Financial services, regulation and ethics

In the las...

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...from them.

Product disclosure

The product disclosure rules exist to regulate the information that is provided to clients to enable them to be aware of all the details of the investment they are purchasing.

Key Features Document (KFD), Key Information Document (KID) and Key Investor Information Document (KIID)

For all retail and life assurance-based products (PRIIPs), the regulator requires a Key Information Document (KID)

For non-PRIIPs products, a Key Features Document (KFD) has to be given

Collective investment schemes have a ‘Key Investor Information Document’ (KIID)

These documents can be either on paper (hard copy) or in electronic format but must be to the same standard as the marketing material, and generally, the do...

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...only payable on death or incapacity due to sickness or injury and the contract has no surrender value or the surrender value does not exceed the single premium and there are no extension or conversion options. This means that it mainly applies to term assurance and income protection policies.

With-profits business

Where a life office deals in with-profits arrangements, it must produce a Principles and Practices of Financial Management (PPFM) document, setting out the way in which the organisation manages its with-profits business. This document is usually sent to all existing with-profits policyholders with their annual statements. It must also be issued where existing policyholders make any change and at the point of sale for a new plan.

Generic financial advice

Many organisations provide generic advice as part of their business activity, including banks and building societies, trade unions and the Citizens Advice Bureau (CAB). This may cover such topics as debt problems, generic mortgage details and the financial consequences of divorce. As this type of advice is unregulated, there is no need to complete fact finds or adhere to other FCA rules.

Generic guidance is that given to an individual on a type of product, as opposed to a specific product from a specific provider.

The Money and Pensions Service (MaPS)

Launched in 2019, MaPS was set up by the Financial Guidance and Claims Act 2018, to provide services previously offered by The Pensions Advisory Service (TPAS), Pension Wise and The Money Advice Service. It covers pension guidance (personal and workplace), debt advice, money guidance (improving knowledge and understanding of money matters), consumer protection and strategy.

The function of MaPS is to develop a national strategy on financial capability and financial education, improving money and debt management skills, and promoting financial inclusion.

In June 2021, MaPS launched its consumer-facing brand MoneyHelper, which meant that the Money Advice Service and TPAs ceased to exist.

Pension Wise (part of MoneyHelper)

Pensions Wise is a free and impartial service to help people understand their choices at retirement and how they work. Individuals can go to the Pension Wise website, speak over the phone or even meet face-to-face about what to do with their pension pot, the different types of pensions and how they work and the tax treatment of pensions. They can also be advised about taxes and fees, how to make their money last, how to compare providers for the best income, and how to avoid pension scams, taxes and fees.

The ‘fair treatment of customers’

The regulator has developed an initiative for ensuring that ‘the fair treatment of customers’ is at the core of all authorised firms, and is embedded throughout their organisation. A firm must be able to demonstrate the fair treatment of customers in respect of every facet of a firm's operations as they relate to custome...

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...e able to use the product or service they have bought as can be reasonably anticipated, with no particular group of clients being disadvantaged in any way. Firms cannot expect to adhere to this requirement if they are offering poor or slow service, or a poorly functioning website, or a lack of support channels for those who cannot access online services.

4. Price and value

The price a customer pays for a product or service is reasonable compared to the benefits they will receive. This is not just about how much they pay for the product – it is as much to do with its design and distribution. A product or service that does not suit a customer’s needs cannot be said to offer fair value to that individual. Firms need to carry out fair value assessments of their products and services, taking account of the nature, limitations and total price paid by the customer, as well as the cost of designing and distributing that product or service. Firms must also consider the market rate for such product or service, and any alternative solutions that could offer a similar outcome for a lower price.

New Conduct Rule

Advisers are subject to the conduct rules in COCON (or APER for appointed representatives), and to which the FCA has added a new rule - Rule 6: You must act to deliver good outcomes for retail clients. 

Application of the Consumer Duty

The Consumer Duty must be considered at every stage of the customer journey. Firms should work to deliver good outcomes by considering the needs, characteristics, objectives and vulnerabilities of customers, and evidence whether these outcomes are being achieved. The implementation of the Duty should be reviewed regularly in respect of all aspects of a firms operations, and any issues addressed.

The duty has different requirements for different types of firms, according to their role – manufacturer or distributor. Where there are other parties in the distribution chain, firms should keep in mind the consumer duty when undertaking due diligence, although firms are ultimately only responsible for their own activities and actions.

Explain the FCA’s expectations in respect of the Consumer Duty.

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Under the provisions of RDR, firms offering ‘ independent advice ’ must meet the rule on independence, which means they must ‘assess a sufficient range of products that are sufficiently diverse in terms of type and issuer to ensure that the client’s investment objectives can be suitably met’. For adviser firms in the UK, this means being in a position to advise on all types of investments, including structured deposits and other retail investment products.

Some products may be excluded (such as traded life policies), and those using panels must be prepared to offer products that are ‘off panel’. It is not necessary for firms to offer pension transfer advice or long-term care insurance advice, and discretionary investment services are not expected to be offered either. Certain multi-manager investment fund recommendations may not meet the independence requirement.

‘ Restricted advice ’ is defined as ‘a personal recommendation to a retail client in relation to products which is not independent advice’. In other words, if a personal recommendation does not meet the standard for independent advice, this is deemed to be restricted advice. Basic advice and restricted advice are both ‘restricted’.

Restricted (non-independent) advice must meet the same suitability, inducement, adviser charging and professionalism standards as independent advice, and the nature of the restriction must be made clear to the firm’s clients.

Types of restricted adviser

A single-tied adviser can only advise on the products of one provider, and they have ...

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...ot to mislead clients as to what is actually meant by the term ‘restricted’, such as giving clients the impression that the firm has restricted its product range to those most suited to their needs, which is not true.

A restricted whole of market adviser is restricted in terms of the types of products they offer, but for the products they do advise on, they will consider all providers in the market for those products. 

Proposed ‘Core Investment Advice Regime’

A new approach to providing investment advice has been suggested by the FCA - the Core Investment Advice Regime. This would allow lesser qualified advisers to advise on a narrow range of products and solutions, bringing investment advice to a wider audience, such as those have excess cash holdings that need investing, but who do not have the financial capacity to pay for full financial advice. The proposed framework would include streamlined, more straightforward fact-finding; a limited range of investments; lower qualification requirements and the possibility of paying advice fees in instalments.

Information about the firm and its services

Firms selling retail investment products are required to disclose to their clients details about the service that the firm will offer (restricted or independent), and the cost of that service, and this must be delivered in a manner that is fair, clear and not misleading. Similar obligations exist for those selling mortgages and general insurance.

What type of advice is provided by a financial adviser that does not consider the whole of the market?

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The FCA’s advertising rules are based on Principle 7 of the Principles for businesses:

Firms have a general requirement to pay due regard to the information needs of their customers and communicate information to customers in a way that is fair, clear and not misleading.

The regulator’s COBS rules apply to all financial promotions apart from the following:

Deposits

General insurance

Mortgage business

Pure protection life assurance

Reinsurance

The rules for financial promotions do not apply to:

Specific one-off product details for a specific recipient

Personal quotations or illustrations

Communications to one recipient only

Straightforward promotions that just contain the firm’s name, contact point, logo, brief factual descriptions of the firm’s activities, fees, products and services

The FCA’s Conduct of Business rules give separate requirements for two distinct types of promotion. These are:

‘ Non-real time ’ promotions that deal with FCA regulated advertising and promotions, such as press advertising, newsletters, leaflets and brochures. E-communications (i.e. websites and emails) are also regarded as non-real time financial promotions

‘ Real time ’ financial promotions deal with activities such as personal visits, telephone conversations and any other interactive dialogue

Non-real time financial promotions

There are some important requirements...

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...ddress and FCA register number) must be easily accessible

There must be clear information about the services provided

Customers must be given clear instructions on how to place an order

Customers must have a way of correcting errors while placing an order

Orders must be acknowledged immediately, though they do not have to be accepted

Real time financial promotions

Authorised firms need to take appropriate measures to ensure that individuals who make real time financial promotions on their behalf:

Do so in a way that is fair, clear and not misleading

Make clear the purpose of the communication from outset and identify themselves and their firm

If the recipient of the communication did not previously agree to it, check that he/she wants to proceed and stop the promotion if not

Provide the recipient with a contact point

Do not communicate at an unsocial hour or on an unlisted telephone number without permission from the recipient

Unsolicited real-time promotions are often referred to as ‘cold calling’. These are no longer generally allowed unless:

The recipient has an established relationship with the firm as a client; or

The promotion only relates to a generally marketable packaged product that is not a higher volatility fund, or a life policy linked to one

Where a non-real time financial promotion mentions past performance, what period of time should be shown?

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Before making a personal recommendation or acting as an investment manager for a retail client, a firm must carry out sufficient work to obtain sufficient personal and financial information about them that is relevant to the services that it provides. This information needs to be reviewed regularly in order to be able to keep giving ongoing advice. No specific fact find form exists, but the information gathered needs to be enough to meet the ‘know your customer&rsquo...

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... limited area of the customer’s circumstances. However, this has many risks. By just providing advice on one part of a customer’s circumstances, there may be impacts on other areas and issues which affect the suitability of holding other products being used to address separate needs within the customer’s portfolio.

Where should an adviser record that a client has declined to provide information requested by them?

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Firms must take reasonable steps to ensure that any advice to a retail client is suitable for them, taking account of the information that the firm has about the client or details of which it is reasonable that the firm should have been aware.

Suitability of recommendations

The FCA’s main concern is that proposals put forward by advisers are in the genuine interest of a client. The guidelines to be followed from the FCA are:

Advice should be arrived at conscientiously and purely in the client’s best interests

Each need should be quantified and any shortfall between the need and existing provision made by the client identified

The client’s wants and needs should be appropriately prioritised

The client’s knowledge and experience, risk tolerance and risk capacity should be taken into account

Consideration should be given to investment objectives, growth, income, timelines and the repayment of debt

Any benchmarking or performance measures against which the proposed solution is to be tested should be agreed

Consideration should be given to affordability and to any religious or ethical/ESG/sustainability investment preferences

For each quantified need, the adviser should prepare a list of suitable products from the range available to them

By comparing these products with the client’s circumstances the identification of a suitable product for each need can be made by the adviser using a process of elimination

When presenting a client with recomm...

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...poser of insurance under the Consumer Insurance (Disclosure and Representations) Act 2012 to take reasonable care not to make a misrepresentation.

Where a client is unwilling or unable to complete the application form, an adviser can complete it for them. However, the client must read and check the form and agree that the completion is full and accurate.

The application form should always be signed by the client, or an individual who has a power of attorney for them. An adviser should never forge a client’s signature as this is a criminal offence, which could lead to disciplinary action or dismissal from their role.

Understanding risk

Risk must be explained and clearly ascertained when making investment recommendations, relative to the client’s knowledge and previous experience. The information gathered by the adviser should be clarified in the suitability report to illustrate how the recommendation fits with the customer’s stated attitude to risk. Clients may have different attitudes to risk at different times of their life and regarding different investments or objectives, and attitudes should be reviewed regularly. 

It is equally important to understand is a client’s capacity for risk or capacity for loss. Unlike a client’s appetite for risk, which is subjective, capacity for loss is objective and relates directly to the money at their disposal.

For what types of business are suitability reports not required?

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A revised MiFID directive came into force on 3 January 2018 to improve the functioning of the financial markets across the EU and to strengthen investor protection.

MiFID II applies to firms providing investment services including advice to clients relating to MiFID products, which include shares, bonds, units in collective investment schemes and derivatives. It also covers structured deposits.

Advisers who do not hold client assets or client money and do not do business outside the UK are exempt from MiFID (Article 3 optional exemption firms), although under MiFID II...

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... levels of protection for consumers.

The IDD, which was effective from October 2018, further improves protection for individuals buying insurance (general insurance, life insurance and insurance-based investment products) and provides a level playing field for operators in the EU.

The IDD goes further than the IMD in that it covers organisational and conduct of business requirements, and matters relating to product oversight and governance. It is the EU’s stated intention to align protection for insurance consumers with that afforded to investors under MiFID II.

The FCA creates rules for the conduct of business (COBS), which advisers are obliged to operate within when establishing and maintaining relationships with their clients.

Types of clients

The COBS rules provide different types of customers. The three main categories are listed below. The majority of COBS rules apply to business dealings with retail and professional clients.

Customers can be reclassified, but only by agreement and with certain safeguards. The main types of customer are:

Retail client

Eligible counterparty

Professional client

Retail client

The category of retail client is the one that applies to most customers. They are any clients who are not eligible counterparties or professional clients. Retail clients benefit from the most protection under the COBS rules. Professional clients receive less protection and the least protection is given to eligible counterparties.

Eligible counterparty

The eligible counterparty definition applies to certain types of MiFID business, including dealing on own account, execution of orders, or receipt and transmission of orders.  Eligible counterparties can be ‘per se or elective’. The following can be ‘per se’ eligible counterparties:

Investment ...

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... is able to satisfactorily make his/her own investment decisions whilst understanding the risks involved.

A record of each client’s classification must be made at the time of their classification and be retained for the relevant period after the firm ceases to carry on business with or for the client. The relevant periods are:

Indefinitely in relation to a pension transfer, pension opt-out or FSAVC

At least five years in relation to a life policy or pension contract

Five years in relation to MiFID business and three years in any other case

Under the ICOBS rules for insurance business, clients are categorised in a different way. Clients are either:

Consumer – this is any natural person acting for purposes which are outside their trade or profession

Commercial customer – this is a commercial customer who is not a consumer

Customer (both) – this term refers to both customers and commercial customers

If it is not clear in a particular situation whether a customer is a consumer or a commercial customer, a firm must treat the customer as a consumer. (Under the MCOB rules for mortgage business, clients are simply known as customers).

State the three types of client.

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On first contact with a retail or professional client where advice or arrangements in relation to packaged products are contemplated, firms must provide certain information in addition to that contained within the client agreement (see below).

The firm must provide the client with the following information, either alongside or within the client agreement:

The name and address of the firm/information necessary for contact

The methods of contact used between firm and adviser

The firm’s regulatory status (that it is authorised and regulated by the FCA)

The firm’s status as independent or restricted (explaining the nature of the restriction)

The services to be provided

Details of how the firm is paid

Details of loans and ownership

How to complain

Details of the coverage provided by the Financial Services Compensation Scheme (FSCS)

A summary of the firm’s conflicts of interest policy

The purpose of this is to ensure that the client is fully aware of whom they are dealing with, the service they will receive, the procedures involved in the process and the costs involved.

Where the adviser is charging a fee, the adviser must obtain the client’s agreement to this before acting on their be...

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...tail. Areas that should be covered include:

Commencement date of the agreement

Regulation by the FCA

Investment objectives

Restrictions

Services provided

Payment

Status

The giving of instructions

Accounting

Conflicts of interest

Withdrawal rights

Risk warnings

Complaints

Compensation

Provisions for terminating the agreement

Professional clients should receive a client agreement within a reasonable period of the start of conducting investment business.

Client agreements are not required for:

Direct offer financial promotions

Life offices selling life and pensions policies as a principal

Firms must not exclude or restrict any liability they may have, under the regulatory system, to any retail or professional client. However, they can set out the obligations that they take on in their client agreement.

Records of the client agreement provided to clients must be retained for (at least) whichever is the longer of:

Five years

The duration of the relationship with the client

In the case of a record relating to a pension transfer, pension opt-out of FSAVC, indefinitely

Explain the purpose of the ‘Terms of Business’ document.

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Best execution

The principle of ‘best execution’ applies mainly to firms dealing in stocks and shares. It does not apply to life or pension contracts or collective investments. The firm must take sufficient steps so that the transaction is carried out on the best terms possible for a transaction of the kind and size concerned. It must execute the order as soon as possible at a price which is no less advantageous to the client, unless it would be in the client’s best interests not to.

Execution-only

A transaction is classed as ‘execution-only’ where it is processed by an authorised firm on the client’s specific instructions but where the customer neither expects nor receives advice about the merits of any facet of the investment. In these circumstances, it is not necessary to complete a fact find or provide a suitability r...

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...on, the adviser should issue a second letter reiterating the advice, and the firm must not enclose any material with that letter, such as key features documents or application forms, as they may undermine the content of the letter.

If the client still wishes to proceed with their chosen course of action on an execution-only basis, it is good practice for the adviser to ask the client to confirm their decision in writing, and for this to include a reason for rejecting the firm’s advice. The firm may then wish to confirm back to the client in writing that they are acting on the client’s specific instructions, using this correspondence to reiterate the implications of the decision they have made.

Where a client requests an ‘execution-only’ transaction, what must the firm request from the client and why?

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All firms must be able to recognise the limitations of their expertise and authority and seek further assistance where necessary. The following points should be constantly borne in mind.

Firms may generally rely on another competent person not connected with the firm to provide them with information in writing, providing that they can demonstrate that it was reasonable to do so. They may also send information to a third party unconnected with the firm on the instruc...

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...ese are usually Authorised Representatives of other firms

Non-FCA authorised – includes professional firms who have chosen not to be FCA regulated and are therefore not subject to their rules

Firms need to take care to ensure that they have arrangements to cover the regulatory and other commercial aspects of their referrals.

What checks should be made by a firm when carrying out business on an  execution-only basis?

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Some investments give the customer the right to cancel after the sale or a right to withdraw pre-sale.

Cancellable investment agreements, with a cancellation period of 30 days, are:

Life policies (including a pension annuity, a pension policy or within a wrapper, e.g. an ISA)

Personal and stakeholder pension contracts

Pension transfers

Variations of existing personal or stakeholder pensions by electing to take income withdrawals

Personal recommendation for a Lifetime ISA (non-distance)

The following contracts all have a cancellation period of 14 days:

Cash deposit ISA

Units in a regulated collective investment scheme (including those purchased as part of a wrapper or pension)

Transferring a Child Trust Fund

Opening or transferring an ISA

Enterprise Investment Scheme

Designated investments

The product pro...

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...ability or impairment

Hearing or sight impairment

Addiction

Low cognitive capacity

Recently bereaved/divorced

With caring responsibilities

Victims of domestic abuse

Over indebtedness

Low savings/earnings

Poor knowledge or lack of confidence

Poor literacy/digital skills

Low emotional resilience

Poor English skills

Retired

Some groups of customers are treated as vulnerable by virtue of the product of service they are buying, such as those releasing equity from their property - a transaction carried out by older borrowers, with significant consequences. Strict guideline exist to ensure the understands the implications of equity release, and has not been unduly influenced by any third parties.

List the information that must be contained within a cancellation notice.

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At the end of the sales process, the client should be aware of how their relationship with the adviser will continue and develop. It is important that financial advice is seen as an ongoing process to ensure that changes in circumstances and needs are addressed promptly to ensure that the client remains fully protected and that their plans remain on track.

Under MiFID II, where a firm is offering a periodic assessment of the suitability of advice, this must be annual. Otherwise, there is no set rule for how often a review ...

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...throughout the advice process, the adviser will start to develop a relationship of trust. Showing a willingness to address ongoing needs and being available to discuss financial queries and concerns at annual reviews not only allows the adviser the opportunity for further advice and sales but also to benefit from referrals to family and friends of the client.

Why might a client benefit in relation to taxation issues by having their annual review towards the end of the financial year?

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This revision test (opens in a new window) has 12 questions and tests y...

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...d multiple choice questions and 8 multiple response questions in the R01 exam.