Unit 2 Topic 20 - Conduct of business requirements I

Question 1

What is BCOBS?

Answer 1

Banking: Conduct of Business Sourcebook.

Rules governing deposit-takers, eg banks and building societies.

Question 2

What is MCOB?

Answer 2

Mortgages and Home Finance: Conduct of Business Sourcebook.

Rules governing the provision of advice relating to mortgages and home finance, including equity release.

Question 3

What is ICOBS?

Answer 3

Insurance: Conduct of Business Sourcebook.

Rules governing the provision of advice on general insurance and protection products.

Question 4

What are the three types of client as set out by COBS?

Answer 4

• Eligible counterparties.
• Professional clients.
• Retail clients.

Question 5

What does Eligible counterparties, as defined by COBS, include?

Answer 5

Includes governments, central banks and financial institution authorised by an EEA state.

Due to the assumed level of knowledge and experience, clients in this category receive the lowest level of investor protection.

Question 6

What does Professional clients, as defined by COBS, include?

Answer 6

This category includes all the bodies that would otherwise be eligible counterparties, except for the fact that they require a higher level of service than would apply to ‘eligible counterparty business’ - for example, they require advice, in addition to execution of transactions.

When dealing with professional clients, advisers can assume an adequate level of experience and knowledge and an ability to accept financial risks.

Question 7

What does Retail clients, as defined by COBS, include?

Answer 7

This category provides the highest level of investor protection and comprises customers who do not fall into eligible counterparties or professional clients.

Question 8

What are the criteria a firm must meet to be classified as independent advice?

Answer 8

• Be sufficiently diverse with regard to their type and issuers or product providers, to ensure that the client’s investment objectives can be suitably met.
• Not be limited to relevant products issued or provided by the firm itself or by entities having close links with the firm.

Question 9

What are the categories of adviser?

Answer 9

Advisers are grouped into one of two categories: independent advisers and restricted advisers.

Question 10

Define Panel in relation to conduct of business requirements.

Answer 10

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

Question 11

What is Restricted advice?

Answer 11

Restricted advice could be summarised as anything that is not independent advice of basic advice.

Basic advice means providing advice on stakeholder products using a process that involves putting scripted questions to a retail client.

Question 12

Define Execution only.

Answer 12

A transaction executed upon a client’s specific instruction, where the firm gives no advice and the rules on assessing the appropriateness do not apply.

Question 13

What is qualified investment advice?

Answer 13

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

Question 14

What is simplified advice?

Answer 14

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

Question 15

Define Financial promotion?

Answer 15

An invitation or inducement to engage in investment activity.

Question 16

What are the rules relating to Comparisons of financial promotions?

Answer 16

• 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 17

What are the rules relating to Past performance of financial promotions?

Answer 17

• 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 18

What are the rules relating to Unsolicited promotions (ie non-written ‘cold calls’).

Answer 18

• 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.
• ‘Appropriate time of day,’ usually between 9am and 9pm Mon to Sat.
• Caller must check 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 19

What aspects laid down by the Advertising standards authority are particularly relevant to financial services?

Answer 19

• Legal, ie containing nothing that breaks the law.
• Decent, ie containing nothing that is likely to cause serious or widespread offence.
• Honest, ie not exploiting inexperience of customers.
• Truthful, ie not misleading or inaccurate.

Question 20

What are the rules relating to adviser charges?

Answer 20

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.

Question 21

What is Designated investment business?

Answer 21

Dealing in investment assets directly on behalf of a client.

Question 22

Define Attitude to risk.

Answer 22

The extent to which a customer can cope with a lack of guarantees in respect of capital values and their feelings on fluctuating returns/income levels.

Question 23

Define Tolerance of risk.

Answer 23

The extent to which a customer’s finances could cope with a loss of capital and/or income.

Question 24

What is a suitability report?

Answer 24

A suitability report explains why the particular product recommended is suitable for the client.

Question 25

What is a suitability report based on?

Answer 25

• Clients’ particular and personal and financial circumstances.
• Their needs and priorities as identified through the fact-finding process.
• Their attitude to risk.

Question 26

What is the timescale for providing a suitability report?

Answer 26

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.

Question 27

What does the contents of a key features document include?

Answer 27

• A brief description of the product’s aims.
• A brief description of how the product works.
• They 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.
• That compensation is available from the FSCS.
• That a right to cancel or withdraw exists (or does not exist).

Question 28

What is the cooling off period for life and pensions policies?

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.

Question 29

What is the cooling off period for investments or deposits and other insurances?

Answer 29

The period is 14 days.

Question 30

When an adviser transacts designated investment business for a client, the basis or amount of the charges would normally be disclosed in which document?

Answer 30

The client agreement letter.