Unit 10 - FCA COBS and Client Assets Part 2 (18 or 80)

Question 1

What information should be provided to retail and professional clients about the nature and risks of investments?

Answer 1

• the firm and its services
• designated investments and proposed investment strategies, including warnings of risks associated with these investments
• an explanation of leverage and its effects, and the risk of losing the entire investment
• volatility of the price and any limitations on the available market for such investments
• if the client has entered into contingent liability transactions, that they might assume additional obligations additional to the cost of acquiring the investments
• margin requirements or similar obligations applicable to certain investments
• execution venues
• costs and associated charges.

Question 2

What information should be provided to retail and professional clients and ECPs about the firm?

Answer 2

• The name and address of the firm
• In respect of MiFID business the languages in which the client may communicate with the firm
• The methods of communication to be used
• A statement of the fact that the firm is authorised and the name and contact details of the competent authority that has authorised it.
• If the firm is acting through an appointed representative or, when applicable, a tied agent.
• The nature, frequency and timing of the reports on the performance of the service
• In the case of a common platform firm a summary description of the firm’s conflicts of interest policy

Question 3

What information needs to be provided to retail clients when managing investments?

Answer 3

• the method and frequency of valuation of the investments
• details of any delegation of the discretionary management
• specification of any benchmark
• the types of investment/transactions that may be included
• objectives, the level of risk to be reflected in the manager’s exercise of discretion, and any specific constraints on that discretion.

Question 4

What information needs to be provided to retail clients regarding costs?

Answer 4

• the total price to be paid, including all related fees, commissions, charges and expenses and any taxes payable via the firm
• or the basis on which they will be calculated s
• the commissions charged by the firm
• if the above are to be paid in a foreign currency, what currency is involved and the conversion rates and costs
• how the above items are to be paid/levied
• information about compensation schemes.

Question 5

When should clients receive information about designated investment business or ancillary services?

Answer 5

in good time before their provision

Question 6

What are the 5 types of conflict of interest?

Answer 6

• is likely to make a financial gain, or avoid a financial loss, at the expense of the client
• has an interest in the outcome of a service/transaction provided to the client, which is different to the client’s interest in that outcome
• has a financial or other incentive to favour the interest of another client or group of clients over the interest of the client
• carries on the same business as the client
• receives, or will receive, from a person other than the client an inducement in relation to a service provided to the client, in the form of monies, goods or services

Question 7

How should a conflicts of interest policy be designed?

Answer 7

set out in writing and is appropriate to the size and organisation of the firm and the nature, scale and complexity of its business

Question 8

When should a conflict of interest be disclosed to the client?

Answer 8

Only if the arrangements that a firm puts in place to prevent or manage potential conflicts of interest are not sufficient to ensure, with reasonable confidence, that the risk of damage to the interests of a client will be prevented,

Question 9

How often should firms provide statements to clients when managing investments on their befalf?

Answer 9

Periodically

Question 10

What is the 4 fold test with regard to best execution?

Answer 10

Firms must assess each of the tests individually and come to a conclusion on whether they owe the client ‘best execution’:

• The client initiated the transaction.
• The client does not (cannot) shop around for quotes.
• The client is not able to identify the relative levels of price transparency within a market.
• Review information provided by the firm and any agreement reached.

Question 11

How often should firms review their order execution policies?

Answer 11

whenever a material event occurs, but no less than annually, and notify clients of any material changes to their order execution arrangements or execution policy

Question 12

What are the rules regarding client order handling?

Answer 12

• executed client orders are promptly and accurately recorded and allocated
• comparable orders are executed sequentially and promptly, unless this is impracticable or client interests require otherwise
• retail clients are informed of any material difficulty in the prompt execution of their order, promptly on the firm becoming aware of this, and
• if the firm is responsible for overseeing or arranging settlement, that the assets or money are delivered promptly and correctly.

Question 13

When can firms aggregate their own account deals with those of a client?

Answer 13

only where:

• to do so is unlikely to disadvantage any of the aggregated clients
• the fact that aggregation may work to their disadvantage is disclosed to the clients, and
• an order allocation policy has been established which provides for the fair allocation of transactions.

Question 14

When must Key Investor Information Docs (KIIDs) be produced and what should they contain?

Answer 14

for each UCITS scheme that an authorised fund manager (AFM) manages,

It must include:

a. identification of the scheme

b. a short description of its investment objectives and investment policy

c. past performance presentation or performance scenarios

d. costs and associated charges, and

e. risk/reward profile of the investment

Question 15

When must Key Features Docs (KFDs) be produced and what should they contain?

Answer 15

• Every packaged product.& Cash deposit ISAs & Cash deposit CTFs.

It must include:

> include enough information about the nature and complexity of the product, how it works, any limitations or minimum standards that apply and the material benefits and risks of buying or investing for a retail client to be able to make an informed decision about whether to proceed,

> arrangements for handling complaints & compensation from FSCS & rights to cancel

Question 16

What are the cancellation periods for OEICs and Life/Pensions Contracts?

Answer 16

14 days and 30 days respectively

Question 17

What are the record keeping time limits for cancellations rights?

Answer 17

• indefinitely for pension transfers, pension opt-out or free-standing additional voluntary contribution (FSAVCs)
• at least five years in relation to a life policy, pension contract, personal pension scheme or stakeholder pension scheme
• at least three years in any other case.

Question 18

When should Key Information Documents (KIDs) be issued and for what products?

Answer 18

All Packaged Retail and Insurance-based Investment Products (PRIIPs) including:

• life policies
• units in an authorised or unauthorised Collective Investment schemes
• stakeholder pension schemes
• personal pension schemes
• interests in investment trusts (ie, regular savings schemes)
• securities in investment trusts
• structured capital-at-risk products.

Question 19

When should KFDs and KIDs be issued?

Answer 19

KFD - in good time before it provides a service to client

KID - in good time before any transaction is concluded

Question 20

Where and when should client assets be placed?

Answer 20

One or more accounts of the following:

• a central bank
• a credit institution
• a bank authorised in a third country
• a qualifying money market fund

Question 21

When do client money rules not apply?

Answer 21

> if money is held in connection with a delivery versus payment (DvP) transaction (unless the DvP does not occur by the close of business on the third business day following the date of payment of a delivery obligation)

> when it becomes due and payable to the firm

Question 22

What changes were made to CASS rules after the financial crisis?

Answer 22

• Increased reporting to clients – daily reporting on client money and assets holdings to all prime brokerage clients.
• Holding client money with group banks – restricting the placement of client money deposits held in client bank accounts within a group to 20%.
• Prohibiting the use of general liens in custodial agreements
• A function with specific responsibility for client money and assets
• A client money and assets return (CMAR) – a monthly return for medium-large firms and twice yearly for small firms,

Question 23

How often should client cass reconcilliations be undertaken?

Answer 23

‘as often as necessary’ to ensure the accuracy of a firm’s records and accounts, between its internal accounts and those records of third parties who hold the assets in safe custody

Question 24

When do CASS rules not apply?

Answer 24

• investment companies with variable capital (ICVCs)
• UCITS-qualifying schemes
• a credit institution, in relation to deposits held with itself
• coins held for the value of their metal
• money transferred under title transfer collateral arrangements
• money held in connection with a DvP transaction
• money due and payable to the firm
• if a firm carries on business in its name but on behalf of the client
• the custody rules (CASS 6) do not apply if a client transfers full ownership of a safe custody asset to a firm for the purpose of securing or otherwise covering present or future, actual contingent or prospective obligations.

Question 25

What are the rules concerning unclaimed balances?

Answer 25

Firms are able to pay away such balances to a registered charity providing that:

• the firm can demonstrate that it has taken reasonable steps to trace the clients concerned and return the balance
• has held the balance concerned for at least six years in respect of client money and 12 years for clients’ assets

Question 26

What is the difference between ‘reasonable assurance client assets reports’ and ‘limited assurance client assets reports’

Answer 26

A reasonable assurance client assets report is completed where the firm hold client assets

Where a firm does not hold client assets, the external auditor will be required to complete a limited assurance client assets report

Question 27

When a client given a firm rights to its assets then they stop being client assets, except in which circumstance?

Answer 27

is if the money and assets belong to a retail client and the purpose of title transfer is to secure or cover that client’s present or future, actual, contingent or prospective obligations under a contract for difference (CFD) or a rolling spot forex contract

Question 28

How quickly should firms be able to retrieve CASS resolution documents?

Answer 28

as soon as practicable, no later than 48 hours.

Question 29

When is a mandate required?

Answer 29

when the client is giving the firm control over their assets and/ or liabilities