IMC Chapter 3 - 3.3 - Communicating with clients, including financial promotions

Question 1

What sources of regulation make up the financial promotion rules?

Answer 1

1) Section 21 FSMA 2000
2) Conduct of business rules

Question 2

What is a financial promotion?

Answer 2

A financial promotion is an invitation or inducement to engage in investment.

Question 3

What does Section 21 FSMA 2000 do?

Answer 3

Section 21 FSMA 2000 imposes a restriction on the communication of financial promotions by unauthorised persons.

Question 4

A person must not communicate a financial promotion unless:

Answer 4

• The content of the financial promotion is approved by an authorised person; or
• The communication is exempt under the Financial Promotions Order

Question 5

Name the 2 principles for Businesses Section 21 FSMA 2000 amplifies.

Answer 5

This rule amplifies:

• Principle 6 (customers’ interests) which requires a firm to pay due regard to the interests of its customers and treat them fairly; and
• Principle 7 (communications with clients) which requires a firm to pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading

Question 6

What is the penalty for breaching Section 21 of FSMA 2000?

Answer 6

Two years in jail and an unlimited fine.

Question 7

What are the rules surrounding a firm approving financial promotions?

Answer 7

Before a firm approves a financial promotion for communication by an unauthorised person, it must confirm that the financial promotion complies with the financial promotion rules and it must withdraw its approval if at any time it becomes aware that this is no longer the case, and notify any person known to be relying on its approval.

A firm must not approve a financial promotion to be made in the course of a personal visit, telephone conversation or any other interactive dialogue.

Question 8

Can a firm rely on another firm’s confirmation of compliance?

Answer 8

Yes! So long as it takes reasonable care to establish that the confirmation of compliance was validly given and has not been withdrawn.

Question 9

What is the Financial Promotions Order?

Answer 9

The Financial Promotions Order sets out exemptions to Section 21 in relation to controlled activities, deposits and insurance.

Question 10

What specific types of investors are exempt under The Financial Promotions Order?

Answer 10

High net worth individuals and sophisticated investors.

Question 11

Are there restriction on media communication?

Answer 11

There are no restrictions on the types of media that can be used for financial promotions.

Question 12

Name the 2 types of non-written financial promotion.

Answer 12

1. solicited - initiated by the client
2. unsolicited - initiated by the firm

Question 13

What is another name for non-written communications?

Answer 13

Real-time communications.

Question 14

Define a ‘made’ communication

Answer 14

A communication being made to another person is a reference to a communication being addressed, whether verbally or in writing, to a particular person or persons (e.g. where it is contained in a telephone call or letter).

Question 15

Define a ‘directed at’ communication

Answer 15

A communication being addressed to persons generally (e.g. where it is contained in a television broadcast or website).

Question 16

What are written communications sometimes referred to as?

Answer 16

Non-real-time communications.

Question 17

What are the exceptions to the fair, clear and not misleading communication rules?

Answer 17

This rule does not apply to financial promotions communicated by the firm that:
• Are excluded communications
• Are non-retail communications

Question 18

What are the 4 key requirements of communication addressed to retail clients?

Answer 18

Information contained in a communication or financial promotion that is addressed to, or likely to be received by, a retail client must:

1. Include the name of the firm
2. Be accurate and give a fair balance between relevant investment benefits
3. Be sufficient for, and comprehensible by, the average likely recipient
4. Avoid disguising, diminishing or obscuring important items, statements or warnings

Question 19

List the 6 rules that apply when information communicated by a firm contains an indication of past performance?

Answer 19

1. That indication must not be the most prominent feature of the communication.
2. Performance information must cover at least the last five years (or the whole available period, if less), and must be based on complete 12-month periods.
3. The reference period and source information must be stated.
4. There must be a prominent warning that the figures refer to the past and that past performance is not a reliable indicator of future results.
5. The currency must be clearly stated (if different from that of the EEA state where the retail client is resident), together with a warning about the effect of currency fluctuations.
6. If the indication is based on gross performance, the effect of commissions, fees or charges must be disclosed.

Question 20

What are direct offer financial promotions?

Answer 20

Direct offer financial promotions are financial promotions that enable a person to enter into an agreement with a firm by responding in a specified manner, such as completing an accompanying application form.

Question 21

List 4 things a firm must do when initiating a non-written financial promotion to a person outside the firm’s premises:

Answer 21

1. Only do so at an appropriate time of day
2. Identify him/herself and the firm he/she represents at the outset and make clear the purpose of the communication
3. Clarify that the client can continue with or terminate the communication at any time
4. Give a contact point to any client with whom he or she arranges an appointment

Question 22

List the 3 circumstances in which a firm can make a cold call.

Answer 22

1. The recipient of the cold call has an established existing client relationship with the firm and envisages receiving cold calls
2. The cold call relates to a generally marketable product (which is not a higher volatility fund)
3. The cold call relates to activities where the only investments involved are readily realisable securities (other than warrants) and generally marketplace non-geared packaged products

Question 23

List the different package products.

Answer 23

1. A life policy
2. A unit in a regulated collective investment scheme
3. A stakeholder pension scheme
4. An interest in an investment trust savings scheme
5. A personal pension scheme

Question 24

Define Higher volatility funds

Answer 24

Collective Investment Schemes in which the price of units is likely to fluctuate significantly because of investments by the fund in warrants or derivatives or because of long-term borrowing.

Question 25

Define ‘Readily realisable securities’

Answer 25

‘Readily realisable securities’ are defined as:
• A government or public security
• Any other security which is listed and regularly traded on an EEA exchange or regularly traded on RIE