Regulatory Environment and Compliance
The Regulatory Environment and Compliance domain tests whether you know who may do what, what must be disclosed, and how client money and orders must be handled. The names of statutes differ by market; the exam tests the underlying rules, so learn the principle and be able to apply it to a scenario.
Permission and people
A firm must be authorised for each regulated activity it performs; an individual must be registered or approved for the activities they carry on. Acting outside the perimeter - or letting an unapproved person advise - is a breach even if the client is happy. Financial promotions must be fair, clear and not misleading, and signed off by someone competent.
Conduct of business
- Suitability: a personal recommendation must match the client's objectives, risk profile and circumstances. Execution-only is different and requires an appropriateness check for complex products.
- Disclosure and costs: all charges, the nature of the service and any conflict must be disclosed before or at the point of sale, in a durable medium.
- Inducements: fees or benefits paid to or by third parties must enhance the quality of the service, not impair the firm's duty, and must be disclosed. Minor non-monetary benefits are acceptable; a paid trip is not.
- Best execution: take all sufficient steps to obtain the best result for the client, considering price, cost, speed and likelihood of execution.
Integrity and records
Insider dealing, market manipulation and misleading statements are market abuse; controls include insider lists, restricted lists, wall-crossing and personal account dealing pre-clearance. Client money must be segregated and reconciled; records must be retained for the required period and be retrievable.
Worked example
A fund manager offers your firm's advisers places on a two-day conference abroad, flights and hotel paid. Apply the test: does it enhance the quality of advice to clients? Possibly the technical content does; the travel does not. Pay the travel yourself, attend only the substantive sessions, record the benefit on the firm's register, and check the gift policy - disclosure alone does not make an excessive benefit acceptable.
Traps
Assuming disclosure cures every conflict. Confusing appropriateness with suitability. Treating client consent as a substitute for segregation. Believing an internal policy protects you if it is not followed. Forgetting that market abuse rules reach personal accounts and casual tip-sharing.