Section 3.5 - Identifying clients needs Flashcards
What should firms,who provide investment advice to clients, do to assess their clients’s suitability
- Undertake the risk tolerance
- The clients financial situation
- Knowledge and expereince relevant to the specifc instrument or service
- Firms should undertake a suitability assessment when providing personal recommendations.
Under MiFID, when should a suitability report be provided
- Must provide a suitability report to retail clients after any transaction is carried out e.g:
- After buying or selling shares through an investment trust savings scheme
- The report must consist of setting out the needs for the client, explain why the transaction is sutiable as well as the disadvanatges of the transaction
How should firms deal with insistent clients
The firm should communicate infomation to the insistent client before going ahead with the transaction that:
* The firm has not recommended the transaction and therefore will not be in accordance to firms personal recommendation
* The risks associated with the transaction
What is churning and switching
- Churning and switching relates to deliberately overtrading clients funds in order to recieve more commission which is not in their best interest
- Churning refers to investments e.g buying and selling shares
- Switching refers to moving clients investments into packaged products
- Market conditions will play a role in determining whether trading was too frequent or not and if switching was appropriate
When are firms required to test appropriatness
- When providing non-advised services - suitability rule doesnt apply
- If a client demands an product that has been that has been assessed as inappropriate, then the firm must give the client a warning before proceeding with the transaction
The appropriateness for non-complex financial instruments e.g. not derivatives, instruments that can be traded easily where infomation is pubically available (shares)
What is the best obligation policy
- Firms must establish the best execution poilicy to achieve the best results for clients - must take into account price, costs, likelihood of execution and settlement size
- A firm must try out different execution venues to see which one delivers the best possible result however firms own commission and cost for executing each order must be taken into account
What factors must a firm take into consideration when executing a client order to a professional client
When executing a client order a firm must take into account:
* Wether it is a professional or retail client
* Execution venue
* Characteristics of client order (large volume or small order)
- When a firm is dealing with a professional client it has more factors to take into account. For example a large client may consider that fast matching at large volume is important so its crucial to execute at right market level. However for smaller clients cost may be the most important factor.
What factors must a firm take into consideration when executing a client order to a retail client
A firm must provide a retail client with the following details regarding its execution policy in good time prior to the prvisions of the service:
- A list of execution venues to obtain the best result
- A clear and prominent warning that any specifc instructions from a client may prevent the firm from taking the best course of action to obtain the best result.
What is investment research
Is research or other infomation recommending or suggesting investment stratgey which:
* It is labelled or described as investment strategy
* it is not a personal recommendation
- Investment research contains some degree of substantive analysis and is undergone by an financial analyst
What arrangements should a firm put in place when producing investment research, to esnure that
- A financial analyst who has knowledge of the timing or content of investment research is not permitted to deal ahead - ‘front running’
- Exemption of this is where firms give unsolicited orders (just asking clients and not giving orders)
- The firm or financial analyst involved in the production of investment research should not accept inducements from those with a material interest in the subject matter of interest
What are the requirements to properly disclose any research recommendation
- The name and job title of the indivdual who prepared the research recommendation
- The name of the firm, and
- Where the firm is an investment firm or credit institution
What is product governance
- Is the creation and mangement of products throughout their life cycle
- The MiFID II proposals are relevant for both manufactueres and distributors
What falls under packaged and non packaged products
PRIIP - Packaged retail and insurance-based investment prodcuts
Packaged products include:
* Life policy
* Regulated collective investment scheme/investment trust saving scheme
* Personal pension scheme
What is a PRIIP manufacturer or distributor required to do:
- Prepare a key infomation document (KID) in good time to retail investors before any transactions is concluded
- The KID may be provided after the conclusion of the transaction if the reail investor initiates the transactions by means of distance communication.
When a firm provides a packaged product to private customers, what must it provide
- A KFD (A key feautues disclosure document
What investors are KIID aimed at
KIID - Key Investor Infomation Document
- It is aimed at retail investors
- The essential elements of the KIID must be kept up to date and can be updated as frequently as a UCITS wishes however must be done within 35 business days of each calander year end to reflect the past performance
What are the cancellation rights on packaged products
- A retail client has the right to cancel within 14 days
- For life policies and pension it is within 30 days
What is occasional reporting
- This is reporting which consists of dealing services
- In the case of a retail client must send the client a notice in a durable medium confirming the excution of the order.
- Should be recieved no later than the first business day following the execution (T+1)
What is periodic reporting
- It is aimed for firms that manage investments on behalf of clients
- It must provide a periodic statement once every six months, except if a retail client requests then it should be provided every 3 months
- Where the client recieves deal-by-deal, confirmations and statements must be sent annually
- For deriviatives business, statements should be produced monthly.
What is the concept of fiduciary duty
- Fiduciary duty is where clients must act in best interest of the client
- A firm is requried to determine and notify the FCA, once a year what type CASS classfication the firms falls into
What is CASS
- CASS (Client Asset sourcebook) is not subjected to MiFID or COBS regulation
- The four points of CASS is:
- Fiduciary duty, custody of client’s assets, use of clients assets and reconcillation of clients assets
Explain custody rules of clients assets
- CASS requires a firm to have arrange adequate protection for assets which it is reponsible for.
- The custody rules are designed to primairly restrict the co-mingling of client and firms assets and minimises the risk of clients assets being used without their consent or against their wishes
Explain the use of clients assets
- A firm must not enter into arrangements for secruties-financing trasnactions e.g stock lending, unless:
- The client has given prior consent to the use of the financial instruments on specified terms
- The use of thats clients financial instruments is restricted to the specified terms to which the client consents
What is reconcilliation of clients assets
- All firms must perform internal custody record checks as regulary as neccessary but at least monthly
What are client money rules
- The client money rules apply to a firm that recieve or holds money from or on behalf of a client, in the course of MiFID or designated investment business
- A firm, on recieving client money, must promptly place this money into one or more accounts opened with the following client bank accounts:
- A central bank
- A BCD credit instituion
- A qualifying money market fund
BCD- Banking Consolidate Directive
What is reconciliation of client money
- Standard methods of internal client money reconciliation, set out in the client money rules, require a firm to calculate its client money requirement:
- Inidvidual client balance
- Net negative add back
What are mandated accounts
Mandates are any means that give a firm the ability to control a clients assets, liabilities, which meet the following condition:
* They are obtained by the firm from the client and with the clients consent
* They are retained by the firm
