CAPÍTULO II. ESTUDIO DEL EFECTO DE LA VARIACIÓN DE LA TENSIÓN DEL BUS
3.2.7. CONCLUSIONES. APLICACIÓN A LA TRACCIÓN DE VEHÍCULOS
Having considered what constitutes fiduciary relationships and what duties this places on advisers and wealth managers, we can now turn to look at what this means in practice when advising clients.
The following sections are based on UK regulation and cover both the rules and their rationale in order to demonstrate some possible best practice principles that can be derived.
Although these principles are based on UK regulation, it should be remembered that the UK is part of the European Union (EU). One of the major objectives of the EU is to create a single market across Europe in financial services. To this end a series of directives have been developed and issued on a wide range of investment regulation which each country, the UK included, has then adopted into its local rules. These have included the recent Markets in Financial Instruments Directive (better known as MiFID) which has brought about a common conduct of business rulebook across the EU, and other directives such as the Distance Marketing Directive (DMD) and the e-Commerce Directive.
While some variance between countries will exist, the general principles bear study, as they are EU-wide and therefore representative of the principles applying in a wide range of markets.
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2.1 Types of Customer
Learning Objective
4.2.1 Understand client categorisation
Classifying clients is at the heart of financial services regulation. The reason for this is simple, namely that the conduct of business rules issued by regulators are designed to give the greatest protection to those who are most vulnerable.
The Markets in Financial Instruments Directive (MiFID) lays down rules as to how client categorisation should be applied. It identifies three types:
• retail;
• professional;
• eligible counterparty.
An eligible counterparty is another financial services firm such as an investment firm, an insurance company or a mutual fund. A professional client can be a financial services firm, an institutional investor or a private investor who can meet certain tests. Any client who is not one of these is then classified as a retail client.
A firm is required to notify a client of how they have been categorised before they undertake any services for them, and of their right to be re-categorised.
If a private investor wishes to be treated as a professional client, the firm must assess whether he has the experience and skills to understand the risks involved and can demonstrate that he has traded regularly and has sufficient financial resources. If he meets these tests and is classified as a professional investor, then the firm must give a written warning of the regulatory protections he will lose.
Client classification therefore drives the level of regulatory protection that a client is entitled to. There are further practical implications as well. Regulatory rules may restrict the marketing of higher-risk products to retail investors, or prevent the offering of certain services that carry greater risk.
2.2 Terms of Business and Client Agreements
Learning Objective
4.2.2 Understand terms of business and client agreements
Regulators require a firm to pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading.
It is a requirement that a customer has all of the information it needs about a firm, the services they intend to use, their charges and the basis on which the firm will be doing business with them before a
firm acts for a client. Typically, this will be achieved by the firm providing its customers with a document that sets out the terms on which it will do business.
In the UK, this is referred to as an initial disclosure document, and the regulator requires it to begin with a statement that the document has been designed by the regulator to be given to consumers buying certain financial products and that the information provided can be used to decide if the services are right for the customer. It should then go on to state:
• whose products are offered;
• what services will be provided;
• what the customer will have to pay for the services provided;
• who regulates the firm;
• details of financial firms that have made loans to the firm or own a share of the firm;
• what to do if the customer has a complaint;
• whether the firm is covered by the Financial Services Compensation Scheme (FSCS).
Details of these terms of business must be provided to a retail customer before any investment business is conducted, and for other customers within a reasonable period after beginning to conduct investment business.
Like terms of business, a client agreement sets out the basis on which investment business will be done and the major difference is that it requires the customer’s acceptance, namely their signature indicating acceptance of the terms. If a firm enters into investment business with a retail or professional client, a firm must have an agreement that sets out the essential rights of the firm and the client.
A client agreement must be used when a retail or professional client is agreeing to complex services being provided, including:
• advising on investments;
• managing investments;
• arranging investments;
• safeguarding and administering investments.
2.3 Status of Advisers and Status Disclosure
Learning Objective
4.2.3 Understand the status of advisers and status disclosure to customers
There are special rules that a firm must adhere to when advising and selling packaged products, such as mutual funds (also known as collective investment schemes), to retail customers.
Because of their attraction to retail customers, the regulator is concerned that they may be sold inappropriately, and therefore requires firms to disclose the basis on which they select the products and why they are being sold to investors.
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A firm or an investment adviser may sell the products of one or a limited number of firms only, or ones from across the whole marketplace. For example, a financial institution could choose to sell either its own range of mutual funds to its customers or ones it selects from across the marketplace. It may do either, but it must make clear to its customer the basis on which it is operating.
Before providing services, a firm must therefore disclose the scope of its advice and whether its recommendations will be based on products:
• from the whole of the market – independent advice;
• limited to a single or several product providers – restricted advice.
An investment firm which offers only its own products, or those of a limited number of other companies, may advise only on those products and must disclose this to the client. A firm that selects products from across the market must ensure that it selects the best products and does not enter into any commercial arrangements that might adversely affect its ability to give independent advice.
2.4 Advice and ‘Know Your Customer’ Rules
Learning Objective
4.2.4 Understand the ‘know your customer’ rules and their impact on investment planning
In the UK, one of the FCA’s 11 Principles for Businesses requires a firm to take reasonable care to ensure the suitability of its advice and discretionary decisions. To comply with this, a firm should obtain sufficient information about its customers to enable it to meet its responsibility to give suitable advice.
Similarly, a firm acting as a discretionary investment manager for a customer should ensure that it has sufficient information to enable it to put suitable investments into the customer’s portfolio.
This requirement to gather sufficient information about the customer is generally referred to as the
‘know your customer’ requirement.
The purpose of gathering information about the client is clearly so that financial plans can be devised and appropriate recommendations made. The types of information that should be gathered include:
• personal details – name; address; age; health; family and dependants;
• financial details – income; outgoings; assets; liabilities; insurance and protection arrangements;
• objectives – growth; protecting real value of capital; generating income; protecting against future events;
• risk tolerance – cautious; balanced; adventurous;
• liquidity and time horizons – immediate needs; known future liabilities; need for an emergency reserve;
• tax status – income; capital gains; inheritance taxes; available allowances;
• investment preferences – restrictions; ethical considerations.
As we will see in the next section, firms must ensure that any recommendations they make are both suitable and appropriate. In order to do so, a firm should ensure that the information they gather also includes details about:
• a client’s knowledge and experience in relation to the investment or service that will be considered for recommendation;
• the level of investment risk that the client can bear financially and whether that is consistent with their investment objectives.
2.5 Suitability and Appropriateness
Learning Objective
4.2.5 Understand the suitability and appropriateness of advice
Once having gathered sufficient information about the customer, the steps expected of a firm to ensure its recommendations are suitable and appropriate will vary depending upon the needs and priorities of the customer, the types of investment or service being offered and the nature of the relationship between the firm and the private customer.
When a firm proposes to offer investment advisory services or discretionary portfolio management, it must first assess whether such services are suitable for a professional or retail client. If the firm intends to offer other investment services, eg, trading derivatives such as contracts for difference, then it must ensure that they are appropriate for the client.
In assessing the client’s knowledge and experience, the firm should gather information on:
• the types of services and transactions with which the client is familiar;
• the nature, volume, frequency and time that the client has been involved in such services and transactions;
• the client’s level of education, profession or relevant former profession.
The general requirement is that the firm must take reasonable steps to ensure it makes no personal recommendation to a customer unless it is suitable for that customer. Suitability will have regard to the facts disclosed by the customer and other facts that the firm should reasonably be aware of.
Having assessed what services and products are suitable and appropriate, the firm should provide the client with a report which should set out, among other things, why the firm has concluded that a recommended transaction is suitable for the client.
If the firm determines after assessment that the service or product is not appropriate for the client, then it should issue a risk warning to the client. If the client still wishes to proceed despite the warning then it is up to the firm to decide whether it will do so.
If the firm is acting as investment manager for a private customer, there is an ongoing requirement that it must ensure that the portfolio remains suitable. Equally, if a customer has agreed to the firm pooling
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his or her funds with others, the firm must take reasonable steps to ensure that any discretionary decisions are suitable for the stated objectives of the fund.
2.6 Execution-Only Sales
Learning Objective
4.2.6 Know the meaning of execution-only sales
An execution-only sale is one where no advice is given to the customer and the firm simply undertakes the transaction. In such cases, the transaction is carried out on the instructions of the customer and no advice is provided about the suitability of the course of action or product.
In such cases, a number of the rules referred to above do not apply so that, for example, a fact-find to establish full details about the customer is not required. If the customer decides on the course of action but then, having been provided with information, asks whether the product or certain features are suitable for them, then clearly this would no longer be execution-only business, and the firm would then need to go through a fact-find (know your customer) process.
2.7 Charges and Commissions
Learning Objective
4.2.7 Know the requirement for disclosure of charges and commission
Whenever a firm conducts investment business for a customer, it must make the customer aware of the costs so that he is better able to make informed choices. It has to do so in writing and before it conducts any business. It must also disclose any product-related charges and any commissions it may receive from a product provider. For packaged products this is usually included within a key features document that is required to be provided to the customer. For mutual funds this is provided in the key investor information document (KIID).
The information to be supplied includes:
• the total price to be paid including all related fees, commissions, charges and expenses and any taxes payable via the firm;
• if these cannot be indicated at the time, the basis on which they will be calculated so that the client can verify them;
• the commissions charged should be itemised separately;
• if any costs or charges are payable in a foreign currency, what the currency is and the conversion rates and costs;
• if other costs and taxes not imposed by the firm could be payable, how they will be paid or levied.
2.8 Cooling Off and Cancellation
Learning Objective
4.2.8 Know the requirement for cooling off and cancellation
In certain circumstances, customers who are entering into an investment arrangement are entitled to a period of reflection during which they can decide whether or not to proceed with their purchase.
If a right to cancel is provided to a customer, the firm must give a clear and prominent notice in writing, either before or, if not possible, immediately after the sale. They must inform the customer of:
• the existence of the right to cancel or withdraw;
• its duration;
• the conditions for exercising it, including any amount the customer may have to pay;
• what happens if the customer does not exercise the right;
• any other practical details the customer may need.
If the customer exercises their right to cancel, the effect is that they withdraw from the contract, which is then terminated.
2.9 Product Disclosure
Learning Objective
4.2.9 Know the requirement for product disclosure
As mentioned in Section 2.7, packaged products are attractive to private customers and the regulator therefore requires certain features of the products to be highlighted in the key features document. Key features are intended to optimise the ability of the customer to make comparisons between different packaged products.
For collective investment schemes, the following information must be disclosed.
• Where details of the latest estimated distribution yield, and buying and selling prices can be found.
• For purchases, how and when the price to be allocated in respect of each payment will be determined.
• Whether certificates will be issued and, if so, where they will be sent.
• How units or shares may be redeemed and when payment on redemption will be made.
• The names and addresses of the scheme manager, authorised corporate director (ACD) and depository.
• When and how copies of the scheme’s particulars, annual and half-yearly reports and accounts and prospectus can be obtained.
• An explanation of any relevant right to cancel or withdraw, or that such rights do not apply.
• How complaints and queries are dealt with and how further details of compensation arrangements can be obtained.
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• A summary of the customer’s potential liability to tax.
• Whether income can be re-invested and whether interest is paid on such monies.
• Information about dealing costs and any dilution levy.
• Whether stamp duty may be incurred.
• Details of any protection arrangements or guarantees.
• If there is a class of limited shares, a summary of the restrictions.