IMC Chapter 3 - 3.7 - Appropriateness (for non-advised services)

Question 1

Who do the rules on appropriateness apply to?

Answer 1

Firm which provides investment services in the course of MiFID business other than making a personal recommendation and managing investments. This will typically be non-advised services.

Question 2

Name the 2 circumstances in which the firm is required to give a warning to the client.

Answer 2

1) Where the firm considers, on the basis of the information received, that the product or service is not appropriate for the client, it must warn the client of that
2) Where the client does not provide information to enable the firm to assess appropriateness (or where the client provides insufficient information regarding his/her knowledge and experience), the firm must warn the client that it is unable to determine whether the product or service is appropriate for him/her

Question 3

What happens if a client asks the firm to go ahead with a transaction despite the warning given by the firm?

Answer 3

When the service only consists of execution and/or reception and transmission of orders and it relates to a non-complex financial instrument.

Question 4

When are firms NOT required to assess appropriateness?

Answer 4

When the service only consists of execution and/or reception and transmission of orders and it relates to a non-complex financial instrument.

Question 5

List 4 non-complex financial instruments.

Answer 5

1) Shares traded on a regulated (or equivalent) market
2) Money market instruments, bonds or other forms of securitised debt (excluding those embedding a derivative)
3) Units in a UCITS scheme
4) Other non-complex financial instruments

Question 6

List the 4 criteria non-complex financial instruments must satisfy.

Answer 6

1) They are not derivatives (or similar products)
2) There are frequent opportunities to trade them at independently determined, publicly available prices
3) They do not involve a potential liability that exceeds their cost
4) There is publicly available information on their characteristics that is likely to be be readily understood by the average retail client for the purpose of making an investment decision

Question 7

When do the rules on conflict of interest apply?

Answer 7

When a firm is carrying out MiFID business for a client.

Question 8

Is the status of the client relevant when it comes to the conflict of interest rules?

Answer 8

The status of the client (retail client, professional client or eligible counterparty) is irrelevant for this purpose.

Question 9

List the 3 areas a firm must take all reasonable steps to identify conflicts of interest between.

Answer 9

1) Itself (including its managers, employees and appointed representatives) and a client of a firm
2) One client of the firm and another client
3) Different departments within the same firm

Question 10

What does Principle for Business 8 state?

Answer 10

A firm must have effective arrangements to identify and manage conflicts of interest so as to prevent them giving rise to a material risk of damage to a client’s interests.

Question 11

What does SYSC10 state firms must have to comply with the conflict of interest rules.

Answer 11

A written conflicts of interest policy.

Question 12

What are 3 things the conflict of interest policy must do?

Answer 12

1) Be appropriate to the size and nature of the firm
2) Specify all potential conflicts
3) Specify the firm’s procedures in managing conflicts, e.g.

• Chinese Walls - information barriers to prevent inappropriate flow of information within a firm
• Controls on research
• Personal account dealing rules

Question 13

List 4 things the Market Abuse Directive of July 2005 requires a firm to take reasonable care of.

Answer 13

A firm must take reasonable care:

1) To label or describe the communication as research
2) To state that any recommendation given does not constitute a personal recommendation
3) To ensure that any research recommendation it publishes is fairly presented
4) To disclose any interests or conflicts of interest it may have in any investments covered by the research

Question 14

What must the resarch document disclose clearly and prominently?

Answer 14

1) The name and job title of the individual who prepared the research recommendation
2) The name of the firm (and the fact it is authorised or regulated)

Question 15

What are the 6 things a firm must endure when it comes to investment research produced by a firm to be disseminated to clients.

Answer 15

1) If a financial analyst or other relevant person has advance knowledge of investment research which is not yet available to the firm’s clients or the public, he/she must not undertake personal transactions or trade on behalf of another person (including the firm) until the recipients of the investment research have had a reasonable opportunity to act on it.
2) There are exceptions for this rule:
– Dealing as a market maker in good faith and in the ordinary course of business
– Dealing to execute an unsolicited client order
3) A financial analyst or other relevant person must not undertake personal transactions in financial instruments to which the investment research relates contrary to current recommendations (except in exceptional circumstances and with prior approval from the firm’s legal or compliance function)
4) The firm, a financial analyst or other relevant person must not accept inducements from those with a material interest in the subject matter
5) The firm, a financial analyst or other relevant person must not promise issuers favourable research coverage
6) Issuers, relevant persons (other than financial analysts) and any other persons must not, before the dissemination of the investor research, be permitted to review a draft of it for the purpose of verifying the accuracy of factual statements made in it, or for any other purpose other than verifying compliance with the firm’s legal obligations, if the draft includes a recommendation such as a target price

A firm is not obliged to comply with all these requirements where it is simply disseminating investment research produced by another person, where the producer is itself subject to these requirements and is independent of the firm.

Question 16

List the 2 requirements of non-independent research.

Answer 16

Non-independent research must:

1) Be clearly identified as a marketing communication
2) Contain a clear and prominent statement that:

– It has not been prepared in accordance with rules designed to promote the independence of investment research

– It is not subject to any prohibition on dealing ahead of the dissemination of investment research

Question 17

List some execution factors.

Answer 17

1. Price
2. Costs
3. Speed
4. Likelihood of execution and settlement
5. size
6. nature
7. any other consideration relevant to the order of execution

Question 18

List the 4 criteria a firm must take into account for determining the relative importance of the execution factors.

Answer 18

1) The characteristics of the client, including the categorisation of the client as retail or professional
2) The characteristics of the client order
3) The characteristics of financial instruments that are the subject of that order
4) The characteristics of the execution venues to which the order can be dissected

Question 19

What does execution venue refer to?

Answer 19

• Regulated market
• Multilateral trading facility (MTF)
• Market maker
• Other liquidity provider

Question 20

What happens in the case of a retail client, where there are two or more competing execution venues?

Answer 20

In the case of a retail client, where there are two or more competing execution venues, the firm, in assessing and comparing the results that could be achieved for the client on each execution venue, must take its own commissions and costs for executing the order into account.
The firm must not structure or charge its commissions in such a way as to discriminate unfairly between execution venues.
The competing execution venues that will be assessed by the firm are the ones that are listed in the firm’s order execution policy.

Question 21

List the 3 things a firm must provide to retail clients about its execution policy before executing any transaction.

Answer 21

1) An account of the relative importance the firm assigns to the execution factors
2) A list of the main execution venues used by the firm
3) A clear and prominent warning that any specific instructions from the client may prevent the firm from taking the steps that it would otherwise have taken under its order execution policy to obtain the best possible result for the client

Question 22

What happens when the order execution policy provides for the possibility that client orders may be executed outside a regulated market or an MTF?

Answer 22

The firm must receive consent from its clients about this possibility. This could be general consent or with regard to individual transactions.

Question 23

List the 4 other requirements of the order execution policy.

Answer 23

1) A firm must obtain the prior consent of its clients to its order execution policy
2) A firm must obtain the prior express consent of its clients before executing their orders outside a regulated market or an MTF. This may be by means of a general agreement or transaction-by-transaction
3) A firm must regularly monitor the effectiveness of its order execution arrangements and execution policy, and it must review them annually
4) A firm must be able to demonstrate to its clients, at their request, that it has executed their orders in accordance with its order execution policy

Question 24

A firm is not permitted to aggregate a client order with an own account transaction or another client order unless which 3 conditions are met?

Answer 24

1) It must be unlikely that the aggregation will work overall to the disadvantage of any client whose order is to be aggregated
2) It must disclose to each client that the effect of aggregation may work to their disadvantage in a particular order
3) The firm must have in place an order allocation policy, providing in precise terms for the allocation of aggregated orders

Question 25

Which location are personal account dealing rules based on?

Answer 25

Personal account dealing rules follow the home state regulations for firms, i.e. it is not dependent on where the client is based.

Question 26

Personal account dealing rules govern the improper use or disclosure of 3 types of information. List the 3 information types.

Answer 26

1) Prohibited under the Market Abuse Regulation
2) Confidential information relating to clients or their transactions
3) Likely to conflict with the firm’s obligations to a customer under the regulatory system. This prohibition extends also to a relevant person:

• Advising or procuring another person to enter into such a transaction
• Disclosing it in such a way that it could be used to the same effect

Question 27

List the 2 types of finanical professionals also covered under the personal account dealing rules.

Answer 27

1) Financial analysts who have advance knowledge of the content of investment research
2) Relevant persons who misuse information relating to pending client orders of which they have advance knowledge

Question 28

List the 3 things a firm’s arrangements on personal account dealing must ensure.

Answer 28

1) Each relevant person is aware of the restrictions on personal transactions (and of the firm’s arrangements in this area)
2) The firm is informed promptly of all personal transactions
3) A record is kept of all personal transactions notified to the firm (including any authorisation or prohibition in connection with such a transaction)

Question 29

List the 3 personal transactions which the rule on personal account dealing does not apply to.

Answer 29

1) A discretionary account managed independently of the relevant person
2) Rights or shares in collective undertakings
3) Life policies