IMC Chapter 3 - 3.6 - Client agreements and suitability

Question 1

What do the COB rules describe a client agreement as?

Answer 1

A written basic agreement between the firm and the client, which sets out the essential rights and obligations of the firm and the client.

Question 2

When is a client agreement required?

Answer 2

When a firm carries on designated investment business for retail clients and (in relation to MiFID business) for professional clients.

Question 3

When is a client agreement not required?

Answer 3

A client agreement is not required where a firm is affecting contracts of insurance in relation to a life policy issued, or to be issued, by the firm in principal.

Question 4

When must the firm provide the client with the terms of agreement?

Answer 4

Before the earlier of:
• The client agreement becoming binding
• The provision of any services

Question 5

Which firms do the rules on suitability apply to?

Answer 5

1. Firms which makes a personal recommendation in designated investments.
2. Firms which manages investments.

Question 6

List the 2 cases in non-MiFID business where the suitability rules apply.

Answer 6

1. The client is a retail client
2. The firm is managing the assets of an occupational pension scheme, stakeholder pension scheme or personal pension scheme

Question 7

What information must the firm obtain from the client in order to assess their suitability?

Answer 7

1. Investment knowledge and experience
2. Financial situation, including the ability to bear losses
3. Investment objectives, including risk tolerance

Question 8

What are the 3 things that the firm must ensure a proposed transaction does?

Answer 8

1. Meets the client’s investment objectives
2. Is such that the client is able financially to bear any related investment risks consistent with the client’s investment objectives
3. Is such that the client has the necessary experience and knowledge to understand those risks

Question 9

What are the 2 things a firm must assume when conducting business with professional clients?

Answer 9

1. In the case of all professional clients, that they have the necessary experience and knowledge to understand the risks; and
2. In the case of per se professional clients, that they are able financially to bear any related investment risks

Question 10

Define ‘Churning’

Answer 10

Overtrading in securities

Question 11

Define ‘switching’

Answer 11

Overtrading in packaged products

Question 12

List the 5 recommendations to retail clients which firms must support with a suitability report.

Answer 12

1) Transactions in a regulated CIS, an interest in an investment trust savings scheme or an investment trust where the shares are to be held in a Personal Equity Plan (PEP) or ISA
2) The purchase, sale or surrender of, or conversion or conciliation of rights under or suspension of contributions to, a personal pension scheme or a stakeholders’ pension scheme
3) An election to make income withdrawals or to purchase a short-term annuity
4) Entering into a pension transfer or pension opt-out
5) Entering into a transaction in relation to a life policy

Question 13

List the 2 circumstances where firms do not have to provide a suitability report.

Answer 13

1. A recommendation about a regulated CIS where the firm is acting as the investment manager for a retail client.
2. The client is habitually resident outside the EEA and is not in the UK at that time.

Question 14

List the 3 minimum requirements of the suitability report.

Answer 14

1. Specify the client’s demands and needs.
2. Explain why the firm believes that the recommended transaction is suitable for the client.
3. Explain any possible disadvantages of the transaction for the client.

Question 15

List the 4 further requirements MiFID added to the suitability assessment.

Answer 15

1. The need to consider the whole portfolio
2. Where automated assessments take place, the firm is still liable
3. Information is up to date and reliable
4. Periodic suitability reports for discretionary management

Question 16

List the 3 cases and timing of the suitability report.

Answer 16

The firm must provide the suitability report to the client:

1. In the case of a life policy – before the contract is concluded (unless immediate cover is necessary)
2. In the case of a personal pension scheme or stakeholder pension scheme – no later than 14 days after the contract is concluded (this is tied in with the timing of cancellation rights)
3. In any other case – at, or as soon as possible after, the effecting of the transaction