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Chapter 1: The Regulatory Environment > The Conduct of Business and Client Asset Rules > Flashcards

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

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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

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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
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4
Q

What are the 3 different client categorisations?

A
  • Retail client
  • Professional clients
  • Eligible counterparties
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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
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6
Q

What is a retail client? (2)

A
  • Not a professional client or an eligibile counterparty
  • Usually individuals or small businesses
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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
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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

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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

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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
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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
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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
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12
Q

What do quantitative tests include? (4)

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

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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
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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.

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15
Q

What type of eligible counterparties are there?

A
  • Elective or per se
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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
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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
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18
Q

Who cannot be a per se eligible counterparty? (3)

A
  • Individuals
  • Other institutional investors e.g SPVs
  • Elective professional clients
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19
Q

What are the protections of eligible counterparty clients? (3)

A
  • They must express that they wish to be categorised as eligible counterparties
  • Per se eligible counterparties are treated as retail and professional clients
  • Per se professional clients can be treated as retail clients
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20
Q

What 2 sources of regulation underpin financial promotions?

A
  • FSMA 2000
  • COBS
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21
Q

What is a financial promotion?

A
  • An invitation or inducement to engage in investment
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22
Q

When should a financial promotion be communicated? (2)

A
  • If content of the promotion is approved by an authorised person
    Or
  • If communication is exempt under the Financial Promotion Order
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23
Q

What is the Financial Promotion Order? (5)

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

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24
Q

What is the penalty for violating the Financial Promotion Order?

A
  • Up to 2 years in jail and unlimited fine
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25
Q

Through what mode of communication should a financial promotion not be approved? (2)

A
  • Personal visit
  • Telephone conversation
  • Must be via durable mode of communication / in writing
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26
Q

How can financial promotions be communicated? (1)

A
  • 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)

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27
Q

When is COBS applied to financial promotions? (3)

A
  • When a firm communicates with a client in the UK
  • Communicates a financial promotion or approves a one for communication to a person in the UK
  • COBS also applies to the communication of a cold call from a UK person outside the UK
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28
Q

What is the rule for communicating a financial promotion to a client in relation to designated investment business? (1)

A
  • Fair, clear and not misleading
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29
Q

What type of communication does the fair, clear and not misleading rule not apply to? (2)

A
  • 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
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30
Q

What are the requirements for the communication of a financial promotion to a retail client? (4)

A
  • The name of the firm
  • Accurate
  • Understandable
  • Avoid disguising, diminishing or obscuring important information, statements or warnings
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31
Q

What are the conditions for communicating past performance? (5)

A
  • 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
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32
Q

What are the requirements for communication simulated past performance? (2)

A
  • Must related to the actual past performance of the same investment or same underling investment
  • Comply with the same rules as past performance
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33
Q

What are the conditions for financial promotions received by retail clients? (3)

A
  • Disclosures relate to the product being priomoted
  • Appropriate information allows the client to understand risks and make informed decisions
  • A right to cancel
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34
Q

How and when should a firm issue non-written financial promotion? (5)

A
  • 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
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35
Q

In which 3 circumstances can a firm carry a cold call? (3)

A
  • 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)
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36
Q

What’s an example of a packaged product?

A
  • Life policy assurance
  • A unit in a regulated investment scheme
  • Stakeholder pension scheme
  • Interest in an investment trust saving scheme
  • Personal pension scheme
37
Q

What type of high risk investments can be promoted to retail clients? (3)

A
  • 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
38
Q

What is distance marketing communication? (5)

A

Where there is no face to face contact, firms must ensure information needs are met
- Redress
- Firm
- Service
- Contract

39
Q

What is the purpose of product governance?

A
  • To ensure that manufacturers and distributors of investment products act in the interests of the client at all stages of the product life cycle
40
Q

What rules must product manufacturers ensure they comply with? (6)

A
  • 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
41
Q

What must distributors ensure they comply with? (4)

A
  • 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
42
Q

What is a PRIIP? (4)

A
  • 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
43
Q

What is a KID and what should it include? (9)

A
  • 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
44
Q

What is KIID? (3)

A
  • Key Investor Information Documents
  • Used for UCITS funds (which are technically PRIIPs)
  • Aimed at retail investors
45
Q

What products for Key Features Documents apply to? (2)

A
  • Non PRIIPs
  • Pension products and cash deposit ISAs
46
Q

Who must offer a client’s right to cancel? (2)

A
  • Most providers of retail financial products
  • Firms that enter into distance contracts with consumers
47
Q

When does the cancellation period begin? (1)

A
  • The day of the conclusion of the contract except for life policies - consumer is informed of contract conclusion
48
Q

Under MiFID, when is inducement permitted? (3)

A
  • 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
49
Q

How long just inducements records be kept on file?

A

5 years from the date in which the fee/commission/benefit was given

50
Q

What information is fundamental for a firm to provide to a client?

A
  • 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)
51
Q

What information needs to be disclosed by an Investment Management firm to a client? (6)

A
  • 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
52
Q

When must the firm provide the terms of agreement to a client? (2)

A
  • Before the client agreement is signed and becomes binding
  • Before any service is provided
53
Q

For who must suitability be carried? (3)

A
  • Personal recommendations in designated investment business
  • Retail clients (non MiFID)
  • PRIIPs
54
Q

What is the criteria for assessing suitability? (3)

A
  • Tolerance to risk
  • Financial profile
  • Investment knowledge and experience
55
Q

What is churning?

A
  • Overtrading in securities

**prohibited in COBS

56
Q

What is switching?

A
  • Overtrading in packaged products

**prohibited in COBS

57
Q

What transactions require a suitability report? (1)

A
  • 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
58
Q

Where do transaction suitability reports not apply?

A
  • 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
59
Q

When should a firm give warning to a client?

A
  • When the service is unsuitable for the client
  • When the firm is unable to determine whether the product or service is suitable
60
Q

What are non-complex financial instruments?

A
  • Single stocks traded on a regulated market
  • Units in UCITS
  • Money market instruments, bonds or other forms of securitised debts
61
Q

What criteria must non-complex financial instruments satisfy? (4)

A
  • They are not derivatives
  • Liabilities do not exceed costs
  • Liquid
  • Product governance
62
Q

Who can conflicts of interest occur between?

A
  • Itself (firm, employees, managers) and the client
  • A client of the firm and another client
  • Different departments within the same firm
63
Q

What must the conflict of interest policy include?

A
  • 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
64
Q

What are the required disclosures for research recommendations? (7)

A
  • 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
65
Q

When should investment research be disseminated?

A
  • Before dealing or trading
66
Q

What are execution factors? (8)

A
  • Price
  • Cost
  • Speed
  • Likelihood
  • Execution
  • Settlement
  • Size
  • Nature
67
Q

What characteristics must be considered when executing an order? (4)

A
  • Type of client - retail or professional
  • Type of security
  • Type of client order
  • Type of execution venues
68
Q

What are the requirements for personal dealing? (3)

A
  • 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
69
Q

When does personal dealing not apply? (3)

A
  • On a discretionary portfolio managed independently of the relevant person
  • Rights or shares in UCITS
  • Life policies
70
Q

What is the essential trade confirmation information?

A
  • Price, settlement, nominal
71
Q

How often must a firm report to clients? (3)

A
  • 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.
72
Q

What is considered a small, medium and large CASS firm? (3)

A

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

73
Q

Does a passported firm have to follow CASS rules?

A

Yes. UK firm passported to Germany would still have to followed rules

74
Q

Where must client money be placed?

A

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

75
Q

How long must pension transfers and opt outs be kept on record?

A

Indefinitely

76
Q

How long must life policy or pension schemes be kept on record?

A

5 years

77
Q

How long must MiFID or third country business be kept on record?

A

5 years

78
Q

How long must any other non-MiFID business be kept on record?

A

3 years

79
Q

COBS applies to firms that carry out specific activities, what are they? (3)

A
  • Desingated investment business (excludes mortgages, home finance or general insurance)
  • Long term insurance business in relation to life policies
  • Accepting deposits
80
Q

Who is responsible for the acts and omissions of appointed representatives?

A

The firm

81
Q

What is the 3 steps procedure for elective professional clients? (3)

A
  • 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
82
Q

What is the penalty for the breach of FSMA 2000?

A
  • Penalty of two years in jail and unlimited fine
83
Q

What is a readily realisable security? (2)

A
  • One that can easily be bought and sold from a RIE or EEA exchange
  • A government or public security
84
Q

What contracts does a client have a right to cancel? (2)

A
  • Life policies and pension schemes within 30 calendar days
  • Any other packaged product within 14 days
85
Q

What is the different between new retail investment products and old packaged products?

A

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

86
Q

In what type of advice does inducement rule apply to? (3)

A
  • Resticted advice
  • Portfolio advice
  • Independent advice
87
Q

What is inducement?

A
  • In relation to MiFID business, when a firms pays or accepts any fee or commission unless stated otherwise
88
Q

Which providers cannot induce a firm? (2)

A
  • Third party
  • A person acting on behalf of a third party
89
Q

When is inducement from a third party or a person acting on behalf of a third party acceptable? (2)

A
  • Direct payments by the firm is made out of its own resources
  • Payments from a separate research payment account controlled by the firm
90
Q

How long are CASS records kept?

A

5 years

Chapter 1: The Regulatory Environment (10 decks)

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