Regulatory Errors

What does UCITS stand for?

Undertakings for Collective Investment in Transferable Securities

Are all non-executive directors automatically approved persons under SM&CR?

No - approval is only required for NEDs holding specific SMFs, such as Chair or chair of the Risk, Audit, Remuneration, or Nominations Committee

Who is liable for an appointed representative's conduct?

The firm itself is responsible for its representatives' actions

Which activities/entities are exempt from the general prohibition?

Appointed reps, Lloyd's syndicate members, recognised exchanges, MTF operators, central banks, and certain professional firms under Part 20

Can a person be both authorised and exempt at the same time, or split activities between statuses?

No - a person cannot be both authorised and exempt simultaneously, nor conduct some activities as an authorised firm and others as an appointed representative

What is a valid defence against a charge of carrying on regulated activity without Part 4A permission?

Dealing purely for yourself, with no service offered to others, e.g. managing your own portfolio, is an excluded activity and a valid defence

What is the difference between an authorised person and an approved person?

Authorised means a firm or individual has permission to carry on regulated activities. Approved means an individual is approved to perform a Senior Management Function

What happens if a firm breaches FSMA s19, the general prohibition?

It's a criminal offence, and any resulting contracts are voidable at the option of the injured client, who may enforce or avoid the agreement

How does authorisation work for a firm that needs to become dual-regulated?

It makes a single application to the PRA as lead regulator. The PRA makes the final decision but can only authorise the firm once the FCA also consents

What must an authorisation application pack include?

Firm details, controllers, business plan, significant events disclosure, approved persons forms, and a signed declaration

What does SYSC require of persons who direct a firm's business?

They must be of good repute and sufficiently experienced for sound, prudent management. The FCA sets no fixed qualifications, but firms must segregate duties

What must an authorised firm establish regarding systems, controls, and staff concerns?

Reasonable care to establish appropriate systems and controls, and internal procedures for staff to raise concerns, e.g. whistleblowing arrangements

Who sets the specific competence standards for staff under the Training and Competence rules?

The authorised firm itself - it defines job roles, sets competence standards, and conducts proper assessment, not the FCA directly

What are the FCA's 12 Principles for Businesses, briefly?

Integrity, skill/care/diligence, management and control, financial prudence, market conduct, customers' interests, communications, conflicts of interest, customer trust, client assets, relations with regulators, and Consumer Duty

Are the FCA's Principles legally binding, and does a breach automatically trigger discipline?

Yes, they're binding on all authorised firms and a breach can lead to sanctions, but discipline isn't automatic for every single breach

To which firms do the Principles for Businesses apply?

All authorised firms, regardless of the type of regulated business, though some Principles apply only to firms carrying on specified types of business

Which Principle covers conflicts of interest, and what number is it?

Principle 8 - manage conflicts fairly between firm and customers, and between customers

What's the exact wording trap for Principle 5, market conduct?

"Proper standards of market conduct" is correct, not "appropriate standards of behaviour"

Which concept is NOT one of the FCA's 12 Principles?

Fair dealing is not a Principle, don't confuse it with Principle 6, customers' interests

Which Principle was breached when a firm creates a misleading impression about a traded investment's value?

Market Conduct - firms must observe proper standards, and misleading impressions on value breach this Principle

What example distinguishes a breach of the Integrity Conduct Rule from other Conduct Rule breaches?

Deliberately misleading a client breaches Integrity. Failing to explain risks from lack of understanding breaches skill/care/diligence. Unknowingly trading on inside information breaches Market Conduct instead

From what point must certified staff comply with the Conduct Rules, and who is exempt?

Immediately on appointment - all relevant staff must comply, except purely ancillary staff like cleaners or catering

How many Conduct Rules must a senior manager follow, and how does this split?

Six individual Conduct Rules apply to all relevant staff, including Rule 6 Consumer Duty, plus four further Senior Manager Conduct Rules, ten in total for senior managers

What do the FCA Handbook markings R and G mean?

R means a binding Rule, breach can trigger discipline. G means Guidance, not binding and carries no evidential effect

Which FCA disciplinary powers apply only to firms, and which aren't available at all against individuals?

Withdrawal of Part 4A permission applies to firms only, not individuals. The FCA cannot disqualify or remove a company director directly

Where does the FCA now handle the issuance of statutory notices, following its 2021 reforms?

Largely moved from the Regulatory Decisions Committee to the FCA's Authorisations, Supervision, and Enforcement Divisions, for faster decisions

Under SM&CR, where are firm-wide senior manager responsibilities documented?

In the firm's responsibility map, distinct from each individual senior manager's own statement of responsibilities

Which activities are always specified vs excluded under the RAO, e.g. currency options or accountant advice?

Stakeholder pensions are always specified. Currency options and futures are specified, spot or forward deals aren't. Incidental accountant advice isn't specified, nor is unpaid trusteeship

Which items are 'specified investments' under the RAO, and which are excluded?

Shares in a public company are specified. Residential property, fine art, and a stake in a friend's private business are not specified investments

Is accepting deposits a specified investment or a specified activity under the RAO?

It's a specified activity, not a specified investment - deposits are the specified investment, accepting them is the activity

What activities are specifically included or excluded under regulated activity via the RAO for property and mortgages?

Included: home reversion plans, retail mortgage advice. Excluded: property purchase advice, unpaid trustees, information providers

What is the CRD's underlying purpose?

Firms must hold financial resources in excess of their minimum requirement, not merely equal to it

What are the three tiers of regulatory capital, and what does each include?

Tier 1: permanent share capital, reserves, externally verified interim profits. Tier 2: long-term subordinated debt and revaluation reserves. Tier 3: short-term subordinated debt and interim trading book profit or loss

Which firms are subject to MIFIDPRU rather than the IPRU-INV sourcebook?

Securities and futures firms directly subject to MiFID follow MIFIDPRU, effective 1 Jan 2022, unlike other investment firms outside CRD scope, which follow IPRU-INV

Does the competence requirement cover all staff or just client-facing roles?

All employees of an authorised firm must be competent

Which roles require T&C exam qualifications, and which are excluded?

Advising, managing, and dealing roles, plus day-to-day oversight of certain functions. Excluded are those who merely arrange deals without carrying out the deal themselves

Who has the power to prosecute a crime under the Criminal Justice Act, e.g. insider dealing?

The Financial Conduct Authority

How does COBS formally define 'client'?

A client is defined as a Retail Client, Professional Client, or Eligible Counterparty, the three core categorisations underpinning most conduct of business protections

How do COBS protections scale down from retail to professional to eligible counterparty?

Retail clients get full protections including agreements, suitability, appropriateness, disclosures, and statements. Professional clients get reduced protections. Eligible counterparties get minimal protection, with most rules disapplied

Which specific COBS rules don't apply when trading with an eligible counterparty?

Advising and selling rules don't apply. Client classification, client assets, and personal account dealing rules still apply, even to eligible counterparties

What two factors modify the general application of the COBS rules?

The nature of a firm's activities and its location, set out in COBS 1 Annex 1, Parts 1 and 2 respectively

Which activities fall under the general conduct of business rules, and which are excluded?

Included: designated investment business, life policies, deposit taking. Excluded: corporate lending, general insurance, occupational pensions

Does the client's best interests rule apply only to retail clients?

No - following MiFID II, it applies to all clients, not just retail. The FCA requires firms to act honestly, fairly and professionally in a client's best interests

Must general pre-service client disclosure be individually tailored, and does it apply to eligible counterparties?

No - it may use a standardised format, and yes, this broader disclosure requirement still applies even to eligible counterparties, unlike the retail-only Information About the Firm rule

What must pre-service client disclosure specifically include, alongside firm and cost information?

Execution venues are specifically required under the information requirements rule

What must "Information About the Firm" (COBS 6.1) specifically disclose, and to whom?

This named rule is retail-only: firm name/address, regulator's name, communication methods, and compensation scheme details

What must firms do to meet the FCA's website disclosure conditions?

Notify the client by email of the website address, ensure continuous accessibility and up-to-date information - written notification alone does not satisfy the rule

How often are periodic statements sent to retail clients, and what's the exception?

Quarterly by default, annually if the client also gets deal-by-deal confirmations

How does the client agreement requirement differ between MiFID and non-MiFID business?

For MiFID business, a client agreement covers designated investment business with both retail and professional clients. For non-MiFID business, it's required for retail clients only

Does the client agreement rule apply to an insurance firm issuing life policies as principal?

No - it does not apply to insurance firms issuing life policies as principal, even if the firm requests not to receive one

What format must a client agreement take, and does a webpage qualify?

Paper or another durable medium under COBS 8A. A webpage does not automatically qualify unless it meets storage and retrieval conditions

Which client category falls outside best execution protection?

Eligible counterparties - best execution applies to everyone else

How are local authorities categorised as clients?

Local authorities are classified as retail clients and can never be treated as eligible counterparties

What makes a client status "elective" rather than automatic?

The firm must actively assess set criteria, clients can't simply opt up

What are the categories of per se professional client, beyond large undertakings?

Regulated financial institutions, large companies meeting 2 of 3 size tests, governments and central banks, and other institutional investors

How does the non-MiFID professional client size test differ from the MiFID 'large undertaking' test?

Non-MiFID: meet 2 of 3, balance sheet over €12.5m, turnover over €25m, staff over 250. MiFID: meet 2 of 3, €20m balance sheet, €40m turnover, €2m own funds

Can an institutional investor become an eligible counterparty on request?

No - it must meet specific eligible counterparty criteria, unlike some elective upgrades

Which rules apply when a firm mixes MiFID and non-MiFID business?

MiFID rules apply throughout, unless the two business types are kept fully separate

When is disclosure an acceptable way to manage a conflict of interest?

Only as a last resort, avoidance or internal separation of duties should be tried first

How long must confirmation records be kept for MiFID business versus non-MiFID business?

Five years from date of dispatch for MiFID business, but only three years from dispatch for non-MiFID business

How long must client verification records be kept under JMLSG guidance?

Five years from the date the account was closed, distinct from the MiFID confirmation record-keeping rule

How long must records be kept relating to a life policy or pension contract?

At least five years, regardless of when cancellation rights were exercised within the contract's life

Which records specifically fall under COBS record-keeping requirements when a firm acquires another business?

Client agreements and suitability records - not payroll, personal tax records, or data subject access request responses

When must firms provide prescribed disclosure information, and what are the specific timing rules for personal pensions?

General rule: disclosure must be given "in good time" before the client is bound by an agreement. For personal pensions specifically: cancellation rights given at point of sale, then a suitability report follows within 14 calendar days

When must a suitability report be sent, and does this vary by product?

Life policies: before the contract concludes, unless oral advice or immediate cover, then immediately after. Personal or stakeholder pensions: within 14 days. All other packaged products: as soon as possible after execution

Does a client's overseas residence remove the requirement for a suitability report?

No - a suitability report is still required regardless of where the client resides, following the normal timing rules for that product type

When does appropriateness apply vs suitability, and when does neither apply?

Suitability applies for advice or discretionary management. Appropriateness applies to non-advised, execution-only deals in complex products. Execution-only in non-complex products needs neither

What information does a firm need for a pure execution-only retail client, versus for suitability?

Execution-only needs only the client's name and contact details. Suitability needs knowledge, experience, risk capacity, and investment objectives too

Which instruments are exempt from an appropriateness assessment?

Listed shares, money market instruments, bonds or other securitised debt, UCITS funds, and other non-complex non-derivatives

What must a firm do after selling a personal pension to a retail client, and by when?

Provide cancellation rights at the point of sale, then send a suitability report within 14 calendar days confirming why the pension is suitable

What factors must a firm weigh to achieve best execution?

Price, costs, speed, likelihood of execution and settlement, size, nature of the order, and other relevant considerations

When can a firm legitimately charge different amounts for the same trade on different venues?

Only if the difference reflects genuine differences in the firm's execution costs on those venues, not to favour one venue

What makes an OTC venue acceptable for best execution, since not all qualify?

It must meet the firm's own criteria for price, cost, and reliability of execution

Beyond investment business, what else falls under conduct of business rules?

Issuing insurance contracts and deposit-taking, alongside designated investment business

Does the conduct of business rules always apply to a MiFID firm operating from a UK establishment?

Yes - under general application, COBS rules apply automatically to any MiFID firm operating from an establishment in the UK

What is an 'out of scope' MiFID firm, and what's an example?

A firm not subject to MiFID business rules, for example insurance undertakings, sometimes described as carrying on 'out of scope' business

What is the core purpose of the financial promotion rules, and how does Consumer Duty reinforce it?

Promotions must be identifiable as such and fair, clear, not misleading. Principle 12, Consumer Duty, requires this to help deliver good retail outcomes

Since July 2023, does Consumer Duty apply to professional clients as well as retail?

No - it applies only to retail clients, across consumer credit, deposit taking, insurance, investments, and regulated mortgages

How does a firm apply Consumer Duty if it serves both retail and professional clients?

It must comply with the relevant requirements for each customer type it serves - the Duty applies to in-scope retail products and services, not automatically to all clients or only new ones

Which communications are excluded from the financial promotion rules?

Those subject to the Takeover Code, one-off promotions that aren't cold calls, and promotions for unregulated CIS. Derivatives promotions are still covered

Do financial promotion rules cover stakeholder pension schemes?

Yes - stakeholder pensions are within scope, unlike the excluded products: qualifying credit, home purchase or reversion plans, non-investment insurance, and unapprovable unregulated CIS

Do real-time financial promotions require approval before use, unlike non-real-time ones?

No - only non-real-time promotions, such as emails, require approval

real-time promotions are exempt from this requirement

What must firms do differently when promoting to retail versus professional clients?

Retail promotions need fuller risk warnings and balanced disclosures. Professional client promotions require less prescriptive detail, reflecting their assumed expertise

What are the main categories of financial promotion, and which products are excluded entirely?

Real-time vs non-real-time, and direct offer vs non-direct offer. Excluded are qualifying credit, home reversion or purchase plans, non-investment insurance, and unapprovable unregulated CIS

What defines a 'direct offer promotion'?

One containing an offer to enter an agreement with the recipient, and specifying how they should respond

Does order record-keeping start at execution or earlier?

It starts at order initiation, the client's original instruction to trade

Can a firm approve its own financial promotions?

Yes - a firm may approve its own promotions as well as those of other firms

What happens if a client instruction conflicts with the firm's execution policy?

The firm must follow the client's instruction, this is not a best execution breach

What must a firm do with an unexecuted client limit order, and what are the exceptions?

Make it public to aid execution, unless the client instructs otherwise or the order is larger than normal market size

What must firms ensure when handling comparable client orders?

Prompt, fair, sequential execution unless impracticable or client interests require otherwise

What must a firm disclose before aggregating a client order with its own or others?

That aggregation may work to the client's disadvantage, typically disclosed via the client agreement, not via separate consent

Which member firm is responsible for reporting an off-order book trade between two LSE members?

The more senior party to the trade. If both are of equal seniority, responsibility falls to the selling member firm

What communication standard applies to all client contact?

Fair, clear, and not misleading, across every channel

What must promotions quoting a yield always show?

A balanced impression of both short-term and long-term prospects

What must advisers charge under RDR rules, and how must fees be presented?

A fee-based model, upfront or ongoing, based on a percentage of funds if an ongoing service is given. Fees must be itemised and based on service, not the product

When can a firm rely on third-party client due diligence, and when is it insufficient?

Acceptable if from another EEA-regulated firm or an independent, competent third party. Other sources don't provide sufficient grounds to rely on it

When can an unauthorised person communicate a financial promotion?

Only once an authorised firm has approved it as compliant

What must be disclosed at first contact in a non-written promotion, e.g. a cold call?

The individual must always identify themselves and the firm they represent

Is an unsolicited email considered a cold call?

No - email allows the recipient time to consider their position, so it isn't treated as a cold call