6 - Regulatory Framework

• All businesses and citizens are subject to laws and regulations that govern their actions
• Considered the HM Revenue & Customs (HMRC)/HM Treasury (HMT) rules that govern the tax-efficient wrappers offered by platforms
• Focus on the Financial Conduct Authority (FCA) rules that govern a platform operator’s provision of retail financial services, and the data protection/information security considerations
• Financial Conduct Authority (FCA) Regulations


  • COBS – 2.2 and 2.2A information disclosure before providing services, compensation arrangements, reporting information to clients, best execution; CASS – custody, client money; SYSC – systems and controls, record-keeping, treatment of shortfall, business continuity planning, disaster recovery, risk assessment
• Each platform operator must be authorised by the FCA for the activity it performs and bears a number of obligations under the FCA Handbook
• Sourcebooks in the FCA Handbook

  • COBS
  • CASS
  • SYSC
• COBS Sourcebook

  • Sets out obligations on a firm when providing services to its clients. These include how the firm advertises for business, defines and explains its services, performs transactions, and reports activity to its customers
• CASS Sourcebook


  • Sets out methods and controls to minimise the risk that investors’ money or assets could be lost – particularly in the event that the firm became insolvent
• SYSC Sourcebook

  • Sets high-level standards for senior management running the business, on matters such as risk management, governance, and compliance
• Failing to comply with the FCA rules exposes a firm to risk of regulatory sanction
• All firms must maintain a record of regulatory breaches that have arisen
• Firms conduct ‘root cause analysis’ to determine the cause of breaches
• The FCA Handbook identifies certain events or breach types as requiring immediate notification to the regulator
• Information to be provided to the investor

  • The firm and its services
  • Designated investments and proposed investment strategies with appropriate guidance and warnings of risks
  • Execution venues
  • Costs and associated charges
• Financial regulation is designed to protect consumers
• Financial regulation recognises that those active in the industry might appropriately be given greater flexibility to obtain services
• Client Categorisation

  • Retail clients
  • Professional clients
  • Eligible counterparties
• Retail clients are most protected by the rules
• Professional and eligible counterparty categorisations have less protection under some rules
• Types of firms automatically defined as professional clients or eligible counterparties

  • Credit institutions
  • Investment firms
  • Insurance companies
  • Collective investment schemes (CISs) and their managers
  • Pension funds and their managers
  • Commodity derivative dealers
• Some other clients can be placed in the professional client category by satisfying quantitative and qualitative tests
• Information required to be provided to all retail clients

  • Name and address of the firm
  • Contact details
  • Languages of communication
  • Methods of communication
  • Statement of authorization
  • Nature, frequency, and timing of reports
  • Summary of conflicts of interest policy
• COBS 6.1 specifies disclosures that must be made before the provision of designated investment business to the client
• COBS 6.1ZA provides equivalent obligations for MiFID businesses
• COBS 6 requires firms to provide details of any compensation scheme relevant to the business being undertaken
• COBS 11.2 and 11.2A focus on 'best execution' obligations for market trades
• Firms should take sufficient steps to obtain the best possible outcome for the investor when executing market trades on their behalf
• Rules relating to MiFID firms

  • COBS 11.2A
• Requirements for UCITS fund managers

  • COBS 11.2B
• Overarching obligation for a firm

  • Take sufficient steps to gain 'the best possible results for its clients' in the context of the instructions being performed
• Execution factors

  • Price
  • Costs
  • Speed
  • Likelihood of successful settlement
  • Size of the order
• Total consideration for completing the trade


  More important than the price alone
• Firm must consider


  Balance between different factors and whether the client's specification of the order should have a bearing on the best possible outcome for a given trade
• Firm allows client specific instructions


  Protection for the firm if it executed an instruction in line with a requirement specified by the client
• Firm must recognise its obligations under the FCA Principles to treat all customers fairly and to act with integrity
• MiFID firm should establish

  An order execution policy guiding its employees on how different types of client orders would best be executed
• Policy should be shared with the client to

  Clearly explain how their orders will be executed
• Firm should obtain prior consent from the client that

  The client accepts the execution policy
• Firm should perform internal monitoring to ensure that


  Its order execution arrangements and execution policy are operating as intended and achieving the desired outcomes for the firm and its clients
• Reporting Information to Clients

  • COBS 16 and 16A