REDO END OF UNIT TEST Chapter 7 (13 exam questions) The Regulatory Advice Process Flashcards
What was the main aim of the National Strategy for Financial Capability?
What body was responsible for it?
The FCA
What is the Money Guidance Service?
It was established following the Retail Distribution Review
It provides impartial and free information and guidance on budgeting, saving and borrowing, amongst other thing. The review found there was a lack of this.
NOTE: It is now called the ‘Money Advise Service’ after name changes. IT does not give advise even though its name suggests otherwise but has now joined as part of The Money and Pensions Service (MaPS)
What is the The Money and Pensions Service (MaPS)?
Now called MoneyHelper
Was formed by merging TPAS (The Pensions Advisory Service), Pension Wise and the MAS (Money Advice Service) to provide a more streamlined approach as there is 1 clear option for receiving free and impartial generic help
Helps in 5 main areas. These are:
All firms must be able to show consistently that fair treatment of customers is at the heart of their business model.
What was this introduced by?
What must firms do specifically to achieve this?
This requirement came about from ‘Fair Treatment of Customers’ initiative from the FCA
Specifically firms must: (see image)
How do the FCA define vulnerable customers?
question
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What did the The Retail Distribution Review (RDR) introduce?
Led to huge changes in the advise sector
Increased the minimum qualification level required for financial advisors from level 3 (A-level) to level 4 (diploma)
Advisors can no longer charge commission. Instead they are remunerated through an ‘advise fee’. This was to remove commission bias.
Introduced two distinct types of advise:
- Independent (offered by whole of market advisers/ IFAs)
- Restricted (Offered by single and multi-tied advisers.)
Tell me the difference between restricted advise and independent advise
Independent
Based on a comprehensive analysis of the client’s situation and the market in terms of suitable products and providers.
This is offered by whole of market advisers/ IFAs.
Restricted
Also based on a comprehensive analysis of the client’s situation, but the choice of both product and provider is limited.
This is offered by both single and multi-tied advisers.
What did the Sandler Review introduce?
S in Sandler = Stakeholder
This brought in a range of stakeholder products to allow consumers to be able to invest in simple, low-cost products.
They were aimed at consumers on low incomes.
NOT a great success, with take-up rates being very low against expectations.
Stakeholder products can be offered with ‘basic advise’
What is basic advise?
Advisers follow a basic advice process. They require no professional qualifications to give advice on stakeholder products.
it makes the product cheaper and easily accessible which is the whole idea of stakeholder products
How basic advise differs:
Full disclosure is not required.
No full fact find… KYC rules are replaced with a series of questions known as ‘decision trees’
The suitability report has been replaced with a simpler ‘recommendation summary’
Recommendations must be suitable, not the ‘most suitable’
A key features document must be provided (still the same)
Stakeholder products are split into three groups: Outline and Explain
What is charging structure and minimum premium amounts for the respective products
LEARN THIS!!! As exam questions involving stakeholder products will likely be based on this
What is a lifestyle fund?
Why does it not suit ‘risk adverse’ clients
Is a type of pension arrangement
It is a pre-programmed fund switch, usually 5 years before the client’s selected retirement date where the fund moves from higher-risk to lower-risk assets,
This is to avoid the effects that a last-minute fall in investment value could have on retirement income.
The client cannot be ‘risk-averse’ as the lifestyle fund will be heavily equity based at the start. It is a way of managing risk, not avoiding it.
QUESTION
QUESTION
QUESTION
QUESTION
What is the Financial Advice Market Review (FAMR)?
Published by the Treasury and the FCA.
Made several recommendations (read 7.1 of chapter 7)
The Financial Advice Working Group (FAWG) is responsible for actioning and taking forward FAMR recommendations.
QUESTION
Summary
ANSWER
following the RDR, there are two types of advice: what are they
Independent
Offered by IFA’s (also known as whole of market advisors)
Restricted
Offered by multi-tied and single-tied advisors
Single-tied and Multi-tied advisors offer restricted advise
IFA’s (also known as whole of market advisors) offer independent advise
They all must equally treat their customers with skill and diligence, but there are a few differences between each type. Explain what this is
If an IFA has no suitable recommendation, what must they do?
They must recommend the best product and provider for their client no matter what
This differs to singlie and mulit
QUESTION
QUESTION
QUESTION
Clients are categorised into groups for investment business.
WHICH ARE:
Retail Clients
Elective Professional Clients
‘Per Se’ Elective Clients
Eligible Counterparties
What are Retail Clients?
Retail Clients -
Anyone who is not a professional client or an eligible counter party
Most common type of client
Offered highest level of disclosure and protection
Clients are categorised into groups for investment business.
WHICH ARE:
Retail Clients
Elective Professional Clients
‘Per Se’ Elective Clients
Eligible Counterparties
What are Elective Professional Clients?
They are deemed ‘professional’ due to their knowledge and experience
Before being deemed as a professional client their knowledge must be checked
It is checked through 2 ways:
Qualitive - Where their feelings, experience and knowledge is assessed
Quantitative - This involves assessing previous transaction history and investment value held if firm is subject to MIFID
FOR EXAMPLE:
An industry expert or a financial advisor could be classed as an elective professional client
Clients are categorised into groups for investment business.
WHICH ARE:
Retail Clients
Elective Professional Clients
‘Per Se’ Elective Clients
Eligible Counterparties
What are ‘Per Se’ Elective Clients?
Deemed professional simply due to the nature of their role, business model and organisation. Not necessary their knowledge like with elective professional clients
No further analysis is required for ‘Per Se’ Clients (differs to elective professional clients where it is required) as by their nature it is satisfied they have greater understanding than a retail client
Examples of Per Se clients are:
Banks, governments, investment firms, any FCA authorised firms and so on
Clients are categorised into groups for investment business.
WHICH ARE:
Retail Clients
Elective Professional Clients
‘Per Se’ Elective Clients
Eligible Counterparties
What are Eligible Counterparties?
Have the least level of protection and disclosure
How does ICOBS rules classify clients? In other words, how do the insurance industry classify their clients?
How does MCOB class clients?
The insurance industry class their clients as:
Consumers: Real people (so not a corporation) who are not ‘in the trade’ of the business being transacted.
Commercial customers: Anyone who is not deemed to be a consumer.
Customers: This is the collective term used when referring to both Consumers and Commercial Customers.
NOTE: This contrasts to the investment industry where clients are classed as either: Retail Clients, Elective Professional Clients, ‘Per Se’ Elective Clients or Eligible Counterparties
NOTE 2: MCOB classifies EVERYONE as customers
Some of the ways a financial adviser can give advise is: Execution only, Best Execution, Limited advise, Non advise
Tell me about each
DO NOT CONFUSE ‘EXECUTION ONLY’ WITH ‘BEST EXECUTION’
QUESTION
An adviser may come across an individual who is an ’insistent client’
What is this and what important task must the advisor do if they are met with this types of client
This is where the client insists on a different course of action from the one recommended by the financial adviser in the original suitability report.
If this occurs, a second letter should be issued, reiterating the original advice. Only then, if the client still insists, should the business be completed.
IMPORTANT: Signed documentation (detailing the fact that their actions are against the advice of the firm) must be obtained before the advisor fulfils whatever their request is.
Many firms do not like insistent clients, as they view it as high-risk and going against Principle 1: Integrity.
QUESTION
What is fiduciary duty?
What is a fiduciary?
Fiduciary duty describes the highest standard of care
It means the firm cannot have a conflict of interest, firms cannot charge for complaints against itself, firms cannot receive inducements from product providers and it cannot offer inducements, firms CANNOT claim to be independent when they are not and so on
The person who has a fiduciary duty is called the fiduciary, and the person to whom he owes the duty, is typically referred to as the principal or the beneficiary.
What is a disclosure of interest
It is a form that an advisor may need use if they are a conflict of interest between two clients
For examples, dealing with both parties during a divorce.
Firms cannot charge to handle complaints against themselves. True of false
TRUE
Firms cannot have contracts with clients that exclude or restrict any duty of liability. True or false
True, for example they could not write to a client saying… ‘we agreed you did not need a suitability letter
This is part of the firms fiduciary duty as the fiduciary.
QUESTION
SUMMARY
What are the main stages of typical advise appointment?
The first stage of any advise appointment is an Initial fact find. What must happen during this stage
Advsior must
Disclose their status.
The services and advice they offer.
How they are paid (generically at this stage).
The advisor must complete a fact-find: where the adviser must satisfy the regulator principle of ‘know your client’.
Advisor carries out Customer Due Diligence:
How has initial disclosure paperwork ( the paperwork advisors must give to their client in their first meeting) changed over the years?
Now firms use the Services and Costs Disclosure Document (SCDD) which covers what the IDD and Menu documents did (status, services, remuneration basis, complaints, client commission charges etc) but in one set of paperwork, rather than two.
What must be covered in the first meeting or interaction with your client when giving advise
Remember client agreement bit
QUESTION
A direct offer financial promotion is an advert in a newspaper or magazine or a life office selling as the principle
A client isnt required a client agreement in this case because they should already know how the firm works once theyve seen their ad
In relation to online advertising what is the minimum information that the company must tell their customer?
For example, an insurance company when adverting their insurance product online
This is COBS rules and apply equally to all authorised individuals markets and firms that carry out regulated activities
Companies must show as minimum this information when selling online:
Their name, address and email contact of the firm offering these services.
Their FCA status, plus their registration number.
The services offered and how to place an order with them.
Answer to the question is C
(NOTE: Orders must be acknowledged, but this does not mean they are accepted.
QUESTION
Why is charges disclosed in the initial meeting generic rather than client-specific?
At this stage of the advice process the adviser knows very little about the client, so the charges disclosed are generic and not client-specific. This happens later in the process.
QUESTION
Records of client agreements must be kept for how long:
WHATEVER IS THE LONGEST OUT OF THE FOLLOWING:
5 years.
The duration of the client relationship.
Indefinitely for pension transfers, opt outs, and FSAVCs.
QUESTION
QUESTION
What regulatory principle is satisfied by completing a factfind?
What can an advisor do if their client doesn’t disclose all information to them?
The adviser has a couple of options:
If they feel they have sufficient client information, they can continue with the advice process, but must document the client’s behaviour.
If they feel they do not, they can terminate the process at this point.
(The job that a financial adviser does is only as good as the information given to them by the client.)
How does the affordability assessment differ where the recommendation is for a single premium policy compared to a multi-premium policy?
A key features document must always be provided where a recommendation is being made. True or false?
True
NOTE: The equivalent for mortgages and home finance recommendation is the European Standardised Information Sheet (ESIS) for mortgage and home finance business
The key features document is provided when a recommendation is made. It is broken down into two parts: a generic section and client-specific section.
Tell me about both
The generic section is made up of: (ARTIC)
-Aims
-Risks
-Costs
-Tax Implications
-Cancellation rights
The client-specific section is made up of:
Either a projection, illustration, or quotation: It must show costs involved and a projection of growth, based upon reasonable expectations (up until this point the client only had a generic explanation of charges during the initial adviser disclosure but know its specific to them)
What is a Consolidated Life Directive summary?
A form that must be given before a life-assurance pure protection contract is finalised
It includes info about the insurer and their commitments to policyholders of pure protection policies
NOTE: (Pure protection policies provide cover that has no investment element)
What is a Principles and Practices of Financial Management (PPFM) booklet?
NOTE: there is a also something called the Consumer Friendly Principles and Practices of Financial Management (CFPPFM). Same thing but more consumer friendly
given to clients of with-profit insurance policies. It explains how with-profits are managed.
This extra booklet is required because a with-profit fund works on an ‘implicit basis’ meaning that any charges are taken before bonuses are declared, so it is difficult for the client to transparently see the effects of these charges
How this policies work is fully explained to the client booklet (if they acc read it).
question
Once the adviser has presented both parts of the KFD, what is the next step? (think about what KFD is as this is pretty obvious)
The next step is to ask for the business. Ie see if the client is happy with the recommendation. When this has been done, and agreed, then a relevant application form needs to be completed.
Can an advisor complete an application form on behalf of their client ?
Yes they can (which many advisors do in the real world) but If an adviser completes an application form for the client, the following rules should be adhered to:
The client signs an agreement, allowing the adviser to complete this on their behalf.
The client is present at the time.
The client carefully reads through, and then signs and dates the application form.
What must the advisor do once advise has been given and accepted?
A suitability report must be created which summarises the recommendations and provides a written record of the advice that has been given
How do regulators judge whether a suitability report is valid or not?
If an independent party can read the report and understand why the advise was given and the product suitable. It should also be jargon-free
A suitability report must contain the following info:
The client’s demands and needs.
Why the recommendation has been made and why it is suitable.
Any possible disadvantages of the recommendation.
A summary of the main consequences and risks
What extra requirement do pension-related products like SIPPs or Personal Pensions require?
Pensions-related products such as a Self-Invested Personal Pension (SIPP) or Personal Pension Plan (PPP), FSAVCs and
AVCs, need a comment as to why stakeholder schemes were discounted.
This is due to the higher charges associated with SIPPs and PPPs, in comparison to a stakeholder pension, where charges are capped at 1.5% reducing to 1% after ten years.
There must be a clear reason why the adviser has recommended these more expensive products, and this must be clearly shown in the suitability report.
REMEMBER
When must suitability reports be issued?
What is the latest time they can be issued?
Friendly Societies of what size are exempt from issuing suitability reports
ASAP after business has been complete. No later than when the cancellation notice is received
For a life policy, it must be given before the contract is concluded.
Friendly societies with low premiums (£50 per annum or £1 per week) are exempt.
Why does the FCA suggests that, in the great majority of cases, continuation of existing insurance plans will be the recommendation unless they are clearly unsuitable?
What is churning?
because although Increased competition, and advances in medical science, can drive down costs, getting older and the associated risks that come with that, can drive premiums straight back up again so its normally not worth surrendering or cancelling a policy. therefore any recommendation to change must be backed by enough rationale as to why, and the adviser needs to ensure that there are no time gaps in the cover or reduced cover (critical illness policies) that would leave the customer exposed to undue risk.
‘Churning’ is the rearrangement of a customer’s policies to purely benefit the adviser - is illegal, and must not be recommended
QUESTION
Dont make a recommendation. Pass clients off to a whole of market advisor
Cancellation for investment products
The period of cancellation rights begins when the customer receives the cancellation notice.
NOTE: There are some exceptions to the cancellation rights that we have covered so far, including:
second year EIS/ISAs with the same fund manager.
any product where it is explained that no cancellation rights exist.
some pension transfers have a pre-sale right to withdraw, rather than a post-sale cancellation right.
What is a shortfall clause?
When investment contracts do not return the entire investment when the right to cancel is exercised
This is because the firm would have physically bought investments which came at a premium for the firm
In these cases, the underlying value of the investment is returned, without further penalty. (Known as a shortfall clause)
What is a cancellation substitute?
Applies to contracts that are generally un-reversible once exercised. It means they cannot be cancelled once they commence but the client as a right to cancel before they commence during a ‘reflection period’
For example pension transfers, annuities, mortgage contracts etc
Ongoing reviews are the final stage of the advise process
Reviews should be carried out upon any client circumstance changes. MIFID recommends annually but it dependents on the clients circumstances
What are Article 3 firms/advisors?
Advisers/firms exempt from the original MIFID Directive, as they did not hold client monies,
What is the the Insurance Distribution Directive (IDD)
What was the aim of IDD?
What did the IDD cover?
Update to its predecessor – the Insurance Mediation Directive (IMD).
What was the aim of IDD?
Aimed to enhance consumer protection when buying insurance.
What did the IDD cover?
It covered additional areas including:
Organisational and COBs requirements for both insurance and reinsurance
Product oversight and governance
Enhanced conduct rules for IBIPs
Promotion of products and services can take different forms.
What are they?
Real time promotions (also known as non-written promotion)
Personal visit, telephone call, or other interactive dialogue.
Non-real-time promotions (known as written promotions).
involves no interaction
e.g. advertisements
Each firm must have an individual with the appropriate expertise to check that any non-real-time promotions meet the rules
True or false
What are the record keeping requirements for non-real-time promotions
True
3 years for non-MiFID firms.
5 years for MiFID firms.
6 years for life and pension contracts.
Indefinitely for pension transfers, opt outs and FSAVCs.
Question
Question
Question
What did the Retail Distribution Review introduced
RDR
A wide-reaching standard enhancing policy aimed at simplifying how consumers receive advice.
Distinguishes between sales and advice.
Altered remuneration packages, using advice fees rather than payment of commission.
REVISE THIS FOR EXAMS
Paul and Sue earn £35,000 and £15,000 respectively. They have two children; Joe 19, and Sam 18. All wish to make maximum contributions to their stakeholder pensions this year. How much tax relief will be received in total upfront?
£21,440.
£20,440.
£15,440.
£11,440.
£11,440.
Basic rate tax relief will be given at source. Both Paul and Sue could contribute 100% of their gross earnings into a stakeholder pension so £35,000 x 20% = £7,000 and £15,000 x 20% = £3,000. No earnings are mentioned for Joe and Sam, so they could both contribute £3,600 gross with no reference to earnings, receiving £720 tax relief each (20% x £3,600).
Total tax relief would therefore be £7,000 + £3,000 + £720 + £720 = £11,440.
Best execution’ is most commonly applied to which of the following product transactions?
Best execution is about getting the best deal possible for your client. It ONLY applies to direct share transactions, not collective investments.
REMEMBER THIS
You have completed a sale with one of your clients and a Principles and Practice of Financial Management document was included in the paperwork provided. This was because you advised on…
a unit-linked bond.
a stakeholder pension.
an income protection policy.
a with-profit bond.
a with-profit bond.
The complex nature of the management of a with-profit arrangement creates the need for more explanation than most other types of investment. The PPFM document explains this in layman’s terms.
Mr and Mrs Jones wish to invest the minimum amount into a stocks and shares stakeholder ISA this year. Mr Jones wants to make 4 quarterly payments this year and Mrs Jones 2 payments. What will their total annual payment be?
£120.
The minimum contribution is £20. Therefore, Mr Jones will be contributing £20 x four payments = £80, and Mrs Jones £20 x two payments = £40 making £120 in total.
Which of the following best describes a customer that requires ‘x amount of insurance for y purpose’?
Best execution.
Execution-only.
Discretionary fund management.
Advised fund management.
Execution-only.
This customer knows how much insurance cover they need and for what purpose. This would be classed as execution-only business.
Toby, a financial adviser, has completed a number of transactions this week. Which of the following would it be necessary to complete a suitability report for?
A) The surrender of a life insurance bond.
B) Investing into NS&I Premium Bonds.
C) Switching between two OEIC funds.
D) Transferring a final salary pension to a personal arrangement.
E) Increasing the regular saving amount to a customers’ long-standing stocks and shares ISA
A, C, D, E
Of the products listed, Premium Bonds are the only ones that do not require a suitability report because they are NOT classed as a regulated activity as they are an NS&I product. (REMEMBER THIS)
Which one of these would not automatically be regarded as a retail client?
A) The UK government.
B) Another authorised firm.
C) A central bank.
D) A mortgage broker.
E) A small business selling cars.
A, B, C
The government and a central bank would be classified as either a professional client or eligible counterparty. Another authorised firm would be classified as a professional client.
The broker and small business would not be deemed to have the expertise necessary to be classified as anything other than a retail client.
You are meeting a client for the first time. Under the disclosure rules you must provide them with…
A) Details of how the firm is remunerated.
B) The complaints procedure.
C) Information about the level of service provided.
D) Details of the specific charges that would be levied.
E) Details of the firm you work for
A, B, C, E
The IDD document must contain the firm’s name, nature of its business and services provided, complaints procedure and payment for services. Specific charges cannot be disclosed as you do not currently ‘know your customer’, or what (if any) actions they will take.
Which of the following was instigated by the Retail Distribution Review (RDR)?
A) Higher charges for consumers to pay for the added protection now offered.
B) Higher minimum level of qualification for financial advisers.
C) Information to help distinguish between advice and sales.
D) A new levy on authorised firms to provider higher consumer protection.
E) The banning of restricted advice.
B & C
RDR introduced a higher level of minimum qualification for advisers and a distinction between advice and sales. It did not address consumer protection directly, increase levies, or ban restricted advice
Which of the following are true in respect of fact finds?
A) The fact find can be electronically captured or stored on paper.
B) All fact finds must be kept for 5 years.
C) The fact find should be updated at reviews, to reflect any change of circumstances.
D) A new fact find must be completed at any review meeting.
E) The fact find must be signed by the client, to confirm that all the information it is true.
A, C
The fact find does not need signing, the period of retention varies dependent upon the transaction undertaken, and a new fact find doesn’t have to be done at each meeting; it merely needs reviewing.
Jeff is Sally’s financial adviser. After meeting with Sally, Jeff provided her with investment recommendations. Sally does not agree with Jeff’s recommendations and ask him to carry out investments she has chosen. Jeff should…
A) tell Sally he cannot carry out her instructions.
B) proceed with the transactions if he is comfortable.
C) proceed but not on an execution-only basis.
D) contact the FCA for a disclaimer form.
B & C
It is up to Jeff whether he carries out Sally’s instructions. The FCA is not keen on disclaimer forms and would certainly not issue Jeff with one. Jeff can carry out these transactions for Sally if he is comfortable, but they would not be on an execution-only basis, as Jeff has given Sally advice.
The Fair Treatment of Customers could correctly be described as?
A) An optional, but highly recommended, initiative designed to put the customer at the heart of everything a firm does.
B) A principle that must be evident at all levels within firms.
C) A policy that should influence product design.
D) A set of six principles that firms must achieve.
E) A policy that only applies to non-MiFID activities.
B, C & D
The Fair Treatment of Customers affects MiFID firms and is not optional, it is mandatory.
At any one time, an intermediary can be…
A) a single-tied agent of one provider.
B) single-tied and multi-tied.
C) whole of market and multi-tied.
D) a multi-tied agent of a limited range or product providers.
E) a whole of market adviser.
A, D & E
Dual status is not permitted. You must be either single-tied, multi-tied or whole of market.
