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Ro1 Regulations And Ethics Of The Finanacial System > Applying The Regualtory Framework In Practice For The Consummer > Flashcards

Applying The Regualtory Framework In Practice For The Consummer Flashcards

1
Q

What is the distinction between information and advice?

A

Information is stating the facts

Advice is an expression of opinion

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2
Q

What will constitute advice for a fianiacial advisor?

A

Causing someone to do/not do something because of what you say to them.

Therefore, anything an advisor says is advise unless it can be proven only factual information was exchanged.

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3
Q

How should advisors protect themselves?

A

Treat anything that could be considered advise as advise.

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4
Q

What categories can guidance be split into?

A

Provider guidance - information supplied by a representative of a product provider.

Generic guidance - non-product specific guidance

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5
Q

If a customer requires guidance/information, where can they get this?

A

The money helper service - formally the money and pensions service (MaPS) (single financial guidance body)

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6
Q

What is the purpose of the Money Helper service?

A

Set up by the government and paid for by the financial service in order to provide free, impartial information in respect of personal finances.

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7
Q

What are the core functions of the money helper service?

A

Pension guidance
Debt advice
Money guidance
Consummer protection as well as its overarching strategy to improve financial capability.

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8
Q

What is money helper also responsible for?

A

The provision of PensionWise.

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9
Q

When was pensionWise set up?

A

When the government relaxed its rules on drawing pension benefits in 2015.

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10
Q

What are the aims of pensionwise

A

To give people guidance on their options at retirement.

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11
Q

Do you have to pay for pensionwise.

A

No, and they offer face to face meetings.

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12
Q

What were the categories of financial advisors?

A

Tied - one company
Independent - no company
Multi-tied - multiple companies

Whole market - fees and no fees

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13
Q

What added to the polarisation of financial advisors

A

The retail distribution review (2012)

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14
Q

What are the categories of financial advisors now?

A

Independent

Restricted
- tied
- multi-tide
- whole market

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15
Q

What is expected for an independent advisor?

A

Whole of market advise on a wider range of products than simply packaged retail products.

The advisor should research the whole of the market, including more esoteric investments where appropriate. Should be unbiased and unrestricted.

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16
Q

What is expected from a restricted advisor?

A

Nature of the restriction is up to the advisor or their regulated firm to determine, provided the customer is made aware.

  • tied selling the products of a single provider
  • multi-tied selling the products of providers on their panel

Whole market - selling products from across the market but subject to restrictions. (E.g. Whole of market but only a certain area)

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17
Q

Where a customer has a certain need but a restricted advisor does not have the product to meet that need what is best practice?

A

Make them aware of the availability of an independent advisor.

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18
Q

What are bancassures?

A

Banks that offer financial services products as tied agents

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19
Q

Are all WoM advisors unrestricted?

A

No. To be unrestricted, the advice needs to conform to the standards set out by the FCA.

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20
Q

What does it mean to be non advised?

A

A client buys on a non- execution basis only

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21
Q

What is payment by advisor charge?

A

Commision is now outlawed on most products, and advisers instead charge fees.

Ongoing charges are only permitted where there is justified ongoing work.

Any fees dur must be disclosed to the customer in advance.

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22
Q

What must advisors do to unskilled and demonstrate professionalism?

A

Pass an appropriate level 4 exam with 30 months of starting work

Meet the requirements of continuing professional development.

Maintain an annual statement of professional standing.

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23
Q

What is the previous way in which information was disclosed to customers?

A

A prescribed format called services and costs disclosure.

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24
Q

How is disclosure now set up?

A

By the individual firm and disclosed in any manner they see fit.

(Designing their own method or using a template - templates removed from FCA handbook)

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25
Q

When should disclosure be given to the customer?

A

At first contact or at least before buisness is concluded.

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26
Q

What information should be disclosed?

A

Level of service - will the firm offer advice or not.

Basis of advice - are they independent or restricted and the nature of any restriction

Fees and commission - followed up by more detailed costings at the point of sale.

How to make a complaint and the right to go to the FOS.

That the firm is covered by the FSCS

Loans and ownership - if the firm is part of a larger group and how this works.

Regulatory status - explaining that the firm is authorised and regulated by the FCA.

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27
Q

What will be included in the detailed follow-up of fees and commissions

A

Detailed costings including non-cash benefits paid to the firm by the provider (such as marketing allowances)

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28
Q

What happens under fee only arrangements?

A

Pre 2013 legacy arrangements that paid trail commission must be paid to the (adviosor) by the (client) unless specific consent is received.

May be reversed.

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29
Q

When does disclosure not need to happen?

A

In execution, only sales
When it has been insuesed in the past and is still correct and current.

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30
Q

In regards to disclosure, what should happen if the initial contact is made over the phone.

A

Exaplied over the phone and followed up in writing.

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31
Q

What are useful things to combine with disclosure?

A

Consent of the clients’ personal data being retained and processed for the purpose of providing advice.

Terms of business (client agreement)- sets out duty of care, rights to cancel, compliance with anti-money laundering regulations, and conflicts of interest.

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32
Q

When must a client agreement be given?

A

Must be issued to retail customers before sale in almost all cases.

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33
Q

What are the exemptions for issuing a client agreement?

A

Execution only buisness or direct offer buisness.

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34
Q

How long should the terms of business be retained

A

5 years for most.
Indefinitely for pension transfer
Kept for the duration if the relationship lasts longer than 5 years

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35
Q

How are customers categorised by the regulator?

A

According to the duty of care owed to them.

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36
Q

What are the categories given by the regulator for clients?

A

Retail

Professional
- per se profesional clients
- elective professional clients

Eligible counterparty
-per se eligible counterparty client (local authorities excluded from this)
-elective counterparty client

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37
Q

What is a retail client?

A

Individuals and small companies that make up most customers. They require the highest duty of care, and firms are unlikely able to waive their responsibilities towards these clients.

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38
Q

What are professional clients?

A

Clients that require less duty of care as they should have sufficient knowledge and skill to know what they are getting into.

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39
Q

What is the subcategory per se professional client?

A

Professional clients who are considered this automatically due to their status. (Local authorities, etc.)

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40
Q

What is the subcategory elective professional client?

A

Companies who choose to be treated as professional clients. This means giving up protection so the advisor should satisfy themselves that they have sufficient knowledge and resources to be classified this way.

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41
Q

What is an eligible counter party?

A

Clients offered the lowest duty of care.
Proffesional clients but opperate a special type of business known as eligible counterparty business.
(Not likely to be handled by most advisors)

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42
Q

What are the categorisations of general insurance business acting as clients?

A

Consumer - a person not acting in respect of their business

Commercial consumer - anyone not covered by the definition consumer

Customer - covers both consumer and commercial consumer

In relation to home finance, customers are simply customers.

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43
Q

What is the principle of the rules set out by the FCA regarding compacting with customers?

A

Clear, fair, and not misleading.

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44
Q

What do the detailed rules for communication apply to?

A

Financial promotions other than those in respect of deposits, general insurance, pure protection, home loans, and reassurance.

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45
Q

What is the primary focus of the communication rules?

A

To govern the way firms communicate with clients ‘en masse’ so Communications to a single client are personalised illustrations. These rules extend over social media posts.

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46
Q

What are the communication groups?

A

Real-time financial promotions - speaking to customers

Non-real time financial promotions - written communications.

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47
Q

What are the rules for real-time financial promotions communication?

A

Not during anti-social hours
Genuine purpose for contact made clear to the customer.
Should offer the customer the chance to terminate the contact if not convenient.
Be mindful of the requirement to be clear, fair, and not misleading.
The customer should be given a contact point for the future quiries.

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48
Q

What are unsolicited real-time financial promotions?

A

Cold calling

Normal communication rules apply to these, and they are only allowed if the caller has an established relationship with the client.

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49
Q

What are the rules for non-real time financial promotions Communications?

A

Must be subject to a sign-off process by compliance with a limited validity period and records of sign off kept:

Indefinitely for pension transfers

6 years for life and pensions

5 years for MiFID firms

3 years for non MiFID firms

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50
Q

How do you make sure a sign-off is clear, fair, and not misleading?

A

Clearly state the risks
Don’t make misleading statements
Provide the firms name and contact details
Don’t make inaccurate comparisons to other products
Not giving negative factors less prominence than positive.

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51
Q

What standardised warnings are required?

A

Past performance is not a guide to future performance

References to tax are based on current position and will depend on the clients’ tax status.

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52
Q

Is it permissble to use past performance?

A

Yes, with the appropriate warning, but it must be over a reasonable period (usually 5 years) and although hypothetical past performance can be used if there isn’t enough data, this must be made clear and has further controls.

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53
Q

Where is cold calling not allowed?

A

Certain types of business such as equity release.

Where used, customers should be given an early opportunity to terminate the call.

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54
Q

Where a firm issues a financial promotion, what should it record?

A

The name of the person who checked it adhered to the communication rules

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55
Q

What are direct offer sales?

A

This is where a provider can write out to customers, inviting them to take certain products, and the customer can choose whether to accept the offer.

56
Q

What are the restrictions concerning direct offers?

A

Does not need to be a personalised illustration.

All key regualtory information must still be included such that the customer has enough to make an informed decision.
- costs and charges
- commission and fees
- name and address of firm

It should contain an outline description of the products features and risks and the statutory warnings around past performance and tax.

57
Q

What information needs to be given for e-commerce?

A

Name and address for contacting the online firm
FCA disclosure requirements
Information on the range of services provided online.

58
Q

In an e-commerce firm, what happens when a customer decides to go ahead with a transaction?

A

A confirmation of the transaction should be sent promptly, though the firm can choose not to accept the order later.

59
Q

What is outcome 1 for fair treatment?

A

Consumers can be confident they are dealing with firms where the fair treatment of customers is central to the corporate culture.

60
Q

What is outcome 2 for fair treatment?

A

Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly.

61
Q

What is outcome 3 for fair treatment?

A

Consumers are provided with clear information and are kept appropriately informed before, during, and after the point of sale.

62
Q

What is outcome 4 for fair treatment?

A

Where consumers receive advice, the advice is suitable and takes account of their circumstances.

63
Q

What is outcome 5 for fair treatment?

A

Consumers are provided with products that perform as firms have led them to expect, and the associated service is of an acceptable standard as they have been led to expect.

64
Q

What is outcome 6 for fair treatment?

A

Consumers do not face unreasonable post-sale barriers imposed by firms to change products, switch providers, submit a claim, or make a complaint.

65
Q

Does treating a customer fairly mean treating them the same or making them happy?

A

No. Ie giving one customer more attention due to them paying more money.

Not giving a customer a loan because they wouldn’t afford the repayments.

66
Q

What should each firm do in regard to fair treatment?

A

Keep evidence of its approach to fair treatment and the successful outcomes it achieves.

67
Q

What evidence could there be for fair treatment?

A

A broad range of sources, including press releases.

68
Q

What is a fiduciary relationship?

A

One where the parties can trust each other.

Fiduciary = trust

69
Q

What is consumer duty?

A

A new form of duty of care, proposed by the FCA in May 2021.

Shifts emphasis towards improved consumer outcomes.

Focuses on firms and their interactions with customers

70
Q

What are the 3 steps the FCA proposed for customer duty?

A

A consumer principle - to be its principle 12 and require a firm to deliver good outcomes for customers.

Cross cutting rules - focused on the financial objectives of the customer with additional requirements on acting in good faith and avoiding foreseeable harm.

Four outcomes to be incorporated into firms’ approaches to dealing with retail customers.
-communcstions (effective, timely, and informative)
-products and services (specifically designed to meet the needs of those to whom they are sold)
-customer service (in a consumers interest and without hiderance)
-price and value (fair value is provided to customers)

71
Q

To make a recommendation, what must an advisor do?

A

Obtain enough information to satisfy the regulator’s know your client rules.

This means gaining hard (name, address, etc. and soft facts (thoughts, feelings) and applying this to the wants-gots=needs equation.

72
Q

Can the advisor rely on the information given to them by a client?

A

Yes unless they know it to not be true.

73
Q

If a client doesn’t tell the truth and an advisor makes an inappropriate recommendation, will the advisor be liable?

A

No. Equally, the client should expect the advisor to tell the truth.

74
Q

Before fact finding, what should an advisor do?

A

Go through a formal introduction process (usually in conjunction with the issuing of terms of business document), ensuring they have covered the services the firm offers and compliance mandatories, such as how data will be handled and how to make a complaint.

75
Q

If a client does not want to disclose the full details of their financial affairs, what can the advisor do?

A

If enough is given for a recommendation to be made, the advisor may offer limited advice restricted to those areas where sufficient information was given.

The clients should be made aware of the recommendation being made on limited advice.

If there is not sufficient information, no recommendation should be made. The client can choose to act on an execution only basis.

76
Q

What should advice given to a client be?

A

Demonstrably suitable to their needs. Not just picking the least bad solution.

77
Q

How is suitability of recommendations demonstrated?

A

With a sutability letter or sutability report.

78
Q

What is in a sutability letter/report?

A

The customers situation
The product
The course of action being recommended
The reasons why the advisor believes this is appropriate.

79
Q

What was a sutability letter preciously called?

A

Reasons why letter.

80
Q

What requires a sutability letter?

A

All new personal recommendations

81
Q

What does not require a sutability letter?

A

Increases to regular primium contributions or increases that are automatically included in a contract.

82
Q

When establishing whether advice is suitable for a customer, the advisor should have what?

A

Due regard to their circumstances.

This means doing the know your customer section properly.

83
Q

What should an advisor know about a customer?

A

What are they hoping to achieve
Their budget
Their attitude to investment risk
Many other things.

84
Q

What should happen with each need?

A

It should be quantified, and the solution targeted, or where budget driven, the sutability letter should explain the extent to which the budget meets the need.

85
Q

What is the starting point for advice?

A

Any arrangement in place should be left unless it can be demonstrated to be unsuitable or there are strong arguments for replacing it with a new policy.

86
Q

What is a policy that is often replaced?

A

Where the customer has a term life insurance policy.

These are rate driven products, and rates have fallen in recent years.

87
Q

If cancelling a policy what should happen?

A

Leave the existing policy in place until the new policy is accepted epted and is on risk.

This is to prevent the customer cancelling and then being refused by the new provider, leaving them uninsured.

88
Q

What is the practice of replacing on e policy with another when not justified called?

A

Churning

This is outlawed

89
Q

How should an advisor make sure the customer fully understands the risk associated with the course of action?

A

The suitability letter should clearly state the downsides risks of an action.

The advisor should find out the clients true attitude to risk and capacity for loss and ensure the recommendation is appropriate to both.

90
Q

What is the exemption from MiFID 2

A

Article 3

91
Q

What does Markets in Finacil Instruments Directive 2 cover?

A

Disclosure of charges and costs
Product governance
How advice services are described
Suitability - both initial and annual, where ongoing service is being provided.
Recording all conversations, including telephone conversations.
Hoe inducements are treated.

92
Q

Pakaged products must have what?

A

A key features document (KFD)

This sets out the most important information about which a customer should be aware.

93
Q

When should a KFD be issued?

A

Before a customer has signed the application form. So the y can know the risks and benefits.

94
Q

How should a KFD be produced.

A

There is no need to be a hard copy.
Can be electronic
To a reasonable standard
Contain mandatory information

95
Q

Where can mandatory information for a KFD laid down?

A

By the FCA

Also, with further information by the consolidated life directive for life polices and income protection polices.

96
Q

What mandatory information should KFDs show?

A

Aims
Risks
Commitments
Main terms of the investment
Cancellation rights
Complaints procedure
Compensation arrangements (FSCS)

97
Q

What 15 prices of information must life and income protection KFDS include?

A

The firms name and its legal form

The name of the EEA State in which the head office, agency, or branch concluding the contract is situated.

The address of the head office, agency, or branch concluding the contract.

Information about the commitment

Definition of each benefit and each option.

Term of the contract

Means of payment of premiums and duration of payments.

Means of calculation and distribution of bonuses.

Indication of surrender and paid-up values and the extent to which they are guaranteed.

Information on the premiums for each benefit, both main benefits and supplementary

For unit-linked. Definition of the units to which the benefits are linked

Indication of the nature of underlying assets for unit-linked polices

Tax-position

Law applicable to the contract where parties do not have free choice or where parties are free to choose the law applicable or the law the insurer proposes to choose.

98
Q

What is the KFD often accompanied with?

A

The Key Features Illustration (KFI)

99
Q

What does a KFI do?

A

Seta out the personalised details for a customer. Primiums, charges, fees etc.

100
Q

What must projections be?

A

Based on reasonable growth estimates, which are to be selected by the provider based on an objective analysis of their funds.

101
Q

When stating charges in effect to growth, what must be done?

A

The charges must be given in relation to the growth estimate. I.e “4% is more like 2.7%”

Also, they must state that the projections are examples, not guarantees.

102
Q

Whi sets bonuses in with profit businesses?

A

Actuaries.

103
Q

To overcome lack of transparency in With Profits business what was introduced?

A

Each with profits office must produce a document called the principles and practices of financial management (PPFM)

They also used to have to produce a client friendly version (CFPPFM) but can now deliver the information how they like.

104
Q

What is beat practice for filling an application form?

A

The customer does it themselves, although they can be complex, so the advisors will often help.

The advisor should give the customer time to complete the form, but if they would prefer the advisor to do it, it should be asked to be checked and signed.

105
Q

What are the details inside an application from?

A

The basis of a contract so should be correct and accurate.

106
Q

What is totally unacceptable?

A

Signing an application before it is complete.

107
Q

The advisors sutability letter should be given to the customer:

A

Before the contract is concluded for a life policy. (Can be given orally and followed up in writing)

For personal pension or stakeholder no later than 14 days after the contract is concluded.

As soon as possible for all other buisness.

No later than any cancellation notice.

108
Q

No sutability letter is needed for:

A

Where someone is a resident outside the EEA and not in the UK at the time agreeing to the recommendations.

Top-ups to existing primium policies

Increases to existing regular primium polices.

109
Q

When a customer is recommended a product on which they have a right to cancel, when should they be notified of this right?

A

Before or straight after concluding the contract.

110
Q

How must a cancellation right be issued?

A

In writing, it must explain what a customer must do to exercise their right.

111
Q

What happens if the cancellation right is not issued

A

The client can cancel any time in the future.

112
Q

How long does the main life and pensions have to cancel?

A

30 days

113
Q

What products only have 14 days to cancel?

A

General insurance
Opening or transferring an ISA (though a 30-day right can apply to the investment held within the wrapper)
Cash ISAs
Enterprise investment schemes (EIS)

114
Q

When does the cancellation period begin?

A

On the day the contract is concluded or if later the date the client receives the terms and conditions and other important information.

115
Q

If cancellation is in writing, what is the date date of the cancellation?

A

The date of the postage.

116
Q

What happens if the value of an investment has gone down and a client cancels?

A

The lower amount can be paid to them.

117
Q

What happens if the value of an investment has gone up and a client cancels?

A

The higher amount does not have to be paid to them.

118
Q

What could cancellations indicate?

A

That the customer had been put under pressure to buy something they didn’t want.

119
Q

How long should cancellations be kept for?

A

Indefinitely - pension transfers

Five years - life and pension contracts

Three years - other cases

120
Q

What given examples of business may be impractical to cancel the ordinary way?

A

Annuity as it is a complicated thing to unwind

Pension transfers as the ceding scheme may not want to take the funds back.

121
Q

If a cancellation is impractical, what may a company use the cancellation period for?

A

Reflection before making the transaction.

122
Q

What instances may businesses transact without or against advice?

A

Non-advised
Execution only
Insistent customer
Discretionary Managment Service

123
Q

What is non-advised?

A

The customer is given enough information to make their own decision but no advice is given.

124
Q

What is execution only?

A

Where no advice is sort or given to the client. The client acts entirely on their own.

125
Q

What should be done with execution only deals?

A

Put in writing that it was made without advice.

FOS rights don’t apply

Monet laundering checks may still apply.

No cooling off or reflection period.

Don’t be confused with Best Execution, which refers to the duty to secure the best prices for a client.

126
Q

What happens with insistent clients

A

If a client wishes to act against advice, and the advisor chooses to transact and not walk away, the client should receive a second letter reiterating the advice not to proceed which is not accompanied by any other letters or applications that could conflict the letter.

After this letter, the client should put in writing their decision to proceed in their own words.

127
Q

What happens with discretionary management service?

A

Advisors/investment managers sometimes offer the ability for themselves to make investment on the clients’ behalf.

This must be signed with an explicit mandate and terms in which the advisor can opperate.

128
Q

What can vulnerability be driven by?

A

Health - physical or mental disabilty

Life events - retirement, bereavement, etc.

Poor resilience - financial or emotional

Capability - Learning disabilities or limited understanding

129
Q

How often should reviews take place?

A

Annually, as a minimum. This is prescribed for MiFID firms

130
Q

Can all reviews be done at the beginning of the tax year?

A

No they will need spreading out?

131
Q

What events warrant a review outside of the usual annual one?

A

Change in legislation
Change in personal circumstances
Change in economic outlook

132
Q

What is the difference between transctional and ongoing relationships customers

A

Transctional call the advisor when they want a review

Ongoing will commit to doing the reviews and contact the client.

133
Q

If the advisor wishes to work with the client on a transactional basis, what must happen?

A

It must be clearly stated in the terms of business to ensure there I’d no expectation of an ongoing service.

134
Q

In 2004 what did the government do to get people more involved in the Finanacial services?

A

Introduced simplified lighter touch products.

Sutability letters were replaced with a simplified summary

No post sale information was needed

Sales were guided, meaning the full requirement for knowing your customer was replaced with a series of questions to ensure advice is suitable but not necessarily the most suitable.

135
Q

What simplified stakeholder products were introduced for customers?

A

Short-term product - a deposit account with a minimum premium of £10

Medium term product - a collective investment that could sit within an equity ISA wrapper. Minimum premium not more than £20

Long-term product - a stakeholder pension with lifestyle built in. Minimum premium not more than £20.

136
Q

What were the maximum charges permitted for both medium and long-term stakeholder products?

A

1.5% annum in the first 10 years 1% after.

137
Q

Why were the stakeholder products unpopular?

A

Providers didn’t like the cap on charges, and they weren’t very attractive to customers.

Ro1 Regulations And Ethics Of The Finanacial System (14 decks)

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