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CeMAP 1 - UKFR > Topic 20 > Flashcards

Topic 20 Flashcards

Conduct of business requirements I

1
Q

What are Conduct of Business Sourcebooks (COBS, BCOBS, MCOB, ICOBS)?

A

Conduct of Business Sourcebooks are sections of the FCA Handbook that set out the rules and guidelines for different financial services regarding customer protection and business conduct.

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2
Q

What does the COBS sourcebook cover?

A

COBS (Conduct of Business Sourcebook) sets out rules for investment firms on how they should conduct business with their clients.

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3
Q

What does the BCOBS sourcebook cover?

A

BCOBS (Banking: Conduct of Business Sourcebook) contains rules for banks and building societies regarding their deposit-taking activities.

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4
Q

What does the MCOB sourcebook cover?

A

MCOB (Mortgage Conduct of Business) sets rules for mortgage and home finance advice, including regulations for equity release products.

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5
Q

What does the ICOBS sourcebook cover?

A

ICOBS (Insurance Conduct of Business) provides rules on advising and selling general insurance and protection products.

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6
Q

What is the purpose of the FCA’s conduct of business sourcebooks?

A

To regulate financial services and ensure fair treatment of consumers by setting rules for how different financial firms operate and interact with clients.

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7
Q

What are the three types of clients in financial services as per the FCA Handbook?

A

Eligible counterparties – Firms and institutional clients engaging in execution-related business.
Professional clients – Financially sophisticated clients, including institutional investors and certain high-net-worth individuals.
Retail clients – General consumers with limited financial knowledge, who require the highest level of protection.

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8
Q

What is an eligible counterparty?

A

An eligible counterparty is a type of client that includes governments, banks, financial institutions, and investment firms engaging in execution-only business. These clients receive the least regulatory protection.

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9
Q

What is a professional client?

A

Professional clients are institutions or high-net-worth investors with sufficient financial experience and knowledge to make their own investment decisions.

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10
Q

Who are retail clients?

A

Retail clients are individuals without specialist financial knowledge, often referred to as ‘the person in the street,’ and receive the highest level of investor protection.

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11
Q

What are the two categories of advisers?

A

The two categories of advisers are:

Independent advisers – Advisers who can recommend a wide range of products and providers.
Restricted advisers – Advisers who cannot recommend the full range of products or providers.

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12
Q

What must an adviser do to describe themselves as an independent financial adviser?

A

An adviser must assess a sufficient range of relevant products that are sufficiently diverse in type and issuers to meet the client’s investment objectives. The adviser’s recommendations should not be limited by close links with the firm or other entities.

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13
Q

What happens if a firm does not meet the requirements to be ‘independent’?

A

If a firm does not meet the independence criteria, it will be considered a restricted adviser, which limits the range of products and providers they can recommend.

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14
Q

What is independent advice?

A

Independent advice involves offering recommendations on a wide range of products and providers, and advisers must ensure that the advice meets the client’s needs without any conflicts of interest or product restrictions.

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15
Q

Can a firm offering advice on pensions call itself independent?

A

Yes, a firm can be considered independent if it offers advice on all types of pension products from a range of providers, ensuring the client’s objectives are met.

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16
Q

What is the role of specialists in firms offering independent advice?

A

Specialists in firms that offer independent advice must still meet the independence requirements in every personal recommendation they provide. If any specialists fail to meet this, the firm cannot claim to offer independent advice.

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17
Q

What is a panel?

A

A selection of providers who are known and trusted, based on their product range, charges and service level.

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18
Q

Can a firm use a panel while remaining independent?

A

Yes, a firm can use a panel, but the panel must be broad enough to offer a sufficient range of diverse and relevant products. The firm must also ensure that clients have access to ‘off-panel’ advice when necessary.

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19
Q

What is restricted advice?

A

Restricted advice is any advice that is not independent or basic. It typically involves focusing on a limited selection of products or providers.

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20
Q

How do restricted advisers differ from independent advisers?

A

Restricted advisers focus on a narrower range of products or providers, while independent advisers can recommend a wide range of products and providers based on a thorough assessment of client needs.

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21
Q

What is execution-only business?

A

Execution-only business involves a customer instructing a firm to carry out a transaction based on their specific instructions, with no advice given by the firm. The firm does not assess the suitability or appropriateness of the transaction.

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22
Q

How does execution-only business differ from qualified investment advice?

A

In execution-only business, no advice is given and the customer is responsible for the transaction. In qualified investment advice, the adviser recommends investments based on an analysis of the customer’s needs and circumstances.

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23
Q

What is the FCA’s definition of execution-only business?

A

Execution-only business is a transaction executed by a firm upon the specific instruction of a client, where the firm does not provide advice on the merits of the transaction, and the rules on the assessment of appropriateness do not apply.

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24
Q

What is required for clear and credible evidence in execution-only business?

A

Firms must obtain a signed statement from the customer confirming that they are aware the business is being transacted on an execution-only basis, have not received advice, are responsible for their decision, and the adviser takes no responsibility for the suitability of the investment.

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25
What is the appropriateness test in execution-only business?
The appropriateness test determines whether a consumer has the necessary knowledge and experience to understand the risks of a complex product, such as alternative investment funds or spread-betting contracts, when the business is engaged in non-advised sales.
26
What is a financial promotion?
A financial promotion is an "invitation or inducement to engage in investment activity," which includes advertisements, telephone calls, marketing during personal visits, and group presentations.
27
What is the distinction between real-time and non-real-time financial promotions?
Real-time financial promotions are non-written, such as personal visits and telephone calls, while non-real-time financial promotions are written, like newspaper ads or online advertisements.
28
What must financial promotions for retail clients include?
Financial promotions for retail clients must be accurate, understandable by an average person, not obscure important terms or warnings, and must not emphasise benefits without indicating risks. They must also contain the name of the conduct regulator (the FCA) for direct offer advertisements.
29
What is the rule regarding comparisons in financial promotions?
Comparisons in financial promotions must be meaningful, fair, and balanced. MiFID firms must also detail the source of information and assumptions made in the comparison.
30
What rules apply to the use of past performance in financial promotions?
Past performance should not be the most prominent part of a promotion, must be clearly stated as referring to the past, and must include a warning that past performance is not a reliable indicator of future results. Data must be based on at least five years or the period since the investment commenced, but not less than one year.
31
What are the rules regarding unsolicited promotions (cold calls)?
Unsolicited promotions, such as cold calls, must only occur between 9am and 9pm (Monday to Saturday), with the caller confirming the recipient is happy to proceed. The caller must also provide a contact point for arranging appointments.
32
What standards must financial promotions meet according to the Advertising Standards Authority (ASA)?
Financial promotions must be legal, decent, honest, and truthful, not exploiting consumers' inexperience or misleading them through inaccuracy, ambiguity, or omission. Special care must be taken with sensitive issues such as race, religion, sex, or disability.
33
What change occurred regarding adviser charges from 1 January 2013?
From 1 January 2013, firms advising on investment business must be remunerated only through adviser charges and can no longer receive commission from product providers for recommended products.
34
Can insurance companies still pay commissions for certain sales?
Yes, insurance companies can still pay commission for the sale of insurance products, such as term assurance and income protection, but they cannot accept any other commissions or benefits from any other party.
35
How should an adviser’s charging structure be determined?
An adviser’s charging structure should be based on the service provided rather than the product or provider recommended. It must represent fair value, be clear, fair, and not misleading, and must reflect the total charges as closely as possible.
36
What must a firm ensure about its adviser charges?
A firm must ensure that the charging structure is clearly disclosed to the client, explaining the amount and purpose of all adviser charges, and must not conceal any charges.
37
What must be disclosed about hourly rates in adviser charges?
If hourly rates are used, the firm must state whether the rates are ‘indicative’ or actual and provide an approximate indication of the number of hours required for each service.
38
What is required for ongoing adviser charges?
A firm cannot charge for ongoing services unless the service is actually provided and disclosed upfront. The client must have the right to cancel the service without penalty and without providing a reason.
39
What is required during initial disclosures regarding charges?
A firm must provide details of its adviser charges during initial disclosures, and the final charges must be included in a suitability report once known.
40
What information must an adviser provide at the outset of a relationship with a client?
An adviser must provide contact information, communication methods, authorisation details, advice type, investment management details (if applicable), information about client money or investments, the charging structure and charges payable, and details of complaints procedures, including FOS and FSCS.
41
What details about authorisation must the firm disclose to a client?
The firm must disclose that it is authorised and provide the name of the regulator that authorised it (e.g., the FCA in the UK or the relevant competent authority for MiFID business).
42
How should the firm describe the type of advice it provides?
The firm must disclose whether the advice is independent or restricted, and if the advice is restricted, it must explain the nature of the restriction.
43
What must the firm disclose if it manages investments on behalf of a client?
The firm must disclose the method and frequency of investment evaluation, any delegation of discretionary management, and the types of designated investments that may be included in the client’s portfolio.
44
What must the firm explain if it holds client money or investments?
The firm must explain that client money or investments may be held by a third party on behalf of the firm, the firm's responsibility for any acts or omissions of that third party, and the consequences of the third party's insolvency.
45
What must the firm include in its disclosure about charges?
The firm must disclose the total adviser charge in cash terms (or equivalent), the amount and frequency of any payments if made over time, and the implications for the client if a retail investment product is cancelled before the adviser charge is paid.
46
What must the firm provide regarding complaints procedures?
The firm must provide details of its complaints procedures and explain the protections offered by the Financial Services Compensation Scheme (FSCS) and the Financial Ombudsman Service (FOS).
47
How should the firm notify clients of material changes to services?
The firm must notify clients in good time of any material changes to the services provided. For existing clients, it does not need to treat each transaction separately but must ensure the client receives all relevant information regarding any subsequent transactions.
48
When is a written client agreement required?
A written client agreement is required when a firm carries out designated investment business, other than advising on packaged investment products. This agreement sets out the essential rights and obligations of both the firm and the client.
49
What is designated investment business?
Designated investment business involves dealing in investment assets directly on behalf of a client, including making investment decisions, exercising discretion in investment choice, and switching between investments without needing client approval for each transaction.
50
Are client agreements required for packaged investments like life assurance policies or personal pensions?
No, client agreements are not usually required for packaged investments such as life assurance policies or personal pensions, though these may be part of the overall arrangement alongside higher-risk investment products.
51
What must a client agreement include?
A client agreement must include the terms upon which the adviser will operate in respect of the client’s investments, including investment range and limits.
52
What are the suitability requirements for an adviser?
An adviser must ensure that any personal recommendation made is suitable for the client, meaning they must fully ascertain the client's personal and financial circumstances relevant to the services being provided.
53
What is the start point for establishing the client's circumstances?
The start point is to complete a confidential client information questionnaire or ‘factfind,’ which captures a range of information that must be retained for a specified period of time, depending on the nature of the recommended product.
54
Why is it important to retain client information after completing the factfind?
Retaining the information helps the firm deal with complaints, provide an audit trail for advice, and ensure compliance with regulatory requirements.
55
What factors should an adviser consider to ensure a recommendation is suitable?
An adviser should ensure the recommendation meets the client’s current and future needs, is affordable (both initially and ongoing), aligns with the client’s risk profile, and is flexible to account for future changes.
56
What is required from advisers regarding risks when making recommendations?
Advisers must take all reasonable steps to ensure that the client understands the nature of any risks implicit in the product proposed, such as the potential non-return of capital, income variability, and circumstances affecting claims or life cover sustainability.
57
What risks might advisers need to discuss with clients?
Advisers might need to discuss risks such as the potential non-return of capital, income variability, pension product income factors, protection product claimability, and life cover sustainability without increased premiums.
58
How does a client’s experience and knowledge of a product affect the risk discussion?
The nature and extent of the risk discussion depend on the client’s experience and knowledge of the product, ensuring the adviser tailors the explanation based on these factors.
59
What is the importance of establishing a client’s attitude to risk?
Establishing the client’s attitude to risk, or risk appetite, is crucial to understanding their psychological ability to cope with fluctuating returns, lack of guarantees, and potential losses.
60
What is a suitability report?
A suitability report explains why a particular product is suitable for the client based on their personal and financial circumstances, needs, priorities, and attitude to risk. It is designed to ensure the recommendation is solely in the best interest of the client.
61
When is a suitability report required?
A suitability report is required when providing investment advice or life policies, before the transaction is concluded. In the case of telephone selling, it must be provided immediately after the conclusion of the life policy.
62
What should a suitability report include?
A suitability report should explain why the recommended product is suitable for the client, identify any potential disadvantages (e.g., lock-in periods), and be clear, concise, and written in plain English.
63
Is a suitability report required for mortgage advice?
No, the FCA does not require a suitability report for mortgage advice, although many lenders may still prepare one.
64
What must advisers provide when advising on or selling packaged products?
Advisers must provide written details of the key features of the product before the sale is concluded, ensuring that clients can make an informed decision.
65
Who usually prepares the key features documents for packaged products?
Product providers usually prepare the key features documents, although it is the adviser’s responsibility to provide them to the client.
66
What should the quality of key features documents be like?
Key features documents should be of the same quality as the materials used for marketing purposes.
67
What is the purpose of the key features document?
The purpose of the key features document is to enable the client to make an informed decision about whether to proceed with the product.
68
What are the general requirements for the content of a key features document?
A key features document must provide information about the nature and complexity of the product, how it works, any limitations, and the material benefits and risks of buying or investing.
69
What specific information must be included in a key features document?
The document must include: A brief description of the product’s aims and how it works. Key terms of the contract, including consequences of failing to maintain the investment. Material risks involved. Arrangements for handling complaints and compensation available from the FSCS. Information about the right to cancel or withdraw, its conditions, duration, any fees, and where the notice must be sent.
70
What is a key information document (KID)?
A KID is a pre-sale disclosure document provided to retail investors when buying a packaged retail and insurance-based investment product (PRIIP). It provides necessary information to help investors make informed decisions.
71
What products require a KID?
Products that require a KID include derivatives, non-UCITS retail schemes (unit trusts, OEICs), insurance-based investments (e.g. unit-linked and with-profit endowments), investment trusts, structured products, and structured deposits.
72
Which products are not considered PRIIPs and do not require a KID?
Products not considered PRIIPs include pension products, deposits with no investment risk (e.g. bank savings), directly held shares, gilts, and bonds, and general insurance or protection insurance products with no surrender value.
73
What are the main objectives of PRIIPs regulation?
The objectives are to improve transparency, consistency, and comparability of investment products, ensuring that information is easy to understand and helps investors make informed decisions.
74
What must be included in a KID?
A KID must include the product name, the name of the provider, the main features, risks, potential returns, costs and charges, and details of the complaints procedure.
75
What is the maximum length for a KID?
The KID must be no longer than three sides of A4 paper.
76
What is the Key Investor Information Document (KIID)?
A KIID is a two-page document provided to investors subscribing to UCITS funds, summarising key features and risks of the fund to help them make an informed decision.
77
What sections does the KIID include?
The KIID includes objectives and investment policy, risk and reward profile, charges, past performance, and practical information.
78
What is the Synthetic Risk and Reward Indicator (SRRI)?
The SRRI is a numerical scale from 1 to 7 that indicates the risk and reward potential of a UCITS, based on its past performance volatility.
79
How do PRIIPs KIDs and UCITS KIIDs differ?
PRIIPs KIDs show forward-looking performance scenarios, while UCITS KIIDs show actual historical performance data.
80
What is the cooling-off period in relation to regulated packaged or insurance products?
The cooling-off period is a specified time during which a client can withdraw from a contract without penalty. The time period is usually 14 or 30 days, depending on the product type.
81
What is the cooling-off period for life and pensions policies, and pure protection insurance contracts?
The cooling-off period for life and pensions policies, and pure protection insurance contracts is 30 days.
82
What is the cooling-off period for investments, deposits, and other insurances?
The cooling-off period for investments, deposits, and other insurances is 14 days.
83
What is a binding mortgage offer's reflection period?
A binding mortgage offer triggers a seven-day reflection period, during which the offer is binding on the lender, but the consumer can accept or reject the offer at any time.
84
When does the cooling-off period start?
The cooling-off period starts either from the date the contract begins or from the date the client receives the contractual terms if this is later.
85
What happens if a client cancels a contract during the cooling-off period?
The client can cancel without penalty and will generally receive a full refund of any premiums paid, within 30 days of the cancellation notice. If the client invested in a unit-linked investment, the refund will reflect the reduced value of the investment.
86
What must an adviser explain when a client purchases a product?
The adviser must explain whether the client will be liable for any outstanding adviser charges if they cancel the product and return the signed cancellation notice.
87
What should a firm do to ensure a client can cancel the contract?
A firm must issue a cancellation notice to the client. If they fail to do so, the client can cancel at any time without being liable for any loss, including a fall in investment value.
88
What is the importance of record-keeping in financial services?
Record-keeping is essential to maintain clear and accessible records throughout the relationship between financial services professionals, clients, and the FCA, covering aspects such as advertisements, factfinds, and advice provided.
89
What are the minimum retention periods for records?
The minimum retention periods for records vary depending on the type of product recommended. Firms must ensure records can be reproduced on paper in English and take steps to protect them from destruction, unauthorised access, and alteration.
90
What other regulations relate to record-keeping apart from COBS?
Record-keeping is also regulated by rules related to the prevention of money laundering and the Data Protection Act 2018 (and UK General Data Protection Regulation).

CeMAP 1 - UKFR (25 decks)

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