The Conduct of Business and Client Asset Rules Flashcards
1
Q
What block does Code of Business Rules and Client Assets fall under?
A
Block 3 - Business Rules
2
Q
What is COBS?
A
Conduct and Business Rules - how a firm works, how it communicates with its clients, how it carries advisory and execution services and the protection of clients assets
3
Q
What is considered a durable medium for information to be requested? (4)
A
- Paper
- Information can be stored, accessible, reproducible
- Information cannot be changed
- Durable medium should be chosen by the person requesting it e.g. floppy disk, cd rooms, hard drives
4
Q
What are the 3 different client categorisations?
A
- Retail client
- Professional clients
- Eligible counterparties
5
Q
What are the 3 other terms for a client?
A
- Consumer - retail client
- Customer - professional client and retail clients, but not eligible counterparts
- Client - all clients
6
Q
What is a retail client? (2)
A
- Not a professional client or an eligibile counterparty
- Usually individuals or small businesses
7
Q
What is a professional client? (3)
A
- Either a PER SE professional client or an ELECTIVE professional client
- A per se professional client is AUTOMATICALLY a professional client
- An elective professional client CHOOSES to be a professional client
8
Q
What are the conditions for a per se professional client under MiFID? (4)
A
- Entity must be authorised and regulated
Must meet 2 of the following
1. Balance sheet of €20m
2. Net turnover of €40m
3. Own funds of €2m
9
Q
What are the conditions for a per se professional client under non-MiFID? (4)
A
- A company or LLP with a called share capital of at least £5m
Meeting 2 of the 3:
- Balance sheet total of €12.5m
- Net turnover of €25m
- 250 employees on average
10
Q
What institutions are deemed per se professional clients? (2)
A
- Supranational institutions, banks, UN, IMF, central banks
- Institutional investor who job is to invest in financial instruments
10
Q
What is an elective professional client? (3)
A
- Client chooses to be a professional client
- Choose this because usually lower fees
- Must do qualitative tests, procedures and quantitative tests to qualify
11
Q
What is included in a qualitative test to become an elective professional client? (3)
A
- Firm checks client is eligible to be deemed a professional client
- Assess clients expertise, knowledge and experience
- Client must makes its own investment decisions and understand the risks involved
12
Q
What do quantitative tests include? (3)
A
- Applies to MiFID business only
2 of the following must be satisfied:
- Average 10 trades over previous 4 quarters
- Portfolio exceeding €500,000
- Professional experience of at least one year
13
Q
What happens if an elective professional client no longer meets the test requirements? (2)
A
- They are re-categorised as a retail client.
- The firm must notify the client of this change
14
Q
Under MiFID II, what is a local authority considered?
A
A retail client, unless they are handling the pension scheme, they can opt to be an elective professional client.
15
Q
What type of eligible counterparties are there?
A
- Elective or per se
16
Q
Under MiFID, what areas of business are eligible counterparties? (3)
A
- Dealing in accounts
- Broking - executing orders on behalf of clients
- Transmission of orders
17
Q
Who is considered a per se eligible counterparty?
A
- Per se professional (not institutional clients/individuals)
- Investment firms
- Credit institutions
- Insurance companies
- Pension funds
- UCITS scheme
- Another EEA authorised or regulated institution
- Government bodies
- Supranational institutions
18
Q
Who cannot be a per se eligible counterparty? (3)
A
- Individuals
- Other institutional investors e.g SPVs
- Elective professional clients
19
Q
What 2 sources of regulation underpin financial promotions?
A
- FSMA 2000
- COBS
20
Q
What is a financial promotion?
A
- An invitation or inducement to engage in investment
21
Q
When should a financial promotion be communicated? (2)
A
- Content has been approved OR
- Type of communication is exempt
22
Q
What is the Financial Promotion Order? (4)
A
Sets out exemptions to the financial promotion rules including:
- To a UK person from a UK person
- Communication to professionals or exempt persons
- Introductions and generic advertising
- Certain communications to HNWI and sophisticated investors
23
Q
What is the penalty for violating the Financial Promotion Order?
A
- Up to 2 years in jail and unlimited fine
24
Through what mode of communication should a financial promotion not be approved? (2)
- Personal visit
- Telephone conversation
- Must be via durable mode of communication / in writing
25
How can financial promotions be communicated? (1)
- There are no restrictions on the type of medium promotions can be communicated
Examples include:
- Telephone calls, cold calls, personal visits, other interactive dialogue (real time)
- Social media (careful, as financial promotions is media neutral - extra considerate here)
- Printed advertising e.g. letters, emails, websites, newspapers (non real time)
26
When is COBS applied to financial promotions?
- ALL communications to a UK clients, including cold calls
27
What must financial promotion to a client in relation to designated investment business be?
- Fair, clear and not misleading
28
What type of communication does the fair, clear and not misleading rule not apply to? (2)
- Excluded communications e.g. one off financial promotion that has been tailored to one client
- Non-retail communications e.g. made only to eligible counterparties or professional clients
29
What are the conditions for communicating past performance? (5)
- Performance must cover past 5 years or whole period if less
- Performance is based on complete 12 month periods
- Reference period and source must be stated
- Disclose that performance is not an indicator of future results
- If gross performance - must be indication of fees, costs, commissions
30
What are the requirements for communication simulated past performance? (2)
- Must related to the actual past performance of the same investment or same underling investment
- Comply with the same rules as past performance
31
What are the conditions for financial promotions received by retail clients? (3)
- Disclosures relate to the product being priomoted
- Appropriate information allows the client to understand risks and make informed decisions
- A right to cancel
32
How and when should a firm issue non-written financial promotion? (5)
- At an appropriate time of the day
- Identify themselves and the firm they work for from the outset
- Make clear the purpose of communication
- Clarify that the client can terminate communication at any time
- Give a contact point to any client with whom they arrange appointment
33
In which 3 circumstances can a firm carry a cold call? (3)
- The recipient has a long standing relationship with the firm
- Call relates to a marketable product (not a higher volatility fund)
- Call relates to readily realisable securities (not warrants or non-geared products)
34
What’s an example of a packaged product?
- Life policy assurance
- A unit in a regulated investment scheme
- Stakeholder pension scheme
- Interest in an investment trust saving scheme
- Personal pension scheme
35
What type of high risk investments can be promoted to retail clients? (3)
- Readily realisable investment - can be freely marketed to retail clients e.g. shares
- Restricted mass market investment - can be marketed to retail clients with restrictions e.g. crypto
- Non-mass market investment - cannot be marketed to retail clients e.g. SPVs
36
What is distance marketing communication? (5)
Where there is no face to face contact, firms must ensure information needs are met
- Redress
- Firm
- Service
- Contract
37
What is the purpose of product governance?
- To ensure that manufacturers and distributors of investment products act in the interests of the client at all stages of the product life cycle
38
What rules must product manufacturers ensure they comply with? (6)
- Product approval process and governance arrangements
- Identify potential target market for the product
- Ensure products are stress tests
- Appropriate charging structures
- Responsbile firms clearly disclosed in writing
- All appropriate information is made available to distributors
39
What must distributors ensure they comply with? (4)
- Determine target market
- Have product governance controls in place
- Ensure it can obtain all required information from the manufacturers
- Comply with the normal MiFID rules
40
What is a PRIIP? (4)
- Packaged retail investment and insurance based product
- Aimed at retail clients
- Packaged retail investment product - any investment where value is affected by the value or performance of another product not directly bought by the investor
- Insurance based product - specifically insurance products with a maturity or surrender value exposed to fluctuations in the market
41
What is a KID and what should it include? (9)
- Key information document
- Used for PRIIPs
- Nature and main features of the product
- Description of risk-reward profile
- Costs
- Time restrictions e.g. cooling off period
- Complaints procedures
- What happens if the manufacturer is unable to pay
- Max three sides of A4 when printed
42
What is KIID? (3)
- Key Investor Information Documents
- Used for UCITS funds (which are technically PRIIPs)
- Aimed at retail investors
43
What products for Key Features Documents apply to? (2)
- Non PRIIPs
- Pension products and cash deposit ISAs
44
Who must offer a client’s right to cancel? (2)
- Most providers of retail financial products
- Firms that enter into distance contracts with consumers
45
When does the cancellation period begin? (1)
- The day of the conclusion of the contract except for life policies - consumer is informed of contract conclusion
46
Under MiFID, when is inducement permitted? (3)
- It does not impair compliance with the firms duty to the client
- The firm discloses the existence of the fee or commission before providing the services
- It is designed to enhance the quality of the service to the client
47
How long just inducements records be kept on file?
5 years from the date in which the fee/commission/benefit was given
48
What information is fundamental for a firm to provide to a client?
- Name and address with appropriate contact details
- Method and language of communication
- Statement that it is authorised
- Whether the firm is acting through an appointed representative
- Occasional and periodic reporting
- Conflict of interest policy
- Fees
- Information about safeguarding assets
- Compensation information (for MiFID business)
49
What information needs to be disclosed by an Investment Management firm to a client? (6)
- Frequency of valuations
- Third parties involved
- Benchmark
- Investments included in the clients portfolio
- Constraints e.g no bonds, china
- Management objectives, risk profile, time horizon
50
When must the firm provide the terms of agreement to a client? (2)
- Before the client agreement is signed and becomes binding
- Before any service is provided
51
For who must suitability be carried? (3)
- Personal recommendations in designated investment business
- Retail clients (non MiFID)
- PRIIPs
52
What is the criteria for assessing suitability? (3)
- Tolerance to risk
- Financial profile
- Investment knowledge and experience
53
What is churning?
- Overtrading in securities
**prohibited in COBS
54
What is switching?
- Overtrading in packaged products
**prohibited in COBS
55
What transactions require a suitability report? (1)
- The purchase, sale or liquidation of any PRIIP or readily realisable investments
E.g. CIS, interest in IT, personal pension, pension transfer, life policy, annuity
56
Where do transaction suitability reports not apply?
- A recommendation about a CIS where the firm is the investment manager to a retail client
- The client is habitually a resident outside of the EEA
- Execution only trades / non-complex financial instruments
57
When should a firm give warning to a client?
- When the service is unsuitable for the client
- When the firm is unable to determine whether the product or service is suitable
58
What are non-complex financial instruments?
- Single stocks traded on a regulated market
- Units in UCITS
- Money market instruments, bonds or other forms of securitised debts
59
What criteria must non-complex financial instruments satisfy? (4)
- They are not derivatives
- Liabilities do not exceed costs
- Liquid
- Product governance
60
Who can conflicts of interest occur between?
- Itself (firm, employees, managers) and the client
- A client of the firm and another client
- Different departments within the same firm
61
What must the conflict of interest policy include?
- All potential conflicts
- Be appropriate to the size and nature of the firm
- Specify the firms nature for handling conflicts e.g Chinese Walls, controls on research, personal account dealing rules
62
What are the required disclosures for research recommendations? (7)
- To label or describe the communication as research
- To disclose this is not a personal recommendation
- Is fairly presented
- Disclose any conflict of interest
- Name and job title of the person who produced the document
- The name of the firm
- Name of the regulator
63
When should investment research be disseminated?
- Before dealing or trading
64
What are execution factors? (8)
- Price
- Cost
- Speed
- Likelihood
- Execution
- Settlement
- Size
- Nature
65
What characteristics must be considered when executing an order? (4)
- Type of client - retail or professional
- Type of security
- Type of client order
- Type of execution venues
66
What are the requirements for personal dealing? (3)
- Awareness restriction on personal transactions
- The firm is informed promptly of all personal transactions
- A record is kept of all personal transactions notified to the firm
67
When does personal dealing not apply? (3)
- On a discretionary portfolio managed independently of the relevant person
- Rights or shares in UCITS
- Life policies
68
What is the essential trade confirmation information?
- Price, settlement, nominal
69
How often must a firm report to clients? (3)
- General rule: every 6 months. Retail clients can ask for statements quarterly and annually.
- Derivatives: every month, sent promptly
- Short reports to unit holders every 6 months, long reports annually.
70
What is considered a small, medium and large CASS firm? (3)
Small - less than £1m in client money and less than £10m in custody assets
Medium - between £1m and £1bn in client money and between £10m and £100bn in custody assets
Large - over £1bn in client money and over £100bn in custody assets
71
Does a passported firm have to follow CASS rules?
Yes. UK firm passported to Germany would still have to followed rules
72
Where must client money be placed?
In a client bank account at an approved bank - client money must be received here and not at the firms bank
*all interest and income must be paid out unless stated otherwise
73
How long must pension transfers and opt outs be kept on record?
Indefinitely
74
How long must life policy or pension schemes be kept on record?
6 years
75
How long must MiFID or third country business be kept on record?
5 years
76
How long must any other non-MiFID business be kept on record?
3 years
77
COBS applies to firms that carry out specific activities, what are they? (3)
- Desingated investment business (excludes mortgages, home finance or general insurance)
- Long term insurance business in relation to life policies
- Accepting deposits
78
Who is responsible for the acts and omissions of appointed representatives?
The firm
79
What is the 3 steps procedure for elective professional clients? (3)
- Client must state in writing it wishes to be professional
- Firm must disclose in writing the rights and protections that are lost with professional clients
- The client must respond and acknowledge that it is aware of losing protections
80
What is the penalty for the breach of FSMA 2000?
- Penalty of two years in jail and unlimited fine
81
What is a readily realisable security? (2)
- One that can easily be bought and sold from a RIE or EEA exchange
- A government or public security
82
What contracts does a client have a right to cancel? (2)
- Life policies and pension schemes within 30 calendar days
- Any other packaged product within 14 days
83
What is the different between new retail investment products and old packaged products?
Packaged product
- A life policy
- A unit is CIS
- An interest in IT saving scheme
- A stakeholder pension
- A personal pension
Retail investment product
- A life policy inc bonds
- A unit in regulated and unregulated CIS
- An interest in IT saving scheme
- A stakeholder pension/group stakeholder pension
- A personal pension (inc SIPPs)/group personal pension
- Share in IT
- Structured products
- Any other product that has been packaged in order to change the features of the product
84
In what type of advice does inducement rule apply to? (3)
- Resticted advice
- Portfolio advice
- Independent advice
85
What is inducement?
- In relation to MiFID business, when a firms pays or accepts any fee or commission unless stated otherwise
86
Which providers cannot induce a firm? (2)
- Third party
- A person acting on behalf of a third party
87
When is inducement from a third party or a person acting on behalf of a third party acceptable? (2)
- Direct payments by the firm is made out of its own resources
- Payments from a separate research payment account controlled by the firm
88
How long are CASS records kept?
5 years
