Topic 13 Principles and rules of the FCA Conduct of Business Sourcebook

Question 1

1. The FCA requires that financial promotions to retail clients and professional clients must be fair, clear and not misleading. What specific requirements does this place on a firm dealing with retail clients?

Answer 1

The specific requirements when dealing with retail clients are that information supplied must:
 be accurate: this includes the requirement not to emphasise potential benefits without giving a fair and prominent indication of the risks;
 be understandable by an ‘average’ member of the group it is aimed at;
 not disguise or obscure important terms or warnings.

Question 2

2. A firm is considering making cold calls to promote a balanced unit trust. What requirements apply?

Answer 2

Unsolicited telephone calls can be made in relation to unit trusts.
 They must be made at an appropriate time.
 The caller must identify themselves and their firm.
 The caller must state the purpose of the call.
 The client must be given a contact point if an appointment is agreed.

Question 3

3. What are the two ways in which financial advisers can operate in the UK market?

Answer 3

 Independent advice – providing advice and recommendations after assessing the client’s needs, based on a comprehensive and fair analysis of the market.
 Restricted advice – providing advice and recommendations after assessing the client’s needs, but only offering products from one company or a limited number of companies.

Question 4

4. List three types of product where a client agreement is not usually required.

Answer 4

A client agreement is not usually required for:
 packaged investments;
 pensions;
 life policies

Question 5

5. An adviser can receive commission for advising on an investment product, as long as they rebate some of it to the client. True or False?

Answer 5

Advisers can only be remunerated for making personal recommendations through a system of adviser charging.

Personal recommendations can include arranging or executing a transaction that has been recommended for the client; administration services connected with the recommendations; and managing a relationship between the client and a discretionary investment manager.
Advisers cannot solicit or accept commission for making personal recommendations, even if they intend to refund the payments to the client.
Although a product provider must not offer or pay any adviser commissions, remuneration or benefit of any kind, it can make payments to an adviser or firm to facilitate the payment of adviser charges from the client’s investments. In simple terms, the provider can pay the adviser’s charges on the client’s behalf from the product charges.

Question 6

6. Explain what is meant by the term ‘suitability’ and state the document the client should receive from the adviser to confirm that advice about a life assurance policy is suitable.

Answer 6

 Suitability means that advisers must recommend the product or service that is most suitable for the client, based on information given by the client and anything else about the client of which the adviser should reasonably be aware.
 The recommendation must be solely in the best interests of the client, with no consideration of any commission that might be payable to the adviser. The adviser must send the client a suitability report.

Question 7

7. Karim’s adviser is about to ask him to sign an application form for a personal pension. Under COBS 14, what must the adviser ensure Karim receives before committing himself?

Answer 7

The adviser must provide Karim with written details of the key features of the product before the sale is concluded.

Question 8

8. Janet is taking out a cash ISA and John is taking out a whole of life assurance policy. What statutory cancellation period applies to each?

Answer 8

 Janet’s cash ISA is subject to a 14-day cancellation period
 John’s life policy is subject to a 30-day cancellation period

Question 9

9. What are the FCA’s expectations of a firm when it designs a new product?

Answer 9

In relation to the design of products, the FCA considers that a firm should:
 identify the target market for which the product is likely to be suitable;
 stress-test the product or service to identify how it could perform in a range of market environments and the effect that could have on the customer;
 have systems and controls in place to manage the risks posed by the product or service design.

Question 10

10. Gareth is an adviser who is authorised to hold client assets. In terms of timescale, what must he do with client money?

Answer 10

On receipt of client money, Gareth must pay it into a client bank account no later than the end of the next business day after receipt or use it promptly to carry out transactions for the client.