End of Chapter Questions 1-5 - CISI Financial Regulations ||
with Complete Solutions.
Chpt 4 Q 16: When do the prospectus advertisements rules apply? (NOTE, not covered in the
slides so don't worry too much) correct answers The prospectus rules apply to offers, or
admission to trading, of transferrable securities in respect of which:
1. A prospectus is required under S85 FSMA.
2. Where an election to produce a prospectus has been made under S87 FSMA.
Chpt 4 Q 17: When is a firm permitted to undertake an unsolicited communication (cold calling)
with a retail client? correct answers 1. The recipeint has an exisitng client relationship with the
firm and would envisage such a call, or;
2. The call relates to a gernally marktable packaged product (not a hgher-volatility fund or a life
policy linked to such a fund), or;
3.It relates to a controlled activity relsting to a limited range of invetsments, including deoposits
and readily realisable invetsments (not warrants or makedable non-geared packaged products).
Chpt 4 Q 18: What are the rules on churning and who do they apply to? correct answers
Churning is over-dealing for a client to generate extra fees. COBS says that a series of
transactions in isolation that looks suitable may not be if trades are so frequent as to be
determinantal to the client.
It applies to firms trading on behalf of their clients, eg investment managers.
Chpt 4 Q 19: What is the purpose of the suitability rules? correct answers To ensure personal
recommendations (or decisions to trade) are suitable for the client's needs.
Chpt 4 Q 20: What is the appropriateness test? correct answers To provide protection for non-
advised transactions.
Chpt 4 Q 21: What is the purpose of the cancellation rules? correct answers To ensure that
clients have the opportunity to reconsider their decision within a certain period of time and are
able to cancel the transaction if they wish to.
Chpt 4 Q 22: State four steps firms could take to prevent or manage conflicts of interest. correct
answers 1. For external investment research, have information controls to stop information
flowing to the rest of the firm (Chinese wall)
2. Prepare conflicts of interest policy
3. Where conflict arises, ensure disclosure is made (only as last resort)
,4. Keep records of activities when conflict of interest has arisen.
Chpt 4 Q 23: What is the difference between investment research and research
recommendations? correct answers Investment research is information recommending an
investment strategy, including opinion as to the value/price of investments, as intended for
distribution to the public (as opposed to just for use within the firm).
It has to be clearly labelled as investment research and presented as an objective or independent
explanation.
Chpt 4 Q 24: What payments are permitted under the inducements rules? correct answers 1. Fees
and non-monetary benefits paid by clients
2. Proper fees paid by firm, which are necessary for the provision of services.
3.Fees and non-monetary benefits paid to/by a third party.
Chpt 4 Q 25: What is the purpose of the best execution requirements? correct answers For firms
to demonstrate to their clients how they obtain the best possible trading results.
Chpt 4 Q 26: What is an order execution policy? correct answers The policy, which tells clients
how the firm seek to obtain the best possible result for them, must contain:
1. The factors considered when choosing the execution venue.
2. How price, cost, speed and likelihood of execution are considered.
3. Clear instruction that if a client has a specific instruction it may impact the firm's ability to
obtain the best possible results.
Chpt 4 Q 27: What is the purpose of the personal account dealing rules? correct answers To
prevent employees from entering into a personal transaction that:
1. Involves misuse of improper disclosure.
2. Conflicts with the firm's duties to a customer.
Chpt 4 Q 28: What is trade confirmation information? correct answers Frequent confirmation
reporting for each transaction - firms must provide essential information promptly (T+1)
Chpt 4 Q 29: How frequently must a periodic statement be sent to a retail client? correct answers
At least quarterly.
Where a client receives deal-by-deal confirmations, statements may be sent annually.
Monthly statements must be sent for leveraged portfolios.
, Chpt 4 Q 30: What is the purpose of the client money segregation and trust rules? correct
answers Restrict comingling of clients' and firm's assets to minimise the risk of clients' assets
being used by firm in event of a default.
Chpt 4 Q 31: What are the reconciliation requirements for safe custody investments and client
money? correct answers Safe custody investments: internal reconciliations carried out as often as
necessary and any discrepancies must be made good immediately. External reconciliations
carried out as often as needed but at least every month.
Client money: If reconciliation shows a discrepancy, firm must pay any shortfall to client by the
close of the business day the reconciliation was performed.
C1 Q1: Who are the two regulators that together make up the twin peaks of UK financial
services regulation and how do their responsibilities differ? correct answers FCA - Oversees
conduct regulation. Responsible for protecting consumers.
PRA - Oversees prudential regulation of 'dual-regulated' firms
C1 Q2: To which government body is the FCA accountable? correct answers HM Treasury
C1 Q3: What are the statutory objectives of the FCA and the PRA? correct answers FCA's
statutory objectives:
• Ensure that relevant markets function well (strategic)
• Consumer protection objective :"Secure an appropriate degree of protection for consumers"
• Integrity objective: "Protecting and enhancing the integrity of the UK financial system"
• Competition objective: "Promoting effective competition in the interests of consumers"
PRA's statutory objectives
• Promoting the safety and soundness of PRA-authorised firms
C1 Q4: List the components of rules-based and forward-looking approaches. correct answers
Forward-looking - the FCA seeks to pre-empt or address poor conduct so that risks do not arise
and any associated harm does not materialise or, if harm does arise, it does not cause significant
harm to consumers or to the UK financial system.
Proportionate and risk-based - the FCA will use its understanding of the UK financial system and
of firms' business models to target firms where misconduct would cause the most harm.
C1 Q5: What is conduct risk? correct answers Risks posed to customers and the wider integrity
of the financial markets by the way in which authorised firms and their staff conduct themselves
C1 Q6: Give three examples of the regulators' powers in addition to rule-making. correct answers
- Grant authorisation (Part 4A permission)
- Supervise authorised persons on an ongoing basis
- Employ disciplinary measures and sanctions to punish or limit activities
- Generally enforce the regulatory framework
with Complete Solutions.
Chpt 4 Q 16: When do the prospectus advertisements rules apply? (NOTE, not covered in the
slides so don't worry too much) correct answers The prospectus rules apply to offers, or
admission to trading, of transferrable securities in respect of which:
1. A prospectus is required under S85 FSMA.
2. Where an election to produce a prospectus has been made under S87 FSMA.
Chpt 4 Q 17: When is a firm permitted to undertake an unsolicited communication (cold calling)
with a retail client? correct answers 1. The recipeint has an exisitng client relationship with the
firm and would envisage such a call, or;
2. The call relates to a gernally marktable packaged product (not a hgher-volatility fund or a life
policy linked to such a fund), or;
3.It relates to a controlled activity relsting to a limited range of invetsments, including deoposits
and readily realisable invetsments (not warrants or makedable non-geared packaged products).
Chpt 4 Q 18: What are the rules on churning and who do they apply to? correct answers
Churning is over-dealing for a client to generate extra fees. COBS says that a series of
transactions in isolation that looks suitable may not be if trades are so frequent as to be
determinantal to the client.
It applies to firms trading on behalf of their clients, eg investment managers.
Chpt 4 Q 19: What is the purpose of the suitability rules? correct answers To ensure personal
recommendations (or decisions to trade) are suitable for the client's needs.
Chpt 4 Q 20: What is the appropriateness test? correct answers To provide protection for non-
advised transactions.
Chpt 4 Q 21: What is the purpose of the cancellation rules? correct answers To ensure that
clients have the opportunity to reconsider their decision within a certain period of time and are
able to cancel the transaction if they wish to.
Chpt 4 Q 22: State four steps firms could take to prevent or manage conflicts of interest. correct
answers 1. For external investment research, have information controls to stop information
flowing to the rest of the firm (Chinese wall)
2. Prepare conflicts of interest policy
3. Where conflict arises, ensure disclosure is made (only as last resort)
,4. Keep records of activities when conflict of interest has arisen.
Chpt 4 Q 23: What is the difference between investment research and research
recommendations? correct answers Investment research is information recommending an
investment strategy, including opinion as to the value/price of investments, as intended for
distribution to the public (as opposed to just for use within the firm).
It has to be clearly labelled as investment research and presented as an objective or independent
explanation.
Chpt 4 Q 24: What payments are permitted under the inducements rules? correct answers 1. Fees
and non-monetary benefits paid by clients
2. Proper fees paid by firm, which are necessary for the provision of services.
3.Fees and non-monetary benefits paid to/by a third party.
Chpt 4 Q 25: What is the purpose of the best execution requirements? correct answers For firms
to demonstrate to their clients how they obtain the best possible trading results.
Chpt 4 Q 26: What is an order execution policy? correct answers The policy, which tells clients
how the firm seek to obtain the best possible result for them, must contain:
1. The factors considered when choosing the execution venue.
2. How price, cost, speed and likelihood of execution are considered.
3. Clear instruction that if a client has a specific instruction it may impact the firm's ability to
obtain the best possible results.
Chpt 4 Q 27: What is the purpose of the personal account dealing rules? correct answers To
prevent employees from entering into a personal transaction that:
1. Involves misuse of improper disclosure.
2. Conflicts with the firm's duties to a customer.
Chpt 4 Q 28: What is trade confirmation information? correct answers Frequent confirmation
reporting for each transaction - firms must provide essential information promptly (T+1)
Chpt 4 Q 29: How frequently must a periodic statement be sent to a retail client? correct answers
At least quarterly.
Where a client receives deal-by-deal confirmations, statements may be sent annually.
Monthly statements must be sent for leveraged portfolios.
, Chpt 4 Q 30: What is the purpose of the client money segregation and trust rules? correct
answers Restrict comingling of clients' and firm's assets to minimise the risk of clients' assets
being used by firm in event of a default.
Chpt 4 Q 31: What are the reconciliation requirements for safe custody investments and client
money? correct answers Safe custody investments: internal reconciliations carried out as often as
necessary and any discrepancies must be made good immediately. External reconciliations
carried out as often as needed but at least every month.
Client money: If reconciliation shows a discrepancy, firm must pay any shortfall to client by the
close of the business day the reconciliation was performed.
C1 Q1: Who are the two regulators that together make up the twin peaks of UK financial
services regulation and how do their responsibilities differ? correct answers FCA - Oversees
conduct regulation. Responsible for protecting consumers.
PRA - Oversees prudential regulation of 'dual-regulated' firms
C1 Q2: To which government body is the FCA accountable? correct answers HM Treasury
C1 Q3: What are the statutory objectives of the FCA and the PRA? correct answers FCA's
statutory objectives:
• Ensure that relevant markets function well (strategic)
• Consumer protection objective :"Secure an appropriate degree of protection for consumers"
• Integrity objective: "Protecting and enhancing the integrity of the UK financial system"
• Competition objective: "Promoting effective competition in the interests of consumers"
PRA's statutory objectives
• Promoting the safety and soundness of PRA-authorised firms
C1 Q4: List the components of rules-based and forward-looking approaches. correct answers
Forward-looking - the FCA seeks to pre-empt or address poor conduct so that risks do not arise
and any associated harm does not materialise or, if harm does arise, it does not cause significant
harm to consumers or to the UK financial system.
Proportionate and risk-based - the FCA will use its understanding of the UK financial system and
of firms' business models to target firms where misconduct would cause the most harm.
C1 Q5: What is conduct risk? correct answers Risks posed to customers and the wider integrity
of the financial markets by the way in which authorised firms and their staff conduct themselves
C1 Q6: Give three examples of the regulators' powers in addition to rule-making. correct answers
- Grant authorisation (Part 4A permission)
- Supervise authorised persons on an ongoing basis
- Employ disciplinary measures and sanctions to punish or limit activities
- Generally enforce the regulatory framework
