Section 5

Question 1

Purpose of suitability rule

Answer 1

This rule requires firms to obtain sufficient information to give suitable advice to retail clients (all business) and professional clients (MiFID business).

Question 2

Suitability rule: How is relevant personal and financial information found?

Answer 2

Fact find.

Question 3

Suitability rule - give suitable advice with respect to the disclosed info and other facts that the firm ought reasonably to be aware of so that client:

Answer 3

Investment objectives are met.
Is able to bear financial risk.
Has necessary knowledge and experience to understand those risks.

Question 4

Suitability rule does not apply to what?

Answer 4

Execution only services.

Question 5

What is churning and switching?

Answer 5

Excessive trading engaged in to generate commissions for the firm. Churning - freely transferable investments, switching to packaged products.

Question 6

Suitability report purpose

Answer 6

To confirm why the firm believes the recommendation is suitable and should be provided for both MiFID and non-MiFID investments.

• Specify the client’s demands and needs.
• Explain why the firm believes the recommended transaction meets those needs.
• Explains any possible disadvantages of the transaction for the client.

Question 7

Suitability report form

Answer 7

• The report must be provided in durable medium before the contract is concluded
• Timing can be delayed if
  • Agreement is concluded at a distance and
  • The client agrees to this delay

Question 8

When is the suitability report not required?

Answer 8

Where the firm, acting as investment manager for a retail client, makes a personal recommendation in connection to a regulated CIS
• Client is habitually resident outside EEA and is not present in UK at the time of acknowledging consent to the proposal
• In ‘small-life policies’ sold by friendly societies (premium no more than £50 pa)
• If recommendation is to increase regular premiums to an existing contract
• If investing further premiums to an existing packaged product into which contributions have already been paid

Question 9

Timing for pension advice (non-MiFID)

Answer 9

In the case of a personal pension scheme or stakeholder pension scheme
where the right to cancel applies, The suitability report must be provided no later
than the fourteenth day after the contract is concluded

Question 10

Appropriateness rule purpose

Answer 10

Ensure the firm obtains sufficient information to assess if a product is appropriate for the customer

Question 11

Appropriateness rule - Before acting, the firm must assess whether the client:

Answer 11

• Is able to bear the financial risks in relation to the product or service
• Has the knowledge and experience to understand those risks (retail clients only)

Question 12

Appropriateness rule - Warnings are provided when:

Answer 12

The firm believes the investment or service is not appropriate
- The client has not produced sufficient information for the firm to come to a conclusion

Question 13

Appropriateness rule - When is assessing appropriateness not necessary?

Answer 13

For execution-only business involving non-complex financial instruments e.g. shares or bonds, money market instruments, units in a UCITS scheme.