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IMC - Unit 1 > Regulation Of The Financial Markets And Institutions > Flashcards

Regulation Of The Financial Markets And Institutions Flashcards

1
Q

When was the financial services action plan launched?

A

1999

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2
Q

What were the 3 objectives of the FSAP?

A
  1. Create a single eu wholesale market
  2. Open and secure retail markets
  3. Create the best rules and supervision structures (regulation)
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3
Q

What are eu directives?

A

They are instructions given by the article 58 of the European treaty and attempts to harmonise laws across member states.

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4
Q

How can eu directives be implemented?

A

Through primary legislation (creating new legislation) or delegated legislation (amending current law ).

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5
Q

What is the vertical direct effect?

A

When legislations are not implemented by the deadline, it will be given precedence over national law.

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6
Q

What are eu regulations?

A

They are the most direct form of eu law and are immediately binding in all eu member states.

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7
Q

What is the difference between eu directives and eu regulations?

A

Directives are advice but regulations are immediately binding rules to be followed.

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8
Q

Who creates all regulations (EU)? (3)

A

Eu council and European Parliament or the European Commission

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9
Q

What happened on 31st January 2020?

A

The UK left the eu but remained a part of the single market and customs union.

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10
Q

What is the European Union (withdrawal) act 2020?

A
  • Eu legislation that was directly applicable to the UK was adopted as part of the ‘retained eu law’
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11
Q

What is onshoring?

A

The retained laws were adapted to suit the needs of the UK financial system.

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12
Q

Who can make amendments in the UK Law?

A

FCA, PRA and the BoE

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13
Q

What is the temporary permissions regime (TPR )?

A

Allows European economic area - based financial services firms who were using a ‘passport’ to continue to operate in the UK for a limited period of time until they could seek authorisation from UK regulators.

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14
Q

What were the three main supervisory failings of the global financial crisis?

A
  1. The accumulation of excessive risk not being detected
  2. The lack of surveillance and supervision being effective in time.
  3. The lack of coordination between national authorities
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15
Q

What were the three supervisory authorities that were created?

A
  1. European Securities and Markets Authority (esma)
  2. European banking authority (eba)
  3. European insurance and occupational pensions authority (eiopa)
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16
Q

What is the main goal of esma?

A

Ensure integrity, transparency, efficiency and orderly functioning of financial markets in Europe.

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17
Q

-What are the main powers of esma? (8)

A
  1. Draft technical things that are legally binding
  2. Launch fast-tracked procedures
  3. Resolve disagreements between diff authorities.
  4. Can protect consumers and ban financial products that threaten stability
  5. Emergency powers
  6. Onsite inspections
  7. Monitoring systematic risk of cross-border FI’s
  8. Enter administrative agreements with supervisions authorities.
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18
Q

What is the investment services directive (isd)?

A

It creates a passport that allows firms in EU member states to engage in investment services throughout the EEA without authorisation.

Can provide usual investment services out of state.

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19
Q

What is the UK version of ISD?

A

Markets in Financial instruments directive (Mifid) 2007 - more range of investment services that can be passported. it said investment advice could be passported. Multilateral Trading facility was covered.

It also allowed commodity derivatives, credit derivatives and financial contracts for differences.

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20
Q

What is MiFID II?

A
  • The organised trading facility was introduced to capture unregulated trades
  • making requirements before and after trading more transparent
  • limiting sizes of positions held in commodity derivatives to avoid speculation
  • rules to avoid risks of new technology creating disorderly markets
  • protecting clients by providing more information on produce and services
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21
Q

MiF1D II distinguishes between…(2)

A

Investment services/actitives (core) and ancillary services (non-core)

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22
Q

What are the core services and activities of MiFID II?

A

Reception and and transmission of orders, execution of orders for clients, dealing ‘own account’, managing investments/portfolios , investment advice, underwriting, placing, operating an MTF or OTF

Basically main investment services activities?

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23
Q

What are the non-core ancillary services?

A

Safekeeping and administration of investments; granting credit; advice on capital structure and advice relating to m&a, fx services, investment research,

Basically anything not to do with investment but support an investment.

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24
Q

What are the MiFID II instruments? (7)

A
  1. Transferable securities
  2. Money-market instruments
  3. Units of collective investment undertakings
  4. Derivative contracts relating to: securities; currencies; interest rates/yields; emission allowances; financial indices and commodities (physical or cash settled).
  5. Derivatives instruments for the transfer of credit risk (CDs)
  6. Financial contracts for differences
  7. Derivatives contracts relating to: climate, freight or inflation; other economic statistics
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25
Q

What are money market instruments?

A

Products with life of less their 12 months

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26
Q

What is MiFID business?

A

When dealing with securities; currencies; interest rates/yields; emission allowances; financial indices and commodities (physical or cash settled), and are undertaking MiFID services and activities, this is MiFID business.

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27
Q

What is MiFIR?

A

Not bound into national law but are reporting requirements in relation to the disclosure of trade data into public authorities.

It basically increases the scope for MiFID to cover more asset classes and ensure more forms are reporting to make things more transparent

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28
Q

What are UCITS? (undertakings in collective investments in transferable securities status)

A

This creates a single market for collective investment schemes in the eu.

A CIS marketed by any eu member state can be mandated without further requests in any other member state.

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29
Q

Who is responsible for recognising schemes under UCITS?

A

Financial conduct authority.

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30
Q

What is a collective investment scheme?

A

A pooled investment. Investors can pool their money together, managed by a professional investment manager and invest in a diversified portfolio of assets.

They can be mutual funds, ETF’s, unit trusts and hedge funds.

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31
Q

What was added when UCITS II was created?

A
  • More activities could be passported
  • Terms and conditions became clearer
  • range of financial instruments allowed increased.
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32
Q

What was added to UCITS IV?

A
  • A passport for management companies
  • more procedures for cross-border fund managers
  • key investor information document
  • master feeder funds were allowed to pool assets
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33
Q

What did UCITS V bring?

A

More regulation on the responsibilities of legal owners of assets.

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34
Q

What is an alternative investment fund manager’s directive (AIFMD)?

A

It lays out the management, administration and manuring of AIF’s.

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35
Q

What is an AIF?

A

An AIF is an alternative investment fund which is collective investment undertaking that is outside the scope of UCITS. it includes hedge funds, private equity funds, retail investment funds, investment companies and real estate funds.

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36
Q

Who does AIFMD focus on?

A

If managers not AIFs

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37
Q

What are the main requirement under AIFMD?

A

Must be authorised by their home state regulator if their AUM exceeds:
- €100m for AIF using leverage (borrows funds)
- €500m for AIF not using leverage

The brokers selected by AIFs should be regulated and proper to provide financial services
Minimum quarterly reporting to home-state regulators.

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38
Q

What use the main requirements under AIFMD to get approval from their regulator to manage assets in AIFs to be compliant?

A
  • €100m for leveraged AIFs
  • €500m for unleveraged AIFs
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39
Q

What are derivatives?

A

Financial instruments that get value from changes in prices or the rate of asset

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40
Q

What is the European market infrastructure regulation (EMIR)?

A

It requires OTC derivatives trades to be reported and risk managed

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41
Q

Under EMIR, what are the three main requirements for OTC trades?

A
  • Standerdised trade reporting (to a trade depository)
  • compulsory central counterparty (CCP) clearing
  • risk management procedures
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42
Q

Under UK EMIR, who should me derivative transactions be reopened to (aka which trade repositories authorised and registered under UK EMIR)?

A
  • Ice trade vault Europe Limited
  • UnaVista limited
  • DTCC derivatives repository Plc
  • REGIS TR UK Limited

The FCA is responsible for me registration and supervision of these trade authorities

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43
Q

What is the eu benchmarks regulation (BMR) ?

A

Ensures (libor) benchmarks are reliable and minimise COI’s

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44
Q

What is the foreign account tax compliance act (FATCA)?

A

A us law to prevent tax evasion by us citizens using offshore banking facilities.it has a tax information reporting and withholding regime to get information about us people.

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45
Q

Under FATCA, what is the 30% withholding tax?

A

If non-us financial institutions don’t report information about us ownerships to the IRA they must pay a 30% tax.

They supply information to the HMRC who then share with the IRA

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46
Q

What are all foreign financial institutions (ffis) required to do? What if they don’t?

A

Provide information about their us customers. If they don’t they are considered non-participating FFIs’ and must pay the 30% witholding tax.

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47
Q

In me UK regulatory structure, what is the financial policy committee?

A

It is a committee of the bank of England that monitors the stability of the whole financial system.it has powers over the FCA and PRA.

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48
Q

What does the financial conduct authority do? (FCA)

A

It is overseen by the treasury and it conducts regulation of banks and other financial institutions.

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49
Q

What does the prudential regulatory authority (PRA) do?

A

It is a legal entity within the Bank of England and promotes the valley and soundness of firms it regulates.

It looks after the largest financial institutions that are deemed ‘too big to fail’

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50
Q

What is the financial services and markets act 2000 (FSMA) and the amended financial services act (2012)??

A

It created the FPC within the Bank of England to monitor risks
Transferred regulation of bonus and big investment firms to the PRA
Created a more focused regulator (FCA) to regulate retail and wholesale cancers

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51
Q

What does section 19 of FSMS 2000 state?

A

No person must carry out regulated activity in the UK unless they are either authorised or exempt

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52
Q

What are the FCA’s three operational objectives?

A
  1. Consumer protection
  2. Protect integrity of the UK financial system
  3. Promote competition and carry out regulation
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53
Q

In UK regulation, what does the Bank of England do?

A

Protect the financial system and work with others like the HM treasury, PRA and FCA.

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54
Q

What does the financial policy committee do?

A

Make recommendations and offer advice to the PRA and FCA and intervene to mane sure appropriate action is taken.

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55
Q

What, under FSMA 2000, classifies one as an authorised person’?

A

FSMA part 4a permission
Person authorised in another EEA member state (under MiFID)

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56
Q

What are criminal offences under FSMA 2000?

A

Unauthorised investment business

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57
Q

What are criminal offences under the financial services act (section 91)?

A

Make false or misleading statements
Act or engage in any act that may be misleading in investments.

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58
Q

What are the consequences of committing criminal offences under FSMA and the financial services act?

A

FSMA - 2 years in prison
FSA - up to 10 years in prison, or a fine, or both

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59
Q

Under the regulated activities order (2001), what are specified investments?

A

All investment instruments and rights to those investments instruments excluding physical assets

Includes: providing credit, mortgages and buy-to-let
Excludes: land, antiques and commodities, gold

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60
Q

There are a few few regulated activities that need authorisation (specific investments) before they can be carried out. What are the regulated activities under the regulated activities order? (7)

A
  1. Accepting deposits
  2. Issuing electronic money
  3. Effecting (administering/performing contracts of insurance
  4. Dealing in investments as a principal or agent/arranging deals in investments/advising clients on investments - using own funds and acting as a broker/intermediary
  5. Arranging advising on home finance transactions
  6. Managing investments
  7. Operating a multilateral trading facility (MTF) and OTFs
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61
Q

What is the payment systems regulator?

A

The regulator for payments systems in the UK, established in April 2015 and is a part of the FCA

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62
Q

What are the systems of the payment systems regulator? (7)

A

BACS
C&C (cheque & credit)
CHAPS
Faster Payments Services (FPS)
LINK
MasterCard
VISA Europe

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63
Q

What is excluded from PSR regulation? Why?

A

Any payments systems in the securities trading systems, clearing houses or CCPs

This is because of the BoE, and its role as one payment provider.

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64
Q

What are the 3 main objectives of the payment systems regulator?

A

Make sure payments systems are operated in ways that has business and consumers best interests

Promote competition in payment systems market

Promote development and innovation

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65
Q

According to the FCA, who is classed as an ’exempt persons’?

A
  • Appointed representatives
    -Recognised investment exchanges (RIEs) and clearing houses (RCHs)
  • Members of the professions: members of a designated professional body (DPB) carrying on incidental investment business
  • members Lloyds
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66
Q

Who are the CMA and the department for business, energy, business industrial strategy?

A

They investigate mergersto ensure sufficient competition in the market to protect consumers.

The Secretary of State for BEIS will intervene if it affects public

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67
Q

When do the CMA and BEIS intervene?

A

-the merged company gains more Than 25% market share ( ‘share supply test’)
-target company has a turnover of $100m > (‘turn over test’)

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68
Q

What does the takeover panel do? (PTM - panel on takeovers and mergers

A

They operate and enforce the City code on takeovers and mergers

They act as the referee for the fair conduct of takeover bids

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69
Q

How is the panel on takeovers and mergers funded?

A

The PTM levy (4 on purchase/sales > £10,000)

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70
Q

What constitutes as payable of the £1 levy for PTM’s?

A

Equity share capital
Securities that convert into equity share capital.
US depository receipts

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71
Q

What constitutes of fair conduct in takeover bids?

A

A bidder that gets 30% or more of the voting rights of a company is required to give a cash-offer to all other shareholders at the highest price they paid for a share in the previous year.

Any offer must remain open for at least 21 days

An offer document must be sent to shareholders of the target company within 28 days of the announcement of the firm’s intention to make it

If the company bidding has 90% or more of a stake in the company, the predator company can force the minority shareholders to sell their shares

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72
Q

What does the information commissioners office do?

A

Data collectors must be registered with the ICO and they set out regulation on how data is to be processed

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73
Q

What are the fines for breaches of GDPR? What is the reporting period for breaches?

A
  • Up to €20m or 4% of global annual turnover (biggest one)
  • breaches must be notified to the ICO within 72 hours
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74
Q

What are one objectives of the pensions regulator? (3)

A
  1. Protecting the benefits of members
  2. Reducing the risk of situations that may lead to compensation
  3. Promoting good administration
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75
Q

What does the pension protection fund do?

A

Provide compensation where a sponsoring employer of a defined benefit scheme becomes insolvent abcs the scheme is unable to pay their liabilities

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76
Q

What does the pension protection fund cover for those retiring and waiting to retire?

How is the PPF funded?

A

PPF covers 100% of benefits for existing pensioners and 90% of benefits for those that have not retired

It is funded by a levy on all defined benefit pension schemes

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77
Q

What is the pensions schemes act 2021?

A

Gave the TPR enforcement powers, additional defined benefit funding requirements, changes to transfer rights and climate change risk governance requirements. There was also a legislative framework for collective money purchase pension scheme.

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78
Q

What are the civil penalties the pensions regulator is able to give out?

A

Up to £1 million

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79
Q

Under the pensions schemes act 2021 regulations, what are trustees required to do?

A
  1. Maintain oversight of climate control risks. - identify and assess the impact of these risks and how they affect the investment strategies in short, medium and long term
  2. Triennial Scenario analysis where there is an increase in the global average temperature
  3. Seta climate target against the emissions based metrics and measure schemes performance against it
  4. Publish annual reports about climate change risk governance. The report must be signed by the trustee and chair and published in the website
    5, fines can be issued by regulators for non compliance of up to £5000 for an individual trustee and £50,000 for an corporate trustee
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80
Q

What is money helper?

What is a Pensions Ombudsman Service?

A

A pensions and financial advice scheme for consumers.

The pensions ombudsman service investigated complaints about pensions administration

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81
Q

What must trustees of pension funds do (2)?

A
  1. Appoint their own actuary, auditor and financial advisors
  2. Produce a statement of investment principals and renew this every three years
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82
Q

What are the roles and statutory objectives of the FCA?

A

Strategic: ensuring relevant market function well

Operational objectives:
- Consumers protection
- Competition
Integrity of UK financial system

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83
Q

What is block 1 of the FCA handbook?

A

The high level standards for authorised persons and approved persons.

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84
Q

What is block 3 of the FCA handbook?

A

Business standards

85
Q

What is block 4 of the FCA handbook?

A

Regulatory process

86
Q

What is block 5 of the FCA handbook?

A

Redress -prices for handling complaints and compensation

87
Q

What is block 6 of the FCA handbook?

A

Specialist sourcebook

88
Q

What is block 7 of the FCA handbook?

A

Listing, prospectus and disclosure rules

89
Q

What are the principals for business? (Block 1 - High level standards) there are 12

What happens if you breach?

A

(1 and 2 ) Integrity, skill, care, diligence etc. (3) management and control (4) financial prudence - adequate financial resources (5) market conduct (6) consumers interest (7) communications with clients (8) Conflicts of interest, (9) customers - relationships of trust aka be a suitable advisor (10) clients assets (11) relationships with regulators and (12) consumer duty

They are just personal things- not too serious

If you breach, there isn’t explicitly a fine but it will be on your record

90
Q

For the principals of business, what changed in July 2023?

A

Principles 6 and 7 no longer applied and was replaced by principal 12 - consumer duty

A firm must act to deliver good outcomes for retail customers

91
Q

What is senior management arrangements, systems and controls?

A

It encourages directors and senior managers to take appropriate, practical responsibility for their firms arrangements.

It creates a common platform of organisational systems and controls

92
Q

If an applicant wanted to apply for permission to carry on regulated activity, what thresholds must be met?

A

-Legal status
- registered office
- be supervised
- Appropriate resources
- be fit and proper
-conduct business of firm in sounds and prudent manner
- appointment off claims representative

93
Q

What are the organisational requirements for a firm to be a SYSC?

A

-firms governance, internal controls, accounting, audit etc
- A business continuity policy to limit losses
-firm managed by at least two people
-senior management should be responsible for ensuring that compliance and regulatory obligations are filed
-clear allocation of responsibilities

94
Q

For SYSC, what systems and controls should the firm have?

A

Training for employers for money laundering.
Provide information to the governing body and the senior managers about anti money laundering.
Documents of the risk management protocols and risk profile in relation to money laundering.
Measures taking into account risk of money laundering in day to day operations.
Ensuring consumers do not miss out on services due to processes

95
Q

How long should a firm maintain records in relation to MiFID business?

A

5 years

96
Q

Which of the following is not a MiFID core service activity?

a) Advising on an investment
b) Discretionary management
c) Dealing as a principal
d) Providing safeguarding options

A

D. Providing scheguarding options

97
Q

Who can passport?

A

A member of the EEA trading across the boarder in the EEA

98
Q

Which of the following statements about the EU directive is not correct?

A) an EU state can choose whether to implement a directive
B) a directive must be implemented by a particular date
C) A directive can be implemented by primary legislation
D) the aim of a directive is harmonisation of laws across EU member states

A

A) an eu state can choose whether to implement a directive.

99
Q

What does the Public Interest Disclosure Act 1998 say?

A

Under PIDA, employers who whistleblow are protected under this act.

100
Q

In 2013, what rules were added to PIDA?

A
  1. Have internal whistleblowing arrangements in place and inform their UK based employees about them. They should be written
  2. The employees should know both FCA & PRA can be told
  3. Offer protection to all whistleblowers
  4. Add language in new employment contracts stating nothing will prevent employees from disclosing-
  5. Appoint whistleblower ‘champion’
101
Q

How did MiFFID II impact remuneration?

A

It prevented payment of reneumeration directly linked to sales

102
Q

What are the main points of the reneumeration policy post 2008 financial crash? (7)

A

1.at least 40% of a bonus must be deferred over a period of 3 years for all code staff
2. at least 50% of any bonus must bemade in shares or non-cash equivalent.
3. Must not offer guaranteed bonuses for over 1 year
4. Ensure bonuses reflect effective risk management
5. Ensure senior management periodically reviews remuneration policy
6. Disclose remuneration details annually
7. Must not enumerate employers ins way that it would create a conflict of interest with consumers or affect duty to client

103
Q

For UK investment to carry out regulated activity, they need to apply for Part 4a permission from the FCA. What do they need to determine?

A

The exact amount of part 4A permission they need to apply for given the specified activities and investments involved.

104
Q

In connection to part 4A permissions, what type of requirements might the FCA ask?
How is it different to a limitation?

A

A requirement differs from a limitation because it is not specific to one particular regulated activity. Permission of only granted once. If an authorised prison wants to carry it regulated activity that is different to their permission, they will need to apply to another permission

105
Q

What are the 4 categories of exempt persons?

A
  1. Appointed representatives of an authorised person
  2. RIEs and RCHs
  3. Members of professions
  4. Members of Lloyds
106
Q

What are the 6 individual conduct rules for SMCR?

A
  1. Act with integrity
  2. Act with due care, shill and diligence
  3. Be open and cooperative with the FCA, PRA and other regulators
  4. Treat and tend to customers fairly
  5. Observe proper manleet conduct
  6. Deliver good outcomes where activities of film fall within the scope of the consumer duty.
107
Q

What are the 4 senior manager conduct rules (SMCR)?

A
  1. Ensure business is controlled effectively
  2. For complies weird relevant requirements and standards of the regulatory system
  3. Any delegation of responsibilities is given to an appropriate person and oversee the delegation effectively
  4. Disclosure any information to the FCA and PRA that is necessary
108
Q

The retail distribution review (RDR) stated requirements for retail investment advisors from 2013. What must they do? (4)

A
  • follow code of ethics
  • hold right qualifications
  • do at least 35 hours if CPD as year
  • hold a statement of professional standing from an accredited body
109
Q

In COLL, what is the seven criteria that a firm must consider at a minimum when assessing the value for money of each fund?

A
  1. Quality of service
  2. Fund performance
  3. AFM costs - cost of providing the service and how much is given to the person
  4. Economies of scale
  5. Compare to other market rates
  6. Compare services
  7. Classes of units
110
Q

What are the recognised investment exchanges RIE) - recognised by the FCA?

A
  • London Stock Exchange (LSE)
  • Aquis Stock Exchange (AQSE)
  • London Metal Exchange (LME)
  • ICE Futures Europe
111
Q

What are the recognised clearing houses - recognised by the back of England?

A
  • ICE Clear Europe
  • LME Cleaar
  • LCH.Cleaarrnet
  • CME Clearing Europe
112
Q

A RIE has to deliver high standards of investor protection and maintain market integrity. What does this include? (7)

A

Ensure the performance of transactions
Have enough financial resources
Have rules and regulations that are enough to protect investors
Ensure dealing correctly and transparently
Good record keeping
Monitors and compliance obligations
Complaint investigation arrangements

113
Q

When do pre-trade transparency requirements not apply for equity or equity-like instruments?

A
  • Financial instruments where there is not a liquid market
  • Systems that formalise negotiated transactions
  • Orders that are large in scale compared to normal market size
  • Orders held in an order management facility pending disclose
114
Q

When must pre and post trade transparency data be published by?

A

Within 15 minutes of publication of a transaction

115
Q

What were the 3 vey changes by MiFID II for trading venues?

A

-limits in size odd pairing that can be held
- daily reporting to regulatory
- FCA power to request information to ensure position limits are being complied with

116
Q

Who is responsible for admitting public companies for listing?

A

The London Stock Exchange - if they meet the retirement set or by the Uk listing authority

117
Q

What is ICE futures Europe?

Who can trade and clear contracts?

A

An RIE where financial futures and options are traded using an electronic order matching system.

Only ICE futures Europe members are one only ones.

118
Q

Who are the two individuals that can execute business on ICE Futures Europe?

A
  1. A trader - a reader makes profits from the positions taken in the futures or options contracts out in associated positions taken in underlying products
  2. a broker - manes profit by charging a commission on the trading dove for others
119
Q

What is ICE Clear Europe?

A

A. clearing houses for ICE futures Europe

They have no involvement with member/client relationships (they are separate back to back contracts)

120
Q

Where can derivatives be traded?

A

Either on organised exchanges or OTC markets.

121
Q

In the UK what is the regulation of derivatives exchanges?

A

RIE status granted to exchanges by the FCA

Detailed trading rules are governed by the exchange

122
Q

What are the US regulation of derivatives?

A

Regulation of exchange traded denvatives are split between the SEC and CFTC.

123
Q

What is the dodd-france Wall Street reform and consumer protection act?

A

Requirement of clearing houses, reporting requirements, registration of dealers and
Established SEFs (Swaps Execution Facilities) which was a platform to promote trading transparency, competition Ann’s efficiency in the swaps market

124
Q

How didMiFID impact derivatives exchanges?

A

Brought commodity derivatives into the list of regulated investments

125
Q

How did EMIR impact derivatives exchanges?

A

Clearing of OTC derivatives has largely moved to central counterparties

126
Q

What is one initial margin in the cleaning house?

A

It is a good will deposit that will be given back if the deal is executed.

127
Q

What is the difference between clients and customers?

A

Clients are everyone including eligible counterparties.

Customers are retail clients and professional clients.

128
Q

What is an elective professional client?

A

A retail client who has opted up to become a professional client. By doing this, they no longer has as much access to the protection.

129
Q

What are eligible counterparties?

A

Regulated financial institutions. This will receive the least amount of regulation.

130
Q

What are the two tests that retail clients need to pass to opt up and become an elective professional client?

A

Qualitative test: assess expertise, experience and knowledge Abbas gain assurance that client is able to make their own investment decisions and understanding of risks involved
Quantitative test (At least 2/3 of criteria):
1. 10 transactions perquarter over the last 4 quarters
2. Portfolio > €500,000
3. One year’s professional work in the financial sector

131
Q

What are the 3 additional requirements when moving from retail client to elective professional client

A
  • client must agree in writing
  • firm must give written warnings of protections lost
  • client must respond stating they are aware of the consequences
132
Q

What are ‘per se’ professional clients?

A

They require authorisation to operate in the financial markets.
Examples: national governments, central banks, supernatural organisations
Have large undertakings (ie. two of the following when conducting MiFID business):
- €20m balance sheet total
- €40m turnover
- €2m own funds
When non-MiFID business (ie. retail audience)
- have a share capital or net assets of at least £5m
And have two of the following:
- €12.5m balance sheet total
- €25m. Turnover
- 250 average number of clients

133
Q

What are ‘per se’ eligible counterparties?

A
  1. Entities that need authorisation and regulation
  2. National governments, central banks and supernatural organisations
134
Q

What is eligible counterparty business? (4)

A
  • execution of orders on behalf of the client
  • dealing on own account
  • reception and transition of orders
  • (not advice or fund management)
135
Q

What is an ‘elective eligible counterparty’?

A

A firm may treat an undertaking as an elective eligible counterparties if the client:
- Is a per se professional client
- Is an elective professional client and requests the categorisation

136
Q

What happens when you opt down and who can opt down?

A

It provides higher levels of protection.

Per se eligible counterparties may opt down to professional client or retail client status

It must be a written agreement

137
Q

What are client agreements?

A

These are done before entering into an agreement or providing any investment business related things (retail client) and MiFID business (professional clients).
A firm must provide the client with:
- terms and conditions
- information about the firm and its services

138
Q

When can client agreements be settled after being bound?

A

If the agreement is via distant communication

139
Q

How long should records be kept when conducting financial business?

A

Either five years or the duration I’d their relationship.
For pension transfers, opt - out or free standing aspirational voluntary contributions, indefinitely.

140
Q

Why don’t we need client agreements o for eligible counterparties?

A

Because they only become eligible counterparties when they deal.

141
Q

When conducting non-MiFID business, when do we need client agreements?

A

Retail clients

142
Q

When conducting MiFID business, when do we need client agreements?

A

For retail and professional

143
Q

What is the FSMA section 21 restriction?

A

It is illegal to communicate an invitation or inducement to engage in investment activity (a financial promotion) unless:
- It is issued by an authorised person
- The content is approved by an authorised person

144
Q

What are the financial promotion rules when communicating with retail clients?

A

Ensure information:
- includes the firm
- doesn’t emphasises benefits either indicating the risks
- Understandable for the average member of the group it is directed at
- Does not disguise, diminish or insecure important statements or warnings

145
Q

What are the promotional regulations for retail clients on past performance?

A

Include at least the immediately proceeding five years.
Include a prominent warning that past performance is not indicative of future performance

146
Q

What isa direct order and what should direct offers contain if sending to a retail client?

A

Direct orders are when the recipient is bound to a deal by responding.

The direct offer must contain:
- Information in the rules on information discounted
- Additional appropriate information so client can make rational decisions

147
Q

Are firms allowed to make cold calls?

A

Firms must not make cold calls unless::
- There is already an existing client relationship and the client is expecting a call
- call related to a generally marketable packaged product e.g. regulated CIS
- Involved regulated investments that are readily realisable (liquid)

148
Q

What are the regulations around non-written financial promotions?

A
  • Should be at an appropriate time of day
  • identify the contact
  • clarify whether client would like to continue
  • give a contact point
149
Q

What is the record keeping requirement for pension transfers, opt-out or FSAVC?

A

Indefinitely because they are long term

150
Q

What is the record keeping requirement for life policies and pensions?

A

Six years

151
Q

What is the record keeping requirement for MiFID business?

A

5 years (think 5 letters in MiFID)

152
Q

What is the record keeping requirement for non-MiFID business?

A

3 years

153
Q

What does the retail distribution review do? (RDR)

A

Look at retail advisors

154
Q

What can’t retail advisors do?

A

Earn a commission set by the retail product provider because that would be double paying (payment from client and product provider).

Firms will now only receive advisors charges agreed with clients in advance.

155
Q

Explain how the financial services act (2012) allowed temporary product information?

A

It allowed the FCA to ban products that posed risks to consumers. Could be banned for up to 12 months.

156
Q

When identifying clients needs, what is the suitability obligation suitability assessment)?

A

This is given to advisors and discretionary retail and professional clients.
The suitability assessment is based on:
- now they understand investment objectives
- financial situation ( bare risks)
- knowledge and experience - assumed for professional clients

157
Q

Suitability obligation: what is a suitability report?

A

Retail clients need a suitability report where they:
- buy/sell parts of a holding in a regulated CIS
- bus/sells etc rights under a pension
- makes income withdrawals from or purchases a short term annuity
- Enters a pension transfer or opt out or life policy
Normally provided as soon as possible after the transaction.

158
Q

What is an insistent client and what should a firm do in this case?

A

They wish to proceed with a transaction against the advice of the firm. The firm should get physical acknowledgement that the transaction is contrary to the firms recommendation.

159
Q

What is churning and switching?

A

Churning and switching involves over trading of customers account to generate commission.
Churning = investments generally
Switching = packaged products

160
Q

What is the firm’s obligation and application for non-advised (‘execution only’) transactions?

A

Only professional clients can do this.

It does not apply to non complex financial instruments such as:
- not a derivatives
- traded easily
- information on value available
- can’t lose more than invested

161
Q

What is a firms duty when advising execution only transactions?

A

Ask client about their knowledge and experience in the investment
only offer products that are appropriate or give the client a warning.

162
Q

When dealing and managing, what is a firms best execution obligation?

A

Firms must take steps to get the best possible result when executing orders, taking into account different factors.
Establish and keep to to date a best execution policy
Get clients consent to execute trades outside a regulated market.

163
Q

When order handling, what should firms ensure?

A
  • orders are accurately allocated and recorded
  • comparable orders are executed sequentially and promptly
    Retail clients are informed of any material difficulty in the prompt execution of their order
164
Q

In what scenarios are firms allowed to aggregate orders?

A

When it is unlikely to disadvantage clients
Disclose to clients that aggregation may disadvantage them
Establish an order allocation policy

165
Q

What are inducements?

A

MiFID II introduced a ban on inducements (incentives/rewards) for firms that provide independent financial advice and portfolio management advise services to professional clients and restricted independent advise to private clients (retail).

Research is not regarded as an inducement if it is either:
-Directly issue for by the firm or if their of resources
- Return for payment from a special research payment account funded by charges to clients

166
Q

What are the regulations around fund manager charges?

A

MiFID IIi requires fund managers to disclose full charges.

‘Unbundled’ charges for research → separate the cost of investment research so we can see what is paid where

Discretionary fund managers are required to notify investors within 24 hours is the portfolio falls be 10% or more

167
Q

What is classified as investment research?

A

Research or other information recommending or sorting an investment strategy that:
- is labelled as investment research
- is not a personal recommendation

168
Q

What arrangements should firms have when conducting investment research?

A
  • No dealing ahead (unless they are a market maker or unsolicited order) as it allows clients to act on the investment research before we do
  • analysts enumeration is not linked to specific transactions
  • analysts are not used ins marketing capacity (or supervised by sales and trading staff)

This is because they must provide investors with unbiased information

169
Q

What are the three research disclosure requirements?

A
  • Name and job title of the analyst
  • Name of a firm
  • Identity of the competent authority (regulator) of the firm
170
Q

What musta firm ensure they do in their research procedures? (4)

A
  1. Facts are clearly distinguished from interpretations
  2. Sources are reliable
  3. Projections and forecasts are clearly labelled and assumptions are given
  4. Can be proven to FCA upon request
171
Q

What are packaged products (3)?

A
  • life policies
  • regulated collecting investment schemes/investment trust savings scheme
  • stakeholder our personal pension scheme
172
Q

What does a KID provide?

A

Where a firm recommend a PACKAGED PRODUCT to a PRIVATE CUSTOMER, the firm needs to provide the key features of the product in worn form and this is fine through the key investor document.

173
Q

How do we disclose key investor information for UCITS funds?

A

UCITS IV introduced the key investor information document (KIID) in place of a simplified prospectus

174
Q

In product disclosure, what are the cancellations rights?

A

14 days
30 days for life policies and pensions

175
Q

For retail clients what is the occasional reporting period for dealing services?

A

No later than the business day following the execution (t+1)

176
Q

For retail clients, what are the periodic reporting requirements?

What are the exceptions?

A

Every sixth months

Exceptions are when:
- Clients request quarterly statements
- Client receives deal-by-deal confirmations statements sent annually
- Monthly statements for derivatives business

177
Q

What are the 4 client assets rules (CAS)?

A
  1. Fiduciary duty - act in best interests of clients
  2. Custody of clients assets - prevent co-mingling of client and firms assets ie. keep in different accounts
  3. Use of clients assets - a firm must not enter a securities financing transaction unless the client has given consent or use is restricted to the specified trend to which the client consents
  4. Reconciliation of clients assets -as soon as possible and as often as necessary
178
Q

What are the client money rules?

A

We must keep separate from firm’s own money.
Reconcile clients money ASAP if lost.
If it is no longer regarded as client money is the money transferred to is was a fee/payment.

179
Q

How do we separate client money? Where can we put it?

A
  • Central bank
  • BCD credit institution
  • Bank authorised in a third country
  • qualifying money market fund
180
Q

What is Title Transfer Collateral Arrangements (TTCAS)?

A

Arrangement where one legal ownership is transferred.

181
Q

What is a part 4A permission?

A

The permission to enter an industry

182
Q

What can the FCA prosecute under FSMA?

A

Caring unauthorised investment business
Issuing unapproved investment business
Failing to corporate with/misleading the FCA
Insider dealing
Breaches of money laundering regulations

183
Q

What are the requirements for complaints?

A

A firm must have a written complaints handling procedure.
Within 8 weeks of receiving a complaint, a firm should send:
- a final response
- a written response informing the complainant of their right to approach the financial ombudsman service

184
Q

How often must a firm provide their complaints reports to the FCA?

A

Twice a year

185
Q

What is the financial ombudsman service (FOS)?

A

A scavenge to facilitate the settlement of disputes where a complaint has not need resolved to the satisfaction of the complainant.

186
Q

How long do we have to refer a complaint to the FOS?

A

Six months

187
Q

What is the maximum reward for a complaint?

A

4375,000 for complaints referred after 1 April 22’

188
Q

What does the Financial Services Compensation Scheme (FSCS) do?

A

They deal with claims against insolvent authorised firms that are no longer trading.

189
Q

When bringing a claim to the FSCS, the claims must be eligible. This means they carry out protected investment business. What are these? (3)

A
  1. A designated investment business (they follow the COB)
  2. Activities of the managers or trustee of an authorised unit trust
  3. Activities us authorised corporate director or depository of an Investment Company with Variable Capital (ICVC) or an Open Ended Investment Scheme (OEIC)
190
Q

How long does a firm have to make a claim on the FSCS?

A

6 years from the date the event in the clearing took place on

191
Q

What is the maximum payout against an investment firm after raising a claim with the FSCS?

A

£85,000

192
Q

What is money laundering and terrorist financing?

A

Criminals discussing the price of their proceeds of a crime.

193
Q

What are the three stages of money laundering?

A
  1. Placement - injecting into the financial system (putting money into deposit account)
  2. Layering - separating the criminal proceeds from the source (buying and selling to disclose original source of money)
  3. Integration - providing apparent legitimacy (put into legit businesses)
194
Q

What were the two DD’s introduced by the Money Laundering Regulations (MLR) 2017?

A

Customer Due Diligence (CDD) - the firm is obligated to perform CDD. This identifies the customer and figures out the purpose and intention of the business relationship

Enhanced Due Diligence (EDD) - more in depth DD. This is for non face to face business and high risk individuals, politically exposed persons and correspondent banking relationships

195
Q

Who does the MLRO report cases of money laundering to?

A

National Crime Agency (NCA)

196
Q

What is the joint money laundering steering group (JMLSG)?

A

They give guidance in interpreting the money laundering rules.

197
Q

Who approves the jmlsg?

A

The HM treasury

198
Q

What are the main requirements of JMLSG?

A
  • Interval controls and policies (SYSC)
  • Identification procedures (identify who they are doing business with)
  • Record keeping of 5 years
  • Recognition and reporting of suspicious transactions to MLRO
  • Training
199
Q

What are the 5 offences under the proceeds of crime act (POCA) 2002?

A
  • Assisting = 14 years imprisonment and/or an unlimited fine
  • Tipping off = two years’ imprisonment and/or an unlimited fine
  • Failure to report = five years imprisonment and/or an unlimited fine
  • Failure to comply: two years imprisonment and/or an unlimited fine
    False or misleading statement: two years’ imprisonment and/or an unlimited fine
200
Q

What counts as inside information in insider dealing?

A

‘Price sensitive information of a ‘specific and precise’ nature

201
Q

According to the Criminal Justice Act 1993, what are the three offences?

A
  1. Dealing while in possession of insider information
  2. Enraging another to deal, knowing, or reasonably believing that dealing will occur
  3. Disclosing information to another (other than in the proper performance of one’s duties)
202
Q

What investments are covered in the insider dealing policy?

A
  • shares
  • debentures (bond)
  • public sector debt securities
  • options
  • warrants
203
Q

Which legislation goes the regulator the power to pursue someone for inside dealing?

A

FSMA 2000

204
Q

Which legislation would the regulators use to pursue someone for inside dealing?

A

Criminal justice act 1993

205
Q

Which assets are not victim to insider dealing? (2)

A
  • Bank accounts
  • Commodities and commodity derivatives (because the market is too large)
  • FX
206
Q

What are the main defences when being accused of insider dealing?

A
  • Information was passed on as their duty but did not expect to deal
  • deal not done to make a profit or avoid a loss (hard to prove)
  • stabilised a new issue under the ICA’s stabilisation rules
  • market maker had inside information but acted bona fide for that business (acting in good faith, not to gain anything).
  • only had information that certain securities were to be issued, acquired or disposed of so it was therefore reasonable to deal
207
Q

What are the penalties of insider dealing? (2)

A
  • Magistrates court: 6 months imprisonment and/or £5000 fine
  • Crown court: 7 years imprisonment and/or unlimited fine
208
Q

What are one penalties of bribery?

A

7 - 10 years imprisonment
Unlimited fine

209
Q

What are the penalties for market abuse?

A

Unlimited but no jail time because cannot prosecute

IMC - Unit 1 (4 decks)

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