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UK Regulation and Professional Integrity - Jul 2024 > Unit 10 - FCA COBS and Client Assets Part 1 (18 or 80) > Flashcards

Unit 10 - FCA COBS and Client Assets Part 1 (18 or 80) Flashcards

1
Q

Which activities are subject to COBS?

A
  • designated investment business
  • long-term life insurance business
  • activities relating to the above
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2
Q

What is a durable medium?

A
  • Paper.
  • Any instrument which lets the recipient store the information so that they can access it for future reference,
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3
Q

What are the rules regarding websites as durable mediums?

A
  • there must be evidence that the client has regular access to the internet. (e.g. if they provide their email address)
  • The client must specifically consent to that form.
  • They must be notified electronically of the website address
  • The information must be up to date.
  • It must be accessible continuously by way of that website
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4
Q

How long should firms keep recorded conversations?

A

MiFID business - at least five years

non-MiFID business - three years

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5
Q

What do the recording rules not apply to? (6)

A
  • activities carried out between operators of the same collective investment scheme (CIS)
  • corporate finance business
  • corporate treasury functions.
  • Investment analysts
  • Financial Advisers
  • Operational Functions
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6
Q

Who do the inducement rules apply to?

A
  • retail/professional clients

> firms undertaking ECP business will NOT be subject to the inducement provisions.

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7
Q

What should a firm do if it receives fees or commissions for providing advice or portfolio management for retail clients outside the UK?

A

they must be returned and the client must be advised

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8
Q

What are the MiFID II rules regarding investment research?

A

UK firms, including EEA firms and branches of third country entities, that produce research must apply a “separate identifiable charge” for these materials when providing it to UK (and EEA)-regulated firms that provide portfolio management services or independent financial advice to professional clients or retail clients

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9
Q

What constitutes research?

A
  • concerning one or several financial instruments/assets
  • concerning the (potential) issuers of financial instruments
  • closely related to a specific industry or market
  • explicitly/implicitly recommending an investment strategy
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10
Q

Who/What is exempt from the reearch rules?

A
  • private equity business and collective investment funds investing in property, or buying/managing companies would not be captured by the prohibition on receiving research for free.
  • Exemption from the Inducement Rules for SME Research - companies with a market capitalisation of £200 million
  • FICC research (MACRO RESEARCH IS CHARGEABLE)
  • Independent research providers
  • Openly available Research (no log-ins)
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11
Q

What is the rule regarding reliance on 3rd parties for KYC/Suitability?

A

Firms must receive this information “in writing” to demonstrate that they have complied with the relevant obligations relating to KYC/suitability.

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12
Q

Who do financial promotion rules not apply?

A

ECPs

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13
Q

What are the rules regarding financial promotions?

A
  • the firm’s name is included on the communication
  • the information is accurate and does not just highlight the potential benefits
  • it is presented in a way likely to be understood by, the average member of the group at whom it is directed or by whom it is likely to be received
  • it does not disguise, diminish or obscure important items, statements or warnings.
  • If comparisons are made, they must be meaningful and presented in a fair and balanced way and the data source cited
  • If tax treatment is mentioned, firms must explain that this depends on the individual circumstances of each client and that it may be subject to change.
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14
Q

What should firms ensure when communicating financial promotions?

A
  • those which deal with products or services when a client’s capital may be at risk make this clear
  • those quoting yields give a balanced impression of both the short-term and long-term
  • if an investment product is, or service charges are, complex, this is communicated fairly, clearly and in a manner which is not misleading
  • the FCA is named as the firm’s regulator
  • those relating to packaged or stakeholder products not produced by the firm itself give a fair, clear and non-misleading impression of the producer or manager of the product.
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15
Q

What is the main rule regarding prominence in financial promotions?

A

Firms must use the same ‘font’ size for risk warnings as is used in the main part of financial promotions – to avoid making this section seem less important and being missed by investors.

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16
Q

What are the FCA’s powers regarding misleading financial promotions?

A
  1. The FCA will give a direction to an authorised firm to remove a financial promotion setting out its reasons for banning it.
  2. Firms make representations to the FCA if they think they are making the wrong decision.
  3. The FCA will decide whether to confirm, amend or revoke the direction
  4. firms will be able to refer the matter to the Upper Tribunal
17
Q

What are the exemptions to the financial promotions rules?

A

For NON-MiFID BUSINESS:

  • Exemptions for high net worth individuals and sophisticated investors
  • Exempt under the financial promotion order (FPO). This is an order which makes certain sorts of promotion exempt from the regime if it is communicated by an unauthorised person, or originates outside the UK and cannot have an effect within the UK.
  • From outside the UK, and would be exempt under the FPO if the office from which they are communicated were a separate unauthorised person (even though it is not).
  • Subject to (or exempted from) the Takeover Code.
  • One-off promotions that are not cold calls.
18
Q

Which type of investment promotions are banned for retail?

A

mini-bonds, preference shares and Non Mass Market Investments

19
Q

What are the enhanced risk warning requirements for high risk investments?

A
  • Risk warnings - Stating that investors could lose all of their money
  • Risk summaries - Prescribed risk summaries – should take no more than two minutes to read.
  • Banning incentives to invest: - monetary and non-monetary e.g. referal
  • Cooling off period - Minimum 24h cooling off period for first time investors
  • Personalised risk warnings - first time investors
  • Client categorisation - Retail clients must self-certify they meet the criteria to receive promotions on high-risk investments and prove why
  • Appropriate test - Make the test more robust.
  • Record keeping requirements - Additional requirements for firms.
20
Q

What are the restrictions for cryptoasset promotions?

A
  • Clear risk warnings - general and personalised.
  • Banning incentives to invest.
  • Positive frictions - cooling off period (24 hours)
  • Client categorisation requirements - self-certified sophisticated investor category will not be applied.
21
Q

What are the rules regarding past performance?

A
  • not the most prominent feature
  • it covers at least the preceding 5 years, or the whole period if less than 5 years - MUST SHOW complete 12-month periods
  • reference periods and sources are clearly shown
  • there is a clear and prominent warning that the data/figures are historic
  • if the figures are in another currency it is stated with warning of effects of currency fluctuations
  • if the performance is cited gross, that the effect of commissions, fees and other charges is disclosed.
22
Q

What are the rules regarding simulated performance?

A
  • relate to an investment or index
  • are based on actual past performance of one or more investments/indices which are the same as, or underlie, the investments being simulated
  • meet the rules set out above on past performance
  • contain a prominent warning that they relate to simulated past performance
23
Q

When is unsolicited real-time promotion (cold call) allowed?

A
  • the recipient has an existing client relationship with the firm
  • the call relates to a generally marketable packaged product (not a higher-volatility fund)
  • it relates to a limited range of investments, including deposits and readily realisable investments other than warrants or generally marketable non-geared packaged products.
24
Q

What is a retail client?

A

any client who is not a professional client or an ECP

25
Q

What is a customer?

A

The term ‘customer’ can mean retail clients and professional clients.

26
Q

What are the 2 types of professional clients?

A

elective professional clients, or per se professional clients

27
Q

What types of client are “per se” professional?

A
  • Other FS entities including: credit institution, investment firms, insurance companies, CISs, pension funds
  • Large undertakings – companies whose balance sheet, turnover or own funds meet 2 of the certain levels, specifically:
    > For MiFID = balance sheet total of €20m, net turnover of €40m, own funds of €2m.
    > For non-MiFID = called-up share capital of at least £5 m, or balance sheet total €12.5m; net turnover of €25m; an
    average of 250 employees during the year
    - a partnership whose net assets >£5m
    - a trustee with assets >£10 million
    - a trustee of an occupational pension scheme or a small self-administered scheme with at least 50 members; and AUM > £10m.
  • governments, certain public bodies, central banks, international/supranational institutions and similar, and
  • institutional investors whose main business is the investment in financial instruments.
28
Q

What are examples of per se ECPs?

A
  • a credit institution
  • an investment firm
  • an insurance company
  • a CIS authorised under the UCITS Directive or its management company
  • a pension fund or its management company
  • another financial institution authorised or regulated under UK law
  • a supranational organisation, and
  • a central bank.
29
Q

Which 3 types of business can a professional client be categorised as an ECP?

A
  • executing orders
  • dealing on own account
  • receiving/transmitting orders.
30
Q

How are local authorities and municipalities categorised under MiFID II?

A

Retail clients

31
Q

What are the thresholds for retail clients electing to be professional clients?

A

> the firm has assessed its expertise, experience and knowledge (this is called the qualitative test) and

> any two of the following are true (this is called the quantitative test)

  • the client carried out ten significanttransactions on the relevant market in each of last 4 quarters
  • portfolio >€500,000
  • the client works, or has worked, as a professional in the financial services sector for at least a year

> The firm must follow certain procedures, including giving a clear written warning to the client of the lost protections, to which the client must agree in writing.

32
Q

What are the thresholds for professional clients electing to be ECPs?

A

> is a per se professional client and has called up share capital of at least £10 million

> any two of the following are true (this is called the quantitative test)

  • the client carried out, on average, ten significantly sized transactions on
    the relevant market in each of the past four quarters
  • the size of the client’s financial portfolio exceeds €500,000
  • the client works, or has worked, as a professional in the financial
    services sector for at least a year

> expressly agrees with the firm to be treated as an ECP.

33
Q

What protection does a retail client lost when electing to be a professional client?

A
  1. Communicating with clients rules regarding the frequency and simplicity, of financial promotions:
  2. Information about the firm, its services and remuneration: - the type of information that the firm provides to retail clients about itself, its services and its products and how it is remunerated differs to what the firm provides to professional clients.
  3. Suitability - in relation to the products, transactions and services for which they have been so classified, they have the necessary level of experience and knowledge to understand the risks involved
  4. Appropriateness i.e. client has the investment knowledge and experience to understand the risks associated with the relevant transaction.
  5. Dealing and Carrying Out Orders including best execution
  6. Reporting Information to Clients - the timeframe for providing confirmation that an order has been carried out is more rigorous for retail clients’ orders than professional clients’ orders.
  7. Remuneration and Incentivisation - some proteftion lost
  8. Client Reporting - no need to report fluctuations in values of leveraged financial instruments or contingent liability transactions
  9. Investor Compensation (FSCS & FOS) Eligibility could be lost
  10. Exclusion of Liability
  11. Share Trading Obligation - can now be transacted anywhere
  12. Transfer of Financial Collateral Arrangements - now eligible
  13. Client Money - some protection lost
34
Q
A

UK Regulation and Professional Integrity - Jul 2024 (12 decks)

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