CISI IAD UK and International Regulatory Framework 2 — Questions and Answers
Question 1: What is the 'client money' (CASS) regime in the UK?
- A requirement for clients to hold money in ring-fenced FCA-approved bank accounts
- FCA rules requiring regulated firms to segregate client money and assets from the firm's own money, protecting clients if the firm becomes insolvent (Correct answer)
- A scheme requiring clients to deposit minimum amounts before trading
- Rules governing how firms charge clients for services
Correct answer: FCA rules requiring regulated firms to segregate client money and assets from the firm's own money, protecting clients if the firm becomes insolvent
The Client Assets Sourcebook (CASS) requires FCA-regulated firms to keep client money and safe custody assets separately from the firm's own funds. In the event of a firm's insolvency, client money held in segregated accounts is protected and returned to clients, rather than becoming available to the firm's creditors.
Question 2: What is a 'person discharging managerial responsibilities' (PDMR) under MAR?
- Any employee with supervisory responsibility over other staff
- A director, senior executive, or person with regular access to inside information about an issuer and power to make managerial decisions affecting its future development and business prospects (Correct answer)
- An FCA supervisor assigned to oversee a listed company
- A compliance officer responsible for managing market abuse reporting
Correct answer: A director, senior executive, or person with regular access to inside information about an issuer and power to make managerial decisions affecting its future development and business prospects
PDMRs are key individuals in listed companies — typically directors and senior executives — who have access to inside information and whose trades in the company's securities must be disclosed to the market and notified to the FCA within three business days of each transaction.
Question 3: What is the FCA's 'Individual Conduct Rules' (ICR) under SM&CR?
- Rules governing how much individual employees can be paid annually
- A set of standards of conduct applicable to all employees of regulated firms, including requirements to act with integrity, due care and diligence, and to be open with regulators (Correct answer)
- Rules specifying mandatory qualifications for all financial services employees
- Rules permitting individuals to carry on regulated activities without a firm's authorisation
Correct answer: A set of standards of conduct applicable to all employees of regulated firms, including requirements to act with integrity, due care and diligence, and to be open with regulators
The Individual Conduct Rules apply to all staff at regulated firms (with some exceptions). The five basic rules require: acting with integrity, acting with due care skill and diligence, being open and cooperative with regulators, paying due regard to clients, and observing proper market conduct standards.
Question 4: What is 'transaction reporting' under MiFID II / UK MiFID?
- The requirement for clients to report all trades to their investment adviser
- The obligation on investment firms to report details of all transactions in financial instruments to the FCA (or relevant competent authority) to assist with market surveillance and detecting abuse (Correct answer)
- The quarterly disclosure of fund holdings to investors
- The annual reporting of client commissions and fees to the FCA
Correct answer: The obligation on investment firms to report details of all transactions in financial instruments to the FCA (or relevant competent authority) to assist with market surveillance and detecting abuse
Transaction reporting requires investment firms to submit detailed reports of every transaction they execute in financial instruments to the FCA by the end of the following business day. The FCA uses this data to monitor for market abuse and ensure market integrity.
Question 5: What is the purpose of the 'product governance' regime under MiFID II?
- To govern the physical production of financial data services
- To require manufacturers and distributors of investment products to identify a target market for each product and ensure it is only distributed to clients for whom it is suitable (Correct answer)
- To regulate the governance of investment product companies' boards
- To set minimum product performance standards for retail investment funds
Correct answer: To require manufacturers and distributors of investment products to identify a target market for each product and ensure it is only distributed to clients for whom it is suitable
Product governance rules require manufacturers to define a target market (the type of client the product is designed for) and distributors to ensure products only reach their intended target market. This aims to prevent unsuitable products being sold to inappropriate clients at the point of product design, not just at sale.
Question 6: What is the 'best execution' obligation under MiFID II?
- A requirement for investment firms to always invest in the best-performing asset classes
- An obligation requiring investment firms to take all sufficient steps to obtain the best possible result for clients when executing orders, considering factors such as price, costs, speed, and likelihood of execution (Correct answer)
- A rule requiring firms to use the cheapest available trading venue for every order
- A requirement to use only FCA-regulated execution venues
Correct answer: An obligation requiring investment firms to take all sufficient steps to obtain the best possible result for clients when executing orders, considering factors such as price, costs, speed, and likelihood of execution
Best execution requires firms to take all sufficient steps to achieve the best possible outcome for clients when executing orders. Firms must have a best execution policy considering factors including price, costs, speed, probability of execution, and order size, tailored to client type.
CISI IAD UK and International Regulatory Framework 2
What is the 'client money' (CASS) regime in the UK?