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UK Financial Regulation > The FCA Conduct of Business and Client Asset Sourcebooks > Flashcards

The FCA Conduct of Business and Client Asset Sourcebooks Flashcards

1
Q

what is a fact find

A

where relevant personal and financial information is obtained (for suitability report)

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2
Q

what is an eligible counterparty

A

either a per se eligible counterparty or an elective eligible counterparty

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3
Q

what is the order execution policy purpose

A

To ensure that a firm obtains the best possible result for the client
-To be provided before providing services

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4
Q

does opting down to retail client guarantee the right of access to bodies such as the FOS and the FSCS

A

does not guarantee

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5
Q

what are post-sale cancellation rights also known as

A

cooling-off period -> right to change their mind

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6
Q

what are the rules regarding allocation

A

timely allocation,
fair allocation (allocate to clients first),
unless: firm has reasonable grounds to allocate proportionally

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7
Q

what are the requirements for a firm to be a large undertaking

A

large undertaking (must satisfy 2/3):

  • BS EUR20m
  • net turnover EUR40m
  • own funds EUR2m
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8
Q

do records need to be kept on site

A

no, but they must be ‘readily accessible’

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9
Q

how does a retail client opt up to be an elective professional client

A

qualitative test
-assess expertise, experience and knowledge
quantitative test (mifid business only)
meet 2/3:
-av. trade freq 10 per quarter over previous 4 quarters
-portfolio > EUR500k
-works or worked in financial sector >= one year in professional capacity
Procedure
- Written intent from client to be classified as professional - Written warning to client explaining lost protection
- Written client consent to lost protection

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10
Q

what is the purpose of a transaction confirmation

A

ensure clients are advised of the essential details of a transaction

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11
Q

what does the client order handling stipulate

A

promptly recorded and allocated

-carried out sequentially

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12
Q

what is mar

A

market abuse regulation

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13
Q

what happens if there is a reconciliation and there is found to be a shortfall

A

shortfalls corrected as soon as possible

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14
Q

what is an approved bank to hold client money in

A

BCD credit institution

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15
Q

what is a durable medium (actual question)

A

A medium that allows the unchanged reproduction and storage of the information, for example:

  • paper
  • floppy disk, CD, DVD
  • hard drive of recipients computer
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16
Q

what is a CASS audit

A
  • required annually and submitted to FCA within four months of audit
  • client asset assurance standard set by financial reporting council
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17
Q

do you have to be the same class of client for all products

A

no

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18
Q

what do periodic statements include

A

client portfolio, value and composition,
total fees and charges,
total dividends and interest

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19
Q

what is cass 7

A

client money rules

  • mifid business
  • opt-in available for non-mifid business
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20
Q

what is conduct of business rules to do with recording voice or electronic communications

A

good quality recording should be kept for 5 years when relating to:
-receiving client orders
-executing client orders
-arranging for a client order to be executed
including communications via fax, email, IM, mobile phones
applies to comms with any client or eligible counterparty

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21
Q

what is reconciliation

A

checking the accounts against the record that we hold for those accounts

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22
Q

when is order aggregation permitted

A

if:

  • unlikely to operate to the disadvantage of clients
  • disclose that on some occasions it may operate to the disadvantage of clients
  • order allocation policy is in place
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23
Q

what is the timings of periodic statements

A

every 3 months (clients can ask for annual),
except:
-derivatives: every month

both need to be sent out promptly

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24
Q

are Chinese walls mandatory

A

no

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25
Q

what are some examples of unwritten communications

A

real time:
conversations,
telephone calls
presentations that are live

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26
Q

how can a firm deal with conflicts of interest

A

systems and controls in place to manage,
conflicts policy,
Chinese wall (or similar)

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27
Q

client asset rules are always home state regulated

A

yes

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28
Q

how does a professional client become an eligible counterparty

A

client just needs to ask and provide information

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29
Q

what three documents are there to provide disclosure to retail clients about the product

A

key information document (KID) (packaged retail and insurance-based investment products (PRIIPS)),
key investor information document (KIID) (UCITS),
key features document

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30
Q

what are the execution factors

A

Price, costs, speed, likelihood of execution and settlement or any other consideration

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31
Q

what is the timeline for reconciliation if there is found to be a shortfall

A

as soon as possible

if internal reconciliation then it is the close of business on the day of reconciliation

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32
Q

what is the purpose of the client order handling

A

prompt, fair and expeditious execution of client orders

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33
Q

what is this called? Knowingly deal for its own account until the clients whom the publication was intended have had a reasonable time to react to it

A

front running investment research

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34
Q

what is eligible counterparty business

A

dealing

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35
Q

what is a formal ‘client agreement’ document

A

retail client document: in clear and easy to understand english, both rights and obligations of firm and rights and obligations of customer

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36
Q

what are readily realisable securities

A

shares and bonds with liquid market

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37
Q

for retail clients, what does a firm then have to do after the fact find and suitability rule

A

create a suitability report (reasons why letter),

reasons why you have recommended abc to you

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38
Q

what are Chinese walls

A

internal arrangements to restrict the flow of confidential information

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39
Q

is assessing appropriateness always necessary

A

not necessary for execution-only business involving non-complex financial instruments

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40
Q

what is eligible counterparty business

A

dealing on own account and/or executing orders on behalf of clients

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41
Q

what is a direct offer or invitation

A

retail clients only - financial promotion that contains a method of response for the client to invest in a product

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42
Q

what do direct offers or invitations have to contain, these are for retail clients and provide a method of response for the client to invest in the product

A

must contain sufficient information to enable a person to make an informed assessment

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43
Q

what is the purpose of client asset rules

A

fiduciary duty to provide adequate protection for clients money + assets,

segregation of assets from the firms (protection in bankruptcy)

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44
Q

what are occasional reports

A

transaction confirmations

45
Q

when is a warning issued by the firm after assessing appropriateness

A

if firm believes the investment or service is not appropriate,
client has not produced sufficient information for firm to come to conclusion

46
Q

what is the time limit for pension contracts, stakeholder pensions and life assurance

A

5 years

47
Q

what is cass 6

A

custody rules

-mifid and non-mifid business

48
Q

when does the FCA define as an appropriate time of day

A

they do not specify, the answer is an appropriate time

49
Q

what four disclosures need to be made to retail clients before advise

A

the adviser
the firm
products
inducements

50
Q

what is COBS

A

conduct of business rules

51
Q

what are the two types of communication media

A

non-written communications - real time

written communications - non-real time (recorded video)

52
Q

what must a firm ensure when communicating with retail clients

A

fair, clear and not misleading

53
Q

what must unwritten communications be:

A

fair, clear and not misleading,
must identify at start:
-caller
-employer
-purpose of call
then ask if they want to continue with the call
then provide with contact point in case want to cancel
communicate at an appropriate time of day

54
Q

what happens to limit orders that are not executed immediately

A

must be made public,
unless:
-client expressly instructs otherwise
-limit order greater than normal market size

55
Q

what is the fair treatment rule (COBS)

A

all firms must ensure that they act honestly, fairly and professionally

56
Q

what is the difference between suitability and appropriateness

A

suitability report: retail clients,

appropriateness: all clients

57
Q

can an elective professional client opt up to be an elective eligible counterparty

A

no

58
Q

can you use future performance in communications with clients

A

yes, but it cannot be based on simulated past performance. only when there is an actual past performance
warn that forecasts are not reliable indicators
assumptions must be reasonable

59
Q

what is the suitability rule

A

requires firms to obtain sufficient information to give suitable advice to retail clients (all business) and professional clients (mifid business)

60
Q

what are the general rules on time limits for mifid and non-mifid business

A 
3 years (non-mifid)
5 years (mifid)
61
Q

what is an IDD

A

initial disclosure document:

62
Q

what is the disclosure regarding the products being marketed to retail clients

A

provide enough information about the nature and risk of the product,

63
Q

what are the best execution criteria

A
  • Client categorisation
  • Type of order
  • Type of financial instrument being traded - Characteristics of execution venues
64
Q

can you use simulated past performance in communications with clients

A

yes

65
Q

what has to be adhered to if putting past performance in communications with clients

A

must not be most prominent feature
cover at least five years in complete 12 month intervals
reference periods and sources must be clearly shown
this is not an indicator of future performance
currency stated and warning of currency risk
disclose effect of fees and commissions

(five years and reliable indicator most important)

66
Q

name some packaged products (actual question)

A 
life policy,
regulated CIS,
investment trust savings scheme,
stakeholder pension,
personal pension
67
Q

what is the procedure for retail clients opting up to professional clients

A

written intent from client to be classified as professional
written warning to client explaining lost protection
written client consent to lost protection

68
Q

what is a financial promotion

A

invitation or inducement to engage in investment activity communicated in the course of business (advertising or marketing)

69
Q

who does conflicts of interest include

A

all clients

70
Q

what is a conduct of business rule to do with websites

A

firm is permitted to communicate via a website if the following conditions are met:

  • evidence appropriate method of communication
  • specifically consented to this method
  • client notified of website address electronically
  • info kept up to date
  • info continuously accessible as long as client requires
71
Q

what is exempt from the requirement to reconcile

A
  • ICVS and UCITD schemes
  • incoming EEA firms (follow home state)
  • BCD credit institution

money that is not client money:

  • coins held for value of the metal (gold sovereigns, client asset not client money)
  • money held for delivery versus payment (DvP) (settlement max 3 days)
  • money due and payable to the firm
72
Q

when are cold calls permitted

A

an existing client who envisages a call
all retail clients where the promotion relates to:
-generally marketable packaged product (not high volatility fund)
-services relating to readily realisable securities other than warrants (shares + bonds with liquid markets)

73
Q

what is the period for the right to cancel

A

generally 14 days, life and pension 30 calendar days

74
Q

what is an inducement

A

thing that persuades or leads someone to do something

75
Q

you are a _____ client until proven otherwise

A

retail client

76
Q

what are the exceptions to the front running of investment research

A 
firm is market maker dealing in normal course of business,
unsolicited client (including eligible counterparties) orders (normal client orders)
77
Q

who does the conduct of business rules apply to

A

apply directly to firms conducting designated business or conducting insurance business from an establishment maintained by them in the UK

designated business:

  • dealing
  • broking
  • advising
  • managing
78
Q

a firm that communicates a financial promotion produced by a third party would never be in breach of rules if:

A
  • it has established that an authorised firm has approved the promotion
  • it communicates the promotion only to those it was intended
  • promotion has not ceased to be fair, clear and misleading
79
Q

what can a large undertaking (professional client) do

A

opt up to become an elective eligible counterparty.

for ex bp if they wanted to be treated same as counterparties

80
Q

what are the post-sale cancellation rights periods for life products and pensions, and other products

A

life products and pensions: 30 calendar days

other products: 14 calendar days

81
Q

what is the time limit for recordings of telephone communications

A

five years from the creation of the record

82
Q

if counterparties dealing among themselves what can you not work out

A

who is the client, so you treat them as equal

83
Q

what do you do if conflicts of interest cannot be managed

A

disclose conflicts of interest to clients (last resort)

84
Q

what is S21 FSMA 2000

A

must not communicate a financial promotion unless:

  • it is an authorised person; or
  • the content has been approved by an authorised person (authorised person takes responsibility)
85
Q

can we rely on information provided by other organisations

A

if the information is from a mifid firm:
-a firm may rely on the information and recommendations
if the information is from a non-mifid firm:
-information is in writing
-non-mifid firm is independent (independent of object of information, company z)
-non-mifid firm is competent (mifid firm accountable for that assessment)

86
Q

retail distribution review (RDR): retail clients

A

adviser charges agreed in advance with client as early as practicable,
no commissions are permitted (conflict of interest),
must disclose adviser status and costs of services before

87
Q

what is the purpose of the suitability report

A

confirm why firm believes recommendation is suitable (mifid and non mifid business)

88
Q

does the suitability rule cover execution services

A

no, not when the firm has no input into the decision making of the investor.
does apply to discretionary services (acting as investment manager) and advisory services (personal recommendation)

89
Q

what is the purpose of best execution

A

A firm must take all sufficient steps to obtain the best possible result for its clients,
taking into account the execution factors

90
Q

when is a financial promotion not subject to any rules

A

-if it is exempt under the financial promotions order (FPO)
from outside the UK, and cannot have an effect in the UK
-subject to takeover code or similar code
-personal quotes or illustrations
-one-off promotions that are not cold calls
-image advertising

91
Q

what is rehypothecation

A

firm using assets of client for own purposes

92
Q

what is the time limit for pension transfers and opt-outs, free standing additional voluntary contributions (FSAVCs)

A

indefinitely

93
Q

what investments apply to COBS

A

mifid instruments
non-mifid designated investments
insurance business -> life assurance with an investment element

94
Q

what does a suitability report contain

A

specify clients demands and needs,
explain why firm believes recommendation meeds those needs,
explains possible disadvantages for client

95
Q

how has mifid 2 strengthened inducement rules

A

firm must not pay to, or accept from, any fee, commission or non-monetary benefit, unless:

  • fee designed to enhance quality of service,
  • fee does not impair the firm’s duty to act in best interest of customer.

firm must disclose all fees

96
Q

when a firm publishes research to its clients or the public, it must ensure:

A

does not receive inducement from those with material interest,
not promise issuers favourable coverage,
issuers covered are not permitted to review drafts of the research

97
Q

what are some examples of per se professional clients

A 
authorised/regulated firm
government, central bank, supranational
other institutional investors (SPV)
large undertaking (must satisfy 2/3):
-BS EUR20m
-net turnover EUR40m
-own funds EUR2m
98
Q

are trail commissions for retail client advisers allowed if the investor and advisor agree (acc q)

A

no, trail commissions are not allowed

99
Q

All of the following could be considered a professional client. Which of them is MOST LIKELY to have reached that status through election? (acc q)

A Local authority
B National body that manages public debt
C Limited liability partnership
D Designated investment exchange

A

A - Local authority,

all others would be considered per se professional clients. The local authority must have met certain requirements to be eligible to opt up

100
Q

when can a retail client expect to receive information regarding their right to cancel an agreement to purchase units in an authorised unit trust?

A Before entering into the agreement at all times
B After entering into the agreement at all times
C Before and after entering into the agreement at all times
D Before or after entering into the agreement depending on the situation

A

D - Before or after entering into the agreement depending on the situation,

If cancellation rights apply, firms must tell consumers of their rights in good time before (or where that is not possible, immediately after) the consumer is bound by the contract; and they must do so in a durable medium.

101
Q

With regard to financial promotions, the need to be fair, clear and not misleading applies to:

A All clients
B Retail clients only
C Professional clients only
D Eligible counterparties only

A

The rule on fair, clear and not misleading applies to retail clients. Beware there is also a general rule regarding communications which applies to professional and retail clients.

102
Q

A firm is approached by an authorised collective investment scheme (CIS) in relation to designated investment business. Which of the following best represents the conditions under which the CIS will get classified as a professional client?

A Turnover of €40 million and own funds of €2 million
B Turnover of €40 million and a balance sheet of €15 million
C It is always classified as a professional client
D It can never be classified as a professional client

A

C - It is always classified as a professional client

103
Q

what is a systematic internaliser

A

investment firms which, on an organised, frequent, systematic and substantial basis, deal on own account when executing client orders outside a regulated market, an MTF or an OTF

104
Q

when entering into a distance marketing contract for a life policy, how much time must a retail client be given to cancel the contract if they wish to do so (acc q)

A

30 calendar days

105
Q

Under the FCA client money rules (CASS 7), in which of the following situations is a firm deemed to have discharged fiduciary duty?

A When a cheque drawn from the client account is paid into a client bank account
B On receipt of an instruction to return funds from the client account from a client
C The despatch of funds to client
D At the point where the payment clears from the client account

A

at point where payment clears from the clients account

106
Q

when communication by a firm contains information about past performance, this must cover a minimum period of how long? (acc q)

A

5 years

107
Q

do they need to take integrity and reputation into account when reclassifying a retail client as a professional client

A

no

108
Q

what does a broker have to do if the client has submitted a limit order much higher than the firm is willing to buy (acc q)

A

place the order on a regulated market

UK Financial Regulation (7 decks)

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