CISI IAD Regulation and Compliance 2 — Questions and Answers
Question 1: Under MiFID II, what is the purpose of the 'product governance' requirements?
- To ensure all products are guaranteed by the FSCS
- To require manufacturers and distributors to identify a target market for each product and ensure it reaches appropriate clients (Correct answer)
- To mandate that all investment products offer a minimum guaranteed return
- To require all products to be listed on a regulated exchange
Correct answer: To require manufacturers and distributors to identify a target market for each product and ensure it reaches appropriate clients
MiFID II product governance requirements oblige manufacturers to define a target market for each product, considering the needs, characteristics, and objectives of the intended client group. Distributors must then ensure the product is distributed to clients within the identified target market. This end-to-end process aims to prevent mis-selling by ensuring products reach appropriate investors.
Question 2: What is the FCA's approach to 'treating customers fairly' (TCF)?
- It is a voluntary code with no enforcement powers
- It is a principles-based approach requiring firms to demonstrate fair outcomes for consumers throughout the product lifecycle (Correct answer)
- It applies only to insurance companies
- It requires all financial products to charge identical fees
Correct answer: It is a principles-based approach requiring firms to demonstrate fair outcomes for consumers throughout the product lifecycle
TCF is embedded in the FCA's Principles for Businesses, particularly Principle 6 (treating customers fairly). It has been further strengthened by the Consumer Duty (effective July 2023). Firms must demonstrate that they deliver fair outcomes across six key areas: culture, products, information, advice, service standards, and barriers to switching. TCF is principles-based, not prescriptive, and is enforceable.
Question 3: Which of the following best describes the FCA's Consumer Duty introduced in 2023?
- A requirement for firms to offer the cheapest products available
- A higher standard of consumer protection requiring firms to act to deliver good outcomes across price, products, understanding, and support (Correct answer)
- A mandatory complaints resolution procedure
- A requirement for all firms to appoint a consumer representative
Correct answer: A higher standard of consumer protection requiring firms to act to deliver good outcomes across price, products, understanding, and support
The Consumer Duty (PS22/9) sets a higher standard than TCF, requiring firms to act to deliver good outcomes for retail customers across four areas: price and value, products and services, consumer understanding, and consumer support. It includes a new Consumer Principle, cross-cutting rules (act in good faith, avoid foreseeable harm, enable customers to pursue financial objectives), and outcome-specific rules.
Question 4: Under anti-money laundering (AML) regulations, what is 'enhanced due diligence' (EDD)?
- Standard identity checks required for all clients
- Additional verification measures required for higher-risk clients, such as politically exposed persons (PEPs) (Correct answer)
- A simplified check for low-risk clients
- An annual audit of all client accounts
Correct answer: Additional verification measures required for higher-risk clients, such as politically exposed persons (PEPs)
EDD is required under the Money Laundering Regulations 2017 (as amended) for situations posing a higher risk of money laundering or terrorist financing. This includes PEPs, clients from high-risk countries, and complex or unusual transactions. EDD requires more detailed verification of identity, source of wealth, source of funds, and enhanced ongoing monitoring. Firms must apply a risk-based approach.
Question 5: What is the maximum compensation limit per person per firm under the Financial Services Compensation Scheme (FSCS) for investment claims?
- £50,000
- £85,000
- Up to £85,000 (Correct answer)
- There is no fixed limit for investment claims
Correct answer: Up to £85,000
The FSCS provides compensation of up to £85,000 per eligible person per firm for investment claims (where a firm has failed and is unable to pay claims against it). This is separate from the deposit protection limit (also £85,000). The FSCS is funded by levies on authorised firms and acts as the compensation scheme of last resort when firms become insolvent.
Question 6: Under FCA rules, what must a firm disclose to a client before providing investment advice?
- Only the total fees charged
- Information about costs, charges, the nature of advice (independent or restricted), and any conflicts of interest (Correct answer)
- Only whether the adviser holds a Level 4 qualification
- The firm's annual financial statements
Correct answer: Information about costs, charges, the nature of advice (independent or restricted), and any conflicts of interest
Before providing advice, a firm must make several key disclosures including: whether the advice is independent or restricted (and what this means); all costs and charges (including adviser charges, platform fees, and product costs); any conflicts of interest; the firm's complaints procedure; and FSCS coverage. MiFID II enhanced these disclosure requirements with standardised cost presentation.
CISI IAD Regulation and Compliance 2
Under MiFID II, what is the purpose of the 'product governance' requirements?