CISI UK Financial Regulation - Chapter 4: End of Chapter
Questions and Solutions.
What is the impact of location on the application of the COBS rules? correct answers The
general application rule - firms are subject to COBS if they carry on any of a range of activities
from an establishment maintained by them or their appointed representative in the UK.
COBS generally applies to a firm which carries on business with a client in the UK from an
establishment overseas
- COBS applies to UK firms conducting MiFID business for UK clients within the UK
- Following the end of the Brexit transitional period on 31 December 2020, the COBS Handbook
no longer applies to MiFID business of a UK MiFID firm carried on from an establishment in
another EEA state.
-The rules in COBS that derive from MiFID apply to a Non-UK MiFID investment firm carrying
out MiFID business within the UK
What activities are subject to the COBS rules? correct answers The activities which are subject
to COBS are:
• designated investment business
• long-term insurance business in relation to life policies, and
• accepting deposits - in part, eg, financial promotion rules, and rules on preparing and providing
product information
Which COBS rules are disapplied for firms undertaking ECP business? correct answers • A large
part of COBS 2 - general conduct of business obligations (such as inducements).
• Much of COBS 4 - communicating with clients (including financial promotions).
• COBS 6.1 - provision of information about the firm, its services and its remuneration.
• COBS 8 - client agreements.
• COBS 10 - appropriateness requirements (non-advised services).
• Certain parts of COBS 11 - such as best execution and client order handling.
• Parts of COBS 12 - labelling of non-independent research.
• COBS 14.3 - information relating to designated investments.
Additionally, members and participants in a regulated market do not have to comply with COBS
11.4 (client limit orders) in respect of each other but they must comply when they are executing
orders on a client's behalf.
Do appointed representatives have to comply with the COBS rules? correct answers Yes, COBS
rules apply to firms in relation to the relevant activities carried out for them by their appointed
representatives.
Firms must ensure that their appointed representatives comply with the COBS rules when they
communicate financial promotions because, technically, a financial promotion communicated by
an appointed representative is an exempt promotion and so does not need approval. Therefore, by
, making reference to this matter in COBS, the FCA reminds firms that they are responsible for
the content of the financial promotions communicated by their appointed representatives.
How will a MiFID firm classify its client in relation to non-MiFID business? correct answers If a
firm provides a mix of MiFID and non-MiFID services, it must categorise clients in accordance
with the MiFID requirements, unless the MiFID business is conducted separately from the non-
MiFID business.
What are the three client categories? correct answers • A retail client - any client who is not a
professional client or an eligible counterparty. (Note: the term customer is an umbrella term
covering both retail clients and professional clients.)
• Professional clients may be either per se professional clients or elective professional clients. Per
se professional clients are, generally, those which fall into any of the following categories -
unless they are an eligible counterparty, or are categorised differently under other specific
provisions.
•Eligible counterparty - can be categorised similar to per se professional clients, how it does not
include larger undertakings (MiFID business with two of balance sheet total of €20 million; a net
turnover of €40 million; or own funds of €2 million)
What are the criteria for reclassifying a retail client as an elective professional client? correct
answers When:
• the firm has assessed their (or its) expertise, experience and knowledge and believes that they
can make their own investment decisions and understand the risks involved (the qualitative test)
And, additionally, for MiFID business any two of the following are true (the quantitative test):
- the client carried out, on average, ten significantly sized transactions on the relevant market in
each of the past four quarters
- the size of the client's financial portfolio exceeds €500,000 (defined as including cash deposits
and financial instruments)
-the client works or has worked as a professional in the financial services sector for at least a
year on a basis which requires knowledge of the transactions envisaged.
Who are elective eligible counterparties? correct answers A professional client may be treated as
an elective ECP if it is an undertaking and it is:
• a per se professional client (other than one which is only a professional client because they are
an institutional investor), and
• they request to be treated as an ECP
What are the notification requirements to clients on their client categorisation? correct answers
New clients must be notified of how the firm has classified them. They must also, before services
are provided, be advised of their rights to request recategorisation and of any limits in their
protections which will arise from this.
When is a firm required to provide a client agreement? correct answers The requirement to enter
into a client agreement applies to designated investment business for a retail client and for
Questions and Solutions.
What is the impact of location on the application of the COBS rules? correct answers The
general application rule - firms are subject to COBS if they carry on any of a range of activities
from an establishment maintained by them or their appointed representative in the UK.
COBS generally applies to a firm which carries on business with a client in the UK from an
establishment overseas
- COBS applies to UK firms conducting MiFID business for UK clients within the UK
- Following the end of the Brexit transitional period on 31 December 2020, the COBS Handbook
no longer applies to MiFID business of a UK MiFID firm carried on from an establishment in
another EEA state.
-The rules in COBS that derive from MiFID apply to a Non-UK MiFID investment firm carrying
out MiFID business within the UK
What activities are subject to the COBS rules? correct answers The activities which are subject
to COBS are:
• designated investment business
• long-term insurance business in relation to life policies, and
• accepting deposits - in part, eg, financial promotion rules, and rules on preparing and providing
product information
Which COBS rules are disapplied for firms undertaking ECP business? correct answers • A large
part of COBS 2 - general conduct of business obligations (such as inducements).
• Much of COBS 4 - communicating with clients (including financial promotions).
• COBS 6.1 - provision of information about the firm, its services and its remuneration.
• COBS 8 - client agreements.
• COBS 10 - appropriateness requirements (non-advised services).
• Certain parts of COBS 11 - such as best execution and client order handling.
• Parts of COBS 12 - labelling of non-independent research.
• COBS 14.3 - information relating to designated investments.
Additionally, members and participants in a regulated market do not have to comply with COBS
11.4 (client limit orders) in respect of each other but they must comply when they are executing
orders on a client's behalf.
Do appointed representatives have to comply with the COBS rules? correct answers Yes, COBS
rules apply to firms in relation to the relevant activities carried out for them by their appointed
representatives.
Firms must ensure that their appointed representatives comply with the COBS rules when they
communicate financial promotions because, technically, a financial promotion communicated by
an appointed representative is an exempt promotion and so does not need approval. Therefore, by
, making reference to this matter in COBS, the FCA reminds firms that they are responsible for
the content of the financial promotions communicated by their appointed representatives.
How will a MiFID firm classify its client in relation to non-MiFID business? correct answers If a
firm provides a mix of MiFID and non-MiFID services, it must categorise clients in accordance
with the MiFID requirements, unless the MiFID business is conducted separately from the non-
MiFID business.
What are the three client categories? correct answers • A retail client - any client who is not a
professional client or an eligible counterparty. (Note: the term customer is an umbrella term
covering both retail clients and professional clients.)
• Professional clients may be either per se professional clients or elective professional clients. Per
se professional clients are, generally, those which fall into any of the following categories -
unless they are an eligible counterparty, or are categorised differently under other specific
provisions.
•Eligible counterparty - can be categorised similar to per se professional clients, how it does not
include larger undertakings (MiFID business with two of balance sheet total of €20 million; a net
turnover of €40 million; or own funds of €2 million)
What are the criteria for reclassifying a retail client as an elective professional client? correct
answers When:
• the firm has assessed their (or its) expertise, experience and knowledge and believes that they
can make their own investment decisions and understand the risks involved (the qualitative test)
And, additionally, for MiFID business any two of the following are true (the quantitative test):
- the client carried out, on average, ten significantly sized transactions on the relevant market in
each of the past four quarters
- the size of the client's financial portfolio exceeds €500,000 (defined as including cash deposits
and financial instruments)
-the client works or has worked as a professional in the financial services sector for at least a
year on a basis which requires knowledge of the transactions envisaged.
Who are elective eligible counterparties? correct answers A professional client may be treated as
an elective ECP if it is an undertaking and it is:
• a per se professional client (other than one which is only a professional client because they are
an institutional investor), and
• they request to be treated as an ECP
What are the notification requirements to clients on their client categorisation? correct answers
New clients must be notified of how the firm has classified them. They must also, before services
are provided, be advised of their rights to request recategorisation and of any limits in their
protections which will arise from this.
When is a firm required to provide a client agreement? correct answers The requirement to enter
into a client agreement applies to designated investment business for a retail client and for
