PRA RULEBOOK AND FCA HANDBOOK OF RULES AND GUIDANCE Flashcards

Question

FCA Supervision model

Answer 1

Proactive - preventative work through conduct assessment of firms Reactive -

Answer 2

HANDBOOK PR REF - Performance of obligations under SMR - Performance of obligations under the Certification Regime - Performance of obligations and training of the CONDUCT RULES - Responsible for the firm's policies and procedures for countering the risk that firms might be used to further financial crime

Answer 3

- Performance of obligations under SMR - Performance of obligations under the Certification Regime - Performance of obligations and training of the CONDUCT RULES - Responsible for the firm's policies and procedures for countering the risk that firms might be used to further financial crime - Compliance with the Responsibilities Map - Safeguarding and overseeing the independence of the Independent Audit function - Safeguarding and overseeing the independence of the Risk function - Ensuring the internal audit function is independent and everyone involved is independent - Developing the firm's business model - Managing the firm's internal stress tests and ensuring the accuracy and timeliness of the firm's information

Answer 4

applied in 2020 for benchmark administrators that do not perform any other regulated activity They are automatically subject to CORE SM&CR Prescribed functions SMF 1 - Chief Executive function SMF 3 - Executive director SMF 9 - Chairman positions SMF 27 - Partner As the firms are subject to UK BMR - they do not require the SMF16 and SMF 17 role Three prescribed responsibilities - Performance of the firm's obligations under SMR - Performance of the firm's obligations regarding notifications and training of CONDUCT RULES - Responsibility for the firm's policies and procedures Has not applied certification regime to these administrators Some might be limited scope and then only require SMF29 - Senior Manager CONDUCT RULES APPLY

Answer 5

Only apply to enhanced firms under SM&CR They are used to map governance and individual accountability for roles - they ensure there are no gaps in accountability for individuals - assigns each responsibility firms must explain why a role might be shared jointly as they are only allowed in specific circumstances

Answer 6

firms must provide statements of responsibilities and they MUST be approved by the regulators they outline which areas/maps of the business that senior managers are responsible for they are used by the regulator when there has been a breach individuals must sign them

Answer 7

the 'burden of proof' that regulators must have sufficient evidence before bringing an SMF on proceedings u-turn after FINANCIAL SERVICES ACT 2016 - burden of proof shifted to regulators rather than individuals to prove an individual did not take appropriate steps to avoid a firm's contravention occurring

Answer 8

From 31 July 2023 - FCA consumer duty implementation date. - CD should be reflected in policies, governance, leadership and people policies - Senior Managers should ensure that firm's have appropriate oversight of customer outcomes through systems and controls - Risk functions should pay attention to consumer risks for internal audit - Senior managers will be held accountable for 'good consumer outcomes' - Must appoint the CONSUMER DUTY CHAMPION at board level

Answer 9

Introduced in 2010 following Financial Services Act 2010 - Financial Stability information power - person has to provide information relevant to the stability of the UK financial system - Overseas financial stability information power - exercisable at the request of an overseas regulator to require a person to provide information relevant to the stability of the financial system of the country

Answer 10

EU Short Selling Regulation 236/2012 applies to EU member states It covers - sovereign debt, sovereign credit default swaps listed for trading on an EU trading venue including MTFs The location does not matter, a person in a third country selling is covered by the regulation Brexit UK firms must comply with UK SSR KEY ELEMENTS - transparency requirements for short positions in shares and sovereign debt - Restrictions on uncovered short sales in shares, sovereign debt and sovereign CDs - Central counterparty procedures to deal with settlement failure - emergency measures that must be taken in exceptional circumstances

Answer 11

Requires - Short positions in equities to be disclosed to the regulator where they reach or fall below 0.1% of the issued share capital of the company. Short positions reaching 0.5% of the issued share capital need to be disclosed to the market. - Short positions in sovereign debt above thresholds need to be reported to the regulator. where the outstanding amount is 500 billion or less, the thresholds are 0.1% then each 0.5% if sovereign debt is above 500 billion the thresholds are 0.5% and then 0.25%

Answer 12

UNCOVERED SHORT SELLING is selling a security when you do not own it. Person may enter into uncovered short selling only if if they have - pre-borrowed the security - entered into an agreement to borrow the security - made arrangements with a third party to ensure the security will be available for settlement - the market making exeption Uncovered short positions in sovereign Credit Default Swaps are not permitted

Answer 13

Common platform firms must implement and maintain adequate risk management policies and procedures. Firms must adopt effective arrangements processes and mechanisms to manage the risk Senior managers in a firm must approve and review the strategies and policies for taking up and monitoring the risks the firm might be exposed to 1. adequacy and effectiveness of the firm's risk management policies and procedures 2. level of compliance and relevant persons with the arrangements, processes and mechanisms 3. the adequancy and effectiveness of measures taken to address deficiencies in the policies

Answer 14

RESIDUAL RISK MATERIAL RISK INTEREST RATE RISK OPERATIONAL RISK

Answer 15

Firms which rely on third parties to perform operational functions which are critical for their adherence to regulatory obligations must ensure they review and monitor the performance of the third party The firm will still be held accountable by the FCA/PRA for its performance. It is the firm's best interests to monitor the performance of third party against SLAs Firms must take steps to avoid undue operational risk and not undertake the outsourcing of important functions that impair internal control and the ability of the regulator to monitor the firm's compliance with obligations under the system. A function is regarded as critical if a defect or failure would impact the compliance of a common platform firm with the conditions and obligations of its authorisation

Answer 16

Provision of advisory services which do not form part of the relevant services including provision of legal advice Purchase of services such as market information services and price feeds recording and retention of relevant telephone conversations

Answer 17

1. Outsourcing must not result in the delegation by senior personnel of their responsibility 2. Relationship and obligations of the firm under the regulatory system must not be altered 3. The conditions the firm must comply with to be authorised must not be compromised 4. None of the conditions subject to the firm's authorisation must be altered

Answer 18

1. the service provider must have the ability, capacity and any authorisation required by law 2. service provider must carry out the outsourced services effectively 3. service provider must supervise the carrying out of the outsourced functions and manage the risks 4. action must be taken if the service provider is not carrying out the functions effectively 5. firm must retain the expertise to supervise the outsourced functions effectively 6. Service provider must disclose to firms any changes that might impact the ability to carry out the outsourced functions effectively 7. The firm must be able to terminate the agreement for outsourcing if necessary 8. The service provider must cooperate with the regulator and any other competent authority in connection with the outsourced activities 9. The firm and the regulator/any other competent authority must have effective data related to the outsourced activities 10. Service provider must protect any confidential information relating to the firm and its clients 11. the firm and the service provider must create disaster recovery plans

Answer 19

MiFID business must be held for five years

Answer 20

Firms must take all steps to identify, prevent and mitigate conflicts of interest when they arise. Principle 8 of the FCA Principles The rules in SYSC apply to common platform firms in respect of regulated business and ancillary activities that constitute MiFID business and non-MiFID business firms need to take steps to identify, prevent and manage conflicts of interest between: - the firm, including the managers, employees, appointed representatives - one client of a firm and another firms should - employ and apply effective organisational arrangements to prevent conflicts of interest from occurring - have appropriate information barriers - chinese walls - ensure the general or nature of the conflict which cannot be prevented is disclosed - prepare and maintain an effective CoI policy - provide retail and professional clients with this policy - have a segregation of duties - policy of independence common platform firms must keep and update a record of the kinds of services or activity carried out by or behalf of the firm which a conflict of interest entailing a material risk has arisen

Answer 21

When a person directly or indirectly linked by control to the firm - is likely to make a financial gain or avoid a financial loss - has an interest in the outcome of a service provided to the client - has a financial incentive to favour the interest of another client or group - carries out the same business as the client - receives or may receive an inducement in relation to a service provided by the client for non-common platform firms - not subject to UK CRR/CRD or MiFID - must take it as guidance or a rule

Answer 22

- Information barriers - delegation of responsibilities - Renumeration structures - policy of independence They must: - be designed to ensure that relevant persons engaged in different activities involving a conflict of interest carry the role at a level of independence - include effective procedures to prevent or control the exchange of information between relevant parties engaged in activities involving a risk of conflict of interest - seperate supervision of relevant persons whose principal functions may conflict or represent different interests that may conflict those of the firm - removal of link of any direct link between the remuneration of relevant persons engaged in one activity and the remuneration of revenues generated by different relevant persons - measures to prevent a person exercising inappropriate influence over the way a relevant person carries out activities

Answer 23

If a firm establishes and maintains information barriers it must: - withhold or not use the information held - permit its employees in one part of the business to withhold the information from those employed in another part of the business - one parts of the business is carrying on regulated activities or another activity carried on in connection with a regulated activity - take reasonable steps to ensure that these arrangements remain effective and are monitored EXAMPLE - corporate finance section of the company is separated from the research function Disclosure must be made in a durable medium and include sufficient detail taking into account the nature of the client to allow them to take an informed decision with respect to the service overdisclosure without adequate consideration as to how the conflict of interest could be mitigated is not permitted Disclosures must be taken as a LAST RESORT

Answer 24

To sustain market confidence and promote financial stability by removing the incentive for inappropriate risk-taking by firms. Remuneration policies and practices are consistent with and promote effective risk management The code limits the risk of damage to the UK's competitiveness The objective of the remuneration policy is to sustain market confidence and promote financial stability The need to ensure that remuneration policies are consistent with and promote effective risk management It applies to - banks - building societies - UK designated investment firms The regulators will seperate firms into three streams 1. HIGH IMPACT GROUPS - need to prepare a remuneration policy statement ahead of the financial year and have remuneration meeting with the PRA and the FCA may not be able to pay bonuses without agreement 2. Medium high risk groups will have to prepare a reported that will be prepared as part of the risk assessment review 3. Low impact firms will only need to prepare a report if part of a thematic review

Answer 25

Principle 1 - Risk management and risk tolerance - Must ensure the policy is consistent with and promotes sound/effective risk management Principle 2 - Supporting Business Strategy, Objectives, Values and Long-Term Interests of the Firm Principle 3 - Avoiding conflicts of interest Principle 4 Governance - Must ensure the governing body in its supervisory function adopts and reviews the principles of the remuneration policy. - The committee must be constituted to exercise competent and independent judgement over remuneration policies - The remuneration committee must be responsible for the preperation of decisions regarding remuneration Principal 5 CONTROL FUNCTIONS - Employees enjoyed in control functions are independent have appropriate authority remunerated to attract qualified and experienced staff the procedures for setting remuneration input into setting the remuneration policy for other business areas. Risk and compliance functions should have significant input into the setting of individual remuneration Principle 6 - Capital Remuneration must not disallow a firm to limit the firm's ability to strengthen its capital base Principle 7 - Exceptional Government Intervention A firm that benefits from exceptional government intervention must ensure variable remuneration is strictly limited as a percentage of net revenues when it is inconsistent with a sound capital base Principle 8 - Profit based measurement and risk adjustment Any measurement of performance used to calculate variable remuneration components takes into account the cost and quantity of capital and the liquidity required and the need for consistency with timing and likelihood of the firm receiving revenues incorporated into current earnings Principle 9 - Pension Policy Firm must ensure the pension strategy is in line with the business strategy, objectives, interests and values Discretionary pension benefits are paid to the employee in the form of instruments and subject to a five year retention period. PRINCIPAL 10 Personal Investment Strategies Employees should not use personal hedging requirements or liability related contracts of insurance that would undermine the limiting risk of the remuneration policy PRINCIPAL 11 - Avoidance of the remuneration code Employees should ensure that remuneration is not paid through vehicles to avoid the remuneration code PRINCIPAL 12 - REMUNERATION STRUCTURES The purpose of this principle is to ensure that the structure of an employee’s remuneration is consistent with, and promotes, effective risk management. - remuneration must be based upon the performance of the individual concerned - Firms are only permitted to offer guaranteed variable remuneration in the first year of service - Firms must set appropriate ratios of fixed versus guaranteed remuneration - Firms must ensure that any variable remuneration, including a deferred portion, is paid or vests only if it is sustainable according to the financial situation of the firm as a whole

Answer 26

AIFMS are required to establish, implement and maintain remuneration policies for code staff that are consistent with and promote sound and effective risk management, which do not encourage risk taking inconsistent with the risk profile of the AIFM they manage Code staff comprise those who have a material impact on the risk profiles of the AIFM or AIFs the AIFMs manage

Answer 27

1 - Risk Management 2- Supporting Business Strategy, Objectives, Values and Interests 3 - Governance 4- Control Functions 5 (a) - Remuneration Structures - Performance 5 (b) - Remuneration Structures - Variable Remuneration 5 (c) - Rem structures - Ratio between fixed and variable components of total remuneration 5 (d) - Rem structures - payment related to early termination 5 (e) - Rem structures - retained units, shares or other instruments 5 (f) - Rem structures deferral 5 (g) Rem structures - Performance adjustments 6 - Measurement of performance 7 - Pension Policy

Answer 28

The FCA Remuneration Code (19D) applies to dual-regulated firm within the scope of UK CRD/CRR that is banks, building societies and PRA designated firms. The FCA adopted a proportionate approach to implementing the Remuneration Code including the CRD and CRR. The code sets out the standards and policies that dual-regulated firms within the scope of UK CRD IV have to meet when setting pay and bonus awards Firms are required to ensure that variable remuneration is only paid or allowed where sustainable and justified by performance, subject to clawback. A balancing mechanism for firms to reduce, cancel or recover awards to the extend the awards are no longer justified by performance. For dual-regulated firms, the FCA is responsible for all Remuneration Code requirements from a conduct perspective. For larger and most significant firms by balance sheet size, the FCA carries out an annual review of firms remuneration policies and practices. This is carried out jointly with the PRA

Answer 29

The UCITS provision include a principle of proportionality based on a similar overarching requirement that fund managers are required to comply Same principles as AIFM Remuneration

Answer 30

On 1 January 2022 the UK MiFID Investment Firm Prudential rules came into effect All MiFID Investment firms are subject to the same Remuneration Code SNI will have to comply with basic remuneration requirements Non-SNI firms with a balance sheet of less than £300 million would not have to apply deferral rules on variable remuneration. Basic remuneration rules apply to all staff in firms

Answer 31

The policy should set out how: - How the firm aligns risk and reward - the appetite and strategy including ESG factors - How the policy is proportionate to the size and complexity of the firm - How the policy is gender neutral and in line with the Equality Act 2010 - The criteria on which remuneration is based, making sure there is appropriate balance between fixed and variable remuneration

Answer 32

Non-SNI firms are subject to the 'standard' requirements in addition to the basic requirements Non-SNI firms must apply the standard requirements to the 'material risk takers' and would not be compelled to apply them to any members of staff

Answer 33

Establish a remuneration committee Pay 50% of remuneration out in shares, instruments or alternative arrangements Defer at least 40% of variable remuneration (or 60% where the remuneration is £500,000 or more) for at least three years

Answer 34

GROUP RISK SYSTEMS AND CONTROL REQUIREMENTS Firms are required to have appropriate risk management systems and internal control mechanisms for the purpose of assessing and managing their own group risk

Answer 35

As part of the firm's business planning and risk management obligations under SYSC, it should undertake reverse stress testing of its business plan

Answer 36

Firms should appoint a chief risk officer and establish a risk committee The chief risk officer would be accountable to the firm’s governing body for oversight of the firm-wide risk and be fully independent of business units. They should have sufficient authority and resources for the execution of their responsibilities, which will mean that there should be no restrictions on access to the business or data, or other information.

Answer 37

Attaining one - must get the reference before certification -best efforts to attain reg references for the past 6 years Providing one - include breaches of Conduct Rules - update references that would affect reference given in the last six years - make disclosure of the mandatory template provided - do not enter an arrangement that limits the firm's ability to disclose information - includes breaches of Conduct Rules Firms need to be careful when providing regulatory references where there may have been 'alleged misconduct' - references need to be - fair and accurate - contain all relevant information - not be misleading - be supported by document fact - provide a complete picture of the individuals conduct record - balance the competing interests

Answer 38

SENIOR MANAGERS AND CERTIFICATION REGIME

Answer 39

Represent the minimum conditions which a firm is required to satisfy and continue to satisfy to retain Part 4A permission The COND Sourcebook gives guidance on the threshold conditions set out under Schedule 6 of FSMA Under Section 41(2) of FSMA in giving or varying a Part 4A permission - the PRA/FCA must ensure the firm can or will continue to satisfy the threshold conditions in relation to all the regulated activities for which it will have permission Financial Services Act 2012 provides the FCA/PRA to make threshold condition codes which elaborate on these conditions and how they apply to different classes of firms

Answer 40

LOCATION OF OFFICES EFFECTIVE SUPERVISION - must be able to be effectively supervised by the FCA and/or the PRA - having regard to the nature and complexity by the way in which the firm operates and the regulated activities it carries out APPROPRIATE RESOURCES SUITABILITY - must satisfy the FCA that it is a fit and proper person BUSINESS MODEL - firms must be able to demonstrate the ability to put forward an appropriate, viable and sustainable business model, given the nature and scale of business that they intend to carry out. In addition, the FCA expects firms to be able to demonstrate adequate contingency planning in their business model application.

Answer 41

The threshold conditions are the minimum requirements that firms must meet at all times to carry out the regulated activities in which they engage - Location of offices - Effective supervision by the PRA in reference to business organisation = Suitability condition - require compliance with obligations imposed and information requests made by the regulator. - Financial Services Act 2012 bestowed responsibility for a new threshold condition on the PRA, namely for business to be conducted in a prudent manner. The new threshold condition is broadly the equivalent of the appropriate resources and business model conditions for which the FCA is responsible.

Answer 42

It requires persons fulfilling either a controlled function or a senior management function to be first approved by the FCA as fit and proper An individual may only be allowed to carry out a certain function once they have been assessed and granted 'approved person' status by the FCA/PRA. Responsibility lies with the firm making the application to satisfy the FCA that the candidate is fit and proper to perform the controlled function applied for. The assessment will look at - the honesty, integrity and reputation - competence and capability - financial soundness

Answer 43

The FCA will have regard to whether the person - satisfies the relevant requirements laid down in the FCA's TRAINING AND COMPETENCE SOURCEBOOK - Has demonstrated the experience and training needed for them to fulfilled the controlled function The FCA will consider convictions/dismissals/suspensions from employment for drugs/alcohol/other abusive acts

Answer 44

It is risk based so businesses that pose the greatest risks to money laundering receive an increased level of attention from the FCA Businesses must show they have policies, procedures and controls in place to manage money laundering and risks Crypoasset businesses should carry out regular assessments of their policies and controls to ensure they remain relevant and appropriate - must be alert to their operating model

Answer 45

- take appropriate steps to identify, assess the risks of money laundering and proliferation financing - appoint an individual who is a member of the board or senior management to be responsible for compliance with the MLRs and the nominated officer. - if it is big enough, establish the internal audit function to evaluate the adequacy and effectiveness of the policies, controls and procedures - undertake CDD when entering into a business relationship or transaction - apply more intrusive due diligence when entering into a business relationship or transaction - undertake ongoing monitoring of all customers to ensure transactions are consistent with the businesses' knowledge of its customer

Answer 46

Firms must provide consumers with distant marketing information in good time before the consumer is bound by distance contract or offer Information about the firm - the firm's name and business, geographical address - if the firm has a representative established in the UK - Where the consumer’s dealings are with any professional other than the firm, the identity of that professional, the capacity in which they are acting with respect to the consumer - an appropriate regulatory disclosure INFORMATION ABOUT THE FINANCIAL SERVICE - a description of the characteristics the service the firm will provide - the total price to be paid by the customer to the firm for the financial service, including all related fees/charges and expenses - whether the service involves special risks related to their specific features or the operations to be executed - possibility of other taxes or costs that may exist which are not paid via the firm - limitations on the period of the information provided and how long it is valid for INFORMATION ABOUT THE CONTRACT - existence or absence of a right to cancel or withdraw under the cancellation rules - minimum duration of the contract - instructions including the right to cancel REDRESS - how to complain to the firm - whether compensation is available to the firm or whether it is able to be referred to the FOS

Answer 47

A firm must make the following information easily, directly and permanently accessible to the recipients of the firm - the name - geographical address - details of the firm, including the email address - whether the firm is regulated or not by the FCA/PRA - authorisation number - if it is a professional firm or designated professional body - if it undertakes activity subject to VAT

Answer 48

Firms carrying out MiFID or equivalent third country business must ensure they provide clients with the following - the firm and its services - designated investment business and strategies including guidance on risks associated with investments - explanation of leverage and its effects - the risk of losing the investment - volatility of the price and limitations on the available market for the investment - if the client has entered into contingent liability transactions - margin requirements or similar obligations applicable to certain investments - costs and associated charges

Answer 49

A firm that manages investments for a client must establish an appropriate method of evaluation and comparison, such as a meaningful benchmark, based on the investment objectives of the client. A firm must provide the client with the following information - information on the method and frequency of valuation of the investments in the client’s portfolio - details of any delegation of the discretionary management of the investments/funds/or clients portfolio - specification of any benchmark the performance will be compared to - the types of investments that will be included - objectives/the level of risk to be reflection at the managers discretion

Answer 50

firms must provide retail/professional and ECPs with information on costs/charges - total price to be paid, including all fees/commissions/charges/expenses - if they cannot be provided, the basis on which they will be calculated - commissions charged be itemised - any other costs/taxes not paid or imposed by the firm could be applicable - information about compensation schemes from july 2021 firms are no longer required to provide this to professional and ECPs Clients have the ability to request (and receive) an itemised breakdown of associated costs and charges – on an individual transaction basis. Must be provided in a DURABLE MEDIUM

Answer 51

- if the money may be held by a third party - what the firm's responsibility is for any acts of omissions of that third party - what will happen if the third party becomes insolvent - a summary of the steps the firm has taken to protect the client money - if the money is subject to any security interest - full clear information in a durable medium

Answer 52

- improve the clarity in which firms provide services to their customers - address the potential for adviser remuneration to distort consumer outcomes - increase the professional standards of advisers

Answer 53

They only apply to advised sales for a defined range of retail products - not to non-advised business such as EXECUTION ONLY and DISCRETIONARY Advisers who are not independent (ie, do not select instruments from the whole of the market) are classified as restricted. They must describe this restricted service to consumers, with a short description to help consumers understand the service that is being provided to them. Advisers are not allowed to be remunerated by product providers for making a recommendation. A firm must not hold itself out to a retail client as acting independently until it has done a full review of the marketplace on an unbiased and unrestricted basis If a firm provides restricted advice - the firm must outline the restriction

Answer 54

- the removal of commission paid by providers to advisers and platforms greatly reduced bias - product prices fell by the amount paid in commission - advisers were now qualified to the new minimum standards - little evidence the availability of advice had reduced

Answer 55

Apply to - firms making recommendations on designated investments - managing investments

Answer 56

Investment firms must obtain from clients/potential clients such information as is necessary for them to understand the essential facts about the client and have a reasonable basis for determining that recommendations, including providing a portfolio management service, satisfy the following criteria: a. meet the client’s investment objectives, including risk tolerance b. clients have the financial ability to bear any related investment risks consistent with their investment objectives c. the client has the necessary experience and knowledge in order to understand the risks involved in the transaction or in the management of their portfolio. Firms must evaluate a clients knowledge on - the type of services, transaction and financial instrument - nature, volume and frequency of the client's transactions in financial instruments and the period they have been carried out - level of education of the client Firms must think about the client's best interests rule when making this decision When providing investment advice, firms must provide the client with the suitability report before the transaction is concluded

Answer 57

When a firm makes a personal recommendation or is managing a client’s investments, it should obtain the necessary information regarding the client’s: * knowledge and experience in the investment field, relevant to the specific type of financial instrument or service * financial situation, including the ability to bare losses, and * investment objectives, including risk tolerance. A firm must provide a client with a suitability report if it makes personal recommendations to the client such as holding parts in - a regulated CIS - investment trust where the shares will be held in an ISA specifically for investment trusts - elects to make income withdrawals - enters into a pension transfer or a pension opt-out Firm must also provide a suitability report if it makes a personal recommendation for a life assurance policy

Answer 58

- where the firm is acting as investment manager for a retail client, makes a recommendation in connection with a regulated CIS - if client is resident outside the EEA and not present in the UK at the time of acknowledging consent to the proposal form - if the recommendation is made by a friendly society in connection to a small life policy - if the recommendation is to increase a regular premium

Answer 59

The FCA will regard whether a person has - been convicted of a criminal offence - subject of adverse media/finding - been dismissed from a position of trust - been disqualified as a director - involved in an insolvent business - subject to a justified complaint

Answer 60

Designated investment business related to firms must be provided before the service to the client - the terms of the agreement - information about the firm and its services relating to the agreement or to those services including information on communications Firm must provide it in a durable medium Records must be kept for - 5 years -duration of the relationship with the client - in the case of a record relating to a pension transfer, pension-opt out or free-standing additional voluntary contribution

Answer 61

During a review of a sample of investment files assessed as unsuitable, over half of those assessed as unsuitable were on the grounds that the investment selection failed to meet the risk the customer was willing to take. The FCA found that investment advisors and investment firms failed to look at the capacity for loss If a firm used a questionnaire to collect information from customers, the regulator was concerned these often-used poor question and answer options - regulator saw poor analysis of customers that should have put their money in cash deposits out of fear for the risk of loss

Answer 62

- can assess a customer's capacity for loss - identifies customers that are best suited to place their money in cash deposits tools are fit for purpose and any limitations recognised and mitigated questions and answers are fair, clear and not misleading robust and flexible process for ensuring investment selections are suitable it engages customers in a suitability assessment process which acts in the best interest of those customers

Answer 63

firms providing MiFID investment services other than personal recommendations or managing of investments firms arranging in deals, warrants or derivatives firms assessing appropriateness on behalf of other firms

Answer 64

- the types of service, transaction or investment a person is familiar - the nature, volume and frequency of an individual's involvement in the transactions - their level of education, profession or relevant former profession

Answer 65

- if it is execution only, or for the receipt and transmission of client orders - client has been informed the firm is not required to do so - the firm is complying with obligations under Principle 8 - conflicts of interest - relates to distribution activity Shares in companies listed on a regulated market or an MTF Bonds or other forms of securitised debt Money market instruments Shares in a UCITs Structured deposits

Answer 66

For each UCITS scheme that an authorised fund manager will manage, it must produce a key investor information document - must be clear, fair and not misleading - must include appropriate information about the essential characteristics of the UCITS scheme, which is to be provided to investors - identification of the scheme - short description of the investment - - objectives and policy - past performance and performance scenarios - costs and associated charges - risk/reward profile of the investment

Answer 67

must include enough information about the complexity of the product, how it works, limitations - arrangements for handling complaints about the product - compensation available from the FSCS - if a right to cancel or withdraw exists and the time to exercise it

Answer 68

- Each packaged product - cash deposit ISAs - cash deposit child trust funds

Answer 69

- show the existence of them and let the person know - how long they exist for - the conditions for exercising it - what happens if they do not exercise it - how to exercise it

Answer 70

- indefinitely for pension transfers, pension opt-outs and FSAVCs - five years for a lift policy, pension contract, personal pension scheme - at least three years in any other case

Answer 71

It is a simple document providing information to investors with respect to collective investment schemes and other packaged products

Answer 72

Performed for retail products provide exposure to multi-underlying assets deliver capital accumulation over a certain amount of time entail a degree of investment risk they apply to a manufacturer and an adviser - they have to produce a KID for each PRIIP they produce

Answer 73

1. investment funds 2. insurance based investment products 3. structured securities 4. structured term deposits

Answer 74

- retail investment product providers - life companies - discretionary investment management firms - fund managers - stockbrokers providing advice to retail clients on funds - financial advisers

Answer 75

- non life insurance/general insurance and life insurance that only pays benefits on death - deposits other than structured deposits - investment funds dedicated to institutional investors - corporate shares and bonds held directly - pension products - certain securities issued by member states, central banks

Answer 76

can be a maximum of three A4 pages - purpose - what is the product? - what are the risks and what could I get in return? - what happens if a manufacturer is unable to pay out? - how long should I hold it for? - what are the costs? - how long should I hold it? - how can I complain?

Answer 77

Came into effect on 31 December 2022 - the presentation of performance scenarios in the KID to be replaced with a requirement for narrative information - address the potential for some PRIIPs to be assigned an inappropriately low risk indicator - address concerns on the slippage methodology

Answer 78

Product Governance and oversight refers to the systems and controls that a firm has over the design, approval and marketing of a product through its 'life cycle' to meet legal and regulatory requirements

Answer 79

The scope of what constitutes a manufacturer and a designer is purposely wide It includes firms advising on the corporate issuing on the launch of new products

Answer 80

- manufacturers must identify the target market for each product - implement management product oversight of the product governance framework and identify any potential conflicts of interest - establish a product review process to gather information from other distributors to determine if the product remains consistent with the target market - review charging structures

Answer 81

- at a business level, conduct target market analysis of their distribution strategy - ensure the products they distribute are appropriate for the target market - conduct a scenario target market analysis

Answer 82

- identify and outline the target market - the needs and objectives of the target market - identify negative target market - whether the financial instruments profile meets the target market -identify whether the design of the financial instrument is driven by features that benefit the client manufacturers that distribute their products through other firms must determine the needs and objectives of the clients for whom the product is compatible based on - knowledge and experience of financial instruments or similar financial instruments - needs and objectives of potential end clients

Answer 83

They must determine it even if it is not defined by the manufacturer they must consider - the client type - knowledge and experience - financial situation and focus on the ability to bear losses level specified in the product beyond the product up to the amount invested - risk tolerance and the compatability of the risk/reward - client's objectives and needs

Answer 84

Must cover negative market conditions, such as - what would happen if a market condition deteriorates? - manufacturer experiences financial difficulties - financial instrument is not commercially viable - demand for the instrument is higher than expected

Answer 85

- whether the costs/charges are compatible with the needs, objectives of the target market - whether the costs/charges undermine the financial instruments return expectations - such as removing the tax advantages of an instrument - whether the charging structure is transparent for the target market

Answer 86

- information on the instrument - information on the product approval process - information about all distribution channels - the information is of adequate standard for distributors to understand the instrument

Answer 87

MiFID II requires firms to take 'all sufficient steps' to obtain the best execution for clients instead of 'all reasonable steps' from the previous MiFID legislation for each transaction (the four-fold test if a client is placing legitimate reliance on the firm) for over the counter transactions, firms must have in place procedures to check each steps of the transaction and retain relevant market data to justify their price decision

Answer 88

Operators of a regulated CIS when purchasing or selling units/shares in that scheme

Answer 89

Applies to firms where a client places legitimate reliance on the firm - did the firm initiate the transaction? - did the client only ask you for a quote? - will the client be unable to identify the relevant levels of price transparency within the market?

Answer 90

PRINCE COSTS SPEED LIKELIHOOD OF EXECUTION SETTLEMENT SIZE NATURE For retail firms, firms must take into account the price of the instrument, the costs relating to the execution, all expenses paid to it such as execution venue fees If a firm is able to execute the order on more than one execution venue, the firm must be able to justify why it chose that execution venue

Answer 91

Firms are required to monitor the execution quality obtained and the quality/appropriateness of their execution arrangements and policies. Senior management/Committees must monitor this. Must include information about the different execution venues and what affected their choice of venue used Firms must review their execution policies when a material event occurs and monitor the effectiveness of the policies and identify any deficiencies If a client gives specific instructions on execution of an order, firms must abide by the specific instructions Portfolio managers, and receivers or transmitters of orders, must also maintain order execution policies, but need not get client consent to them.

Answer 92

Firms must apply procedures and arrangements which provide for the prompt, fair and expeditious execution of client orders. firms need to avoid conflicts of interest where possible Client orders should be executed in the order they are received Firms should ensure client orders are: - executed promptly, accurately and recorded - comparable orders are executed one after the other in the order they came in and promptly - retail clients are informed of any material difficulty in executing the order - if the firm is responsible for overseeing or arranging settlement, that the assets or money are delivered promptly and correctly. Firms’ Order Handling Policy will deal with orders left by a client which state ‘good till cancelled’ or ‘good to the close’

Answer 93

- it is unlikely to disadvantage any of the clients - the fact that aggregation may disadvantage the clients is disclosed to them - an order allocation policy has been established which covers how volume and price of orders will affect allocation When an aggregated order is only partly executed, the firm must then allocate the various trades in order with this allocation policy. A firm's allocation policy must incorporate procedures that prevent the reallocation of own account orders aggregated with client orders that disadvantage the client

Answer 94

unless a client instructs otherwise, a firm that cannot execute a limit order fully under the market conditions must make the limit order public so it can be executed as quickly as possible can do this by - transmitting the order to a regulated market or MTF - ensuring the order is made public and can be easily executed when market conditions allow

Answer 95

entering into a transaction that is contrary to UK MAR involves or misuses disclosure of confidential information conflicts with the firms duties to a customer improperly advising or procuring that anyone else enters into a transaction improperly disclosing information or opinion

Answer 96

- deals under a discretionary management service, if there is no prior communication between the portfolio manager and the relevant person - investments into certain units or funds if the person is not involved in the management of the fund

Answer 97

Churning is the activity of dealing excessively frequently for a client, in order to generate additional fees and/or commissions for the firm.

Answer 98

Switching is the activity of selling one investment and replacing it with another frequently in order to generate additional fees or commissions for the firm

Answer 99

Firms that provide corporate finance strategy and provide the service of underwriting and placing must provide the following: 1. various financing alternatives available within the firm 2. timing and process with regard to corporate finance advice on pricing 3. details of the targeted investors to whom the firm intends to provide the offering 4. the firm's arrangements to prevent or manage conflicts of interest that may arise with placing the financial instruments with the firm's own proprietary book Firms are required to be able to identify all underwriting and placing operations and ensure that adequate controls are in place to manage any potential conflicts of interest.

Answer 100

Firms are required to ensure that clients receive adequate reports on the services they provide to them. These must include any associated costs. If a firm (other than one managing investments) carries out an order for a client it must: - provide essential information on it promptly - provide the client with information on the status of their orders - send a 'notice' confirming the deal details as soon as possible

Answer 101

- the name of the firm - the name/designation of the firm - the trading day and time - the type of order (limit order/market order/ - the venue the transaction was executed - the financial instrument - the buy/sell indicator - the nature of the order if other than buy/sell - the unit price - the total consideration - total of the commission Firms do not need to send the required information where the client is receiving the same information from another person For non-MiFID business, this must be kept for three years For MiFID business, this must be kept for five years

Answer 102

For firms managing investments to retail clients, these need to be at least quarterly unless - if the client receives deal-by-deal confirmations and the higher risk investments are excluded, it may be sent every 12 months - if the client has authorised for the portfolio to be leveraged for MiFID business - at least 5 years for other business - at least 3 years Firms must report any losses over a pre-approved limit on a contingent liability transaction If the order is executed in tranches, firms may supply clients with the information about the price of each tranche

Answer 103

Trustee firms Energy market activity Corporate finance business Stock lending activity Residual CIS operators and small authorised UK AIFMs Depositaries Authorised professional firms

PRA RULEBOOK AND FCA HANDBOOK OF RULES AND GUIDANCE Flashcards

(128 cards)