The FCA Conduct of Business and Client Asset Sourcebooks Flashcards
what is a fact find
where relevant personal and financial information is obtained (for suitability report)
what is an eligible counterparty
either a per se eligible counterparty or an elective eligible counterparty
what is the order execution policy purpose
To ensure that a firm obtains the best possible result for the client
-To be provided before providing services
does opting down to retail client guarantee the right of access to bodies such as the FOS and the FSCS
does not guarantee
what are post-sale cancellation rights also known as
cooling-off period -> right to change their mind
what are the rules regarding allocation
timely allocation,
fair allocation (allocate to clients first),
unless: firm has reasonable grounds to allocate proportionally
what are the requirements for a firm to be a large undertaking
large undertaking (must satisfy 2/3):
- BS EUR20m
- net turnover EUR40m
- own funds EUR2m
do records need to be kept on site
no, but they must be ‘readily accessible’
how does a retail client opt up to be an elective professional client
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
what is the purpose of a transaction confirmation
ensure clients are advised of the essential details of a transaction
what does the client order handling stipulate
promptly recorded and allocated
-carried out sequentially
what is mar
market abuse regulation
what happens if there is a reconciliation and there is found to be a shortfall
shortfalls corrected as soon as possible
what is an approved bank to hold client money in
BCD credit institution
what is a durable medium (actual question)
A medium that allows the unchanged reproduction and storage of the information, for example:
- paper
- floppy disk, CD, DVD
- hard drive of recipients computer
what is a CASS audit
- required annually and submitted to FCA within four months of audit
- client asset assurance standard set by financial reporting council
do you have to be the same class of client for all products
no
what do periodic statements include
client portfolio, value and composition,
total fees and charges,
total dividends and interest
what is cass 7
client money rules
- mifid business
- opt-in available for non-mifid business
what is conduct of business rules to do with recording voice or electronic communications
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
what is reconciliation
checking the accounts against the record that we hold for those accounts
when is order aggregation permitted
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
what is the timings of periodic statements
every 3 months (clients can ask for annual),
except:
-derivatives: every month
both need to be sent out promptly
are Chinese walls mandatory
no
what are some examples of unwritten communications
real time:
conversations,
telephone calls
presentations that are live
how can a firm deal with conflicts of interest
systems and controls in place to manage,
conflicts policy,
Chinese wall (or similar)
client asset rules are always home state regulated
yes
how does a professional client become an eligible counterparty
client just needs to ask and provide information
what three documents are there to provide disclosure to retail clients about the product
key information document (KID) (packaged retail and insurance-based investment products (PRIIPS)),
key investor information document (KIID) (UCITS),
key features document
what are the execution factors
Price, costs, speed, likelihood of execution and settlement or any other consideration
what is the timeline for reconciliation if there is found to be a shortfall
as soon as possible
if internal reconciliation then it is the close of business on the day of reconciliation
what is the purpose of the client order handling
prompt, fair and expeditious execution of client orders
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
front running investment research
what is eligible counterparty business
dealing
what is a formal ‘client agreement’ document
retail client document: in clear and easy to understand english, both rights and obligations of firm and rights and obligations of customer
what are readily realisable securities
shares and bonds with liquid market
for retail clients, what does a firm then have to do after the fact find and suitability rule
create a suitability report (reasons why letter),
reasons why you have recommended abc to you
what are Chinese walls
internal arrangements to restrict the flow of confidential information
is assessing appropriateness always necessary
not necessary for execution-only business involving non-complex financial instruments
what is eligible counterparty business
dealing on own account and/or executing orders on behalf of clients
what is a direct offer or invitation
retail clients only - financial promotion that contains a method of response for the client to invest in a product
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
must contain sufficient information to enable a person to make an informed assessment
what is the purpose of client asset rules
fiduciary duty to provide adequate protection for clients money + assets,
segregation of assets from the firms (protection in bankruptcy)
what are occasional reports
transaction confirmations
when is a warning issued by the firm after assessing appropriateness
if firm believes the investment or service is not appropriate,
client has not produced sufficient information for firm to come to conclusion
what is the time limit for pension contracts, stakeholder pensions and life assurance
5 years
what is cass 6
custody rules
-mifid and non-mifid business
when does the FCA define as an appropriate time of day
they do not specify, the answer is an appropriate time
what four disclosures need to be made to retail clients before advise
the adviser
the firm
products
inducements
what is COBS
conduct of business rules
what are the two types of communication media
non-written communications - real time
written communications - non-real time (recorded video)
what must a firm ensure when communicating with retail clients
fair, clear and not misleading
what must unwritten communications be:
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
what happens to limit orders that are not executed immediately
must be made public,
unless:
-client expressly instructs otherwise
-limit order greater than normal market size
what is the fair treatment rule (COBS)
all firms must ensure that they act honestly, fairly and professionally
what is the difference between suitability and appropriateness
suitability report: retail clients,
appropriateness: all clients
can an elective professional client opt up to be an elective eligible counterparty
no
can you use future performance in communications with clients
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
what is the suitability rule
requires firms to obtain sufficient information to give suitable advice to retail clients (all business) and professional clients (mifid business)
what are the general rules on time limits for mifid and non-mifid business
3 years (non-mifid) 5 years (mifid)
what is an IDD
initial disclosure document:
what is the disclosure regarding the products being marketed to retail clients
provide enough information about the nature and risk of the product,
what are the best execution criteria
- Client categorisation
- Type of order
- Type of financial instrument being traded - Characteristics of execution venues
can you use simulated past performance in communications with clients
yes
what has to be adhered to if putting past performance in communications with clients
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)
name some packaged products (actual question)
life policy, regulated CIS, investment trust savings scheme, stakeholder pension, personal pension
what is the procedure for retail clients opting up to professional clients
written intent from client to be classified as professional
written warning to client explaining lost protection
written client consent to lost protection
what is a financial promotion
invitation or inducement to engage in investment activity communicated in the course of business (advertising or marketing)
who does conflicts of interest include
all clients
what is a conduct of business rule to do with websites
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
what is exempt from the requirement to reconcile
- 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
when are cold calls permitted
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)
what is the period for the right to cancel
generally 14 days, life and pension 30 calendar days
what is an inducement
thing that persuades or leads someone to do something
you are a _____ client until proven otherwise
retail client
what are the exceptions to the front running of investment research
firm is market maker dealing in normal course of business, unsolicited client (including eligible counterparties) orders (normal client orders)
who does the conduct of business rules apply to
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
a firm that communicates a financial promotion produced by a third party would never be in breach of rules if:
- 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
what can a large undertaking (professional client) do
opt up to become an elective eligible counterparty.
for ex bp if they wanted to be treated same as counterparties
what are the post-sale cancellation rights periods for life products and pensions, and other products
life products and pensions: 30 calendar days
other products: 14 calendar days
what is the time limit for recordings of telephone communications
five years from the creation of the record
if counterparties dealing among themselves what can you not work out
who is the client, so you treat them as equal
what do you do if conflicts of interest cannot be managed
disclose conflicts of interest to clients (last resort)
what is S21 FSMA 2000
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)
can we rely on information provided by other organisations
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)
retail distribution review (RDR): retail clients
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
what is the purpose of the suitability report
confirm why firm believes recommendation is suitable (mifid and non mifid business)
does the suitability rule cover execution services
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)
what is the purpose of best execution
A firm must take all sufficient steps to obtain the best possible result for its clients,
taking into account the execution factors
when is a financial promotion not subject to any rules
-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
what is rehypothecation
firm using assets of client for own purposes
what is the time limit for pension transfers and opt-outs, free standing additional voluntary contributions (FSAVCs)
indefinitely
what investments apply to COBS
mifid instruments
non-mifid designated investments
insurance business -> life assurance with an investment element
what does a suitability report contain
specify clients demands and needs,
explain why firm believes recommendation meeds those needs,
explains possible disadvantages for client
how has mifid 2 strengthened inducement rules
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
when a firm publishes research to its clients or the public, it must ensure:
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
what are some examples of per se professional clients
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
are trail commissions for retail client advisers allowed if the investor and advisor agree (acc q)
no, trail commissions are not allowed
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 - 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
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
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.
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
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.
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
C - It is always classified as a professional client
what is a systematic internaliser
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
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)
30 calendar days
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
at point where payment clears from the clients account
when communication by a firm contains information about past performance, this must cover a minimum period of how long? (acc q)
5 years
do they need to take integrity and reputation into account when reclassifying a retail client as a professional client
no
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)
place the order on a regulated market
