Section 3.5- FCA Business Standards Flashcards
What are the three types of catogeries clients fall into
- Retail Clients- Have most regulatory protection, E.G. a local authority. Can ‘opt up’ to be professional client if they fall under Local Government Pension Scheme
- Professional Clients- More experienced and able to assess their own risks so some lighter regulations
- Eligible counterparties- The most experienced and include financial institutions such as investment firms.
FCA ranks clients with least experience to most
What are the two types of professional clients
Per se and elective clients
Who falls under the per se professional clients under MiFID II
A large undertaking with :
* A balance sheet total of £20m
* A net turnover of £40m
* Own funds of £2m
In relation to businesses that are not MiFID, a large undertaking must meet two of the following:
* A corporate body that has a share capital of £5m
* A balance sheet total of £12.5m
* A net turnover of £25m
* An average employees during the year 250
When may a firm treat a client an elective professional client
- If it complies with the following list:
- The firm undertakes an adequate assessment of the expertise, experience and knowledge of their clients (quantative test)
- The client must state that it wants to be treated as a professional client, either generally or one off transaction.
- The firm must give the client a clear written warning of the protections and investor compensation rights the clients may lose (Client must write in separate document that it is aware of this)
Quantative test must meet the following:
* Client has relevant knowledge by working in financial sector for at least one year
* Clients portfolio exceeds over £500,000
* Client must of carried out significant transactions - average 10 per quarter over the past 4 quarter
What are the two types of eligable counterparties
- Per se or elective eligible
- ‘Light touch’ regulation is permitted to those who:
* Execute orders on behalf of clients
* Dealing on own account
* Recieving and transmitting orders
What are some examples of Eligable counterparties
- Per se counterparty include: Investment firms, credit institutions, pension funds, central banks and national government
- A firm can treat a client as an Elective counterparty if the client is an undertaking e.g. are limited liability partnerships that hold share capital of £10m
What can a firm allow an elective counterparty or professional client to do
- Request re-categorisation as a client so it can benefit from higher levels of protection.
- For example a per se professional client may be treated as a retail client although this does not mean the client has access all aspects of protection.
What does MiFID require firms to do before providing an investment service
- Enter a basic written agreement with professionals and retail client for every investment or ancillary service
- The agreement must cover:
*Infomation about the firm and services e.g conflicts of interest
* Must keep all records of transactions
What is a financial promotion
- Financial promotion is an invitation with aims of making a client take part in investment activity
An investment activity under section 21 of FSMA is described entering an agreement in which either party constitutes a controlling activity.
What does section 21 of the FSMA state
- Not an authorized persons shold not communicate a financial promotion in the UK unless it is subject to exemption by FPO.
- The exemptions by the FPO are split into 3 catogeries:
- Exemptions are applicable to all controlled activites (part IV of the order)
- Exemptions are applicable to only controlled activties concerning deposists and contarcts of lnsurance other than life policy (Part V of the order)
- Exemptions under Part VI of the FPO applies to different types of financial promotion which includes:
- High net worth indivduals
- Sophsicated Investors
How is fair, clear and not misleading communication achieved when it comes to financial promotions
- Principle 7 of PRIN and COBS sets out requirements and the financial promotion rule doesnt apply to:
- A one off promotion
- Financial promotions communicated only to investment professionals or eligable counterparties
- In order to achieve complaince with this rule firms must ensure a financial promotion for products or services that emphasises clients capital is at risk
How should a firm should communicate with retail clients
- List the potential benefits of the investment activities as well as the risks aswell
- Is easy to read and digest by the average member of the group - Same font size thoughout the whole document particulary when listing risks
- Sources must be specified - past peformance should not be the only indicator and shiuld not be the most prominent feature of communciation.
What rules should a firm follow if making cold calls as part of a financial promotion
A firm should not cold call people unless:
* The recipients has an exisiting relationship with the firm
* The call must relate to generally marketable packaged products
* Must terminate the call at any given point upon prospects request.
- Cold calls should only be made at an appropriate time of day.
What are the requirements for record keeping
A firm must keep a record of financial promotion is communicates, and must be retained:
* For six years for pension transfer
* For five years in terms of MiFID
* For three years in other cases
What must a firm provide a client when managing investment activity on their behalf
- Must give methods and frequency of valuation of the designated investment in the clients portfolio
- Types of designated investments and type of transaction that is carried out
- The level of risk of the investment
