The FCA's Conduct of Business and Client Assets Sourcebook Flashcards

Question

Timing and medium of disclosures.

Answer 1

Provided in good time before the provision of a firm's services. Can be provided immediately after provision of services if: * At the request of the client, the agreement was executed using a means of distance communication which prevented the firm from providing the information before svs provision. * firm complies with the rules in relation to telephone communication. The disclosures must be in a durable medium/on the website if it complies with regulation.

Answer 2

* client's must be notified/kept up to date in good time of any changes ti a service they are using in a durable medium * Firms don't have to renew disclosures for every transaction for exisiting clients, only when there are changes to the product/servuce * Make clients aware of the compensation schemes, the amount of cover offered, the conditions and formalities required to get compensation (upon request).

Answer 3

* Covered by COBS 6.2A and B - firms must not describe themselves as independant unless they only offer recommendations to retail clients that based cmprehensive, unbiased and unrestricted. *

Answer 4

If a fim offering UK MiFID products recieves instruction toprovide investment or ancilliary services to a client via anotehr UK Mifid firm - it can rely on: * information provided by the 3rd party about the client * recommendations that teh 3rd party provide * 3rd party remains responsible for the accuracy of client info and appropriateness of reccomendations. **reliance on anotehr firm must be confirmed in writing** * Non Mifid inv. firms can rely on info from an unconnected authorised person/professional firm unless it is aware the info is wrong.

Answer 5

Firms must follow either principle 12 or FTOC when communiciating with clients.

Answer 6

* Only authorised persons/firms can be communicate a financial promotion with clients / or the fin. promotion is through an approved source. **otehrwise it's illegal** Designated investment businesses have some exemptions: * qualifying credit, home purchase plan or home reversion plan. * promotion for a non-inv. insurance contract * cannot promote unregulated CISs * relates to a credit agreement, cosnumer hire agreeement or credit regulated activity. This also applies to communications to authorised professional firms. Applies to a firm carrying out business/communciates a fin promotion to a client in the UK (including when this is done from an overseas branch offering svs in the UK). Mostly don't apply to ECPs

Answer 7

* Ensure fin. promotions are fair, clear and not misleading. * Consistent with principles 6 & 7 (unless the firm is in scope for consumer duty - then principle 12 takes over) * FCA has the power to remove promotions from the mkt or prevent it from being issued in the first place. The FCA will notify the firm that they need to remove the promotion, the firm can contest it and the FCA will then issue a final decision

Answer 8

* Fin. promotions must be fair, clear and not misleading as well as appropriate and proportionate based on the type of communication and target market. Firms must ensure fin promotions communications are: * Clearly call out when customer's capital is at risk * Give clear impression of short/medium/long term yeild if a yeild is quoted. * Clear and appropriate info. on service charges/fees if they are complex * If areas of the business are mot FCA regulated, that this is called out. * Clear information about the manager/producer of the product if the firm didn't create it internally. FCA advises firms to review the **'code of conduct for the advertising of interest bearing accounts'** when creating fin. propmotions for deposit accs. Fin. promotions must be clearly identifiable for the customer.

Answer 9

* Post FCA consultation in 2022, they published a policy statement in 2023 with their final rules. * Anti greenwashing rules come in from 31st May 2024 for all regulated firms when marketing a product's sustainability features to a client. * Ensures sustainability claims are consistent with the product and are fair, clear and not misleading.

Answer 10

Exempt excluded communications: * High net worth individuals (FPO artcile 48) and sophisticated investors (FPO art. 50 and 50a). * Exempt under the **financial promotion order (FPO)** - makes some promotions exempt if communicated by an unauthorised person, originates from outside UK or doesn't affect the UK. * Originates from outside the UK if the office sending the promotion is a seperate unauthorised person * Subject to/exempted from the takeover code * one-off promotions that are not cold calls.

Answer 11

* Passed in 2023 Changes * Increased fin thresholds to be a HNWI - annual income of £170K (up from 100K) and net assets of $430K (up from £250K). * Amend the criteria to self certify as a sophisticated investor - removed criteria of making an investment in a private company in the past 2 years and increased company turnover threshold to £1.6mil for the company director exemption. * Business must provide their details in communications under exemption * removed 'certified' from HNWI exemption * updated the HNWI and soph. inv. statements. * applied changes to promotion of CISs. Passed through parliament on 6/11/23 and implemented on 31/1/24

Answer 12

* Real time - e.g. face to face, phone, presentations, etc. * Unsolicited real time - cold calls * non-real time communications - emails, letters, websites, typically where a record of communication is made * direct offer financial promotions - make an offer to any person to enter into an agreement and include a form of response/method of responding

Answer 13

* **COBS 3.3 applies to prospectusses NOT COBS 4** COBS 3.3 applies when: * Prospectus is required under FSMA section 85 or * election to produce a prospectus is made unde FSMA section 87 Prospectus promotion is any communication specifically promoting subscritpion to/acquisition of securities and cannot be issued unless. * The communication states a prospectus has/will be issued * clearly an advertisment * the information is accurate/not misleading. * consistent with the info in the prospectus Must also include a bold and prominent statement to the effect that the advertisment is not a prospectus and is only an advert. Investors should only subscribe to securities after reviewing the propectus.

Answer 14

* NOV 2023 - treasury published a statutory instrument - **the publlic offers and admissions to trading regulations 2023** to take a step towards replacing the old EU derived prospectus rules. * will be implemented in 2 stages - FCA granted new powers to make rules, provide guidance and issue policy and a formal consultation process of the rules the FCA creates.

Answer 15

COBS rules required the following when sending fin promotions to retail clients: * Firm;s name is on the promotion * accurate information which gives fair explaination of both risk and potential rewards * information is presented so the average joe can read/understand it * information does not obscure important information * If comparisons to other products are made they must be fair and balanced (data sources + any assumptions must be stated for MiFID business) * If tax treatement is mentioned - statement saying it depends on each customer's personal circumstance + is subject to change is required * Rules aren't applicable to 3rd party prospectuses and image advertising * Excluded communications are exempt for MiFID business also

Answer 16

* 2020 - FCA implemented temporary rules re promtoing illiquid investments to retail clients. * Implemented to protect retail clients form investing in high risk instruments that they don't understand. * Banned promotion of mini-bonds and preference shares to retail investors. * increased transparency disclosure requirements on risks

Answer 17

* Active from 01/12/2022 * banned promo. of non mass market inv. instruments to retail inv. * restricted mass mkt inv. are not permitted to non-readily realisable securities and peer-peer agreements. * Enhanced risk warnings * banned incentives to invest - referral schemes, chasback etc * cooling off periods * personalised risk warnings - e.g. first time investors with a firm * client categorisation - retail investors must confirm they meet the cirteria to recieve HR inv. promotions * more robust appropriate test and preventing firms from coaching clients to pass it. * record keepign requirements are enhanced *

Answer 18

* Enhanced requiremetns for firms apprvoing and communicating financial promotions * display the name of the approver of the fin. promotion and the date approved. Firms can use FRN and approvers must be competent and take active steps to ensure compliance. * Enhanced conflict of interest requirements * approverrs must undertake suitability assessments before NMMI are promoted to retail investors.

Answer 19

* Sep 2023 final rules published * Focusses on clear, fair and not misleading promotion of cryptoassets

Answer 20

* In-scope cryptoassets covered in 26F, schedule 1 of the FPO and is a digital representation of value that is transferable and fungible but excludes crypto assets that are electronic money/already regulated. * dealing in/arrangign deals of, managing/advising and agreeing to carrry out certain kinds of activity for cryptoassets are now in scope for regulation. * Unauthorised firms selling cryptoassets can communicate their promotions under a specific exemption by the FPO called the MLRs.

Answer 21

1. Promotion communicated by an authorised person 2. promo made by an unauthorised person but approved by an authorised person 3. Promo is communicated by a cryptto business registered with the FCA under teh MLRs in reliance with the FPO exemption. 4. promotion is communicated under an FPO exemption FCA is making crypto a restricted mass market investment that can be mass marketed under the following restrictions: * clear risk warnings - general and personalised * banning incentives to invest * positive frictions (cooling off periods, client categorisiation etc) * Appropriateness assessments

Answer 22

Firms must provide information on past performance in a way that is: * Not the most prominent feature of a communication. * show the most immediate 5 years past performance at least * reference periods + relevant sources are given * clear warning the past performance may not be repeated in the future * If the currency is not sterling - warning on currency risk * if gross performance is cited - clear disclosures on otehr fees, tax etc are required.

Answer 23

When firms give data that is simulated past performance as the product does not have a track record, they must: * Relate to an investment/fin. index * based on/relate to an index/instrument similar to the one beign simualted * meet teh past performance rules * clear and prominent warning the data is simulated

Answer 24

Information referring to possible future performance must: * not be based on/refer to past performance * based on reasonable assumptions and supported by data * disclosures on tax, fees etc if quoted gross * contains a prominent warning the figures a projected and not reliable.

Answer 25

Direct offer promos making a direct offer/invitation must follow the below rules (examples are in newspapers/direct mail) * Prescribed info on the firm + services it offers * info on the mgmt of client's investements if relevant * info on safekeeping of client assets * info on costs/charges * info on risks and taxes etc. * statement confirming a prospectus has been published * if 2 or more inv. are combined, a breakdown of the risks of each instrument is required * if a third party guarantee is in place, info must be presented * advise the recipient to get advice if they are unsure on the inv. suitablity **not required if the offer directs a client to anothe doc detialing the above info**

Answer 26

Firms cannot initiate unwritten promotions to clients outside of their premises unless: * it is at an appropriate time of day * identifies themselves and their firm and makes the reason for contact clear * clarify whether the client wants to continue with promos or cancel them * gives teh client a point of contact if an appointment is arranged

Answer 27

When an authorised person or exempt person contacts people without a prior appointment with teh view to communicate a fin. promo. Firms must not cold call unless: * the recipient has an exisiting relationship with the firm * call relates to a generally marketable product and not high risk prods/life policies * it relates to controlled activity relating to a limited range of investments inclluding deposits and readily realisable investments (not warrants or fruity geared products)

Answer 28

Firms only allowed to approve/communicated fin. promos. for overseas firms if the promo sets out which firm has approved/communicated the promo and explains teh following where applicable. * the rules for inv. protection don't apply * the extent that UK compensation schemes will be available if at all * at the communicator's discretion - any overseas comp. schemes Firms cannot approve/communicate a promo unless it is fully confident the firm will deal honestly/reliably with UK retail clients

Answer 29

* Approving fin. promos is a formal process set out in COBS 4.10 and FSMA - complimens SYSC 3 and 4 - require communication in related to designated inv. business and the firm to have policies to comply with fin. promo rules. *

Answer 30

* 'Gateway' policy introduced Sep 2023 * means all firms must apply for permission to approve fin promos for third parties with the FCA. FCA final rules/requirements for firms applicable to 'gateway' * how they assess applicants * the basis for the FCA approving/rejecting applications * bi-annual reporting for approved firms. * Firms must notify the FCA of action on fin promos within 7 days of approving/rejecting a 3rd party's promo * not extending teh compulsory jurisidication of the fin. ombudsman service * further changes to the FCA, non handbook guidance on fin. promos

Answer 31

* Firms must check the promo complies with the rules and withdraw it if it no longer applies ater approval. * Rules apply to the third party approver as if they were the firm doing it themselves * Firms may not approve real time fin promos * Cannot approve promos fro restricted instruments unless under an exemption - ie unauthorised CISs * When approving promos under exemptions - the exemption must be stated in the promo.

Answer 32

For non-MiFID business if it communicates a promo approved by a third party along with the following: * Takes care to ensure the promo is approved by an authorised third party * communicates the promo with the intended audience only * promo is fair, clear and not misleading

Answer 33

COBS suitability rules apply to firms wehn: * make personal reccomedations/inv. advice on what to buy/hold/sell * manage inv. on behalf of clients * Manage pensions other than MiFID exempt schemes Some specific rules exisit on giving basic advice and can apply stakeholder rules on suitability when advising on stakeholder prods. For non-MiFID business, rules only apply when: * retail clients are involved * managing inv. for a pension fund that is MiFID exempt

Answer 34

* **Churning**=trading more frequently than is necessary to get more fees from a client. usually when a firm manages a client protfolio on a discretionary basis * **switching** = selling one investment and replacing it with another. * FCA guidance on switching = under COBS suitability rules a series of suitable transactions carried out very frequently and are detrimental to the client are not suitable/mot allowed. * The firm should consider client inv. objectives when deciding how frequently to deal.

Answer 35

Firms should obtain the following about a client before giving them inv advice etcc. * their knowledged and experience * fin. situation and ability to bear losses * inv objectives and risk profile Allows for suitable reccomendations/the firm to make suitable decisions on behalf of the client. * Suitability assessment must be made before commencing busines with a client.. * Firms need policies in place to ensure their understanding of the client and that the products they are offering/selecting for a client are suitable *

Answer 36

* Consider if incetive schemes increased risk of misselling their svs. * review the adequacy of their governance, controls etc * take action to address inadequacies Common areas firms need to improve in to reduce incetive risk * check foor spikes/trends in advicers sales patterns to identify risk * monitor face to face sales practice to discourage piss taking * managing risk in discretionary incentive schemes to ensure they are not misused. * monitor non-advised sales to ensure unauthorised persons are not giving reccomendations * introduce oversght incetives * recognising that phat bonuses can incetivise misseling for salespeople

Answer 37

* Firms must provide retail client with a suitability report when they give advice/recommendations on investements such as equities, derivitives, structured prods, unregulated CISs. * It also covers products that were prviosuly covered under the previosu MiFID regime if the recomendation is to 1. acquire/sell a regulated CIS, inv. trust (where acquired via an ISA or otherwise) 2. take any action (buy, sell, etc) in a personal/stakeholder pension shceme 3. make income iwthdrawals/purchase short term annuity 4. enter into a pension transfer/pension opt out

Answer 38

* firm acts as an inv. manager for a retail client nd makes a recomendation to buy a regulated CIS * when the client is habitually resident/perminently resident outside the UK * if the personal recommendation is made by a friendly scoiety relating to a small life polciy not exceeding £50 cost per year ot £1 per week. * if the recommendation is to increase a premium to an exisiting contract * invest additional single premiums/contributions to an exisiting product they have previosuly paid into *

Answer 39

* life policy - before the contract is concluded. if the contract is needed immediately it must be done immediately after conclusion on a durable medium * personal/stakeholder pension scheme - within 14 days if cancellation rules apply * in other cases - before the transaction is concluded unless prior consent it given

Answer 40

* specify client's demands, needs, disadvantages 9risks) of hte transaction * explain why the firm has reccomended the prod/svs. * have due regard ofthe info the client provided * if a life policy telephone sale and teh only contact between the firm and the client is the blower then: * it must comply with teh Distance Marketing Directive (DMD) rules * provided immediately after teh conclusion of the contract * provided in a durable medium

Answer 41

For MIFID business, MiFID requires the collection of: * info on client knowledge/experience relating to the fin instrument being obtained * info on client's fin. standing and ability to bear loss * client inv. objectives and ris appetite UK MiFID means perosnal reccomednations AND any adivce to buy/hold/sell is in scope for suitability reports. Firms provided inv. mgmt svs. must undertake suitability assessments of clients.

Answer 42

Firms must collect the following to assess clietn suitability (caled fact-finding: * inv objectives * level of bearable inv. risk * risk is of a level the client can manage/understand Info on knowledge/experience: * types of service/transaction and investments which they are familiar with * nature,volume and frequency of those transactions * level of education and current/former profession (trader etc) Firms can rely on info provided by clients unless it is out of date or evidently BS. The firm cannot make personal reccomednations unles the correct info is collected

Answer 43

* Firms are allowed to assume pro. clients have suitable knowledge and experience in an area of inv and they are able to bear any risks assocaited with their inv objectives. * Firms **Cannot** assume this with elective professionals

Answer 44

* Insistent clients= firm has given the client a personal reccomendation, decides to enter into a different/not enter into a transaction at all that was advised by the firm and if the client wishing for the firm to facilitate the transactions. Info to be communicated with an insistent client * the firm has not reccomended the transaction and it is not in-line with the firm's personal reccomendation * the reason why it won't be in line with the firm's personal reccomendation * risks of transactiion proposed by the clientt * reason why the firm didn't reccomend that transacttion to the client

Answer 45

Firms should obtain acknowledgement that: * transaction isn't in accordance with the firm's personal reccomendation * transaction is being executed at the request of the client only

Answer 46

Rules on non-advised sales apply to a range of MiFID and non Mifid inv. svs. not involving advice or disretionary portfolio mgmt. apply to firms/business that is: * providing MiFID inv svs other than personal reccomendations/inv. mgmt. * arranging deals/dealing in warrants and derivs for retail clients when the trade is a direct response to a fin promo * assess a client's appropriateness on behalf of other UK MIFID firms Purpose of appropriateness test is to give protection to non advised transactions

Answer 47

Firms must ask client about knowledge/experience in the mkt they wish to trade in so they can assess appropriateness. To assess appropriateness a firm must: * determine whether a client has experience/knowledgeto understand the risk * assume pro. clients have sufficient knowledge etc Firms must collect the following info to asses knowledge/experience: * type of service/inv they are expereienced in * nature,volume/frequnecy of trading in that svs/prod * level of education, current/former profession Firms can rely on info provided by clients unless it is out of date or evidently BS. The firm cannot make personal reccomednations unles the correct info is collected. Must must not discourage client's from providing this info.

Answer 48

If a firm believes the assessment is not appropriate for a client of this. Can be done in a non standardised format. If a client declines to provide info a firm needs toassess appropriateness, the firm must warn them that tehy cannot assess the product's appopriateness. If the client asks to trade regardless, it is up to the firm whether to continue this business.

Answer 49

Firms don't need to do appropriateness assessments when: * services are execution only * client is notfied the firm doens't need to assess appropriateness and they therefore lose their protections because of this. * the firm complies with conflict of interest obligations (principle 8) This relates to the following instruments (COBS 10A 4.1): * shares listed on UK, EEA or equivalent third country regulated exchanges * money mkts, bonds, securitised debt * UCITS funds * non complex investments (liquid, not derivs, the client cannot lose more than the initial inv., comprehensive publically available info on the prod)

Answer 50

* Firms don't need to reasssess/test clients before providing new svs if they are dealing in similar svs/prods * If the client was dealing in fruity products before MiFID in 2007 it would be assumed to have suufficient knowledge not to be assessed.

Answer 51

**Authorised fund managers (AFM) managing UCITS must produce a key investor information document (KIID).** * It must be clear, fair, not misleading and be conssitent with the prospectus. * Must include info to allow potential investors to identify key risks and make informed inv. decisions. the firm must provide the following essential elements of info in the KIID about the UCTIS fund: * identification of the scheme, its objectives and inv. policy * past performance and relevant performance scenarios * costs/charges * risk/reward profile and guidance/warning on risks **KIIDs cover the terms and features of a product in a predescribed level of detail**

Answer 52

* where another firm has agreed to prep. teh doc * For certain types of scheme or if the info is already provided in another doc required for the product * the prod is a specific reinsurance/pure protection insurance contract

Answer 53

Firms must produce a KFD product disclosure for each of the following prods: * each packaged prod * cash desposit ISAs * Cash deposit child trust funds * a key features illustration for each packaged prod it produes firms must provide info on teh nature of risks for designated investments for MiFID clients and sometimes retail clients when the prod relates to certain business

Answer 54

Advice provided to retail clients is either independant or restricted. Independant advice is *a personal reccomendation for a retail investment product meeting the independance advice rules)* Independant advice firms must ensure they assess the range of prods available on the mkt and ensure they are: * sufficiently diversified with respect to type and issuer/provider * not limited to relevant products issued by the firm giving the advice or other entities the firm has a close relationship with Basically gives the client a list of all suitable products based on their inv. objectives with limiting certain providers to help benefit themsleves/their mates.

Answer 55

* comes in many forms and is advice that does not meet the independant advice criteria * Firms must disclose that they provide restricted advice and teh nature of that restriction to clients. *

Answer 56

* requires the firm to produce a KID (key infirmation document) to help the investor better understand the packaged product. * UCITS offering a new PRIIP have a 5 year exemption to produce a KID as they already have KIID and KFDs - exemption expires on 31/12/2026 * Scope of PRIIPs is distinguished by their largely comparible features for retial clients. PRIIPs are categorised into 4 groups 1. inv. funds 2. insurance based inv. products 3. retail strcutured securities 4. strucutured term deposits

Answer 57

* Firms manufacturing/advising on PRIIPs * Manufacturers must prepare a KID for each PRIIP produce or publlish each KID on their website * Firms advising/selling retail investors PRIIPs must provide them with teh KID in good time before any transaction is conducted * Retail clients in this sense are MIFID retail clients or customers reffered to in the Insurance Distribution directive

Answer 58

**required for PRIIPS - standardised document preapred for each investment. Can be a max of 3 A4 pages in length.** Must provide info in the following sections: * what teh prod is * risks and returns * insolvency from the producer of the PRIIP * costs.fees * lock in periods * cmplaints * other relevant info

Answer 59

* HM treasury published UK retail disclosure framework regime seeing **Consumer Composite Investments (CCIs) replaces the PRIIPS regime**. It will: * Replace PRIIPs and defien the scope of CCIs * regulate manufacture, advising and offering of CCis in the UK for retail clients * give teh FCA powers to create legislation * restate FCA supervisory powers * set civil liability for pre-contractual disclosures * provide a transition period for UCITs KIIDs The scope of prods is largely similar to the current PRIIP rules but it could end up capturing a much broader scope of firms as per teh statutory instrument published that is to be confirmed in 2024.

Answer 60

Retail clients must be gven cancellation rights when dealing in nvestment business. Cancellation rules apply to: * firms providing retail fin. prods. based on designated inv. or deposits * firms entering into distance contracts Allows a client to terminate a contract if they change their mind. Cancellation periods are as follows based on when the client recieves contractual confirmation or the day the contract concludes: * life/pension prods - 30 days * cash deposit ISAs - 14 days * non life and pension prods (advised and non distance) = 14 days * non life and pension prods (distance) - 14 days

Answer 61

* Firms must tell clients their cancellation rights: 1. the existance of the rights 2. their duration 3. conditions for exercising a cancellation 4. what happens if they don't exercise 5. practical steps to exercise their right This is not required if the person is already recieving this guidance for other prods/otehr firms under COBS rules

Answer 62

* Indefinitey for pension funds (opt outs/transfers), free standing additional contributions * 5 years for life policies, pesnion contracts, personal or stakeholder pension schemes * 3 years in other cases

Answer 63

COBs rules - typically apply to authorised firms: * Best execution (COBS 11.2 a,b,c) * Client order handling - 11.3 * client limit orders - 11.4 * record keeping, client observations and transactions - 11.5a * personal account dealing - 11.7 * recording phone conversations and electronic comms - SYSC 10a certain non-mifid firms are applicable to the above (as per the FCA handbook) and the personal account dealing rules apply to designated investment businesses of authorised firms in reltaion to their UK based activity.

Answer 64

* **FCA principle 8** * Apply to all firms - (MIFID and non-MIFID) * in place to prevent conflicts of interest between teh firm and the client and the client and another client

Answer 65

* Gaining/avoiding loss at the expense of a client * having interest in the outcome of a transaction that is intended to benefit the client * incentives to favour particular clients * conducting the same business as a client * recieving inducements that are greater than teh regular commission fee in return for preferential treatment - bribes

Answer 66

* maintain effective administrative arrangements to prevent CoI from affecting cleints * have barriers to stop external inv. research from reaching internal businesses - trading desks etc * disclose any conflicts in a durable medium before they occur to allow the client to decide the next step - this should be secondary to preventing CoI inteh first place * prepare, maintain and implement a conflicts policy * provide the CoI policy to retail clients * keep records of all conflicts of interest that have arisen

Answer 67

* barriers between departments to prevent sharing of information

Answer 68

* Where conflict of interest policies fail and a conflict arises, the firm must inform the client before transacting for/on the client's behalf. * last resort when there is potential material damage to a client's transactions * disclosures must be made in a durable medium * Over-reliance on disclosing conflicts instead of correctly preventing them is not permitted

Answer 69

* the policies must be developed to suit the nature and business of the firm. This includes if a firm is a member of a large group, how the conflicts with other business areas will be managed * The policy must set out the circumstances that could cause conflicts e.g. research and prop trading * Must also state theprocesses and procedures for managing conflicts to cover control of info internally, seperate supervision of individuals engaged in activities for different clients and remove renumeration that is made possible from conflicts. * For corp fin firms managing an offering of securities - the policy should pay attentio to the offering process, allocation and pricing of the securities

Answer 70

* inv. research is advice on an inv. stratergy with info on present/future value, etc and is intended for public distribution * Must be lablled as inv. research and as an objective and independant explaination. Should not be presented in a way that looks like a personal reccomendation

Answer 71

* Firm must manage CoIs using SYSC 10.1.11R by ensuring that * People with access to the info before it is public do not act upon it until the targeted recipient has recieved the info * cannot trade the ideas in the research unless approved by compliance * no promise of favourable results for trading using the research * only financial analysts can review the research if it contains a reccomednation/target price **Firms don't have to comply with the above if they are disseminating inv. research on behalf of another firm** as long as: * the firm is not in the same group as the research author * the firm doesn't amend the research * the firm doesn't say it made the research * the firm verifies the author of the research is in scope for COI regs *

Answer 72

* when research isn't objective/independant it is considered a marketing communication and would be treated under COBS 4 as a fin. promo. therefore it must include clear identification to be a marketing communication and clear notes that it hasn't been prepared in line with COI requirements. Firms must comply with the following to prevent conflicts of interest for Non-independant research. * ensure that a research reccomendation is fairly presented * disclose the firm's interests/any investments in teh info contained in the research * name of the firm + regulator * identify the person who created the research * ensure it contains facts and opinions/subjective info is clearly distinguishable * sources of info are reliable * projections are clearly labelled and sources identified * ensure the research can be proven as reasonable if asked by the FCA

Answer 73

* material sources are identified and their authors notified if required * basis of setting pricing targets is summarised * definitions of terms (buy, sell, time horisions) as well as risks and warnings * reference made to the planned frequency of updates to the material * date of first release given and date/time of any prices * call out any difference between the subject piece of research any any other research released in the past 12 months *

Answer 74

Firms must disclose * Any relationships they may have that could obsecure the objectivity of the research * relationships of the writers of the research - i.e. is their comp based on the transactions that occur as a result * any interests that may be accessible to the author/other people ahead of the release of the research * disclosure of a firm's holdings in an issuer that exceed 5% * statements calling out the purpose of the firm in the mkt - i.e mkt maker, lead manager etc * COI arrangements * if the author acts on the information presented in the research the price and date of acquisition is required

Answer 75

**Rules around prohibiting firms receiving payments (outside of usual fee amounts) in exchange for a prod/svs unless expressly permitted when engaging in MiFID and non-MiFID business. Only apply to retail and pro. clients** * also applies when firms provide independant advice, restricted advice and portfolio mgmt to retail clients but they can recieve some minor non-monetary benefits (must be reasonable given the service being provided, must be disclosed before the deal. Examples are participations in conferences, basic product info etc) *

Answer 76

Firms are prevented from paying/accepting fees/commissions or providing and receiving non-monetary benefits other than: * fees, commissions, non-monetary benefits paid by the client * proper fees required to facilitate a service - i.e. legal fees, custody costs, etc. that cannot give rise to conflict * fees, commissions, non-monetary benefits paid by a 3rd party This is only permissible when: * the benefts don't impair the firm's duty to act in the client's best interest * are designed to enhance the client's quality of service * disclosed prior to provision of services to a client

Answer 77

Firms can meet disclosure requirements if they: * disclose the essential arrrangements for payments/benefits * make it clear to the client that further details will be disclosed on request * do give such details on request Firms must keep records of the payments and benefits made to other firms for UK MIFID business.

Answer 78

* Research must be charged to a client as a seperate fee if the client isn't eligible to recieve it for free. * **For UK and EU regulated firms** Firms can only recieve research if it is paid for with it's own resources or sent from a research payment account managed by the firm and paid into by it's client - doesn't apply to non-UK/EU entities *

Answer 79

* Exemption for the inducement rules for SME research - companies with a mkt. cap. of more than £200mil are also exempt. This will be reviewed in 2025 * Exemption for FICC instruments * Independant research providers who don't execute transactions are exempt * Openly available/public research can be receieved for free by UK asset managers

Answer 80

* RPA must be funded by a specific research charge made to the client thhat is designed to cover the costs that teh firm wil incur by providing research to the client * the money cannot be used to pay for any other goods and services including the below which the FCA doesn't consider research 1. post trade analytics 2. historical price data/price feeds 3. seminar fees 4. corporate access fees 5. order and execution management services 6. admin of the RPA

Answer 81

* Applies to MiFID and Non-MiFID firms * Applies to the following COBS rules 1. COBS 11.2 - alternative investment fund amangers and residual CIS operators (operate under old FCA rules) 2. 11.2a - MiFID inv. firms 3. 11.2B - UCITS mgmt firms 4. 11.2c - mkt makers/liquidty providers are obligated to release details on their execution quality **Requires firms to execute orders on the terms that are most favourable to the client taking all sufficient steps to achieve this regardless of instrument** * Can be hard to apply a uniform procedure due to the variables of an order. * UK MiFID quick fix removed the required for MiFID firms to report best execution datain 2021 *

Answer 82

* price * Speed * costs (fees) * liklihood of execution * settlement size * nature * any other relevant details The relevance/priority of the above is based on: 1. the client and their categorisation 2. client order 3. instruments involved in the trade 4. execution venues that can process the order

Answer 83

* Inv. firms must assess whether/ the level of which a client is placing reliance on the firm to achieve best execution for the transaction or if the firm is using it's discretion. * OTC deals in scope of best execution should have processes in place for firm's to check best execution 4 fold test (firms must assess each point seperately to idenify whether they owe the client best execution) 1. did the investment firm initiation the transaction? 2. did the client only ask you for a quote (didn't shop around) 3. will the client be unable/able toidentify mkt price transparency 4. has the client confirmed that they place reliance with the inv firm?

Answer 84

* Retial clients - firms must consider total costs of the transaction (fees, taxes etc included) and achieve best execution with this in mind

Answer 85

* if a firm can execcute at more than 1 venue - it must assess it's own costs + the costs of the various execution venues to reach best execution * A firm's commissions should not make it discriminate between venues. * The firm can't charge more to a client for executing at different venues because of the inconvenience.

Answer 86

* firms must establish order execution (best execution) policies - MiFID firms have strict conditions of the contents of the execution policy * Firm's don't need explicit consent from client re the BE policy but it should be shared with clients at onboarding (ToBS) * If clients don't agree, their business is terminated

Answer 87

* Must be disclosed to clients undertaking MiFID investment business * Firms must obtain prior consent from clients on the policy via a general agreement/specific CCL * firms must review the policies at least annually/where there are material changes to the business the firm offers/conducts * The required content is contained under FCA handbook, COBS chapter 11 * clients must be uodated of any changes to the policy

Answer 88

* must include each class of fin. instrument the firm deals in, the execution venues the firm uses and the factors effecting how these are selected * Polciy must included execution venues that enable the firm to get the best possible outcome only * firms must disclose the polciy to clients - more detail is needed for retail clients * Firms must obtain consent however, this can be implied consent after the client deals wth the firm after recieving a copy of the BE policy * Firms must review the policy annually/when there are material chanegs to it

Answer 89

* firms must monitor the effectiveness of teh BE policy and their ability to meet it as well as any deficiencies. * Must be able to prove to clietns that they are executing orders in line with BE policy * **portfolio managers and firms receiving/transmitting orders for clients must act in the client's best interest when placing orders on their behalf** * Portfolio managers, receivers and transmitters of orders must have BE polcies but do not need explicit consent. Their policies must detail the entities they engage for execution for each intrument type.. * Entities being used for execution must have BE compliant execution arrangements

Answer 90

* Specific instructions on execution from a client must be executed as instructed and a firm will have achieved it's obligation if it executes according to the cleint's request. * Firms must stick to the client order regardless if a better alternative exists * If a specific instruction only applies to one part of an order, teh rest of the order must be conducted with BE in mind * Firms must not guide clients to provide specific instructions/limit how they can place orders to avoid meeting BE

Answer 91

Firms can only aggregate deals for a client or 2 or more client's deals when: * it is unlikely to disavantage the client * the fact aggregation may work to the client's disadvantage if disclosed to them * order allocation policy is sent to clients detailing how order price/size affects allocation and details on partial allocation. If orders are allocated and only partially executed, firms must use the allocation policy to re-allocate them * If a firm has aggregated it's own orders with that of a client's - it must not allocate them in a way that is detrimental to the client, with client orders taking priority

Answer 92

* Firms need procedures for prompt, fair and expeditious execution relative to the firm's own trading interests Firms must ensure: * executed client orders are recorded and allocated promptly and accurately * comparable orders are executed sequentially and quickly unless it is impractical/against client interests * retail clietns are informed of material difficulties in prompt execution as soon as the firm is aware of the issue * if the firm oversees settlement - it must be done correctly+quickly * Firms must not misuse and prevent abuse of client order info

Answer 93

* firm's that receive client limit orders for shares listed on a regualted market must make the orders public if they cannot execute them iimmediately given teh current mkt conditions. For orders over the normal mkt size firms may make the orders public by: * send the order to a regulated mkt or MTF order book trading system. * ensure the order is made public immediately and can be executed as soon as market conditions all it.

Answer 94

Firms must prevent it's employees from: * enter into transactions that contradict UK MAR, involves misuse of MNPI or conflicts the firm's duty to it's customers * improperly advising that anyone else enters into a transaction which would fall into the abvooe catagory (i.e. getting your granny to trade on insider info on your behalf) * improperly disclosing information that would lead anotehr person to enter into a transaction that would be covered in the firms bullet point or advise another person to enter in a transaction. The relevant provisions are: * rules on personal transactions undertaken by financial analysts * the rules relating to misuse of information on pending client orders Firms must keep record of personal transactions and those that are approved/rejected.

Answer 95

* Employees in scope for PAD must be aware of the restrictions and that they inform the firm of any personal transactions they do PAD exemptions: * deals under a discretionary management service (i.e. someone else manages your account for you like a fin. advisor and you don't instruct them on what orders to place) * Deals in UCITS/ETFs as long as the person doesn't manage them * personal transactions in life policies Employees (aside from directors/SMs) are subject to PAD to the extent that tehy have visibility over portfolio mgmt svs.

Answer 96

* Firms must send reports to clients of the services provided to them inclduign costs. Firms (other than inv. managers) must provide clients: * essential info on the svs offered by the firm in a durable medium+timely manneer * status on order requests * notice cofnriming deal details ASAP or when a third party confirms details(no later that 1 business day) The notice provided to client must contain info on the firm, teh time, price, type, veneue, intrument, order type (buy/sell), commissions, client responibility in settling the transactions, etc. Firms must keep copies of all confirmations sent to clients for: 1. 5 days for MiFID business from date of dispatch 2. other business - 3 days from date of dispatch Firms may provide info on the price of a transactions at each tranche if it is a lrage order executed in trnaches or provide them an average

Answer 97

* Investment managers must provide retail and professional clients with periodic statements unless another party provides them * Periodic statements must containing: firm's name, client account designation, port. value, total charges, benchmakr performance comparison, dividends/interest/other payemnts recieved, ifno on corp actions. * Must be sent **at least quarterly** unless the client receieves deal by deal confirmations or some higher risk investments only need annual reports * If a client's portfolio is leveraged a monthly statement is needed. Firms must keep copies of periodic reports for 5 days for Mifid and 3 days for non Mifid business.

Answer 98

* exceptions exist for overseas customers with junior ISAs * when losses exceed a preagreed limit, the client must be notified by the end of the same business day * Portfolio managers must issue a depreciation notification if a client portfolio value falls by >10% (however this was removed after june 2023)

Answer 99

**FCA High level requirements** * FCA record keepign reqs are detailed in SYSC sourcebook * Firms must keep orderly recordsof business operations from all services and transactions. No requirement to store in a durbale medium but the firm must be able to reproduce the records in english and in a hard copy if requested. * the records should be retained as long as is relevant for the busness type **Specific requirements** * invetsment firms must retain all records for MiFID business for 5 years * Inv firms must retain records for 3 yeas for Non-MiFD business

Answer 100

Page 249 print out

Answer 101

* Client Assets Sourcebook (CASS) sets requirements for safeguarding client assets * CASS applies to all firms (some exceptions) and to all clients types (retail, pro, etc) * Required firms to segregate client money from other money held by the firm so client money won't be used to pay creditors if the firm fails. **Achieved by holding client money in a statutory trust** * **CASS 6**=custody rules for holding instruments for MiIFD and non-MiFID business * **CASS 7**= Applies to certain UK MiFID firms regarding client money distribution rules: 1. holding client money over the course of it's MiFID business 2. when firms opt to comply with MiFID CASS rules for non-MiFID busines 3. holds money when CASS 5 (insurance mediation activity) applies and firms elect to use CASS 7. * Client assets must be segregated unless explicit consent is obttained not to. * Firms must register the assests in teh correct legal name of the client, nominee/PAOB. * When firms open accounts for clients they must inform the bank the money mus not be combined with the firm's own cash. teh bank must acknowledge within 20 days. *

Answer 102

* Firms must be able to immediately distinguish between client assets and their own as well as evidence segregation. * CASS 6.5 requires firms to carry out internal/external reconcilliations of CASS assets. * Internal reconcilliations should be done as frequently as is needed * External reconcilliations - ensure accuracy of a firm's records and accounts. Should be done as frequently as necessary but at least **monthly** by someone seperate to the production/maintenance of the accounts etc. * If there are discrepancies the firm must make up the difference if it's their fault or they should reach out to the person who's fault it is to resolve it * All failures/discrepancies in reconcilliation should be reported to the FCA immediately * CASS firms must be externally audited and provide reports on the firm's controls/systems annually.

Answer 103

* governed by CASS 7.15, FCA considers internal reconcilliation the most appropriate form of reconciling clietn money * firms must ensure client money is paid directly into their segregated account * firms must ensure their aggregate balance on client accounts is at least equal to the client money requirement. * If clients have very complex dealing relationships, alternative methods to segregating client money may be used to reduce operational risks (alternative approach) - daily reconciliations are then required and discrepancies must be resolved accordingly * Firms should use the value of cash contained in accounting records to value client accounts *

Answer 104

* Cross checking internal accounts against records held with external parties (banks) that hold the client money in trust. * Firms must do external reconcilliations as often as neccessay and as soon as practical after the reconciliation date * firms must resolve discrepancies ASAP - if the investigation is ongoing, the firm must use it's own money to credit the client's account until it is resolved * if the firms doesnt comply with the requirements it most notify the FCA in writing FCA believes the following is adequate to reconcile client money * reconciliation is recorded using a statement from the third party (bank) * proof of the firm's client account balance and a statement from the account holder with the account balance

Answer 105

CASS doesn't apply to * ICVCs * UCITs * Credit institutions holdings funds as the bank and not trustee * coins held for their physical value (gold coins etc) * Money held for a DvP transaction (unless delivery doesn't occur after 3 days) * money due and payable to the firm * cases where the firm is acting on behalf of a client where teh nature of the business makes segregated accounts impossible - requires client consent * clients who transfer full ownership fo a safe custody asset to a firm to cover obligations Some specific areas of CASS may also be disapplied depending on the circumstances

Answer 106

* resolution pack enables firms to retrieve relevant CASS info in teh event off a crisis * Must be maintained at all times * Must be able to retreive all client info ASAP - max 48 hours * purpose = assist an insolvency practioner to return client's money/assets in a timely manner. * CASS 6 and 7 firms are in scope * CASS 5 firms don't need resolution packs * Any changes to the info/accounts mustbe updated into the pack in 5 days

Answer 107

* **CASS 3=rules firms must follow when they recieve certain assets from clients of which they have certain rights over** * Right of use is when a client transfers full ownership of assets to the investment firm so they can ensure fulll performance of the assets on the client's behalf * No longer client assets so become out of scope for CASS (unless it is a retail client transfering rights to a firm to ensure performance of FX futures, CFDs when the firm is a mkt maker)

Answer 108

Used by firms to undertake derivatives contracts where firms are involved in margined trades with clients. This allows teh firms to treat teh margin as their own capital to open a position. Firms then usually use that cash to fund hedging positions

Answer 109

**AKA repledging = a party that has been pledged collateral, then pledges it to a third party** Typically used by broker/prime brokers when hedge funds give them collateral and then the firm reuses the collateral for it's own purposes. This lowers the firm's financing cost. Called a reuse in derivatives and repo mkts

Answer 110

If clients have lodged collateral on the provision that the collateral is just a pledge/a charge placed on the assets then the firm cannot reuse the assets. The client remains the legal owner of the assets until the bare security interest is exercised or is crystalised on the client's default

Answer 111

* Fimrs holding client assets need an annual audit. The auditor publishes their findings to the FCA * the supervision manual determines whether the firm must complete a resonable assurance client assets report or a limited assurance client assets report. * resonable assurance client assets report - needed when a firm holds client assets and a limited assurance client assets report is when the firm did/does not hold client assets * Auditor reviews breaches and the impact on the clietn assets * Auditor completes a risk assessment of how th firm manages their CASS systems/complies with rules * Financial reporting council (FRC sets CASS audit standards

Answer 112

* guidance CASS auditors should follow when reporting to the FCA.] Requirements are: * process for forming and expressing reasonable assurance opinions * process for forming and expressing limited assurrance opinions * provision of reasoable assurance to the FCA with the firm's proposed adoption of alternative appraoch to CASS segregation or non-standard reconcilliation method * Cass auditor confirmations of non-statutory client money in trusts. * Firms must review the draft audit report and provide explainations where required for breaches. * Auditor must deliver the report to the firm within 4 months of hte end of the period covered

The FCA's Conduct of Business and Client Assets Sourcebook Flashcards

37/75 Qs (138 cards)