REDO END OF UNIT TEST Chapter 7 (13 exam questions) The Regulatory Advice Process Flashcards

Question 1

Q

What was the main aim of the National Strategy for Financial Capability?

What body was responsible for it?

Question 2

Q

What is the Money Guidance Service?

Answer

A

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)

Question 3

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Question 4

Q

What is the The Money and Pensions Service (MaPS)?

Answer

A

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:

Question 5

Q

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?

Answer

A

This requirement came about from ‘Fair Treatment of Customers’ initiative from the FCA

Specifically firms must: (see image)

Question 6

Q

How do the FCA define vulnerable customers?

Question 7

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question

Question 8

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question

Question 9

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What did the The Retail Distribution Review (RDR) introduce?

Answer

A

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.)

Question 10

Q

Tell me the difference between restricted advise and independent advise

Answer

A

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.

Question 11

Q

What did the Sandler Review introduce?

Answer

A

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.

Question 12

Q

Stakeholder products can be offered with ‘basic advise’

What is basic advise?

Answer

A

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)

Question 13

Q

Stakeholder products are split into three groups: Outline and Explain

What is charging structure and minimum premium amounts for the respective products

Answer

A

LEARN THIS!!! As exam questions involving stakeholder products will likely be based on this

Question 14

Q

What is a lifestyle fund?

Why does it not suit ‘risk adverse’ clients

Answer

A

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 15

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QUESTION

Question 16

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QUESTION

Question 17

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QUESTION

Question 18

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QUESTION

Question 19

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What is the Financial Advice Market Review (FAMR)?

Answer

A

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 20

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QUESTION

Question 21

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Summary

Question 22

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Question 23

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following the RDR, there are two types of advice: what are they

Answer

A

Independent
Offered by IFA’s (also known as whole of market advisors)

Restricted
Offered by multi-tied and single-tied advisors

Question 24

Q

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

Question 25

Q

If an IFA has no suitable recommendation, what must they do?

Answer

A

They must recommend the best product and provider for their client no matter what

This differs to singlie and mulit

Question 26

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QUESTION

Question 27

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QUESTION

Question 28

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QUESTION

Question 29

Q

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?

Answer

A

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

Question 30

Q

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?

Answer

A

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

Question 31

Q

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?

Answer

A

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

Question 32

Q

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?

Answer

A

Have the least level of protection and disclosure

Question 33

Q

How does ICOBS rules classify clients? In other words, how do the insurance industry classify their clients?

How does MCOB class clients?

Answer

A

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

Question 34

Q

Some of the ways a financial adviser can give advise is: Execution only, Best Execution, Limited advise, Non advise

Tell me about each

Answer

A

DO NOT CONFUSE ‘EXECUTION ONLY’ WITH ‘BEST EXECUTION’

Question 35

Q

QUESTION

Question 36

Q

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

Answer

A

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 37

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Question 38

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QUESTION

Question 39

Q

What is fiduciary duty?

What is a fiduciary?

Answer

A

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.

Question 40

Q

What is a disclosure of interest

Answer

A

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.

Question 41

Q

Firms cannot charge to handle complaints against themselves. True of false

Question 42

Q

Firms cannot have contracts with clients that exclude or restrict any duty of liability. True or false

Answer

A

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 43

Q

QUESTION

Question 44

Q

SUMMARY

Question 45

Q

What are the main stages of typical advise appointment?

Question 46

Q

The first stage of any advise appointment is an Initial fact find. What must happen during this stage

Answer

A

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:

Question 47

Q

How has initial disclosure paperwork ( the paperwork advisors must give to their client in their first meeting) changed over the years?

Answer

A

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.

Question 48

Q

What must be covered in the first meeting or interaction with your client when giving advise

Answer

A

Remember client agreement bit

Question 49

Q

QUESTION

Answer

A

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

Question 50

Q

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

Answer

A

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 51

Q

QUESTION

Question 52

Q

Why is charges disclosed in the initial meeting generic rather than client-specific?

Answer

A

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 53

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QUESTION

Question 54

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Question 55

Q

Records of client agreements must be kept for how long:

Answer

A

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 56

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QUESTION

Question 57

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QUESTION

Question 58

Q

What regulatory principle is satisfied by completing a factfind?

Question 59

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Question 60

Q

What can an advisor do if their client doesn’t disclose all information to them?

Answer

A

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.)

Question 61

Q

How does the affordability assessment differ where the recommendation is for a single premium policy compared to a multi-premium policy?

Question 62

Q

A key features document must always be provided where a recommendation is being made. True or false?

Answer

A

True

NOTE: The equivalent for mortgages and home finance recommendation is the European Standardised Information Sheet (ESIS) for mortgage and home finance business

Question 63

Q

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

Answer

A

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)

Question 64

Q

What is a Consolidated Life Directive summary?

Answer

A

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)

Answer 34

A

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).

Answer 35

A

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.

Answer 36

A

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.

Answer 37

A

A suitability report must be created which summarises the recommendations and provides a written record of the advice that has been given

Answer 38

A

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

Answer 39

A

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.

Answer 40

A

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.

Answer 41

A

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

Answer 42

A

Dont make a recommendation. Pass clients off to a whole of market advisor

Answer 43

A

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.

Answer 44

A

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)

Answer 45

A

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

Answer 46

A

Advisers/firms exempt from the original MIFID Directive, as they did not hold client monies,

Answer 47

A

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

Answer 48

A

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

Answer 49

A

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.

Answer 50

A

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.

Answer 51

A

£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.

Answer 52

A

Best execution is about getting the best deal possible for your client. It ONLY applies to direct share transactions, not collective investments.

REMEMBER THIS

Answer 53

A

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.

Answer 54

A

£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.

Answer 55

A

Execution-only.

This customer knows how much insurance cover they need and for what purpose. This would be classed as execution-only business.

Answer 56

A

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)

Answer 57

A

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.

Answer 58

A

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.

Answer 59

A

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

Answer 60

A

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.

Answer 61

A

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.

Answer 62

A

B, C & D

The Fair Treatment of Customers affects MiFID firms and is not optional, it is mandatory.

Answer 63

A

A, D & E

Dual status is not permitted. You must be either single-tied, multi-tied or whole of market.

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REDO END OF UNIT TEST Chapter 7 (13 exam questions) The Regulatory Advice Process Flashcards

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