Topic 20: Conduct of business requirements 1

Question 1

What is an Eligible counterparty?

Answer 1

An FCA client category that includes large financial institutions such as banks, insurance companies, investment firms, collective investment funds and governments, where the organisation (the counterparty) requires a limited service, such as straightforward execution of transactions. This category provides the lowest level of investor protection.

Question 2

What is a Professional Client?

Answer 2

An FCA client category that includes eligible counterparties that require a higher level of service, eg they require advice, in addition to execution, and other large clients. It can be assumed that they have adequate experience and knowledge and an acceptance of financial risks, but they have a higher level of protection than an eligible counterparty.

Question 3

What is Independent Advice?

Answer 3

The firm provides advice and recommendations, based on an analysis of the most suitable solution from a sufficiently diverse range of products and providers across the market and not just its own products or those of a closely linked company. The analysis must be comprehensive, fair, unrestricted and unbiased.

Question 4

What is Execution Only?

Answer 4

Where the customer clearly states that they do not want advice and a recommendation, but instructs the adviser to arrange a specific transaction on their behalf, with full details of the product required. No requirement for the adviser to show suitability or appropriateness, and the customer is responsible for their decision.

Question 5

What is COBS?

Answer 5

Conduct of Business Sourcebook

Regulations relating to the way in which advisers interact with clients are
set out in the Business Standards section of the FCA Handbook. Within this
section, there are a number of sourcebooks detailing the rules governing advice in specific areas. Figure 20.1 summarises the sourcebooks we will be considering. The remainder of this topic addresses the provisions of COBS, with Topic 21 considering BCOBS, MCOB and ICOBS.

Question 6

What are Retail Clients?

Answer 6

This category provides the highest level of investor protection and comprises
customers who do not fall into either of the previous two categories – especially
customers who might be described as ‘the person in the street’ and who cannot be expected to have anything more than a basic general understanding of
financial services.

Question 7

What is Restricted Advice?

Answer 7

Restricted advice could be summarised as anything that is not independent
advice or basic advice. Restricted advisers generally focus on a limited selection of products or providers.

Question 8

What is Qualified Investment Advice?

Answer 8

where an adviser makes a recommendation based on a full analysis of a customer’s needs and circumstances

Question 9

What os simplified advice?

Answer 9

where a streamlined or automated process is used to gather the personal and financial information on which advice is given.

Question 10

What is an insistent customer?

Answer 10

Advisors provides advice to a client but the client wishes to carry out a transaction that contravenes the advice given.

Question 11

What is a Financial Promotion?

Answer 11

A financial promotion is defined in COBS as an “invitation or inducement to engage in investment activity”. This includes:
- advertisements in all forms of media;
- telephone calls;
- marketing during personal visits to clients;
- presentations to groups.
Financial promotions can be ‘communicated’ only if they have been prepared,
or approved, by an authorised person

Question 12

What is the distinction between ‘real time’ and ‘non real time’ financial prmotions?

Answer 12

• real‑time financial promotions (non‑written financial promotions), such as personal visits and telephone conversations; and
• non‑real‑time financial promotions (written financial promotions), such as newspaper advertisements and those on internet sites.

Question 13

What is the rule in relation to comparisons for financial promotions?

Answer 13

• comparisons with other products must be meaningful, and presented in a fair and balanced way.
• Markets in Financial Instruments Directive (MiFID) firms are subject to additional requirements to detail
  the source of information and the assumptions made in the comparison.

Question 14

What is the rule for past performance for financial promotions?

Answer 14

• Past performance information must not be the most prominent part of a promotion.
• It must be made clear that it refers to the past, and it must contain a warning that past performance is
  not necessarily a reliable indicator of future results.
• Past performance data must be based on at least five years (or the period since the investment
  commenced, if less, but must not relate to a period of less than one year)

Question 15

What is the rule for Unsolicited Promotions (i.e non written ‘cold calls’ for financial promotions?

Answer 15

• Permitted only in relation to certain investments, including packaged products, such as life assurance policies and unit trusts. Not permitted in relation to higher-volatility funds (which use gearing) or life policies with links to such funds, due to the increased investment risk involved. Cold calls are not
  permitted in relation to mortgage contracts.
• Unsolicited telephone calls or visits must only be made at ‘an appropriate time of the day’. Within the industry, this is generally taken to mean between 9am and 9pm Monday to Saturday.
• The caller must check that the recipient is happy to proceed with the call.
• The caller must also give a contact point to any client with whom they arrange an appointment.

Question 16

What are the rules relating to advisor charges?

Answer 16

Traditionally many investment advisers charged for their services, in full or in part, through the receipt of a commission payment from the providers of
products they recommended. This led to concerns that advice could be ‘skewed’ in favour of providers or products that offered the highest commission rates.

Since 1 January 2013, a firm advising on investment business must only be remunerated for its services by adviser charges; it is no longer allowed to receive
commission from the product providers for the products it recommends.

While commission is not permitted in relation to investment business, an insurance company can still pay commission
in relation to sales of insurance such as term assurance and income protection.

Question 17

When must charges be disclosed to the client?

Answer 17

The firm must provide details of its charges during the initial disclosures and,
once the final charges are known, it may include the information about total
adviser charges in a suitability report.

Question 18

What information must be provided at the outset? (Nine)

Answer 18

1. Contact information
2. Communication
3. Authorisation
4. Advice type
5. Investment management
6. Client money or investments
7. Charging structure/ method
8. Charges payable
9. Details of complaints procedures, including FOS and FSCS.

Question 19

When is a written client agreement required?

Answer 19

If a firm carries out designated investment business, other than advising on packaged investment products, the firm must enter into a written basic agreement with the client, setting out the essential rights and obligations of the firm and the client.

Question 20

What is Designated Investment Business?

Answer 20

Dealing in investment assets directly on behalf of a client.

Question 21

What is a Suitability Report?

Answer 21

Explains clearly why a recommended product is suitable for a specific
client, based on information identified through the factfind.

Question 22

What products are suitability reports required for?

Answer 22

• Life policies
• Pension policies
• Unit trusts
• Investment trusts acquired through investment trust savings scheme
• OEICs
• Pension transfers and Opt-outs

Question 23

What is the timescale for issuing a suitability report?

Answer 23

When providing investment advice to a retail client and in
the case of life policies, a firm must, before the transaction is concluded, provide the client with a suitability report.

In the case of telephone selling, if, prior to the conclusion of the contract, the information is provided orally or in a durable medium other than paper, the suitability report for a life
policy must be provided immediately after the conclusion of
the life policy.

For a personal pension or stakeholder pension, where cancellation rights apply, the report must be sent no later than
the fourteenth day after the contract is concluded.

In any other case, the report should be provided when or as soon as possible after the transaction is effected or executed.

Question 24

Explain the content of a key features document?

Answer 24

A key features document must include:
- a brief description of the product’s aims;
- a brief description of how the product works;
- the key terms of the contract, including any consequences
of failing to maintain the commitment or investment;
- the material risks involved;
- the arrangements for handling complaints about the product;
- compensation is available from the FSCS;
- that a right to cancel or withdraw exists (or does not exist), and if it does, its duration, the conditions for exercising it,
any amount the client might have to pay, and where the notice
must be sent.

Question 25

What are Key Information Documents?

Answer 25

Since 1 January 2018 a key information document (KID) must be provided if a
customer is buying a packaged retail and insurance‑based investment product
(PRIIP). A PRIIP is defined as an investment where the amount repayable to
the retail investor is subject to risk and fluctuation as a result of exposure to reference values or the performance of assets not directly held by the client; or an insurance‑based product that is exposed to market fluctuations.

A PRIIPs KID is a short pre‑sale disclosure document to give retail investors the necessary information to make an informed investment. It must include specific key information on an investment product in a prescribed way and in
a standard format, so that retail investors can assess and compare products.

Question 26

How long must a KID be?

Answer 26

The KID must be no longer than three sides of A4 and the language used
must be plain, concise and easy to understand

Question 27

What is a KIID?

Answer 27

An investor who is subscribing to a UCITS must be provided with a key investor information document (KIID). The purpose of the KIID is to summarise the key
features and risks of the UCITS to provide investors with sufficient information
to make an informed investment decision. The KIID is a two‑page document that describes key fund information in concise and plain language.

Question 28

In relation to Cooling off, The time period is usually either 14 or 30 days depending on the product type?

Answer 28

• For life and pensions policies, and contracts of insurance that are, or have elements of, a pure protection contract or payment protection, the period is 30 days.
• For investments or deposits and other insurances, the period is 14 days.

Question 29

What is a cooling off period?

Answer 29

A limited time during which a client can withdraw from the
contract without penalty.

Question 30

When will a client not get a full refund in a cooling off period?

Answer 30

he exception to this is if the client invests in a lump‑sum unit‑linked investment (such as a unit trust, OEIC or investment bond), the money has been invested and the value of the investment has fallen. Under these
circumstances, the client is entitled to a refund of the reduced investment; no
charges can be taken but an adjustment can be made to reflect the fall in value of the investment. The aim is to prevent people cancelling due to falls in the market.
This risk should be explained to the client before they enter into the contract.