EXAM PAPER QUESTIONS Flashcards

Question

WHAT ARE THE CONDUCT RULES?

Answer 1

1. Act with integrity 2. Act with due skill care and diligence 3. Must be open and cooperative with the FCA and the PRA extra 2 for when working with retail clients 4. Pay due regard to the interest of customers and treat them fairly 5. Must observe proper standards of market conduct

Answer 2

P1 - firms whose failure would cause lasting damage and widespread financial and reputational damage to their customers, client assets, the marketplace and beyond P2 - firms who disorderly failure who damage consumers and client assets but are more easily dealt with than the failure of a P1 firm P3 - firms whose failure, even if disorderly, would be unlikely to cause significant harm to consumers or market integrity the categories

Answer 3

Intended to cover individuals with overall responsibility for one or more key functions or identified risks, those who perform a function not caught by an SMF

Answer 4

Created to allow firms to designate senior executives who have ultimate responsibility for functions but would not be part of the SMF structure 12-week rule for individuals who cover for an approved person (SMF) if the absence is less than 12 consecutive weeks

Answer 5

PRA Function SMF 2 - Chief Finance function SMF 4 - Chief Risk function SMF 5 - Head of Internal Audit Function SMF 7 - Group Entity Senior Manager SMF 19 - Head of third country branch function FCA Functions SMF 3 - Executive Director SMF 16 - Compliance oversight function SMF 17 - Money Laundering Reporting officer SMF 22 - Other local responsibility function

Answer 6

Firm's performance of its obligations under SMF regime - FCA/PRA Responsibility for performance of obligations under the certification regime - FCA/PRA Responsible for the compliance of requirements of the regulatory system about the responsibilities map - FCA/PRA Responsible for the firm's policies and procedures for countering the risk the firm might be used to further financial crime - FCA prescribed Responsible for allocation of prescribed responsibilities - PRA prescribed

Answer 7

- leading the development of - monitoring the effective implementation of policies and procedures FCA/PRA Prescribed - Overseeing the adoption of the firm's culture in day to day management of the firm is PRA prescribed - Leading the development of the firm's culture is PRA Prescribed - Responsible for developing and overseeing the firm's renumeration policies in accordance with SYSC 19D is FCA and PRA Prescribed - Firms compliance with CASS is FCA prescribed - Firm carrying out propriety trading, being responsible for the oversight is a PRA function - Firm's recovery procedure and resolution pack is a PRA prescribed function - Responsible for firm's obligations under F&P is a PRA prescribed function - Treasury management function - PRA prescribed function

Answer 8

It applies when a firm is seeking approval from the PRA for a candidate to perform a PRA-designated SMF and this individual also intends to act as a FCA SMF, once the PRA gives approval It only applies to the FCA governing functions

Answer 9

One or more persons must perform the following - Chief Finance Function - Chief Executive Function - the Chairman FCA Applied "Overall responsibility" to Solvency II firms Firms must have a senior manager for every activity, business area and management function in the firm

Answer 10

Applies to Lloyds market Consistent with the underwriting risk function which is also exclusively only applied to Lloyd's The senior manager will also be accountable for monitoring agents compliance with Lloyds conduct of business standards

Answer 11

Applied in a different manner than banks and deposit takers, due to the nature and impact these firms have on financial markets Lighter touch/more appropriate approach adopted by FCA for these firms

Answer 12

- limited permission consumer credit firms - all sole traders - authorised professionals whose regulated activity are non-mainstream activities - oil market participants - service companies - energy market participants - subsidiaries of local authorities - insurance intermediaries - authorised internally managed AIFs

Answer 13

firms that have a baseline of SM&CR requirements applied

Answer 14

Small proportion of solo-regulated firms that will have to apply extra rules

Answer 15

SMF 1 - CEO SMF 3 - EXECUTIVE DIRECTOR SMF9 - CHAIR SMF16 - COMPLIANCE OVERSIGHT SMF17 - MLRO SMF 18 - OTHER ENHANCED RESPONSIBILITY (ENHANCED) SMF27 - PARTNER

Answer 16

DISPUTE RESOLUTION: COMPLAINTS (Disp) - detail about complaints and the FOS arrangements CONSUMER REDRESS SCHEMES SOURCEBOOK - contains conditions and guidance on how to establish a redress scheme COMPENSATION (Comp) - rules governing eligibility and under FSCS

Answer 17

Putting consumers needs first Strengthening the UK's position in wholesale markets Preventing Financial Crime Preparing financial services for the future

Answer 18

Setting and testing higher standards Promoting competition and positive change Reducing and preventing serious harm

Answer 19

It is APPLICATION

Answer 20

To move the regulatory approach forward towards a better focus on outcomes rather than compliance with detailed and prescriptive rules Implements MiFID and MiFID II firms are subject to COBS if they carry out designated investment business from an establishment maintained by them or an appointed representative - this is called the GENERAL APPLICATION

Answer 21

Firms carrying out eligible counterparty business COBS 2 - conduct of business on inducements COBS 4 - communicating financial promotions COBS 6 - Provisions about information on the firm and renumeration COBS 8 - Client arrangements COBS 10 - appropriateness requirements Part of COBS 11 - such as best execution Part of COBS 12 - labelling of non-independent research

Answer 22

- rules in COBS that derive from MiFID apply to UK MiFID firms carrying on MiFID business from a UK establishment - Non-uk MiFID investment firm - from January 2021, EEA firms operating a branch in the UK are now classified as 'third country' branches

Answer 23

Act in good faith towards retail customers - standard conduct - open, honest and fair dialogue - Acting consistently with expectations of retail customers - consider this rule at product design stage Avoid foreseeable harm - Firms must understand that retail customers accept the inherent risk in products Firms dont have a responsibility to protect customers from all foreseeable harm - understand and accept risks with products - proactive steps to avoid forseeable harm when you can - do not exploit customers vulnerabilities Enable and support retail customers to pursue their financial objectives - Support customers to ensure they have the right information and understanding to make their own decisions - firms need to establish an environment where customers have trust and faith in the firm and the products they are purchasing - firms can assume the information provided to them by the retail customer as part of that due diligence where advisory or discretionary services are provided

Answer 24

Client Best Interest Rule - firms must act honestly, fairly and professionally in accordance with best interests of its clients FAIR TREATMENT OF CUSTOMERS - fits in with the consumer duty rule REQUIREMENT FOR FAIR AGREEMENTS UNFAIR CONTRACT TERMS LEGISLATION

Answer 25

It fits in with the Consumer Duty Rule and is embedded in Principle 6 of the FCA Principles - "A firm must pay due regard to the interests of its customers interests and treat them fairly" Often important imbalance between the firm and its customers SIX OUTCOMES TO EXPLAIN FAIR TREATMENT OF CUSTOMERS 1. consumers can be confident they are dealing with firms where fair treatment of customers is central to culture 2. Products and Services are designed to meet the needs of consumer groups 3. Consumers are provided with clear information and are kept appropriately informed before/during and after point of sale. 4.when consumers receive advice, it is suitable and takes account of their circumstances 5. consumers provided with products that perform as firms lead them to expect 6. consumers do not face unreasonable post-sale barriers imposed by firms to sell, change products

Answer 26

- applies to designated investment business carried out for retail and professional clients in relation to MiFID Does not apply to INSURANCE FIRMS issuing life policies as principal - firms must provide this investment agreement - information about the firm and its service relating to that agreement, or information required by COBS 6 - agreement needs to be provided in a durable medium firm may provide the agreement and information immediately after the client is bound by any agreement only in the following circumstances - firm unable to comply with the requirement to provide the agreement in good time prior to carrying out investment business - rule on telephone voice communications does not apply - firm complies with that rule MUST BE MAINTAINED FOR - 5 YEARS - Duration of relationship with client - case of pension transfer, pension opt-outs, additionl voluntary contributions to private pension, pension contract indefinitely

Answer 27

Provides a guide on how the FCA will use powers under CONSUMER RIGHTS ACT 2015 The FCA will consider fairness contract terms and consumer notices issued by authorised firms or appointed representatives Under the CRA, a contract term or notice is considered unfair if contrary to the requirement of good faith - it causes a significant imbalance in the parties' rights and obligations to the detriment of the customers. FCA may consider the fairness of a term or notice within the meaning of the CRA if it receives a complaint from a customer Different ways the FCA can deal with unfair terms or notices when a firm has breached a principle, rule or breach of financial promotions rules - The FCA can take action under FSMA FCA does not have the powers to redress BUT when the use of an unfair term amounts to the breach of an FCA rule, the FCA can apply to the courts for restitution

Answer 28

taking steps to identify, prevent and mitigate conflicts of interests that arise An investment firm must not pay/provide, accept/receive from any party other than its client a commission or minor non-monetary benefit with the provision of any investment or ancillary service. does not apply when - it is designed to enhance the quality of the service and does not impair the firm to act in the best interests of the client - enables the provision of an investment service of the firm such as custody costs or exchange fees does not apply when it is a minor non-monetary benefit

Answer 29

- clearly disclosed prior to the provision of the relevant service to the client - capable of enhancing the quality of the service - scale/nature that could not impair the firm to act honestly, fairly and professionally - reasonable, proportionate to ensure the firm does not act in any way that is detrimental to the interests of the relevant client - consists of: hospitality of de minimis value such as food/drink in a business meeting participation in conferences, seminars and other training events written material from a third party that is commissioned and paid for by the corporate issuer information about a financial instrument or investment service that is generic in nature

Answer 30

The UK had to onshore and scrap their own legislation ANY regulated firm that - provides investment advice - restricted advice - portfolio management services prohibited from receiving research for free, they need to pay for the research Firms can pay from their own resources or from a research payment account Do not apply to non-UK regulated bodies that produce research and non-UK regulated firms that consume research It constitutes research if - concerning more than one financial instrument - concerning issuer or potential issuers of financial instruments - closely related to specific industry or market such that it informs views on financial instruments - specifically recommends an investment strategy PROVIDED EXEMPTION FOR AIFs and CISs whose core investment policy is not MiFID financial instruments - Private Equity and Real Estate not captured

Answer 31

2021 consultation Policy statement 2021 NOVEMBER - Equity research on small and mid cap companies with market capitalisation of below £200 million are exempt from the inducement rules - brokers could provide it to asset managers on a bundled basis Third party research on fixed income currencies and commodities instruments will be exempt from inducement rules allowing it to be bundled 'Independent' research providers will be exempt when they do not provide execution services Openly available research does not apply

Answer 32

See if it is exempt under the Inducement Rules If it is not exempt - firms need to take steps to ensure that they do not read/benefit/have access to the research

Answer 33

The general view is that macroeconomic analysis is likely to suggest an investment strategy whether it is explicit or implicit (providing views on curve growth/economic growth/currency rates) If it is not considered research (vague/general by nature) - does not automatically classify as a minor non-monetary benefit. Portfolio managers and independent advisors would need to make a commercial decision on whether to pay for it or not One exception is if the macro-economic analysis is made open to the public on a website. It could then be justified as a minor non-monetary benefit

Answer 34

One of the ways you can pay for research under Inducement Rules - may only be funded by a specific charge to clients, agreed with clients and developed by the firm as its research budget firms must provide clients - information about the budgeted amount - annual information for the total costs firms must make sure the budget amount does not fund in-house research it may cover the following however - post-trade analysis - price feeds - seminar feeds - corporate access services - administration of an RPA

Answer 35

2019 FCA review - most asset managers absorb the costs themselves - still able to access the research they need. No evidence of material reduction in research coverage including for SMEs - wide range of sell side pricing levels - firms were uncertain how the new rules apply

Answer 36

If a firm (F) is aware one person (C1) is acting as agent for another person (C2) then C1 is the client, not C2 Under MiFID a business acting for another person in investment or ancillary services and the other firm is a MiFID firm they can rely on - information shared to the client - recommendations that have been provided by the third-party firm If a firm relies on information provided by a third party, this should be given in writing This should not occur when C1 has agreed in writing that it should treat C2 like the client instead

Answer 37

Balance sheet - 20 million euros Net turnover - 40 million euros own funds - 2 million euros

Answer 38

Balance sheet - 12.5 million euros Net turnover - 20 million euros average 250 employees over the year

Answer 39

- if the firm has assessed its expertise, experience and knowledge and believes it can make its own investment decisions - portfolio that exceeds 500,000 euros - client works or has worked as in financial services as a professional for at least a year firm must follow certain procedures to give a clear written warning to the client of the lost protections to which the client must agree in writing - it wishes to be treated as a professional MiFID business - if the client meets the qualitative/quantitative test it can be treated as an ECP If the person no longer meets those requirements the firm must take action Professional clients can be ECP if they are - a company - per se professional client - requests to be classified as an ECP

Answer 40

For Suitability - firms servicing professional clients assume the client has the knowledge and experience for the product. For Appropriateness (when it is not investment advice or discretionary portfolio managed services) retail clients have to undergo appropriateness tests - for professional clients a firm is entitled to assume the individual has the knowledge and expertise Dealing and carrying out orders - Range of factors can be considered for professional clients to carry out best execution. But for retail clients, the total consideration representing the price of the financial instrument and the costs relating to execution but be the overriding factor. - for order execution, firms may not have to report difficulties in the execution of the order to professional clients REPORTING INFOMATION - For transactions, where the firm does not provide discretionary management services, the timeframe for providing confirmation is more rigorous for retail clients Remuneration - it is the same for all clients, do not be remunerated to take risks for products that do not suit them. CLIENT REPORTING - Investment firms that hold a retail client account that includes positions in leveraged financial instruments or contingent liability transactions shall inform the retail client when the instrument depreciates by 10% - reports do not have to be produced for INVESTOR COMPENSATION Eligibility for compensation from FSCS is dependent on the institution and NOT client categorisation FOS may not be available to professional clients unless they are consumers or small businesses EXCLUSION OF LIABILITY FCA rules restrict firms ability to exclude or restrict duty of liability - stricter for retail than professional SHARE TRADING OBLIGATION For shares admitted to trading on a regulated market, or a trading venue, the firm may only arrange for such trades to be carried out on a regulated market such as an MTF, a regulated market TRANSFER OF FINANCIAL COLLATERAL ARRANGEMENTS A firm may conclude title transfer financial collateral arrangements for the purpose of securing or covering present or future obligations CLIENT MONEY Client money is more prescriptive for retail clients than professional clients

Answer 41

The main purpose of the requirements are to: 1. Encourage firms directors and senior managers to take responsibility for their firm's arrangements on matters to be of interest to the FCA and the PRA 2. amplify FCA Principle 3 of organising and controlling affairs efficiently 3. encourage firms to vest responsibility for an effective and responsible organisation in specific directors and managers 4. Create a common platform of organisational systems and controls for firms subject to the Capital Requirements Directive and MiFID - known as 'common platform firms' requirements have been extended to firms that are not subject to either MiFID or the CRD. - called non-scope or non common platform firms

Answer 42

FOR INSURERS, UK INSURANCE SPVs - 2,3,11 to 18, 21 to 28 MANAGING AGENTS - 2,3,12,18, 19F and 21-28 SM&CR Firm - 4-12,18,19D,19F,19G,21-28 BUILDING SOCIETIES - 2,3,12,18 19F and 21-28 For every other firm - 4-12-18,19, 19G, 21-28

Answer 43

CONFLICTS OF INTEREST

Answer 44

General organisational requirements

Answer 45

systems and controls (for limited time only)

Answer 46

UCITS Renumeration Code

Answer 47

Outsourcing

Answer 48

Compliance, internal audit and financial crime

Answer 49

Risk Control

Answer 50

Senior Management Arrangements the FCA and PRA require firms to take reasonable steps to maintain a clear and appropriate apportionment of significant responsibilities among their directors and senior managers - it is clear who has those responsibilities - the business and affairs of the firm can be monitored and controlled by the directors firms must make a record of the arrangements they have made to satisfy the FCA and the PRA requirement to apportion responsibilities

Answer 51

systems and controls for a limited time only only applies to - insurers - UK insurance special purpose vehicles - managing agents - building societies Firms systems and controls need to be appropriate for their business Reporting lines should be clear and appropriate, having regard to the nature/scale and complexity of the business Firms cannot contract out their regulatory obligations Firms carrying out designated investment business for retail or professional clients - need to ensure someone is overseeing compliance - reporting to the governing body in respect of this responsibility Compliance means in accordance with COBS COLL (CIS sourcebook) CASS AUDIT COMMITTEE MANAGEMENT INFORMATION INTERNAL AUDIT

Answer 52

Firms must take care to establish and maintain effective systems and controls for compliance with requirements and standards under the regulatory system Ensuring the systems and controls: - enable the firm to identify, assess, monitor and manage money laundering risks - comprehensive and proportionate to the nature, scale and complexity of the activities firms are expected to carry out regular assessments of the systems and controls

Answer 53

GENERAL ORGANISATIONAL REQUIREMENTS applies to common platform firms Investment firm or management company under MiFID must establish and implement/maintain systems and procedures that are adequate to safeguard the security and integrity of information Must establish and implement accounting policies that enable at the request of the regulators to be delivered in a timely manner - must reflect true financial position Must monitor the adequacy and effectiveness of the systems, internal control mechanisms Firms must take reasonable care to maintain a clear and appropriate apportionment of significant responsibilities among their directors and senior managers