The FCA Conduct of Businesses and Client Asset Sourcebooks Flashcards
MiFID instruments
Shares
Bonds
Derivatives
Non-MiFID designated investments
- Package products
- Retail investment products
Insurance business
Life assurance with an investment element regulated as designated investment business
General Application of COBS
The conduct of business rules apply directly to firms conducting designated investment business or conducting insurance business from an establishment maintained by them in the UK
The COBS therefore apply indirectly to appointed representatives
Fair treatment
All firms must ensure that they act honestly, fairly and professionally - Clients’ best interests rule
When a firm is permitted to communicate via a website
- There must be evidence that it is an appropriate method of communication
- The client has specifically consented to this method
- The client is notified of the website address electronically
- The information is kept up to date
- The information must be continuously accessible for as long as the client requires it
Recording voice or electronic comms
Good quality recording should be made and kept for five years when relating to:
-Receiving client orders
-Executing client orders
-Arranging for a client order to be executed
In qualifying investments admitted to trading on a prescribed market (e.g. securities)
Includes communications via fax, email, instant messaging, and mobile phones
Applies to communications with any client or eligible counterparty
Per se professional clients
Authorised/regulated firm
Government, Central Bank, Supranational
Other institutional investors e.g. special purpose vehicles
MiFID Meet 2/3 of - Balance sheet > €20m, Net turnover > €40, Own funds €2m
Per se professional Balance sheet
€20m
Per se professional Net turnover
€40m
Per se professional Own funds
€2m
Elective professional clients
Where retail client opts up to professional client
Qualitative test
Applies to all business
Firm to assess expertise, experience and knowledge to provide reasonable assurance about capability and understanding
Quantitative test
Relates to MiFID business only Meet 2/3 conditions. Average trade frequency ten per quarter over previous four quarters. Portfolio > €500k, works or worked in financial sector for > one year in professional capacity
Quantitative test trade frequency
10 per quarter for previous 4 quarters
Quantitative test portfolio
> €500K
Quantitative test experience
Worked in financial sector > 1 year
Elective professional client -Procedure
Written intent from client to be classified as professional
Written warning to client explaining lost protection
Written client consent to lost protection
Eligible counter parties
An eligible counterparty can be per se eligible counterparty or an elective counterparty
The classification only relates to eligible counterparty business; dealing on own account and/or executing orders on behalf of clients
Per se eligible counterparties
Certain per se professional clients conducting eligible counterparty business
-Authorised/regulated firm
Government, Central Bank, Supranational
Elective eligible counterparties
Available to any undertaking that is a per se professional client (except an individual investor)
Procedure
-Obtain client confirmation to be treated as an eligible counterparty
Acting as agent
Where the person with whom the firm is dealing is acting as an agent of another person then the rep should be regarded as the client
Exceptions:
-There is a written agreement between the firm and the agent to treat B as the client
-The purpose of the agency is to avoid duties owed to B
Firms often need to rely on info provided by other organisations
If the information is from a MiFID firm - a firm may rely on the info and recommendations
-If the information is from a non-MiFID firm: a firm may rely on info if:
1. The info is in writing
2 The non-MiFID firm is independent
3.The non-MiFID firm is competent
Financial promotion
Invitation or inducement to engage in investment activity communicated in the course of business
S21 FSMA 2000
Must not communicate a financial promotion unless:
- It is an authorised person
- The content has been approved by an authorised person
Approval of Financial Promotion
Before a firm approves a financial promotion it must confirm that it complies with the relevant regulations
A firm that communicates financial promotion produced by a 3rd party would Never be in breach of the rules if
-It has established that an authorised firm has approved the promotion
-It communicates the promotion only to those it was intended
-The promotion has not ceased to be fair, clear and not misleading
Approval of Financial Promotion (exceptions)
Exempt under the financial promotions order (FPO)
From outside the UK, and cannot have an effect within the UK
Subject to Takeover Code or any similar code
Personal quotes or illustrations
One-off promotions that are not cold calls
Communication with clients
Fair, clear and not misleading
Firms must ensure that financial promotions are clearly identifiable as such
Some exceptions when promotion made solely to a professional client or eligible counterparty
When communicating with retail clients firms must ensure
-Name of the firm is included
-Details are accurate and fair
Promotion is comprehensible
Promotion does not obscure important items, statements or warnings
Should be fair, clear and not misleading
Past performance
Must not be prominent feature
Cover at least 5 years (or life of investment) in complete 12-month periods
Reference periods and sources must be clearly shown
State this is not an indicator of future performance
If relevant, currency stated and warning of currency risk provided
Disclose effect of fees and commissions if gross performance shown
Simulated past
Must be based on actual performance of a similar investment/index
Comply with the rules above
Future performance
Must be based on simulated past performance
Assumptions must be reasonable
Disclose effect of fees and commissions
Warn that forecasts are not reliable indicators
Direct offers/invitations - Retail clients only
A financial promotion that contains a method of response for the client to invest in a product
Must contain sufficient information to enable a person to make informed assessment
Provide information about:
-The firm and its services
-Safekeeping of client investments and money
-Costs and charges
Additional appropriate information to allow an understanding of the nature and risks of the investment (non-MiFID business only)
Direct offers - links with the Distance Marketing Directive
- Right to cancel
- Generally 14 calendar days
- Life+Pension products 30 calendar days
Unwritten promotions (solicited/unsolicited)
Must be fair clear and not misleading
At the start must identify: The caller, the employer, the purpose of the call
Ask whether the client wishes to continue with the call, and terminate it if requested to do so
Provide client who has an appointment with contact point in the event of a cancellation
Communicate at an appropriate time of the day
Cold calls
An unwritten promotions which is not expressly requested or initiated by the client
Permitted cold calls
-An existing client who envisages a call
-All retail clients where the promotion relates to: generally marketable packaged product (not a high volatility fund), services relating to readily realisable securities other than warrants
Information disclosure: all clients (what to provide)
- Name and address of firm
- Method and language of communication
- Name and contact details of competent authority
- Whether the firm is acting through an appointed representative
- Nature, frequency and timing of performance reports
- If a common platform firm, the conflicts of interest policy
Information disclosure: all clients (documentation)
Information must be in a standardised format and be provided in an initial disclosure document BEFORE engaging in business
All customers must be provided with a formal client agreement that sets out the essential rights obligations of the firm and of the customer
Retail Distribution Review: Retail Clients
Firms making personal recommendations to clients be either independent or restricted.
Adviser charges agreed in advance with the client as early as practicable in a durable medium or via a website. No commissions from the product provider permitted. Clients can choose either to pay the adviser charge upfront or have it deducted from their investment over time
RDR Disclosure
Must disclose adviser status, and the costs of the service before:
Providing a service;
The client is bound by any agreement
Product Disclosure rules: Retail clients
Purpose - To provide enough info about the nature and risks of a product to enable a retail client to make an informed decision.
Key information Document (KID)
Packaged Retail and Insurance-based Investment Products (PRIIPS)
Key Investor Information Document (KIID)
UCITS schemes
Key Features Document
Any non-PRIIP packaged product e.g. Pension annuities
Post-sale cancellation
Providers of retail products and services covered under the Distance Marketing Directive
- Life products and pensions - 30 calendar days
- Other products (e.g. ISAs) - 14 calendar days
Inducements: All customers
MiFID II strengthened inducement rules to reduce risk of conflicts of interest
For MiFID business
-A firm must not pay to, or accept from, a person other than the customer, any fee, commission or non-monetary benefit, unless:
-The fee is designed to enhance the quality of service to the customer
-The fee does not impair the firm’s duty to act in the best interests of the customer
The firm must disclose the existence, nature and amount of the fee to the customer before providing the service
Proper fees necessary for the provision of business are permissible
This prohibition does not apply to minor non-monetary benefits
Provision of research: All customers
Firms must apply a charge when providing research to other firms.
-The receiving firm can only use th research if it pays for it with either: Direct payments by the firm out of its own resources; or payments from separate research payment account controlled by the firm. The research payment account: the account must only be funded by a specific charge agreed with and charged to customers.
-The firm must disclose: the budget, as well as the charges, before providing services;
-annual information on the total costs that each customer has incurred for third-party research
The firm must also regularly assess the quality and effectiveness of the research paid for
Suitability: All customers
Rule to obtain sufficient information to give suitable advice to retail clients (all business) and professional clients (MiFID business). Application - acting as investment manager (‘discretionary’) and personal recommendation (‘advisory’). Relevant personal and financial information is obtained via a ‘fact find’. Give suitable advice to meet client’s objective and that the client is able to bear financial risk, and for retail clients they have the necessary knowledge and experience to understand those risks. Churning and switching are considered unsuitable.
Suitability report: Retail clients
Purpose is 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
Form - The report must be provided in durable medium before the contract is concluded. The time can be delayed if agreement is concluded at a distance and client agrees to this delay
Appropriateness: All customers
- Purpose is to ensure the firm obtains sufficient information to assess if a product is appropriate for the customer: Applies to MiFID business (both RC and PC) and direct offers (RC only)
- Before acting, the firm must assess whether the client: is able to bear the financial risks in relation to the product or service; has the knowledge and experience to understand those risks.
- Warnings are provided when: 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. Assessing appropriateness is not necessary for execution-only business involving non-complex financial instruments
Conflicts of interest: All clients
- Apply to services provided by firms irrespective of client or counterparty
- Conflicts identified and managed effectively
- Principle for Businesses 8 - Conflict of interest
- Management or disclosure of conflicts. A firm must have systems and controls in play to manage conflicts e.g. conflict policy, Chinese Walls, disclose in durable medium (last resort)
- Conflicts of interest policy: in writing, identifies potential conflicts relevant to the firm’s operations, specifies procedure to manage the conflicts, provide retail clients with a description of the policy
Chinese Walls
Internal arrangements to restrict the flow of confidential info. Not mandatory if used, must be monitored and effective
Investment research: All clients
Where firm published research must ensure:
-That it does not receive inducement from those with a material interest
-Not to promise issuers favourable coverage
-Issuers covered are not permitted to review drafts of the research
Firm must not knowingly deal for its own account until the clients for whom publication was intended have had a reasonable time to react to it unless market marker or unsolicited client orders
Best execution: All customers
A firm must take all sufficient steps to obtain the best possible result for its clients, taking into account the execution factors.
Best execution criteria:
-Client categorisation
-Type of order
-Type of financial instrument being traded
-Characteristics of execution venues
Order execution policy: All customers
To ensure that firm obtains the best possible result for the client
To be provided before providing services
Prescribed info (retail)
-A list of execution venues
-Factors that will affect the firm’s choice of venues
Written two-way agreement (all clients)
-Monitored and reviewed annually
-Notify clients of any material changes
When acting on specific clients instructions, a firm is deemed to have obtained the best possible result
Client order handling: all customers
Prompt, fair and expeditious execution of client orders. Orders should be promptly recorded and allocated, carried out sequentially. Exceptions (notify retail clients) - interests of the clients; material difficulty
Aggregation
Permitted if unlikely to operate to disadvantage of client or disclose that on some occasions it may operate to the disadvantage of clients. Order allocation policy is in place.
Allocation
-Timely allocation in accordance with the order allocation policy
-Fair allocation: allocate to clients first
-Unless: the firm has reasonable grounds to allocate proportionally
Limit orders
Limit orders not executed immediately must be made public. Unless clients instructs otherwise, the limit order is greater than normal market size.
Trade Report
For price transparancy, filed by selling firm, automatic or within 3 minutes, and sent to exchange
Transaction Report
For market surveillance, both counterparties file, must be given by T+1 and sent to the regulator
Transaction confirmation
To ensure clients are advised of the essential details of a transaction. Requirement to confirm a transaction in a durable medium and promptly no later than the next business day. Exceptions: for MiFID business NONE, for non-MiFID business, if requested by the client
Personal account dealing
Arrangements to prevent inappropriate dealings which:
-Are prohibited under the Market Abuse Regulation
-Involve misuse or disclosure of confidential client information
-Conflict with the firm’s obligations to the client
Arrangements: relevant persons are aware of restrictions, relevant persons inform the firm, firm records all notifications including a copy of the transaction confirmation.
Exceptions to rule on personal account dealing
- Funds managed independently
- Shares in certain classes of fund
- Life policies
Periodic statements
General rule: prepared every 3 months and sent out promptly but the client can ask for annual statements
Derivatives: prepared every month
The purpose of the client money and custody rules
The fiduciary duty to provide adequate protection for client money + assets.
Segregation of assets: for the firms to protect in the case of bankruptcy. For client money held in an approved bank and identified as separate from the firm’s money
Client assets
Reconcile records of client asset balances as often as possible
Correct shortfalls as soon as possible: this is close of business on the day of reconciliation. A firm must write to FCA if they are unable to reconcile
Exemptions include:
-ICVC and UCITS schemes
-Incoming EEA firms
-BCD credit institution
-Coins held for the value of the metal
-Money held for delivery vs payment (settlement max 3 days)
-Money due and payable to the firm
CASS audit
Required annually and submitted to the FCA within four months of the audit
Client asset assurance standard set by the Financial Reporting Council
Firm to explain any breach identified
Other. CASS
Right of use: Where the right to use assets transferred to the firm
- Rehypothecation
- Right-to-use clause
CASS resolution pack
-Specific documents and information relating to client money and assets must be available to the regulator on request
Mandate accounts
- Where a client gives a firm control over their assets or liabilities
- Firms must establish and maintain adequate records and controls
Record keeping non-MiFID business
3 year
Record keeping MiFID business
5 year
Record keeping - Pension transfers and opt-outs, free-standing additional voluntary contributions
Indefinitely
Record keeping - telephone communications
5 years from the creation of the record
Trail commissions
When the RDR regulations were first enforced in 2013, advisers were still able to receive trail commission on advice provided before 31 December 2012 on a legacy business, so long as an ongoing service was provided to their client. However, advisers have been prohibited from receiving any trail commission (including from existing clients) as from April 2016.
To whom should a firm produce a document about compensation claims when carrying on MiFID business?
A firm which carries on MiFID business must make available to any client who has used or intends to use those services, the information necessary for the identification of the compensation scheme or any other investor compensation scheme of which the firm is a member or any alternative arrangement provided for in accordance with the investor compensation scheme.
