topic 20 - conduct of business requirements 1

Question 1

Eligible counterparties

Answer 1

• Includes governments, central banks and financial institutions
• Situations such as straightforward execution of transactions received or the purchase of shares, by a firm, for onward sale to the firm’s clients
• Due to assumed knowledge and experience, these clients receive the lowest level of investor protection

Question 2

Professional clients

Answer 2

• Includes all the bodies that would otherwise be eligible counterparties, except they require a higher level of service
• Eg they require advice, in addition to execution of transactions
• Includes other types of large client, particularly institutional investors
• When dealing with professional clients, advisors can assume an adequate level of experience and knowledge & ability to accept financial risks

Question 3

Retail clients

Answer 3

• The highest level of investor protection
• Those who cannot be expected to have anything more than a basic general understanding of financial services

Question 4

Independent advice

Answer 4

• Unrestricted and unbiased
• Offer advice on a wide range of financial products and providers
• Must be sufficiently diverse with regard to their type and issuers or product providers
• Not be limited to relevant products issued or provided by the firm itself or by entities having close links with the firm
• Personal recommendation – aimed at the specific individual

Question 5

The use of panels

Answer 5

• Rules do not permit or even restrict the use of panels by firms operating as independent
• Any panel should be broad enough to a make an assessment based on a sufficient range of diverse and relevant products on the market
• Panel – a selection of providers who are known and trusted, based on their product rage, charges and service level
• Should be possibility of off-panel advice still where it would provide a more suitable outcome for that client

Question 6

Restricted advice

Answer 6

• Anything that is not independent advice or basic advice
• Generally, focus on a limited selection of products or providers
• Company representatives
• Can be one company or small selection

Question 7

Basic advice

Answer 7

• Advice on stakeholder products
• Scripted questions to help client decision

Question 8

Execution-only business

Answer 8

• Involves the customer telling the firm what they wish to do and the firm executing their wishes, with no advice given
• The adviser’s duty of care is to fully explain the nature of the transaction and risks involved does not apply
• Customer is entirely responsible for their own choice

Question 9

Insistent client

Answer 9

wants something that contradicts advice given by firm

Question 10

Rules relating to adviser charges

Answer 10

• Commission no longer permitted apart from insurance products
• Charge structure up to firm – hourly, % investment etc
• Client right to cancel service without a reason – no penalty

Question 11

Suitability reports

Answer 11

• For pension plans (within 14 days of contract concluded), life policies (ASAP), investment trusts, unit trusts/OEICs
• Not required for mortgages

Question 12

Cooling off, cancellation rights and reflective periods

Answer 12

• 30 days - for life and pensions polices, and contracts of insurance that are, or have elements of, a pure protection contract or payment protection
• 14 days - for investments or deposits and other insurances
• Can cancel without penalty
• Unit-linked investment – lower of initial investment or current value

Question 13

Which of the three categories of investor identified in COBS is provided with the highest level of regulatory protection?

Answer 13

Retail clients are assumed to have least expertise in relation to financial services and consequently require more support from the adviser. Dealings with retail clients are more highly regulated than those with eligible counterparties or professional clients.