Financial Conduct Authority (FCA) UK Regulation Sample Exam

Which type of firms are subject to rules relating to the use of dealing commission?

1. Firms acting as an investment manager

2. Firms involved in trading securities

3. Firms providing financial advisory services

4. Firms engaged in insurance underwriting

The correct answer is: Firms acting as an investment manager

Firms acting as investment managers are specifically subject to rules concerning the use of dealing commission because they execute trades on behalf of their clients and have a fiduciary duty to act in their clients' best interests. Dealing commissions can be a critical aspect of how these firms manage costs and allocate expenses related to executing transactions. The Financial Conduct Authority (FCA) has established regulations that govern the use of dealing commissions, ensuring that commissions are not only cost-effective but also used to obtain execution services that benefit the clients. In particular, the rules promote transparency and accountability, stipulating that any dealing commission paid must serve a legitimate purpose and should contribute to the quality of trade execution or provide research that aids investment decisions. Investment managers must therefore carefully navigate these rules, ensuring compliance while fulfilling their obligations to their clients. Other types of firms listed, such as securities traders, financial advisors, and insurance underwriters, generally do not engage with dealing commissions in the same regulatory framework as investment managers. For example, while firms involved in trading securities may incur transaction costs, they are not required to adhere to the same stringent rules as investment managers regarding client commissions.