Section 3.5 - Identifying clients needs

Question 1

What should firms,who provide investment advice to clients, do to assess their clients’s suitability

Answer 1

• 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.

Question 2

Under MiFID, when should a suitability report be provided

Answer 2

• 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

Question 3

How should firms deal with insistent clients

Answer 3

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

Question 4

What is churning and switching

Answer 4

• 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

Question 5

When are firms required to test appropriatness

Answer 5

• 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)

Question 6

What is the best obligation policy

Answer 6

• 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

Question 7

What factors must a firm take into consideration when executing a client order to a professional client

Answer 7

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.

Question 8

What factors must a firm take into consideration when executing a client order to a retail client

Answer 8

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.

Question 9

What is investment research

Answer 9

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

Question 10

What arrangements should a firm put in place when producing investment research, to esnure that

Answer 10

• 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

Question 11

What are the requirements to properly disclose any research recommendation

Answer 11

• 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

Question 12

What is product governance

Answer 12

• Is the creation and mangement of products throughout their life cycle
• The MiFID II proposals are relevant for both manufactueres and distributors

Question 13

What falls under packaged and non packaged products

PRIIP - Packaged retail and insurance-based investment prodcuts

Answer 13

Packaged products include:
* Life policy
* Regulated collective investment scheme/investment trust saving scheme
* Personal pension scheme

Question 14

What is a PRIIP manufacturer or distributor required to do:

Answer 14

• 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.

Question 15

When a firm provides a packaged product to private customers, what must it provide

Answer 15

• A KFD (A key feautues disclosure document

Question 16

What investors are KIID aimed at

KIID - Key Investor Infomation Document

Answer 16

• 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

Question 17

What are the cancellation rights on packaged products

Answer 17

• A retail client has the right to cancel within 14 days
• For life policies and pension it is within 30 days

Question 18

What is occasional reporting

Answer 18

• 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)

Question 19

What is periodic reporting

Answer 19

• 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.

Question 20

What is the concept of fiduciary duty

Answer 20

• 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

Question 21

What is CASS

Answer 21

• 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

Question 22

Explain custody rules of clients assets

Answer 22

• 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

Question 23

Explain the use of clients assets

Answer 23

• 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

Question 24

What is reconcilliation of clients assets

Answer 24

• All firms must perform internal custody record checks as regulary as neccessary but at least monthly

Question 25

What are client money rules

Answer 25

• 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

Question 26

What is reconciliation of client money

Answer 26

• 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

Question 27

What are mandated accounts

Answer 27

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