Compliance Officer Questions & Answers (Client Money, Cobs, Tcf)

 regulators?
Can client money be mixed with the firm'sTrades executed in certain recognised venues
money?need to be reported to the FSA on a daily basis.
No. The FSA rules does not permit a firm to placeThis enables the regulator to assess whether a
client money with a bank under the firm's name,firm is conducting business outside its scope of
the money must be segregated into a client poolpermission to use to detect market abuse.
account. Under the FSA Disclosure and Transparency
For some non-Mifid business professional clientsRules a shareholder must disclose any shareholding
may opt out and can consent for their money toof a listed company in UK which is over 3% and
be held under the firm's name.   Client moneyevery subsequent 1% holding thereafter. This is
rules may also not apply to regulated collectivealso required under the Companies Act 2006
investment schemes but only for non-Mifidwhich imposes the obligation on the shareholders
business like Pensions.to make the disclosure. 
For Mifid business, instances where a firm can holdUnder the Takeover Code, disclosure to the
client money in the firm's name are:Takeover Panel is required if we execute a trade
- if the firm is a bank holding a bankwhich leads to a person acquiring 1% of shares of
deposit(CASS 7.1.8);a quoted company in UK in a takeover situation.
- if it is a DVP transaction within one businessThis is to protect shareholders in event of
day(CASS 7.2.8);mergers and acquisition. The stockbroker may
- where the firm acts as principal and have paidmake the disclosure using the prescribed forms.
for securities in advance(CASS 7.2.9);  
- if money has been transferred to the firm asCan I recategorise a retail client into a professional
collateral (CASS 7.2.3).client?
  To do so the client must meet certain criteria
Are firms liable if the bank holding the clientset by FSA in terms of experience and capability
money collapses?and demonstrate a willingness to be treated as an
To increase the security of the client money,elective professional client despite the protection
firms use several banks, not just one single bank.that they will lose as a consequence.
Firms also use due diligence to choose the type To be upgraded they must also satisfy certain
of Bank. The aim of holding client money on trustquantitative assessment.   They should meet at
is to protect the client in the event of the failureleast two of the following:
of the firm, or a third party at which the money (a)  the client has carried out transactions, in
may be held. In such circumstances, the generalsignificant size, on the relevant market at an
creditors should not be able to make claims onaverage frequency of 10 per quarter over the
client money as it will not form part of the firm'sprevious four quarters;
or third party's  assets in event of failure.  As(b)  the size of the client's financial instrument
trustee of the account firms have a fiduciaryportfolio, defined as including cash deposits and
duty to take good care of the client money. Butfinancial instruments, exceeds EUR 500,000;
the firm will not be liable in the event of default(c)  the client works or has worked in the
by any Bank with whom deposit is placed.financial sector for at least one year in a
If a Bank should become insolvent, then a firm willprofessional position, which requires knowledge of
be responsible for making all effort to recover thethe transactions or services envisaged.
client money.  This will depend on the   
compensation scheme of the country in which theHow can I show that we are TCF compliant?
Bank is based. Whatever the firm manages to Have your gap analysis to hand
recover should be distributed pro rata to the allArticulate and document your TCF policy and
clients in the fund.objective
If there is a shortfall, the clients may have to sueProvide TCF staff training
the firm and can only succeed if they can showReview and document your Financial promotions
that the firm have been negligent in placing theirprocedures and approval process
money with that Bank. CASS 7.9.16 -  WhenReview and document your complaints
client money is transferred to a third party, a firmprocedures and complaint management system
continues to owe fiduciary duties to the client.Review and document your advice and selling
Whether a firm is liable for a shortfall in clientprocedures suitability, appropriateness, best
money caused by a third party failure will dependexecution
on whether it has complied with its duty of careReview and document the Training &
as agent or trustee.Competence Scheme, files and Recruitment
 procedure
Can I place client money with any bank I wish?Obtain Staff feedback on TCF.
Client money must be placed in an approved bankObtain Client feedback and Client survey on TCF
Approved bank is defined as follows:Management information to be delivered to senior
"(except in COLL and CIS) (in relation to a bankmanagement
account opened by a firm):Compliance monitoring should be ongoing.
(a) if the account is opened at a branch in the 
United Kingdom: As I have a duty of confidentiality to my clients,
(i) the Bank of England; orcan I disclose their information to regulators?
(ii) the central bank of a member state of the Client's information should always be treated as
OECD; orconfidential provided that such information is not
(iii) a bank; oralready in the public domain.  It should only be
(iv) a building society 39 ; ordisclosed where required by law or if requested
(v) a bank which is supervised by the centralby any regulatory authority or exchange having
bank or other banking regulator of a membercontrol or jurisdiction over the firm , to
state of the OECD; orinvestigate or prevent fraud or other illegal
(b) if the account is opened elsewhere:activity, and also if it is in the public interest to
(i) a bank in (a); ordisclose such information.
(ii) a credit institution established in an EEA State You can get your clients to warrant that they
other than the United Kingdom and dulywill not enter into a transaction/s or take any
authorised by the relevant Home State regulator;other action which might result in market
ormanipulation and money laundering or fraud and if
(iii) a bank which is regulated in the Isle of Man orthey enter into a transaction which is the subject
the Channel Islands; orof any enquiry or cancellation by a regulatory
(c) a bank supervised by the South Africanauthority, they will co-operate with the firm and
Reserve Bank; orpromptly supply information in connection with the
(d) any other bank that:enquiry.
(i) is subject to regulation by a national banking 
regulator; Does a firm have to disclose any spread it
(ii) is required to provide audited accounts;makes when dealing on own account?
(iii) has minimum net assets of £5 million (or its COBS 16 requires disclosure of  a total sum of
equivalent in any other currency at the relevantthe commissions and expenses charged and,
time) and has a surplus revenue over expenditurewhere the retail client so requests, an itemised
for the last two financial years; andbreakdown, including, where relevant, the amount
(iv) has an annual audit report which is notof any mark-up or mark-down imposed by the
materially qualified. (in COLL and CIS) any personfirm or its associate where the firm or associate
falling within (a-c). "acted as principal in executing the transaction, and
   the firm owes a duty of best execution to the
Do firms need to hold PII cover?client
 Firms regarded as a 'personal investment The rationale for the disclosure is to prevent
firms'  are required to hold PII cover.  They areany potential client detriment and balance of
mainly firms that do mortgage or generalinformation (See Policy Statement 07/14). 
insurance business.  Some BIPRU firms also do So on a contract note the firm may state any
mortgage & general insurance business, sosettlement fee and state that "A mark-up (i.e is
they will need to have PII cover.the difference between the price we take position
 Firms that are purely a BIPRU firm are notand the price we execute the transaction) can
required to hold PII cover but can still hold PII justrange between 20% to 60%.  The firm is not
as a matter of good practice not because theobliged to provide you with an itemised
rules require it. PII cover may be useful for firmsbreakdown of mark up unless you specifically
to cover low frequency high severity losses orrequest it".
claims for giving bad advice to client. On best execution, where the execution factor
  is Price, the firm have to keep a record of the
Can I market and sell funds?different prices offered in the different execution
 To promote or market a fund to retailvenues considered and show that the firm
customers, the fund must be a recognised fundselected the execution venue that provided the
register with the FSA.best price for the client
 A firm's scope of permission must allow them To cover conflict of interest the terms may
to recommend and make arrangement forstate:
persons to "buy or sell contractually based "in exceptional circumstances deal as principal for
investments".its own account by selling to you or buying from
 The firm has to produce a Key featuresyou the investment concerned and therefore
document saying how to join the fund and howmake a profit (or loss) or take a mark-up,
to leave the fund etc (to go to clients with themark-down or credit for our or its own
prospectus). The firm is obliged to provide a keyaccount..................... you agree that we and any
facts document showing whose product arerelevant associated company may provide the
offered and commission and charges.relevant services despite any such interest and
 The firm must check the marketing material tothat we are not required to account to you for
ensure it is clear, fair and not misleading.any income, gain, profit, benefit or other
 The firm must put in all the relevant riskadvantage arising from doing so provided that we
warnings about past performance of the fundsdo not contravene the FSA Rules."
etc.  
 Suitability and appropriateness should bePlease note that this publication is provided for
recorded.information purposes only: it is not intended to be
 TCF must be covered in terms of staff producta comprehensive or complete statement of the
knowledge to spot inconsistencies, ambiguities orlaw or of the legal and regulatory requirement or
potential unfairness in the product literature andto constitute legal advice.  Readers should take
complaints procedures should be in place.legal advice before applying the information
 contained in this publication to specific issues or
Do I need to disclose any trade I execute to thetransactions.