements, for each UCITS scheme that an authorised fund manager (AFM)
manages, it must produce a key investor information document (KIID).

Question 68

What must KIIDs include?

Answer 68

KIIDs must include appropriate information about the essential characteristics of the UCITS scheme,
which is to be provided to investors so that they are reasonably able to understand the nature and
risks of the investment product being offered to them, and therefore make investment decisions on an
informed basis.

a. identification of the scheme
b. a short description of its investment objectives and investment policy
c. past performance presentation or, where relevant, performance scenarios
d. costs and associated charges, and
e. risk/reward profile of the investment, including appropriate guidance and warnings in relation to
the risks associated with investments in the scheme.

Question 69

When do the Rules of Cancellation apply?

Answer 69

The rules on cancellation apply to:
• most firms providing retail financial products based on designated investments or deposits, and
• firms entering into distance contracts with consumers, relating to deposits or designated
investments.

Question 70

What is the purpose of the Rules of Cancellation?

Answer 70

They are intended to ensure that clients entering into the relevant range of transactions have the
opportunity to reconsider, within a certain period of time, and to cancel the transaction. If a consumer
does so, the effect is that they withdraw from the contract and it is terminated.

Question 71

How long is the cancellation rights period for a life and pensions contract?

Answer 71

30 days

Question 72

Whhat is the records retention period for cancellation rights?

Answer 72

The record-keeping retention period is:
• indefinitely for pension transfers, pension opt-out or free-standing additional voluntary contribution
(FSAVCs)
• at least five years in relation to a life policy, pension contract, personal pension scheme or
stakeholder pension scheme
• at least three years in any other case.

Question 73

What are the types of Retail Investment Product?

Answer 73

• life policies
• units in an authorised or unauthorised CIS (ie, OEICs or unit trusts)
• stakeholder pension schemes
• personal pension schemes
• interests in investment trusts (ie, regular savings schemes)
• securities in investment trusts
• any other designated investments which offer exposure to underlying financial assets in a packaged
form which modifies that exposure when compared with a direct holding in the financial asset
• structured capital-at-risk products

Question 74

What are Packaged Retail and Insurance-based Investment Products (PRIIPs)?

Answer 74

Although there is no specific definition of PRIIPs, they are distinguished by the broadly comparable
functions they perform for retail investors. They typically provide exposure to multiple underlying
assets, deliver capital accumulation over a medium- to long-term investment period, entail a degree of
investment risk (although some may provide capital guarantees), and are normally marketed to retail
investors.

They can be categorised into four groups:

1. investment funds
2. insurance-based investment products
3. retail-structured securities
4. structured term deposits.

Question 75

What is required of a PRIIP manufacturor?

Answer 75

A PRIIP manufacturer (or anyone who changes an existing PRIIP, such as a distributor) is required to:
• prepare a KID for each PRIIP that they produce
• publish each KID on their website.

Question 76

Does the PRIPP regulation apply to Professional Investors?

Answer 76

No - only retail

Question 77

What is the maximum length of a Key Information Documents (KID)?

Answer 77

3 A4 pages

Question 78

What must a Key Information Documents (KID) contain?

Answer 78

• Purpose.
• What is this product?
• What are the risks and what could I get in return?
• What happens if (name of the PRIIP manufacturer) is unable to pay out?
• What are the costs?
• How long should I hold it and can I take money out early?
• How can I complain?
• Other relevant information.

Question 79

What is included in a MIFID product approval process?

Answer 79

• identifying the target market for each product (‘Target Market Analysis’)
• conducting a scenario analysis regarding risk (‘Scenario Analysis’)
• providing distributors with the appropriate information about the product
• implementing management body oversight of the product governance framework, including
managing/identifying any possible conflicts of interest and determining whether the product could
represent a threat to the orderly functioning of the market
• establishing a product review process which includes gathering information from distributors to
determine if the product remains consistent with the identified target market
• reviewing the charging structure.

Question 80

If a Target Market has already been determined by a product manufacturer, can the distributor rely on this?

Answer 80

No - the distributor must do its own analysis on the target market

Question 81

What are common scenarios to consider when Stress Testing?

Answer 81

• The market environment deteriorates.
• The manufacturer experiences financial difficulties.
• The financial instrument fails to be commercially viable.
• Demand for the financial instrument is much higher than expected.

Question 82

What is Rehypothecation?

Answer 82

The process when a borrower pledges collateral to secure a debt or a borrower, as a condition precedent to a loan. In financial markets, mainly in prime-broking, the collateral pledged by clients as collateral for its own borrowing is used by investment firms. The collapse of Lehman Brothers raised this issue.

Question 83

Must firms deposit Client Money with the central bank?

Answer 83

No. But Firms that do not deposit client money with a central bank must exercise all due skill, care and diligence in the selection, appointment and periodic review of the credit institution, bank or qualifying money market fund where the money is deposited, and in the arrangements for the holding of this money.

Question 84

What is the requirement for Reconciliation when considering Client Money?

Answer 84

Firms must keep such records and accounts as necessary to enable it, at any time and without delay, to distinguish safe custody assets held for one client from safe custody assets held for any other client, and
from the firm’s own assets.

Question 85

How frequently should reconciliation be done?

Answer 85

As often as necessary to ensure the accuracy of a firm’s records and accounts, between its internal accounts and records and those of any third parties by whom those safe custody assets are held.

Question 86

What is the standard approach for Internal Reconciliation of client monies?

Answer 86

• Each business day, a firm that adopts the normal approach should check whether its client money
resource, being the aggregate balance on the firm’s client bank accounts, as at the close of business
on the previous business day, was at least equal to the client money requirement as at the close of
business on that day.
• Each business day, a firm that adopts the alternative approach should ensure that its client money
resource, being the aggregate balance on the firm’s client bank accounts, as at the close of business
on that business day is at least equal to the client money requirement as at the close of business
on the previous business day. No excess or shortfall should arise when adopting the alternative
approach.

Question 87

What is the standard approach for External Reconciliation of client monies?

Answer 87

• a reconciliation of a client bank account as recorded by the firm with the statement issued by the
bank (or other form of confirmation issued by the bank)
• a reconciliation of the balance on each client transaction account as recorded by the firm, with the
balance of that account as set out in the statement (or other form of confirmation) issued by the
person with whom the account is held.

Question 88

Are unclaimed balances still considered Client Money?

Answer 88

Firms are able to pay away such balances to a registered charity providing that the firm can demonstrate that it has taken reasonable steps to trace the clients concerned and return the balance and has held the balance concerned for at least six years in respect of client money and 12 years for clients’ assets.

Question 89

Who is required to undergo a CASS audit?

Answer 89

If a firm holds client money and assets then it must have an annual CASS assurance audit performed.
The audit assurance report is submitted to the FCA.

Question 90

What are the 3 types of questions?

Answer 90

• Closed questions contain an embedded assumption, demand a yes or no response, and in doing
so, they close out the potential for another answer to emerge. For example, ‘Do you want to retire at
60?’ may lead a client to conclude that only one retirement age is possible. Closed questions are best
used on a limited basis.
• Open questions minimise assumptions and leave the window open for clients to express their own
views, leading to better quality information. ‘Do you have a retirement age in mind?’ offers the client
greater freedom and accuracy of response.
• Either/or questions are sometimes known as double binds because they offer only two alternatives.
These questions can be highly manipulative. An unscrupulous adviser may ask, ‘Would you prefer
fund A or fund B?’ when either could generate more commission than average for the adviser, and the
client is tricked into accepting one of them in the absence of wider choice. Effectively, double binds
offer false choice and should be avoided whenever possible.