IMC Chapter 3 - 3.4 - Product disclosures

Question 1

What is the aim of the product governance rules?

Answer 1

To ensure that manufacturers and distributors of investment products act in the client’s best interests during all stages of the life cycle of products or services.

Question 2

Define a ‘packaged retail investment product’

Answer 2

Any investment whose value is affected by the value or performance of another product (or products) not directly bought by the investor.

Question 3

Define ‘insurance-based’ products

Answer 3

Insurance products with a maturity or surrender value that is exposed to the fluctuations of the market.

Question 4

Who do the PRIPP disclosure requirements not apply to?

Answer 4

1) Non-life insurance products, e.g. general insurance
2) Pure protection life insurance contracts
3) Deposits other than structured deposits
4) Debt securities, unless dependent on the value of another asset (e.g. some asset-backed securities)
5) Pension products: Both personal and occupational pensions are covered, as well as annuities

Question 5

How long should a Key Information Document (KID) be?

Answer 5

A maximum of three sides of A4-sized paper when printed.

Question 6

What is the purpose of a Key Information Document (KID)?

Answer 6

The purpose is to promote comparability by presenting information in a standardised format.

Question 7

List the information included in a Key Information Document.

Answer 7

1) The nature and main features of the product
2) A description of the risk-reward profile, including a summary risk
indicator
3) A description of what happens if the manufacturer is unable to pay
4) Costs associated with the product, including both direct and indirect
costs
5) Time restrictions, such as:
• Cooling off periods
• Minimum holding periods
• Early encashment opportunities

6) Any penalties for the above
7) Complaints procedures
8) Any other relevant information

Question 8

Which items are in the Key Investor Information Document?

Answer 8

1) Identification of the scheme
2) A short description of the scheme’s investment objectives and
investment policy
3) Past performance information, or, if relevant, performance scenarios
4) Costs and associated charges
5) The risk/reward profile of the scheme, including risk warnings where
appropriate

Question 9

Define the ‘client’s right to cancel’ rule.

Answer 9

A consumer has a right to cancel any of the following contracts with a firm:

1. Life policies and pension schemes within 30 calendar days
2. Any other packaged product within 14 calendar days

Question 10

Who does the client’s right to cancel rule apply to?

Answer 10

• Most providers of retail financial products that are based on deposits or designated investments
• Firms that enter into distance contracts with consumers that relate to accepting deposits or designated investment business

Question 11

When does the cancellation period begin?

Answer 11

The cancellation period begins on the latter of:

• The day of the conclusion of the contract, except in respect of contracts relating to life policies where the time limit will begin from the time when the consumer is informed that the contract has been concluded.
• From the day on which the consumer receives the contractual terms and conditions and any other
  pre-contractual information.

Question 12

When should a firm disclose the consumer’s right to cancel?

Answer 12

The firm must disclose in a durable medium to the consumer in good time before or, if that is not possible, immediately after the consumer is bound by a contract that attracts a right to cancel or withdraw.

Question 13

Name 5 packaged products.

Answer 13

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

Question 14

List 8 examples of retail investment products.

Answer 14

1. Life policies (including investment bonds)
2. Units in regulated and unregulated collective investment schemes (CIS)
3. An interest in an investment trust savings scheme
4. A stakeholder pension/group stakeholder pension
5. A personal pension scheme (including self-invested personal pensions)/group personal pension scheme
6. Share in an investment trust
7. Structured capital at risk products
8. Any other product that has been packaged in order to change the features of the product

Question 15

A firm must not pay to, or accept from, a person other than the client ) any fee or commission unless 3 conditions are satisfied. List the 3 conditions.

Answer 15

1. The fee, commission or benefit is designed to enhance the quality of the service to the client
2. The fee, commission or benefit does not impair compliance with the firm’s duty to act in the best interests of the client
3. The firm clearly discloses to the client the existence, nature and amount of the fee, commission or benefit before providing the service.

Question 16

List the 3 qualifications of the disclosure requirement.

Answer 16

1. In the case of business other than MiFID business, disclosure is only required if the business includes giving a personal recommendation in relation to a packaged product
2. In the case of business other than MiFID business, disclosure is not required if the benefit falls within the table of reasonable non-monetary benefits
3. Disclosure is not required where a firm is giving basic advice on a stakeholder product

Question 17

The inducement rules apply where a firm provides a retail client in the UK with one of 3 services. List the 3 services.

Answer 17

1. Independent advice
2. Restricted advice
3. Portfolio management services

Question 18

The firm must not accept any fees, commission, monetary or non-monetary benefits which are paid or
provided by 2 groups. List the 2 groups.

Answer 18

1) Any third party
2) A person acting on behalf of a third party,

Question 19

Third party research payments will not be viewed as an inducement if it is received in return of what?

Answer 19

• Direct payments by the firm out of its own resources; or
• Payments from a separate research payment account controlled by the firm

Question 20

What is the research charge based on?

Answer 20

The research budget set by the firm.

Question 21

What should the research budget be based on?

Answer 21

Investment services rendered to clients.

Question 22

What should the research budget NOT be based on?

Answer 22

It should not be based on the volume or value of transactions executed on behalf of clients.

Question 23

List the 2 things the firm must disclose.

Answer 23

The firm must disclose:

1. The budget, as well as the charges, before providing services
2. Annual information on the total costs that each client has incurred for third party research

Question 24

What 2 things must the firm regularly assess?

Answer 24

1. The quality of the research purchased
2. Its ability to contribute to better investment decisions for the clients who pay the research charge.

Question 25

What are the record keeping rules for when a firm gives a fee, commission or benefit to another firm?

Answer 25

Where a firm gives a fee, commission or benefit to another firm it must make a record and keep it for at least five years from the date on which the fee etc. was given.