Regulation Chapter 4 Flashcards
Application of COBS:
Firms are subject to COBS if….
they carry on the following activities from an establishment maintained by them (or representative) in the UK.
the activities:
- designated investment business (subset of specified investment list. Note: in this is both MiFID (most important) and non-MiFID business)
- accepting deposits
- long-term life insurance business (non-MiFID)
appointed representatives: (tied agents) (indirectly affected by COBS)
- firm’s responsibility
- indirect application (Firm is directly affected by COBS, representatives are indirectly affected.)
Electronic Media:
- Durable Medium &
- Website requirements
DURABLE MEDIUM: (kind of like evidence/hard proof)
- paper
- an instrument that enables the recipient to store information in a way accessible for future reference
when communications are allowed on a website, FCA requires that: WEBSITE CONDITIONS to be met:
- information must be appropriate
- client must specifically consent
- cleint must be notified by email of web address and where to access information
- information must be up-to-date
- information must be continuously available
Recording of Telephone Conversations and Electronic Communications
under what rules?
applicable what situation?
How long do you hold onto records? (likely question)
- under SYSC 10A telephone conversations and electronic communications must be recorded
- application: receiving/executing/arranging client orders
- keep records: 5 years under MiFID II
Client Categorisation overview
If a Retail Client wants to Opt Up to Elective Professional Client the have to…..
- Qualitative test (FOR ALL BUSINESS, MiFID and NON-MiFID)
assess expertise, experience, and knowledge.
- Quantitative test at least 2 of the following: (ONLY FOR MiFID BUSINESS)
- at least 10 transactions per quarter on the relevant market over the last four quarters
- client’s portfolio exceeds e500,000
- at least one year’s professional work in financial sector
- 3 way communication
- client says in writing they want to be treated as profesh cl
- firm gives written warnings of protections lost
- cleitn must state (seperately) in writing that they are aware of the consequences
Per Se Professional Client
Per Se Eligible Counterparties
Elective Eligible Counterparties
Who can opt down?
per se eligible counterparies to professional client or retail. and a per say professional to retail.
You need an agreement when conducting designated buysiness with a …… for MiFID business and ……… for Non-MiFID business.
retail and professional client
retail client
Client Agreement
- need one for retail and professional clients if MiFID business, and only for retail clients if Non-MiFID business.
- must be in durable medium form (can just be one-way communication)
- needs to be made before provision of services
- keep records for 5 years (MiFID), 3 years (Non-MiFID), or duration of relationship plus the 5 or 3 years.
Information Requirements
purpose &
the information firms must provide clients
Purpose:
- understand the nature and risk of investmetns/services
- make decisions on an informed basis
Firsm must provide clients info on:
- the firm and its services
- designated investments and proposed investment strategies (including risks)
- execution venues
- costs and charges
It is an offence under FSMA to communicate a financail promotion, unless…..
- you are an authorised firm
- the financial promotion has been approved by an authorised firm
Purpose of financial promotion rules.
- promotions are clearly identified as such
- they are fair, clear, and not misleading
The financial promotion rules are consistent with….
principle 6 & principle 7 of principles for business (Ch1)
6: customers’ interests (treat fairly!)
7: communication with clients (info is clear etc.)
What is a prospectus?
What is a promotion?
prospectus: gives a lot of detail
promotion: more like pamphlet (tells you where to get prospectus etc.)
Exceptions to the Financial Promotion Rules
they are disapplied for certain ‘excluded communications’
- exempt under the FPO (financial promotions oder)
- subject to the Takeover Code
- promotions about unregulated collective investment schemes (e.g. hedge funds)
Types of communication.
Real time (interactive dialogue e.g. face-to-face, telephone, conversations, presentations)
Non-real time (typically where record is made e.g. emails, letters)
Past performance data
future performance data
both..:
past
- should not be the most prominent feature
- should cover at least 5 years immediately preceding (or the product life if less)
future:
- must not be based on simulated past
- must be based on reasonable assumptions supported by objective data
both:
- have wardning that past/possible future data is NOT a reliable indicator of actual future performance
- if cited gross, the effects of comissions, fees, taxes and other charges should be disclosed
Direct Offers or Invitations
likely to be recieved by a retaill client, must contain information about…
- the firm and its services
- managements of clients’ investments
- safekeeping of clients’ investments and money (CASS)
- costs and charges
- nature and risks of investments
- any third party guarantees
Unwritten Promotions
A firm must not initiate an unwritten promotion unless…
(must be real time)
- it is at an appropriate time of day
- the individual identifies themselves, their firm and the reason for the contact
- clarification of whether the client would like to continue is gained
- a contact point is given (if appointmet arranged)
A firm may cold call when….
- the call relates to a limited range of investments including deposits and readily realisable investments
or
- the recipient has an exisitng client relationship and would envisage a call
Suitability Rule
purpose
when it applies
information you need to obtain
Purpose:
ensure that personal recommendations (or decisions to trade) are suitable for the client’s needs. (MiFID II enhanced the suitability requirements)
Applies:
personal recommendation (advisory service)
investment advise (advisory service)
managing client’s investments (discretionary service)
Information you need to obtain:
knowledge and experience
financial situation (& ability to bear losses)
objectives and risk profiel
Suitability Report
provide when…
MiFID extended it to cover ….
Timing of suitability report for life, pension, and other (likely question!!)
firm must provide retail client (originally) with a suitability report where the client…
- acquires/sells CIS
- buys sells surrenders, converts or cancels rights under pension
- makes income withdrawals from or purchases a short-term annuity
- enters into a pension transfer or opt-out
MiFID II extended the requirement to cover personal recommendations to retail clients in relation to:
- equities
- derivatives
- structure products
- unregulated collective investments
So, if you make any of those above recommendations, you need to give them a suitability report.
Timing:
- life policies: before contract is concluded (unless information is provided orally. Or, cover is required immediately, then immediately after the contract is concluded)
- pensions: within 14 days of concluding contract
- any other case: as soon as possible after the transaction is effected or executed
What is churning and switching?
a series of transactions that look suitable in isolation may not be so if the recommendations/trading decisions are so FREQUENT as to be detrimental to the client.
churning and switching involve OVERTRADING for a customer and is mainly done to generate COMMISSION.
Appropriateness
Application when…
Firms must ask about knowledge & experinece ….
Obligation to WARN CLIENT if…
Assessment unecessary when…
(similar to suitability, but not about advise)
Application:
- execution-only services provided to CLIENTS
- derivatives or warrants for RETAIL CLIENTS when in response to a direct offer financial promotion
Ask about knowledge and experience:
- types of service/transaction/investment with which they are familiar
- volume, frequency and period of involvement
- education, profession or relevant former profession
Obligation to WARN CLIENT (in durable medium) if…
- firm believes the product is not appropriate, or
- client declines to provide the information
Assessment unecessary when they ask for..
- listed shares
- debt securities (without embedded derivatives)
- UCITS funds
- other ‘non-complex investments (liquid, not a derivative, not contingent liability, comprehensive information available)
Product Disclosure
KIID
KFD
independent and restricted advice
- Key Investor Information Document (KIID) is required to be produced by fund managers when retail clients invest in UCIT funds.
- Key Features Document (KFD) is required for packaged product providers when retail clients invest in packaged products (and cash ISAs)
Need to tell retail clients whether they are giving ‘independent’ or ‘restricted’ (e.g. tied agent only about one product) advice.
Cancellation and the Right to Withdraw
cancellation periods
rules ensure clients have the opportunity to reconsider
cancellation periods:
normal: 14 days
life and pension products: 30 days
Conflict of Interest
which principle?
Firms should….
Principle 8
Firms should…
- have organisational and admin arrangements designed to prevent conflicts of interest
- (for investment research) have information controls to stop information flowing to the rest of the firm
- prepare a conflicts of interest policy (and provide it to retail clients)
- where a conflict arises, ensure disclosure is made (durable medium) to the client before undertaking business for the client
- keep records of activities when a conflict has arisen
Inducements
(cannot bribe someone to do business with you)
Firms are PROHIBITED from paying or accepting any fees or commissions, or providing or receiving non-monetary benefirs OTHER THAN:
- fees paid by the client
- proper fees paid by the firm necessary for the provision of services (custory, legal, settlement)
- non-monetart benefits paid to or by a third party
Examples of reasonable non-monetary benefits that may be provided:
- conferences, seminars and other training events on the benefits and features of a specific financial instrument or service
- hospitality of a reasonable de minimis value
Inducements in relation to RESEARCH
What rules over this?
an EU firm may only recieve (consume) research if it…
Purpose?
What is not deemed as research (and can thus not be funded from a RPA)?
MiFID II rules on how firms consume and pay for research (further extended)
an EU firm may only recieve (consume) research if it.. pays for it using one of two methods:
- directly from its own resources or
- from a research payment account (RPA) funded by a specific charge to its clients
Purpose: to mitigate conflicts of interest and ensure that research is not being offered as an inducement
Not research: (could be a question)
- price feeds/historic price data
- seminar fees
- order and execution services
Best Execution
Order Execution Policy
Order Execution Policy
- firms are required to establish an order execution policy to obtain, and demonstrate to clients how they obtain, the best possible trading results for their clients.
- Need to obtain client consent prior to the policy
- information to include in it is:
- factors considered when choosing an execution venue
- how price, cost, speed, likelihood of execution are considered
- a clear instruction that if a client has a specific instruction (if they want a different way) it may impact on the firms ability to obtain the best possible results
- It needs to be renewed whenever a material even occurs (and at least annually)
Client Order Handling
- firms must ensure PROMT, FAIR, and EXPEDIOUS execution of client orders
- firms should ensure that:
- the orders are recorded and allocated
- comparable orders are executed sequentially and quickly
- retail clients are informed of any material difficulty in the promt execution of their order
- settlement assets or money are delivered promptly and correctly
Aggregation and Allocation
Aggregation is permitted when:
Partially executed aggregated transations:
Aggregation is premitted when…
- it is UNLIKELY TO DISADVANTAGE clients
- the fact that aggregatin may work to their disadvantage is DISCLOSED to clients
- an ORDER ALLOCATION POLICY is established
Partially executed aggregated transations: allocate to the client in priority to the firm.
Client Limit Orders
Firms have an obligation to make unexecuted client limit orders…
Exception:
… make unexecuted client limit orders for shares listed on a regulated market public. (give to regulated market or MTF operating an order book trading system)
exception: orders OVER normal market size. (then don’t put it on!) (or if the client asks you not to do it!)
Personal Account Dealing
Firms must have arrangements to prevent employees from entering into a personal transaction that….
Arrangements:
These rules do NOT apply to:
…. involves misuse or improper disclosure, or
…. conflicts with the firm’s duties to a customer.
Arrangements:
- employee awareness of restrictions
- firms must be notified of such transactions
these rules do NOT apply to:
- deals under a discretionary management service
- deals in units/shares of a fund where the individual is not involved in the management of the fund
- personal transactions in life policies
Reporting to Clients
transaction reporting
periodic reporting
Transaction reporting: (for dealing services)
firms must provide info promptly. For retail client, no later than the next business day.
Periodic reporting:
firms must provide statements at least QUARTERLY.
Execption:
- where the client receives deal-by-deal confirmations, statements may be sent ANNUALLY
- MONTHLY statements must be sent for leveraged portfolios
Client Assets
Rules section
Purpose of the rules
Client money rules:
Rules: CLIENT ASSETS (CASS) section of the FCA handbook
Purpose:
- restrict the commingling of clients and firms’ assets
- minimise the risk of clients’ investments being used by the firm in an event of insolvency
Client Money Rules:
- keep things in seperate accounts from the firm
- rules are disapplied for:
- delivery vs payment (DVP) up to T+3
- money ‘due and payable to the firm’ (fee or commission)
- reconsiliation:
- do as often as necessary
- make good discrepancies immediately
