FCA Conduct of Business Sourcebook

Question 1

When are the COBS rules applicable? (3)

Answer 1

1) Accepting deposits
2) Designated investment businesses (DIB)
3) Long-term insurance business

Question 2

What are the inducement rules?

Answer 2

A firm must not pay to or accept from a person other than the client any fee, commission or non-monetary benefit.

Must provide disclosure about existence and amount of fee

Question 3

What are the rules regarding reliance on others? (i.e. third party firms)

Answer 3

A firm receiving information from third party firm must establish in writing that:

i) not connected with firm and
ii) competent to provide information

Question 4

What is a financial promotion?

Answer 4

An invitation or inducement to engage in investment activity that is communicated in the course of business

Question 5

Which principles of business are most relevant for financial promotions?

Answer 5

Principle 6 and 7

Interests of customers and communication with clients

Question 6

Which legislation covers financial promotion?

Answer 6

S21 of FSMA

COBS 4

Question 7

What are the rules for past (3), simulated (1) and future performance (2)?

Answer 7

Past performance must:

1) Not be the most prominent feature,
2) Covers at least five years (or length of investment)
3) State that it is not an indicator of future performance

Simulated past:
1) Must be based on actual performance of similar investment/index

Future:

1) Must not be based on simulated past performance
2) Warn that forecasts are not reliable indicators

Question 8

What type of cold calls are permitted?

Answer 8

1) An existing client that envisages a call

2) Promotion relates to deposits, marketable packaged products, readily realisable securities other than warrants

Question 9

What is required for ‘real-time promotions’?

Answer 9

1) Must be communicated at appropriate time of day
2) Must identify caller, employer and purpose of call
3) Clarify whether client wishes to continue
4) Give contact point

Question 10

Define a client

Answer 10

Someone whom a firm provides, intends to provide, or has provided a service in the course of carrying on a regulated activity

Question 11

List per se professional clients (6)

Answer 11

1. Authorised / regulated firm
   2) Central bank
   3) Government
   4) Supranational
   5) Large undertaking
   6) Other institutional investors

Question 12

Define retail client

Answer 12

Any client that is not a professional client and not an eligible counterparty

Question 13

What are the requirements for an elective professional client?

Answer 13

Qualitative test (all businesses)

Quantitative test (for MiFID firms meet 2/3):

1) Avg trade frequency >10 per quarter over previous four quarters
2) Portfolio >500K EUR
3) Works or worked in financial sector for >1 year professionally

Question 14

What are the record-keeping requirements in relation to client categorisation?

Answer 14

5 years for MiFID business

3 years for non-MiFID

Question 15

What are rules regarding conflict of interest?

Answer 15

1) Managing

Firm must maintain and operate effective organisational arrangements to prevent CoI

2) Disclosing

When arrangements not sufficient, risk of damage must be disclosed in writing before undertaking business for client

3) Recording

Keep and regularly update record of services for firm with conflict of interest

Question 16

What is the rule for conflicts of interest and investment research?

Answer 16

An FCA firm must not knowingly deal for its own account until clients for whom the publication was intended have had a reasonable time to react to it

Question 17

What are the exceptions to conflicts of interest and investment research?

Answer 17

1) Market maker dealing in normal course of business

2) Execution only client

Question 18

What is the purpose of personal account dealing rules?

Answer 18

Prevent inappropriate dealing which are:

1) Prohibited under MAR
2) Involve misuse or disclosure of confidential client information
3) Conflict with firm’s obligations to client

Question 19

What are the exceptions to personal account dealing rules? (3)

Answer 19

1) Discretionary funds
2) Shares in UCITS scheme
3) Life policies

Question 20

What are the rules on suitability?

Answer 20

To ensure personal recommendations are suitable for clients’ needs with reference to the clients:

1) Knowledge and experience
2) Financial situation
3) Investment objectives

Question 21

When must a firm provide suitability report? (5)

Answer 21

1) Life assurance policies
2) Collective Investment Trusts
3) Investment Trust Companies
4) Pension schemes
5) Short-term annuity

Question 22

What is best execution?

Answer 22

A firm must take all reasonable steps to ensure they obtain the best possible results for clients

Question 23

What are the criteria for best execution? (4)

Answer 23

1) Client categorisation
2) Type of order
3) Type of financial instrument
4) Execution venues

Question 24

What are the procedures in client order handling?

Answer 24

1) Promptly recorded and allocated

2) Carried out sequentially

Question 25

What are the requirements for a large undertaking as a professional client?

Answer 25

Satisfy at least two of:

1. Balance sheet 20m EUR
2. Net turnover: 40m EUR
3. Own funds: 2m EUR