Duties to Clients III

Risk Disclosure

Where the risks associated with a financial instrument composed of two or more different instruments are likely to be greater than the risk of the components, the investment firm must provide an adequate description of the components and the way in which their interaction increases the risk.

Where an instrument incorporates a guarantee by a third-party, the firm must provide information about the guarantee including sufficient details of the guarantor to enable the retail or potential retail client to make a fair assessment of the guarantee.

Where a firm holds financial instruments or funds belonging to a retail client, it must provide them with sufficient information as relevant.

Where  funds  are held by a third-party on behalf of an investment firm; it must inform the retail client of the responsibility of the firm concerned, for acts and omissions of that third party and for the consequence of its insolvency.

Where the financial investments may be held in an omnibus account by a third-party, the investment firm must inform the client of the fact a prominent warning of the resultant risk.

Where it is not possible for the instruments to be held with a third-party to be separately identifiable for proprietary and financial interests of the  third-party, this must be disclosed, and prominent warning of the resultant risks must be given.

If accounts of a client are held under the law of another jurisdiction, the firm must disclose that the relevant rights may differ accordingly.

Information to Clients

The investment firm must inform clients about the existence of any security interest over its instruments,  rights of set off and about the fact that a depository may have a security interest in funds or investments.

Before entering a securities financing transaction in relation to financing instruments held by the firm for its client or for use of the instruments on its own account or that of another, it must inform the client in a durable medium of obligations and responsibilities of the firm with respect to the use of the instruments, the terms of restitution and the risks.

An investment firm must provide its retail clients and  potential retail clients with information,  costs and associated charges, including:

• total price to be paid in connection with the instrument, investment service or ancillary services, including fees, commission charges, expenses and taxes paid by the firm. If the exact price cannot be ascertained, the basis for calculation must be provided
• where part of the price is a foreign currency, an indication of the currency, conversion rates and costs
• notice of the possibility of other costs, including taxes, which may arise
• arrangements for payment and performance. The commissions charged are to be itemized separately in each case.

A non-complex instrument is one that falls into certain categories where there are frequent opportunities to dispose and redeem at prices that are publicly available to market participants, does not have actual or potential liability for the client that exceeds the cost of its acquisition, and adequate comprehensive information on its characteristics is publicly available and likely to be understood by the average, retail client to make an informed judgment as to whether to enter a transaction in that instrument.

Where an investment firm carries out an order other than portfolio management, it must promptly report to the client. There are certain exceptions.  Certain particulars of the transaction must be furnished, including

• type of order
• venue identification,
• quantity,
• unit price,
• total price,
• commission, expenses,
• client settlement responsibilities,
• whether the counterparty was the firm itself.

The explanations may be given by way of standards codes, provided the codes themselves are explained.

A firm which provides portfolio management shall  provide a periodic statement including

• statements of content and a valuation of the portfolio, including details of instruments held value, market value, total fees and charges
• comparison of performance during the period with the investment performance, benchmark if any,
• total dividends, interest and payment received.
• information about other corporate actions giving rights in relation to the instrument

The periodic statement must be provided once every six months for retail clients or if so requested every three months in other circumstances, twelve months

Execution Only

Where the investment firm provides execution of orders, transmission of orders or both, with or without ancillary services, it may do so without the need to obtain the information or make the assessments above in terms of appropriate and best execution.

The following conditions must, however, apply. The instruments must be

• shares must be admitted to trading on a regulated market,
• money market instruments, bonds, or other securitized debt.
• units in mutual funds or other non-complex financial transactions

The services must be provided at the client’s initiative. The firm must warn the client that in the provision of the services, the firm is not required to assess suitability, and the customer does not benefit from the corresponding protection of the relevant business codes.

An investment firm must keep records of documents setting out agreements between the firm and the client. The investment firm must provide its clients with adequate reports of transactions and services provided to them, including details of cost.

Where services are offered as part of a product which is already subject to other EU standards relating to credit institutions, consumer credit, with respect to risk assessment, and information requirements, the investment service need not be additionally subject to suitability, best execution, and appropriateness.

Where a firm receives instructions through another firm, it may relay client information transmitted by that latter firm. The other firm remains responsible for the completeness and accuracy of information.

Outsourcing

Where an investment firm, outsources critical or important operational functions, it retains responsibility for all the firm’s obligations. A function is critical if a defect in its performance would materially impair the compliance by the firm with the condition of authorization, its other obligations, its financial importance, performance of the soundness or continuity of its investment functions.

The firm which outsources remains responsible for and must not result in the delegation by senior management of its responsibilities. Relationships with clients must not be altered

The conditions under  which the investment firm must comply in order to be authorized, must not be undermined. Conditions of authorization must not be modified or removed.

A firm must exercise due care and skill when entering, managing or terminating an outsourcing arrangement to a service provider of a critical or important function or investment services and activities. It must be satisfied that

• it has the capacity, ability, and authorization to carry out the functions;
• that it may do so effectively and
• has effective methods of assessing performance standards.
• It must properly supervise the outsourced functions and manage the risks associated.

A range of other obligations apply.

Client’s Orders

An investment firm must ensure that client orders are executed promptly and accurately recorded and allocated. It must carry out otherwise comparable orders sequentially unless the orders or prevailing market conditions make this impracticable or the interest of the client otherwise requires.

It must inform retail clients of any material difficulty relevant to the carrying out of an order. The firm must ensure that any financial instruments received in settlement to an order are delivered to the account of the client promptly and correctly.

An investment firm must not misuse information related to pending client orders. It must take reasonable steps to ensure that others do not do so.

• An investment firm may not perform a client order in aggregation with another client unless
• it is unlikely the aggregation will lead to an overall disadvantage:
• it is disclosed that aggregations may work to the disadvantage in relation to a particular order;
• the order allocation policy is established and effectively implemented, and
• provides in sufficiently precise terms for fair allocation of aggregated orders and transactions.

Where a firm aggregates transactions for its own account with client orders, it must not act to the detriment of the client. It shall allocate orders in priority to the client. Where it is able to show on reasonable grounds that without aggregation with its own account, the firm would not have been able to carry out an order on advantageous terms,, the firm may allocate the transaction for its own account proportionately in accordance with its allocation policy.

An investment firm which executes orders on behalf of a client must implement procedures which provide

• prompt, fair and expeditious execution of orders
• provide for execution of comparable client orders in accordance with the time they receive by the investment firm.

In the case of a client limit order, unless the client otherwise instructs, the investment firm will take measures to facilitate the earliest possible execution of the order by making it public without delay in a manner easily accessible to other participants.

Tied Agents

Where investment firms appoint persons as tied agents, the investment firm remains responsible for any act or omission on its part when acting on behalf of the firm. It should ensure that the tied agent discloses the capacity in which the tied agent is acting and the firm that the tied agent is representing when dealing with any client or potential client.

An investment firm must monitor the activities of its tied agents to ensure compliance with the regulations when they act on behalf of the firm.

Appointments of tied agents must be reported to the regulator. Where the tied firm provides services regulated under MIFID and other services, the appointing firm must take adequate measures to avoid any negative impact by the latter on the former.

Tied agents entered on public register only shall be appointed. A tied agent may act on behalf of one investment firm only.The public register of tied agents is maintained by the regulator. The register is available to the public.

A firm may only be included in the register if the regulator is satisfied; it is of sufficiently good repute, and it possesses the appropriate general commercial and professional knowledge to enable it to communicate all information about the proposed services to clients proposed clients of the firm for whom it is tied, agent. The regulator may enter arrangements with investment firms and entities for the registration and supervision of tied agents by those entities under the supervision of the regulator.