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R01 Chapter 5B: The FCA Handbook > 5B.3. Block 3: Business standards > Flashcards

5B.3. Block 3: Business standards Flashcards

1
Q

What does Block 3 of the FCA handbook cover?

A

Covers off FCA business standards.

These are the rules for day-to-day activities in relation to an individual, firm, or market with Part 4a permission.

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2
Q

What does the COBS sourcebook or manual stand for?

A

Conduct of Business Sourcebook

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3
Q

What does the COBS sourcebook or manual include?

A

Conduct of business applying to individuals, firms and markets.

Covers day to day rules and requirements.

On how to deal with customers.

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4
Q

What does ICOBS sourcebook or manual stand for?

A

Insurance: Conduct of Business Sourcebook

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5
Q

What does the ICOBS sourcebook or manual include?

A

Conduct of business applying to insurance-mediation firms.

Areas such as general insurance, pure protection, and payment protection insurance (PPI).

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6
Q

What does the MCOB sourcebook or manual stand for?

A

Mortgages and Home Finance: Conduct of Business

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7
Q

What does the MCOB sourcebook or manual include?

A

Conduct of business applying to mortgage firms.

Rules about what is classified as a ‘regulated mortgage contract’

Has incorporated new rules from the Mortgage Market Review (MMR).

And subsequently, the Mortgage Credit Directive (MCD).

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8
Q

What does the BCOBS sourcebook or manual stand for?

A

Banking: Conduct of Business Sourcebook

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9
Q

What does the BCOBS sourcebook or manual include?

A

Conduct of business applying to banks and how they must deal with customers.

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10
Q

What does the CMCOB sourcebook or manual stand for?

A

Claims Management: Conduct of Business Sourcebook

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11
Q

What does the CMCOB sourcebook or manual include?

A

Conduct of business applying to claims management firms and how they must deal with customers.

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12
Q

What does the PROD sourcebook or manual stand for?

A

Product Interventions and Product Governance.

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13
Q

What does the PROD sourcebook or manual include?

A

Product oversight and governance processes. Outlines FCA policy on temporary ‘product intervention’ rules.

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14
Q

What does the CASS sourcebook or manual stand for?

A

Client Assets

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15
Q

What does the CASS sourcebook or manual include?

A

The FCA requirements relating to the holding of client money.

Rules relating to timescales, interest payments and protection.

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16
Q

What does the MAR sourcebook or manual stand for?

A

Market Conduct

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17
Q

What does the MAR sourcebook or manual include?

A

What is acceptable market-conduct and what is market abuse.

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18
Q

What does the Conduct of Business Sourcebook (COBS) set out?

A

Detailed guidance of how businesses should deal with their customers. They apply to deposit taking firms and all regulated life, pension and investment companies (investment based.)

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19
Q

What does the Conduct of Business Sourcebook (COBS) focus on?

A

Investment companies that were previously registered under the Financial Services Act 1985.

However, different types of regulated firms have their own COB rules to content with.

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20
Q

What do the COB rules address?

A

The conduct of individuals, firms and markets with Part 4a permission.

There are all sorts of ‘dodgy dealings’ that can take place to ‘encourage’ people to do business with you. COBS sets out what is, and what is not, acceptable in day-to-day activities.

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21
Q

In terms of inducements, what must firms do?

A

Must take reasonable steps to ensure that inducements are not offered to customers.

They must also avoid anything that may prejudice the duty of care that they owe customers.

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22
Q

What did the Retail Distribution Review (RDR) make clear?

A

That any payments to firms or advisers can only be to the intermediary giving the advice, unless:

  1. The intermediary waives their right to it and passes it back to the customer, or
  2. Another firm has been involved, or
  3. The investment is a packaged product, provided by direct advertisement to the customer (known as an ‘off the page’ advert).
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23
Q

What do packaged products tend to be?

A

Collective investment schemes, such as unit trusts or OEICS.

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24
Q

How are intermediaries meant to act?

A

Impartially and there are rules designed to prevent them being swayed by incentives or ‘under the table’ payments and services in return for placing business with providers.

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25
Q

Can commission payments to advisers increase in line with greater volumes?

A

No, this is forbidden under COB rules.

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26
Q

Can providers supply goods and services to intermediaries, either free of change or at a reduced cost?

A

Yes, if they stay within certain rules.

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27
Q

How long must records of any benefits provided to intermediaries be kept for?

A

At least 5 years.

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28
Q

What is the general rule in relation to indirect benefits, gifts and extras?

A

Any of the allowed goods and services should be widely available, not exclusively to intermediaries.

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29
Q

What are the 5 rules that must be complied with for providers supplying goods and services to intermediaries?

A
  1. Selling
  2. Gifts/extras
  3. Communications
  4. Training
  5. Hardware
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30
Q

What is the rule of selling?

A

Product literature and product promotion material can be provided to the intermediary as long as it doesn’t have the intermediary name on it.

Attendance (by provider staff) of training provided by the intermediary is also permitted, for business reasons, with reasonable expenses claimable.

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31
Q

What is the rule of gifts/extras?

A

Gifts and hospitality of a ‘reasonable value’ are allowed.

Intermediaries can be paid a ‘reasonable amount’ for participating in market research.

The term ‘reasonable’ will have a different interpretation, depending on the size of the firm.

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32
Q

What is the rule of communications?

A

A provider can pay reasonable travel and accommodation costs for an intermediary visiting a UK office.

A provider can supply a freephone link and pre-paid envelopes for communication purposes.

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33
Q

What is the rule of training?

A

Training can be provided, without charge, if it is made generally available to intermediaries.

Reasonable travelling and accommodation costs can be reimbursed.

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34
Q

What is the rule of hardware?

A

Hardware, such as laptops, can only be provided if they are part of a software package in relation to the provider’s products.

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35
Q

Many of the rules that apply to COBS also apply to what?

A

The insurance market version; ICOBS

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36
Q

What 3 main product categories does ICOBS cover?

A
  1. General insurance (GI) products: home, car, pet insurance.
  2. Pure protection: no investment content, purely protection.
  3. Payment protection insurance: to cover loan repayments in event of incapacity to work.
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37
Q

Is ICOBS now more principle-based or rule-based?

A

Principle-based, with high-level guidance replacing specific actions.

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38
Q

Why was there no ICOBS granfathering?

A

Because you cannot grandfather-over something that did not require authorisation at the time of the FSMA 2000.

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39
Q

How many chapters are there within ICOBS?

A

8

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40
Q

What are the eight chapters within ICOBS?

A

ICOB1: Application

ICOB2: General matters

ICOB3: Distance communications

ICOB4: Firm information

ICOB5: Identifying needs

ICOB6: Products

ICOB7: Cancellation

ICOB8: Claims handling

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41
Q

Who is offered less protection: commercial or retail customers?

A

Commercial customers

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42
Q

There is a simpler advice process (than life, pensions or mortgages). What requirements does it include?

A

Initial disclose - Production of a demands and needs statement - Suitable recommendations given including product disclosure - Cancellation rights.

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43
Q

Before offering any advice, what must an intermediary supply the client with and how is this done?

A

An initial disclosure document (IDD) or terms of business (OB).

As a lot of ICOBS business is done over the telephone or online, this could involve reading out an extract, followed up with a copy in writing which is subsequently sent in the post.

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44
Q

What are common inclusions with ICOBS and what are mandatory?

A

Disclosure details of the service offered, authorisation status, companies dealt with, and fee information.

Services offered and authorisation status are mandatory.

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45
Q

What is produced for ICOBS cases which outlines recommendations?

A

A ‘demands and needs statement’.

Material facts must be disclosed, outlining why the product is suitable. Policy documents must be provided, and the claims and compensation sections discussed.

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46
Q

When is a demands and needs statement/suitability report production NOT necessary?

A

For non-advised cases.

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47
Q

For ICOBS cases, a cancellation notice must also be sent in all cases, except for which 5?

A
  1. Traded life policies
  2. Policies less than 6 months in duration
  3. Non-UK resident and some pension-linked benefits.
  4. Travel insurance policies.
  5. Policies lasting less than a month.
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48
Q

How long is the cooling off period?

A

Generally, 14 days for general insurance and 30 days for pure protection and PPI.

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49
Q

When are cancellation periods generally longer?

A

The more complex the product, the longer the cancellation period. The simpler the product, the shorter the cancellation period.

  • General Insurance, such as car, buildings and contents are simpler, hence the 14 days ‘cooling off’
  • Protection products involve more detailed discussions, hence the 30 days ‘cooling off’.
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50
Q

When are the terms for ICOBS renegotiated?

A

Many ICOBs products are annual, so terms are renegotiated every 12 months, at the ‘renewal date’.

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51
Q

When does renewal documentation need to be provided?

A

In a timely fashion, 21 days before expiry is ‘good practice’.

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52
Q

In 2019, who became the new regulator for claims management companies (CMCs)?

A

The FCA.

This was after heavy criticism of this market sector which includes firms such as ‘no win no fee’ companies. These services consist of advice/services of claims for compensation, restitution, repayment, or other remedies for loss/damage.

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53
Q

What is the focus of the regulator for CMCs?

A

Driving up standards of conduct and boosting consumer protection.

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54
Q

How many chapters are there within CMCOBS (Claims Management Conduct of Business)?

A

CMCOB1: Application

CMCOB2: General matters

CMCOB3: Financial promotions and client communications

CMCOB4: Pre-contractual requirements

CMCOB5: Fee caps

CMCOB6: Post-contractual requirements

CMCOB7: Prudential requirements and professional indemnity insurance

CMCOB8: Requirements for firms with temporary permission

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55
Q

What 3 main areas of focus does the regulator have under these rules for the CMCOB?

A
  1. Empowering customers.
  2. Authorisation that meets common standards
  3. High standard of conduct rules.
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56
Q

What is the aim of empowering customers?

A

The FCA aim is that customers are empowered and confident in choosing a value-for-money service which is appropriate for their needs.

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57
Q

What is the aim of authorisation that meets common standards?

A

Firms must help customers secure redress in a way that complies with FCA rules and is in line with a common set of standards.

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58
Q

What is the aim of high standard of conduct rules?

A

That improves public confidence in these firms.

59
Q

The CMCOB 2.1: General principles contains rules which include what 3 things?

A
  1. Not making or pursuing fraudulent claims
  2. Taking reasonable steps to investigate the potential claim.
  3. Not taking customer payments without strict adherence to the rules.
60
Q

What does the CMCOB 2.2: Generating, obtaining and passing on leads include?

A

The source of such leads, referrals or date must be clearly recorded.

61
Q

What does the CMCOB 2.2.3: Rules that affect lead generators include?

A
  • Appropriate systems and processes must be in place.
  • There must be compliance with data protection.
  • This includes procedures relating to customer consents.
  • There are now strict rules in relation to consent which must be:

Freely given
specific and informed
unambigious

62
Q

What does the CMCOB 2.3: Sales referral leads and data include?

A

Telephone calls and electronic communications with clients must be recorded. These records must be maintained for at least 12 months.

63
Q

What does the CMCOB 3.2: Financial promotions and communications include?

A

Must be clear, fair, and not misleading.

New restrictions on ‘no win no fee’ advertising.

64
Q

What does the CMCOB 5.1: Charges include?

A

A new PPI fee cap of 20% of the amount recovered.

Revised fees must be offered if applicable.

65
Q

What does the CMCOB 7: Prudential requirements include?

A

Appropriate financial resources required. General and specific financial prudency requirement including PII indemnity insurance.

66
Q

In terms of the Mortgage Conduct of Business (MCOB), what is the FCA responsible for?

A

The regulation of mortgage lending and advising, with a few exceptions; lenders, administrators, arrangers and advisers all need authorisation from the FCA.

67
Q

Was the MCOB grandfathered?

A

No, for the same reasons as for the ICOBS authorisations.

68
Q

Firms and individuals can be authorised in what 2 ways?

A
  1. Direct authorisation
  2. Appointed representative
69
Q

What is direct authorisation?

A

The firm or individual must demonstrate compliance with MCOB and FCA rules.

70
Q

What is appointed representative?

A

Business is processed via a directly-authorised firm or individual, who retains responsibility for compliance.

71
Q

What are ‘introducers’?

A

They pass on business leads to an authorised firm or individual.

72
Q

Why do introducers not need FCA authorisation?

A

Because they do not give advice. They are therefore not carrying out regulated activities. They simply pass on leads to an authorised firm or individual.

73
Q

What 3 ways can individuals giving mortgage advice do so in?

A
  1. The whole of the market
  2. A limited selection of lenders
  3. A single lender
74
Q

What are the 2 types of mortgage service?

A
  1. Information only, or non-advised.
  2. ‘Advice’ or ‘advised’ (as of April 2014, advice is compulsory for those in vulnerable groups).
75
Q

What is information only as a mortgage service?

A

Also known as non-advised, is where the adviser gives the client facts and information about their various options. There is no discussion around suitability.

76
Q

What does advice or advised mortgage service include?

A

Includes advice on the most suitable option for the client, and its merits. Since the Mortgage Market Review (MMR), the default method is an advised service.

77
Q

What else, as part of a conversation around mortgages, does NOT constitute an advised sale?

A

A mortgage adviser could discuss a range of other areas and this would not constitute advice to a client. This includes:

  1. Discussing features and benefits of a mortgage or interest rate option.
  2. Outlining the benefits of a client switching from say, a fixed-interest mortgage, to a discounted scheme.
  3. Discussing the pros and cons of buying a property in comparison to renting.
78
Q

If there is any talk of ‘suitability’ or ‘merit’ for a specific product in relation to a client, what does this constitute?

A

Advice.

79
Q

What is classed as a regulated mortgage contract?

A

For mortgages to be classed as a regulated activity, and be subject to the rules in MCOB, they must satisfy a broad definition.

80
Q

An FCA-regulated mortgage contract is on where what happens? (5 answers)

A
  1. The lender provides credit to an individual or trustee.
  2. It is secured by a first legal charge on land in the UK.
  3. And at least 40% of the property is to be used as a dwelling by the borrower or related person.
  4. Where a loan is secured on a second or subsequent charge (as of March 2016).
  5. Consumer (accidental landlords) buy to let mortgages (as of March 2016).
81
Q

What is NOT classed as a regulated mortgage contract?

A

Where the borrower is a company.

82
Q

What does Principle 6 of MCOB state?

A

That customers must be treated fairly and must not feel pressured into taking out a mortgage until they have had time to fully consider the offer.

This is an FCA and a MCOB requirement.

83
Q

What 5 other things does the MCOB also provide guidance on?

A
  1. Promotions
  2. Advice standards
  3. Disclosure requirements
  4. Suitability principles
  5. Calculation of Annual Percentage Rate (APR)
  6. Responsible lending, arrears and reposessions.
84
Q

What does the calculation of APR in a MCOB show?

A

The total cost of borrowing, not just interest charges. A mortgage is likely to involve additional charges, such as administration fees, lending charges and valuation fees. APR takes all costs and charges into account.

85
Q

What can a person do with both types of equity-release schemes?

A

A person can release the cash value locked in their property (the equity) to use in whichever way they see fit. This could be to improve their lifestyle, usually in retirement, allow them to help their families financially, or to provide funds for long-term care costs.

86
Q

What do home reversion plans involve?

A

Selling part or all of a property, often for a discounted price, and receiving a lump sum of cash to spend on whatever you want. You can often live in the house for the rest of your life, whilst paying a peppercorn (not commercial) rent. When you die, the house is sold, and the proceeds split between the property owners.

87
Q

What is a lifetime mortgage?

A

Where the lump sum required is generated by taking out a mortgage on the property.

88
Q

How does lifetime mortgage differ from a home reversion plan?

A

Unlike a home reversion plan, with a lifetime mortgage, the individual still owns their property, but the lender has a first legal charge on it.

89
Q

What types of lifetime mortgage are there?

A

Many different types. Some types involve only the interest being paid, others may be where interest, plus any other charges, are rolled-up rather than paid.

90
Q

What is a sale and rent back scheme?

A

Launched on 1st July 2010. They involve you selling your home, usually at a discount and obtaining a right to remain there for a set time, whilst paying a commerical rent.

91
Q

When are sale and rent back schemes often used?

A

Where people still have mortgages outstanding while home reversion plans are for those that are mortgage-free.

92
Q

Sam is looking to give advice in the equity-release market. He holds no specialist qualifications. Can he offer advice?

A

He cannot give advice in this market area. He will require specialist qualifications before being able to do so. This is because this type of advice usually involves vulnerable clients.

93
Q

What are the 2 sets of mortgage reforms that have significantly changed the market and, as a result, the rules contained in the MCOB?

A
  1. Mortgage Market Review (MMR)
  2. Mortgage Credit Directive (MCD)
94
Q

What were the main reasons for the new mortgage rules?

A

The property market was feared to be overheating and the regulator was worried that borrowers were overcommitting themselves.

95
Q

When did the Mortgage Market Review (MMR) come into effect?

A

26th April 2014

96
Q

What happened as a result of the MMR introduction?

A

Most mortgages arranged will be on an advice basis.

97
Q

What does advice on a mortgage recommend?

A

Involves recommending a specific product, having considered the customers’ circumstances. It involves ‘stress-tests’ should interest rates increase.

98
Q

Is providing information on the types of mortgages available, or current offers, classed as advice?

A

No

99
Q

How should ‘trapped’ borrowers, who cannot re-mortgage be treated?

A

Cannot be treated any less favourably by the lender.

100
Q

What did the MMR make wide-ranging and wholesale changes to reflect?

A

To reflect the FSA’s (and now FCA’s) increased focus on mortgages.

101
Q

What 3 key changes did the MMR involve?

A
  1. More stringent affordability tests
  2. Stress testing
  3. FCA accountability
102
Q

What does more stringent affordability tests involve?

A

Lenders are responsible for assessing a customer’s ability to pay in all situations.

Self-certification of income and ‘toxic combinations’ e.g. high loan to value with poor credit history were banned.

103
Q

What does stress testing involve?

A

Wider consideration of the customer’s income and expenditure required.

Consideration of how this could be affected by an increase in interest rates.

104
Q

What does FCA accountability involve?

A

All mortgage advisers are personally accountable to the FCA.

Non-advised mortgages (no advice given) are now not available.

105
Q

When must affordability, in relation to mortgages, be assessed?

A

In all cases.

106
Q

What did the Mortgage Credit Directive (MCD) introduce?

A

Some follow-up rules to those introduced by MMR, in relation to residential property.

107
Q

When did the new requirements from the MCD become UK law?

A

On 21st March 2016.

108
Q

What were the 3 aims of the MCD?

A
  1. Prevent the repetition of irresponsible lending and borrowing practices.
  2. Create a more efficient and competitive single mortgage market.
  3. Foster consumer confidence and mobility.
109
Q

What 3 key features did the MCD include?

A
  1. New disclosure method
  2. Binding offer and reflection period
  3. New Buy to Let Mortgages (BTL) categories.
110
Q

What did the key feature of ‘new disclosure method’ involve?

A

A new European Standard Information Sheet (ESIS) replaced the KFI as the mortgage disclosure method for most mortgages. This had to be in use by mortgage lenders no later than 21st March 2019.

111
Q

What did the key feature of ‘binding offer and reflection period’ mean?

A

Customers to be given 7 working days to reflect on the terms of loans that they are considering taking out.

This is in addition to any post-offer cooling-off period.

112
Q

What did the key feature of ‘new buy to let mortgages (BTL) categories’ mean?

A

The introduction of new consumer and business BTL mortgage categories.

Individuals are either professional (business) or accidental (consumer) landlords.

Accidental are regulated, professional are not.

Example of accidental is someone that goes abroad and rents their property temporarily, professional is where a conscious decision was made usually with the aid of a new mortgage.

113
Q

MCD means firms will need to do what 4 things?

A
  1. Provide a binding mortgage offer and a minimum 7 day reflection period.
  2. Provide an adequate explanation of all product-essential features.
  3. Abide by new disclosure requirements.
  4. Provide mortgage illustrations before a suitability report.
114
Q

What is the whole ethos of the MCD?

A

To build on MMR

115
Q

What does MCD aim to do?

A

To ensure that customers are well-informed about contracts they are taking out, and the associated costs and risks.

116
Q

Where recommendations are provided (and in most cases, they are now mandatory), a firm must ensure that a customer knows and has what 2 things?

A
  1. Has stability of repayment and an appropriate mortgage term.
  2. Knows their rights to early repayment or mortgage redemption.
117
Q

What must all mortgage sellers and advisers hold?

A

A relevant level 3 qualification.

118
Q

Regulated mortgages used to only be those established on a first-charge basis. What are they now?

A

Following the MCD, it also includes those on a second-charge basis.

119
Q

When can Product intervention rules be implemented?

A

Without any consultation

120
Q

Why are Product intervention rules known as ‘temporary product intervention rules’?

A

Because they have a maximum duration of 12 months.

121
Q

What do product intervention rules apply to?

A

Specific products (types and features of) and the marketing practices around them.

122
Q

What are the 3 aims of good product governance?

A
  1. To meet the needs of identifiable target markets.
  2. To make products available to the target market through suitable distribution channels.
  3. To deliver appropriate client outcomes.
123
Q

Client money is regularly held by firms. What does it usually comprise of?

A

Cash and/or cheques payable to an intermediary.

124
Q

What do client asset rules do?

A

They restrict the use of client money by the firm, without the client’s agreement.

In general terms, clients’ assets must be segregated from the firms.

125
Q

What do client asset rules protect clients from? (3 answers)

A
  1. It avoids client assets being viewed as assets of the individual, firm, or market.
  2. If bankruptcy or insolvency is on the cards, all the assets of the individual or firm are potentially available to their creditors (those they owe money to).
  3. Client monies are the assets of the client, so these rules protect these monies from creditors.
126
Q

Where does a firm have to hold client money?

A

Separately in a client bank account. Monies must be deposited in this account by close of business (COB) the next working day. Banks, life offices, and friendly societies are exempt.

127
Q

How must the ‘client account’ be set up?

A

As a nominee account, and be with an approved bank, to ensure that the money is not available to creditors, should the business become insolvent. Any interest earned belongs to the client.

128
Q

When must client money reconciliation be done?

A

As often as necessary - this means daily in FCA speak.

129
Q

What does a nominee account mean?

A

Means that the firm is the custodian of your monies, with you remaining the owner.

130
Q

If an investment firm does not hold client monies, what are they not subject to?

A

MiFiD

131
Q

What is a nominee bank account used for?

A

To protect client funds from creditors.

This type of account has the client as the actual owner of any funds before they are invested, even though the account has been set up by the firm.

132
Q

How is reporting of a clients assets and money completed?

A

Through a client money and asset return (CMAR). This is for medium and large firms holding monies equal to or over £1 million and/or assets equal to or over £10 million. Reporting is monthly and one director/senior manager in the firm must have CASS responsibility.

133
Q

What is a CASS Resolution Pack?

A

This is a pack containing information on a firm’s client monies account in line with FCA client monies rules.

134
Q

Who is required to have a CASS Resolution Pack?

A

All investment firms holding client monies.

135
Q

What is the aim of the CASS Resolution Pack?

A

To promote the speedier return of client monies and assets in the event of the failure of the product provider.

136
Q

What 3 documents does the CASS Resolution Pack include?

A
  1. New and existing client assets records.
  2. Latest client money reconciliations.
  3. A list of custodians where assets are held.
137
Q

If a firm is or becomes a CASS medium or large firm holding client money equal to or over £1 million and/or assets equal to or over £10m, what 2 things must they do?

A
  1. Complete a CMAR via RegData every month
    and
  2. Make a director or senior manager responsible for CASS (SMF18).
138
Q

What should the pack contain if a firm goes bust?

A

All the required records to enable an insolvency practitioner to return client assets to owners. Its aim is the swift return of assets to clients.

139
Q

What 3 things do Market Conduct (MAR) rules cover?

A
  1. Prohibitions on false or misleading information
  2. Prohibitions on false or misleading impression
  3. Making artificial transactions.
140
Q

What informs the Market conduct section of the handbook?

A

The Market Abuse Directive (MAD).

It also identifies the 2 offences of ‘insider dealing’ and ‘market manipulation’, and measures to detect and reduce such abuse.

141
Q

What property loan contracts/types are FCA regulated?

A
  • Main residential home
  • Buy to let for family use
  • Holiday homes in the UK
  • Second homes
  • Equity-released schemes
  • Sale and rent back schemes
142
Q

What property loan contracts/types are NOT FCA regulated?

A
  • Buy to let (not regulated unless ‘accidental’ or consumer landlord)
  • Commercial property purchase.
  • Holiday homes abroad
143
Q

What does the ESG Sourcebook (ESG 2) set out?

A

The rules and guidance concerning a firm’s approach to environmental, social and governance matters.

R01 Chapter 5B: The FCA Handbook (7 decks)

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