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CISI > Unit 4 FCA conduct of business sourcebook > Flashcards

Unit 4 FCA conduct of business sourcebook Flashcards

1
Q

How long do different customers have to cancel contracts if it’s a distance marketing contract?

A
  • Life and pension products - 30 calender days
  • cash deposit ISAs/ non life and pension products - 14 calendar days
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2
Q

Who do the conduct of business rules apply to?

A

Firms + indirectly appointed representative conducting designated investment business/ insurance business AND communication/approving financial promo

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3
Q

What are the exemptions to communicating/ approving a financial promo?

A
  1. qualifying credit, home purchase plan, home reversion plan
  2. promo on non investment insurance contract
  3. promo on unregulated CIS (cant approve)
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4
Q

What are the designated investment business?

What is insurance business?

A
  1. Dealing designated investments
  2. Broking - arranging deals between clients/ through MTF or exchange
  3. Advising
  4. Managing

DI:
- Inc MIFID instruments = shares, bonds and derivatives
- non-MIFID investments = e.g. packaged products = retail investment products e.g. personal pension plans

Insurance business:
- insurance products that are indirectly exposed to investments e.g. life assurance with an investment element

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5
Q

What does tied agents mean in context of appointed reps mean?

A

If they’re found guilty, the firm is also guilty

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6
Q

What is the fair treatment/ best interest rule?

A

Firms must always act with integrity + honesty (applies to all clients)

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7
Q

What are the 5 website COBS rule for firms communicating via website must follow?

A
  1. uptodate info
  2. client consent + has web address (given electronically)
  3. evidence it’s an appropriate method
  4. info continuously accessible as long as client needs
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8
Q

COB rules for record keeping of voice/ email comms?

A

Keep voice/email recordings for 5 years if: receiving/ executing/ arrange client order

Applies to qualified investments on prescribed markets

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9
Q

What are the 3 types of clients in order of protection?

A
  1. retail clients (most protection)
    - inc by default local authorities/ municipalities
  2. Professional clients
  3. Eligible counterpart (least protection)
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10
Q

What are the types of professional clients?

A
  1. Per se clients
    - authorised firms/ central banks/ gov/supranational (eg world bank)/ pension fund
    - large undertakings = corps
    - other institutional investors e.g. special purpose vehicles
  2. retail clients opt up –> elective professional clients (have to take tests)
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11
Q

Who are eligible counterparty?
What types of business does this include?
What are they exempt from?

A
  1. deals between 2 professional clients. = both per se eligible counterparty
  2. large corps opt up –> elective eligible counterparty (NOT individuals)
  • ECP business = 1. Executing orders 2. dealing on own account 3. transmitting orders. For advisory services = per se PC
  • Exempt from most COBS rules
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12
Q

What are the large undertaking criteria?

A

Must meet 2/3 criteria (MIFID firms):
- balance sheet €20m
- net turnover €40m
- own funds €2m

Criteria for non MIFID:
- balance sheet €12.5m
- net turnover €25m
- employees = 250

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13
Q

What are the tests retail clients have to do to become elective professional clients?

A
  1. Qualitative (all business)
    - assess expertise
  2. Quantitative (MIFID business)
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14
Q

What criteria do retail clients have to make to opt up?

A

2/3 following:
- av. trade frequency of 10/ qtr in last year
- portfolio > €500k
- works in financial sector >= 1 yr professionally

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15
Q

What are the procedures retail clients have to do to opt up?

A
  • state in writing they want to opt up
  • receive in writing the loss of protection
  • consent in writing to loss of protection
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16
Q

what business does the eligible counter classification relate to?

A

only on eligible counterparty business e.g. dealing on own account +/ or executing on behalf of clients

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17
Q

How does opting down?

A

Can opt down if want more protection
Flexible in terms of what securities it applies to

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18
Q

What are 2 exceptions to agents acting on behalf of investors being treated as the client?

A
  1. written agreement between firm and agent to treat investor as client
  2. if agent is appointed rep of firm - again investor would be client
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19
Q

What are the rules to do with financial promotion (S21)?

A
  1. must be an authorised person
    OR
  2. Content approved by authorised person (they take responsibility)
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20
Q

How does a firm using financial ads from 3rd party prevent breaching the rules?

A
  1. authorised firm approves ad (note confirmation = proof-readingleaves responsibility with firm)
  2. communicates ad only to those intended
  3. ad is fair, clear and not misleading
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21
Q

What types of ads are exempt from FCA financial promo rules?

A

TO FUUP
1. ads under financial promotions order e.g. to professionals, communications made by gov/ central banks/ journalists/ by company to its shareholders
2. outside UK and can’t have an affect in UK - these
3. subject to takeover code etc (have their own rules)
4. personal quotes/ image ads i.e just logo and services of the firm
5. one offs (not cold calls)
6. promo on unreg CIS

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22
Q

What are prospectus rules?

A

Prospectus = doc issued when companies want to raise capital via IPO/ bonds on details of this

Ad on prospectus but let them know where they can find prospectus, shouldn’t contradict prospectus

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23
Q

What types of communications do the COBS rules apply to?

A

Real time / non written - e.g. in person / call

non real time/ written e.g. email or anything where person can’t interact e.g. dvd recording

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24
Q

Rules for comms with retail clients?
What principle for business rules does this refer to?
Who do the financial promotion COBS rules apply to?

A

Fair, clear (name of firm) and not misleading (details of risk)
FICY
- FCA - clearly state if and what parts FCA is regulator for and what parts arent reg
- Impression - if relating to products not made by firm itself, state impression of producing manager
- Complex - if product/ service is complex or firm gets >1 type of renumeration state this clearly
- Yields - give balanced view of short, med, long term prospects

Principle for business rules 6 and 7

Applies to RC only (i.e. ECP and PC exempt from protection)

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25
Q

What types of performance figures can be included in comms with clients?

A
  1. past performance
    - cover >= 5 yrs in 12m intervals/ entire duration it’s been offered if < 5yrs
    - state not indicator of future performance
    - cant be most prominent feature
  2. simulated performance
    - based on actual performance of similar investment/index
  3. future performance
    - cant be based on simulated performance
    - warn forecasts aren’t reliable indicators

General
- if figures not in their currency must state the currency and warn about effects of currency fluctuations
- if give gross performance, must state effects of commissions, fees, tax etc

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26
Q

What is a direct offer?

What are the rules surrounding direct offers/ invitations?

What directive is it linked to?

A

Direct offer = ad that allows client to invest in a product directly e.g. links to application form

Must give info re:
1. firm + service
2. how they’ll keep money safe
3. costs

Links to distance marketing directive which also gives them rights to cancel
- 14 calander days
- 30 calendar days for life and pension products

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27
Q

What are the rules of real time/ unwritten comms that apply to both solicited and unsolicited calls?

A
  1. fair, clear and not misleading
  2. ID at start the caller, employer and purpose of call
  3. ask if want to continue or not
  4. if they have an appt must give them a contact in case of cancellation
  5. must communicate at APPROPRIATE time of day (no details on what this is in handbook)
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28
Q

What unwritten cold calls are allowed?

A
  1. existing client who expects call from time to time
  2. retail clients where ad relates to:
    - generally marketable packaged products ( not high volatility fund) - not retail investment products
    - services on readily realisable securities (not warrants as complex) e.g. shares and bonds with liquid market
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29
Q

Examples of Packaged products

A

RIP
- regulated collective investment scheme e.g. regulated open ended investment company
- investment trust saving scheme
- personal/stakeholder pension
-life policy

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30
Q

What info must be included to all clients according to information disclosure rules (5)

What info must also be included for common platform firms?

A

All clients: - PLAN-R
1. name and address of firm
2. language of comms
3. contact details of regulator
4. if firm using appointed rep
5. frequency of performance reports

(+ for common platform firms, the conflict of interest policy)

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31
Q

What’s included in a client agreement?
When and how?
For what type of business?
How long are records kept?

A
  1. Rights and obligations of firm and customer (rc + pc)
  2. Must be written in a durable medium in good time (i.e. before consumer is bound by contract)
  3. Designated investment business for retail clients and for MIFID business for retail/ professional clients (except insurance firms offering life policies as principle)
  4. Records kept for the longer of 5 yrs/ duration of relationship with client/ indefinitely for pension products
32
Q

What do the rules of the Retail Distribution Review state about information disclosure between financial advisors and retail clients?

A
  1. firms making personal recommendations must state if they’re indep/ restricted
  2. agree their charges in advance either via website or other durable medium
    - can’t get commission on the product
    - charges must be paid upfront/ deducted from investment over time
33
Q

What is the purpose of product disclosure rules?

Types of documents where it’s detailed?

post sale cancellation rights?

A

Purpose = simple info on nature + risk of product so retail client can make informed decision (format = pre determined questions that are answered)

Documents
1. Key info documents - Packaged retail and insurance based investment products (PRIIPs)

Being phased out:
2. Key investor info document - UCITS scheme
3. key features document - packaged products, cash deposit ISA, cash deposit child trust fund

Cancellation - providers of these services/products subject to distance marketing directive

34
Q

What are the cancellation periods for different products?
When does it start?
When must firms tell customers of their rights?

A
  • life and pension products - 30 calendar days
  • cash ISA’s and non-life and pension products - 14 calendar days
  • starts the day contract is finalised/ client gets info if this is after
  • firms must tell customers of cancellation rights before (or if not possible immediately after) they are bound by contract via a durable medium
35
Q

Examples of PRIIPs (2I + 2S)

A
  1. investment funds
  2. insurance-based investment products
  3. retail-structured securities
  4. structured term deposits
36
Q

What are the inducement rules MIFID businesses must follow?

Exceptions?

A
  1. can’t pay/ accept money from anyone (other than customer or 3rd party) other than proper fees i.e. needed to provide service = custody costs, legal fees, settlement fees

Exceptions:
1. fee designed to enhance quality of service for customer
2. can prove fee doesn’t impair their ability to act in best interests of customer (have to disclose amount to customer before providing service)
3. minor non-monetary benefits

  • office equipment NOT ALLOWED
37
Q

What are the information disclosure rules that apply to research?

A
  1. firms have to charge for research used by other firms
    - receiving firm must also pay directly from its own resources
    - separate research account controlled by the firm. Funded by specific research charge agreed with customers beforehand. Firm must also disclose 1. research budget 2. charges 3. annual updates on total costs

Firms should also regularly asses quality and effectiveness of research

38
Q

What is the suitability rule?

What types of business does it apply to?
Who does it apply to?

How do they ensure suitability?

What type of businesses are excluded from this?

A

Firms have to get enough info to be able to give suitable advice to retail and professional clients

Applies to:
1. discretionary services i.e. acting as investment manager
2. advisory services i.e. personal recommendations

  • All customers for MIFID business and RC for non MIFID business

How?
Personal/ financial info on the customer via fact find (otherwise cant do these services/ only do execution) -

Execution only businesses are excluded

39
Q

What are the 3 qualities suitable advice has?

Who does this apply to?

A
  1. meet clients objectives (per se PC + RC)
  2. ensure client can take the risk (elective PC and RC)
  3. ensure client has knowledge to understand risk (RC)
40
Q

What is a suitability reports?

Medium?

Reasonable reasons for delay?

A

firm must produce ‘reasons why letter’ on why their recommendation is suitable. including (for retail clients only)
1. clients demands
2. why recommendation meets needs
3. possible disadvantages

Durable medium i.e. written

Delay
- distance agreement
- client agrees to delay

41
Q

What products require suitability reports?

A
  1. MIFID and non-MIFID products for RC
    - regulated CIS (unless acting as investment manager)
    - investment trusts
    - pensions
42
Q

What are some exceptions to providing a suitability report?

A
  1. firm acting as investment manager and recommends regulated CIS
  2. Client outside of UK at time
  3. recommendation made by friendly society to a small life policy where premium doesnt exceed £50/yr
  4. recommendation to increase regular premium to existing contract/ invest more in existing packaged products
43
Q

What is the appropriateness rule?

When are warnings given?

A

Firms must get enough info to check if products are appropriate for customers by assessing:
- client can take financial risk in relation to product/service
- client can understand the risks (RC only)

Warnings
- firm believes investment/service not appropriate
- clients hasn’t given them enough info to reach conclusion

44
Q

When should suitability reports be provided?

A
  1. For life policy - before contact finalised (unless info given orally/ cover needed urgently then immediately after contract)
  2. for pensions - within 14 days of finishing contract
  3. other - before transaction is concluded unless it’s done by distance marketing comms, in which case ASAP
45
Q

What products/ services does the appropriateness rule apply to?
What are exempt from appropriateness rule?

A

Applies to non advised business (i.e.execution/ arranging business) involving complex investments
- MIFID business for RC and PC e.g. warrants and derivatives (other business covered by suitability rule)
- direct offers for RC

Execution only business on non-complex financial instruments:
- shares
- securitised debt
- holdings in UCITS funds

46
Q

Which businesses does the suitability rule apply to?

Which businesses does the appropriateness rule apply to?

A
  1. Suitability of advice
    - MIFID business (PC and RC)
    - non MIFID (RC)
  2. Appropriateness of product
    - MIFID business (both RC and PC)
    - direct offer (RC)
47
Q

What is the best execution rule?

Execution factors?

A

Firm must ensure they get best result for its clients

  • PCSLS = please can shade like someone = price, cost, speed, likelihood of execution and settlement

higher price isn’t automatically written off as may also indicate better service

48
Q

4 factors that affect execution factors?

A
  1. type of client (PC or RC)
  2. type of order (limit vs market)
  3. type of security
  4. execution venue (i.e. how liquid etc)
49
Q

Types of execution venues?

A
  1. regulated market
  2. MTF/OTF
  3. Systematic internaliser/ market maker/ liquidity provider
50
Q

How do we achieve best execution?

A
  1. follow order execution policy
    - giving prescribed info before providing services (list of execution venues + factors affecting their choice of venues) Also warning that specific client instructions may hinder best execution
    - 2 way agreement (i.e. must get consent) reviewed annually
    - notify clients if any sig. changes
    - must be able to demonstrate on request that they’re executing according to their execution policy
  2. follow specific client instructions
51
Q

What are client order handling rules?

2 exceptions?

A

States orders should be recorded promptly + carried out in order

Exceptions:
1. interests of client
2. specific difficulty (must tell retail clients if this is the case)

52
Q

What is the aggregation rule?

A

Allowed to aggregate trades if
1. unlikely to disadvantage clients
2. disclose that there is possibility that client may be disadvantaged

53
Q

How are aggregated trades allocated?

Exception?

A
  1. promptly
  2. fairly
    - usually to clients first UNLESS reasonable grounds to allocate proportionally (i.e. clients already got sig. benefit e.g. with block trades)
54
Q

what are the rules on limit orders?
Exception?

A

limit orders (direction given to broker to buy/sell at a specific price or better) not executed immediately (i.e. usually exchanges can settle within their own order books) must be made public

UNLESS
1. client says shouldn’t be public
2. limit order > regular sized order (as may distort market)

55
Q

How are conflicts policies maintained?

A
  1. In writing
  2. ID potential conflicts (if part of a group, inc. potential conflicts from the group)
  3. specify procedures to manage it e.g. chinese walls
  4. give retail clients + potential retail clients description of policy
  5. disclosure = last resort
56
Q

What are chinese walls?

A

Internal arrangements to restrict flow of confidential info within firm (not mandatory)

57
Q

What is the policy of independence regarding investment research?

A
  1. can’t accept inducement (persuasion) from interested parties
  2. can’t promise favourable coverage
  3. cant allow covered company to review drafts
58
Q

Exceptions for FCA firms dealing before clients who they publish research for have had time to react to research?

A
  1. Market maker i.e. dealing in normal course of business
  2. unsolicited client order
59
Q

How are personal account dealings managed?

A
  1. restrictions on what relevant persons (directors/ appointed reps/ppl involved in regulated activity) can trade (notifications/ permission)
  2. must request to trade and firm records all notifications (acceptance + refusal)
60
Q

What personal account dealing are excluded from restrictions?

A
  1. funds managed independently
  2. shares in certain classes of fund where relevant person doesnt control management of fund e.g. regulated collective investment scheme
  3. life policies
61
Q

What is a transaction confirmation?
Exceptions?

A

Occasional reports that inform clients on details of transaction (date, time, amount, execution venue)
1. durable medium
2. by next business day

Exceptions
- don’t have to for non-MIFID business unless client asks

62
Q

what are periodic statements?
Timing?
Exceptions?
Record keeping?

A
  • info firms but send to clients on the value and break down of their portfolio inc inflows (dividends) and outflows (fees)
  • timing = 3m generally (clients can request/ if client gets deal by deal confirmation –> 1/yr) OR for derivatives/leveraged portfolio must be monthly

Records kept 5yrs for MIFID business, 3 yrs for other business

63
Q

What are the CASS 6 and CASS 7 rules?

A

CASS 6 - custody rules for MIFID and non MIFID business

CASS 7 - client money rules for MIFID business

64
Q

What is a MIFID firm?

A

Firm that conducts MIFID business -
Dealing, managing, advising OTFs / MTFs in investments inc shares, bonds, UCIT, futures, options, CFDs

65
Q

Purpose of client money + asset rules?

A

Protect client money/ assets through segregation (held in approved bank and separate from firm) in case of liquidation of firm. approved bank doesn’t have to treat it separate however

66
Q

Types of approved bank (4)?

A
  1. central bank
  2. BCD credit institutions - Banking consolidation directive (deposit takers)
  3. qualifying money market fund
  4. bank authorised in a 3rd country
67
Q

Who does client assets refer to?

How often must firms reconcile records of client asset balances?

When should shortfalls be corrected?

A

RC, PC, ECP

As often as necessary

Corrected same day if client money is held by firm itself (not authorised bank) otherwise ASAP

68
Q

3 types of clients who are exempt from client asset rules?
3 types of assets exempt?

A

Who
- ICVC and UCITS schemes
- EEA firms (except insurers) conducting MIFID business in UK - they follow rules of their home state regulator
- BCD credit institutions

What
- coins held for value of the metal
- money held for delivery vs payment (ie settlement) ie when buy shares to be executed within 3 business days (after that rules apply)
- money due to firm
- Interest earned on client money if they disclose they dont pay interest

69
Q

How has the CASS (client money and assets) regime been enhanced?

A
  1. CASS audit annually (based on independent standards set bb financial reporting council) submitted to FCA within 4m
  2. Rehypothecation (must have right of use clause)
  3. CASS resolution pack (explains where relevant docs on who owns what) available to regulator on request
70
Q

What are mandated accounts?

A

Where give firm control of client assets/ liabilities (ie credit card control)
Firms must have records

71
Q

General rule for record keeping?

A

3 y - non MIFID business
5y - MIFID business/ pension contracts and life assurance/ recording of phone comms
Indefinitely - pension transfers/ opt out / extra contributions

72
Q

How do you know when record keeping starts?

A

Does client get info?
N —> record keeping started from creation of record
Y —> does it create contract/ rs ?

N —> record keeping from dispatch e.g. confirmation of trades
Y —> record keeping until end of contract / rs

73
Q

Definition of durable medium according to FCA COBS?

A
  • media that can be accessed by clients
  • allows unchanged reproduction of the info
74
Q

What is churning and switching?
Who do the rules apply to?

A

Trading more often to benefit from fees/ selling one investment and replacing it with another
- Churching = excess activity relates to shares
- switching = excess activity relates to packaged products
Rules apply to retail clients on advisory services and all clients for discretionary servicesC

75
Q

What are the rules surrounding comparison made in financial promo for MIFID investments

A
  • presented fairly
  • site data source + key assumptions
  • if tax mentioned, must stat that tax treatments depend on individual circumstances

(doesnt’ include 3rd party prospectuses/ image advertising/non-MIFID businesses)

CISI (5 decks)

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