CISI IoI Financial Services Regulation (FCA) 2 — Questions and Answers
Question 1: Under FCA rules, what is the key difference between 'advised' and 'non-advised' (execution-only) services?
- Advised services are free while non-advised services charge a fee
- In advised services the firm makes a personal recommendation; in non-advised the client makes their own decision (Correct answer)
- Non-advised services are not regulated by the FCA
- Advised services can only be provided to professional clients
Correct answer: In advised services the firm makes a personal recommendation; in non-advised the client makes their own decision
In an advised service, the firm assesses suitability and makes a personal recommendation to the client. In a non-advised (execution-only) service, the client decides which products to buy without receiving a recommendation, and the firm simply executes the instruction. Both are regulated but carry different obligations.
Question 2: What is the FCA's Consumer Duty, which came into force in 2023?
- A requirement for consumers to report any financial losses to the FCA
- A higher standard requiring firms to act to deliver good outcomes for retail customers (Correct answer)
- A government programme providing free financial education to all UK adults
- A tax relief scheme for consumers investing in ISAs
Correct answer: A higher standard requiring firms to act to deliver good outcomes for retail customers
The Consumer Duty (FCA PS22/9) sets a higher standard of consumer protection, requiring firms to act to deliver good outcomes for retail customers. It includes a new Consumer Principle, cross-cutting rules (act in good faith, avoid foreseeable harm, enable customers to pursue financial objectives), and four outcome areas: products, price/value, consumer understanding, and consumer support.
Question 3: What is money laundering, and what are the three stages commonly associated with it?
- Tax evasion involving three different jurisdictions
- The process of making illegally obtained money appear legitimate, through placement, layering, and integration (Correct answer)
- A banking process involving deposits, transfers, and withdrawals
- Insurance fraud conducted in three separate transactions
Correct answer: The process of making illegally obtained money appear legitimate, through placement, layering, and integration
Money laundering is the process of disguising the proceeds of crime to make them appear legitimate. The three stages are: (1) Placement — introducing criminal proceeds into the financial system, (2) Layering — moving money through complex transactions to obscure its origin, (3) Integration — reintroducing the 'cleaned' money into the legitimate economy.
Question 4: What does 'best execution' require of a firm under FCA rules?
- Always achieving the lowest possible price for the client
- Taking all sufficient steps to obtain the best possible result for the client, considering price, costs, speed, and other relevant factors (Correct answer)
- Executing trades only on the London Stock Exchange
- Guaranteeing that no losses will occur on any trade executed
Correct answer: Taking all sufficient steps to obtain the best possible result for the client, considering price, costs, speed, and other relevant factors
Best execution requires firms to take all sufficient steps to obtain the best possible result for clients when executing orders, taking into account factors including price, costs, speed, likelihood of execution and settlement, size, nature, and any other relevant consideration. Price is typically the most important factor for retail clients but is not the only consideration.
Question 5: Under the FCA's client categorisation rules, which category of client receives the highest level of regulatory protection?
- Professional clients
- Eligible counterparties
- Retail clients (Correct answer)
- Institutional clients
Correct answer: Retail clients
The FCA categorises clients into three groups: retail clients (highest protection), professional clients (intermediate protection), and eligible counterparties (lowest protection). Retail clients receive the most comprehensive protections including suitability requirements, best execution, and access to the Financial Ombudsman Service and FSCS.
Question 6: What is the role of the Financial Ombudsman Service (FOS)?
- To authorise and regulate financial services firms
- To resolve disputes between consumers and financial services firms without going to court (Correct answer)
- To set interest rates for savings accounts
- To prosecute firms for market abuse offences
Correct answer: To resolve disputes between consumers and financial services firms without going to court
The FOS is an independent service that resolves disputes between consumers and financial services firms. If a consumer is unhappy with a firm's response to their complaint, they can refer the case to the FOS, which can make binding decisions up to certain monetary limits. The service is free to consumers.
CISI IoI Financial Services Regulation (FCA) 2
Under FCA rules, what is the key difference between 'advised' and 'non-advised' (execution-only) services?