Regulations: Problem Questions

A Money Laundering Reporting Officer (MLRO) has not organised any money laundering training in the firm for the past 30 months.
Two new employees, who joined the firm last month, have been found to have been involved in handling criminal funds. The criminals have since fled the UK.
Which of the following parties are the FCA most likely to successfully prosecute?

A The two new employees who are personally liable

B The MLRO who is personally liable

C The two new employees and the MLRO who are personally liable

D The firm which is liable as an entity

The correct answer is: B - The MLRO who is personally liable

As an approved person, the MLRO will be prosecuted by the FCA for breach of the Money Laundering Regulations (MLR).
The MLRO is required to organise training at least every 24 months, and therefore the two new employees would have a defence against an accusation of money laundering. They have not received the necessary training, and thus did not know any better.

When must confirmation of a transaction be dispatched to a retail client?

A Immediately

B No later than the end of that business day

C No later than the end of the next business day

D As soon as reasonably practicable

The correct answer is: C - No later than the end of the next business day

Explanation: The requirement for trade confirmations remains trade date +1 business day in the Conduct of Business Rules.

The Training and Competency (TC) Sourcebook emphasises a high-level approach, where firms must employ personnel with the skills, knowledge and expertise necessary to discharge their responsibilities. If an employee, when offering services to retail clients, offers basic advice only, which of the following is TRUE?

A The customer is of limited understanding with regards to financial services and only simply language is allowed

B The client has been subject to an extensive fact-find which includes the collection of both hard and soft facts

C The product being advised upon is a stakeholder pension

D The client would only like advice on products for which there is Key Information Document

The correct answer is: C - The product being advised upon is a stakeholder pension

Explanation: Where a firm is providing advisory services, which consists of basic advice, the only product to which this relates is a stakeholder pension.

Which of the following firms are subject to thecapital adequacy rules under the Interim Prudential Sourcebook for Investment Businesses (IPRU -INV)?

A Credit institutions

B MiFID investment firms

C Lloyd's underwriting agents

D Banks

The correct answer is: C - Lloyd's underwriting agents

Explanation: Credit institutions and banks are subject to CRD. MiFID investment firms are subject to MiFIDPRU. Everyone else is subject to IPRU-INV.

Which requirement applies under the rules governing high-risk investment promotion?

A The firm may offer a referral bonus if the client is experienced

B The firm must provide a personalised risk warning including the client's name

C The firm may promote non-mass market investments freely after a suitability check

D The firm may waive risk summaries where the client is self-certified

The correct answer is: B - The firm must provide a personalised risk warning including the client's name

Explanation: For high-risk investment promotions, clients must receive a personalised risk warning that includes the client's name. Promotions of non-mass market investments are banned to retail investors, and incentives to invest such as referral bonuses are prohibited.

When considering the rule on product information to be disclosed before providing services, to whom would the firm need to make these disclosures?

A Retail clients only

B Retail clients and professional clients

C All clients and counterparties

D Professional clients only

The correct answer is: A - Retail clients only

Explanation: The product disclosure rules (i.e. KIDs) would only apply to retail clients. 

What is the expectation on how the Bank of England deals with threats to financial stability?

A Through cross-party committees to discuss outcomes-based regulation

B Through reporting to HM Treasury who deals with fiscal policy

C Through delegating to the PRA to ensure firms are safe and sound

D Through financial and non-financial operations both at home and abroad

D Through financial and non-financial operations both at home and abroad

Under which of the following circumstances do the conduct of business rules not require a firm to enter into a client agreement?

A The client is habitually resident outside the UK

B The firm has established, by taking reasonable steps, that the client does not want to enter into such an agreement

C The client is habitually resident outside the UK and the firm has established, by taking reasonable steps, that the client does not want to enter into such an agreement

D The client enters into an insurance contract with the firm as principal

The correct answer is: D - The client enters into an insurance contract with the firm as principal

Explanation: The COBS are explicit in saying that MiFID business requires a client agreement for all customers, unless the firm acts as principal with an insurance contract.

Which regulatory body safeguards the members of defined benefit pension schemes?

A Financial Conduct Authority

B Prudential Regulation Authority

C Takeover Panel

D The Pensions Regulator

The correct answer is: D - The Pensions Regulator

Explanation: The Pensions Regulator was formed in 2005 to safeguard members of work based pension schemes. The FCA is responsible for the activities of advisers and providers of personal pension plans.

Where the regulator has seen fit to issue a section 56 prohibition order to an individual, which of the following observations is MOST correct? The prohibition order can relate to:

A a particular regulated activity or regulated activities generally. If the individual breaches the order, their authorisation is withdrawn under a civil action

B a particular regulated activity or regulated activities generally. If the individual breaches the order, they are guilty of a criminal offence and liable to a fine

C a particular regulated activity only. If the individual breaches the order, they are guilty of a civil offence and liable to a fine

D a particular regulated activity only. If the individual breaches the order, they are guilty of a criminal offence and liable to a fine and a two year jail sentence

The correct answer is: B - a particular regulated activity or regulated activities generally. If the individual breaches the order, they are guilty of a criminal offence and liable to a fine

Explanation: The prohibition order can relate to a particular regulated activity or regulated activities generally. If the individual breaches the order, they are guilty of a criminal offence and liable to a fine

A professional client wishes to complain to the Financial Ombudsman Service about a matter unrelated to the activity for which it is classified as a professional client. What is the most accurate position?

A It is automatically excluded because all professional clients are outside scope

B It may be eligible because classification does not always prevent eligibility for other activities

C It is eligible only if the firm agrees to submit the complaint under voluntary jurisdiction

D It is eligible only if the client opts down to retail client during the process

The correct answer is: B - It may be eligible because classification does not always prevent eligibility for other activities

Explanation: Professional clients and eligible counterparties are generally not eligible complainants, but they may be eligible if the complaint concerns an activity other than that for which they are classified as a professional client or eligible counterparty. This requires careful application of the eligibility rule rather than simple client categorisation.

Which of the following would be considered a general defence against the accusation of insider dealing as defined under the Criminal Justice Act?

A Preventing the volatility of a share one week after an IPO

B The trade was an execution only instruction

C No other party was involved in the trade

D Did not expect to gain a profit

The correct answer is: D - Did not expect to gain a profit

Explanation: Where no advantage was expected is a general defence. This includes not expecting to make a profit. Preventing volatility in shares after an IPO is referred to as stabilisation. This is a specific defence. The other two choices would create no defence to an accusation under the Criminal Justice Act.

Under the FCA Training and Competency rules, who must be supervised?

A All staff performing any activity

B All staff performing specified activities

C Staff not yet deemed competent performing specified activities

D Staff not yet deemed competent performing any activity

The correct answer is: B - All staff performing specified activities

Explanation:

Under the Training and Competency rules, firms must not allow an employee to carry on any of the specified activities without appropriate supervision. Firms are required to ensure that employees are appropriately supervised at all times.

The specified activities include the following, when conducted with or for retail clients:
- advising on/dealing in/managing investments
- acting as broker fund adviser
- acting as pension transfer specialist
- safeguarding assets or client money
- advising on regulated mortgages and home finance

Which of the following would be a regulated activity and therefore those who offer it would need to be authorised?

A A bank providing finance to another person and accepting an instrument acknowledging the debt

B A custodian, which is holding title documents to investments, dematerialised investments in its own name, and administers the collection of interest and or dividends

C An individual who achieves direct membership of an exchange and trades derivatives only for their own account

D A company that wishes to rationalise its capital structure and proceeds to buy back its own shares through the secondary market

The correct answer is: B - A custodian, which is holding title documents to investments, dematerialised investments in its own name, and administers the collection of interest and or dividends

Explanation: Safekeeping and administration of assets - i.e. acting as a custodian - is a regulated activity and needs to be authorised. There is no need to be authorised to conduct trades for your own account if you are the end user of those trades. A company issuing or buying back its own shares is has no need to be authorised. A bank providing finance to another person and accepting an instrument acknowledging the debt, for example a bank buying the debt instruments issued by a company, is also excluded.

According to the FCA's client money rules (CASS 7), which of the following is considered ‘client money'?

A Money held by a firm as collateral for a client's margin obligation

B Money owed by the client to the firm

C Money received by the firm from a client in relation to a proposed transaction

D Money invested by the firm on behalf of the client

The correct answer is: C - Money received by the firm from a client in relation to a proposed transaction

Explanation: According to the FCA's CASS 7 client money rules, client money is any money that a firm receives or holds on behalf of a client in relation to the provision of designated investment business. This includes money received from a client in relation to a transaction, such as payment for a financial product or service. The rules are designed to ensure that client money is properly protected and segregated from the firm's own funds.

In the event that a firm breaches the general prohibition under S19 of the Financial Services and Markets Act 2000, which of the following is TRUE?

A All of the firm's contracts are void

B Any agreements with the firm are unenforceable against the client

C Contracts are voidable at the discretion of the court

D Contracts are voidable at the discretion of the FCA

The correct answer is: B - Any agreements with the firm are unenforceable against the client

Explanation: In essence contracts are voidable at the discretion of the client.

Which of the following methods of delivery would be permissible for a financial promotion to be approved by an authorised person?

A An unsolicited call from a company

B A meeting or presentation

C A website

D Any interactive dialogue

The correct answer is: C - A website

Explanation: We have to assume the authorised firm is not producing the promotion and is being asked to approve the promotion of another, unauthorised, entity. In these situations only a non-real-time communication is permissible

Which of the following complies with COBS rule 4.8 on cold calls? Assume all calls are unsolicited by the client.

A A call to a prospective client who would envisage a call were they to become a client

B A call that relates to a retail investment product, such as an investment trust share

C A call to a retail client, where the investment being sold is a blue-chip stock

D A call to a retail client, relating to a controlled activity in readily realisable securities

The correct answer is: D - A call to a retail client, relating to a controlled activity in readily realisable securities

Explanation:

We can cold call:

• Existing clients who envisage a call - (not potential clients who would if they were)

• Regarding generally marketable packaged products (not retail investment products), which might include an investment trust saving scheme, but not direct investment in an investment trust shares.

• Regarding a controlled activity (e.g. advice) relating to deposits, readily realisable securities (other than warrants) or generally marketable packaged products (N.B. It is 'controlled activities' that can be provided, not the securities themselves, hence why C is incorrect).

Do not be overly concerned about the specific reference to the FCA Handbook. Generally, when these are made, the question can still be answered without the reference. For example, "Which of the following complies with COBS rule on cold calls? Assume all calls are unsolicited by the client."

Which of the following is the best description of those who qualify as an ‘eligible claimant’ for the Financial Services Compensation Scheme (FSCS) in the UK?

A UK citizens aged 18 and above only

B Retail clients who have lost money due to poor financial advice

C Both individual and small business customers of UK authorised firms

D All UK clients of authorised firms regardless of their financial status

The correct answer is: C - Both individual and small business customers of UK authorised firms

Explanation: The Financial Services Compensation Scheme (FSCS) is designed to provide compensation to eligible claimants if a regulated financial services firm fails or is unable to meet its financial obligations. ‘Eligible complainants’ include both individuals and small businesses, but does not include many larger clients, such as large companies, government or local authorities, etc.

Which of the following gives the FCA the power to prosecute insider dealing offences?

A Financial Services and Markets Act 2000

B Criminal Justice Act 1993

C The Proceeds of Crime Act 2002

D Companies Act 2006

The correct answer is: A - Financial Services and Markets Act 2000

Explanation: The offence is contained within the CJA 1993, however the ability of the FCA to prosecute comes from ss 401-402 FSMA 2000. 

When a firm communicates initially with a retail client, COBS requires it to provide 'appropriate information', which includes all of the following except:

A The firm's name and address

B A statement that it is FCA authorised or regulated

C The name and status of the person they can contact

D Who to refer complaints to if they cannot be resolved by the firm

The correct answer is: D - Who to refer complaints to if they cannot be resolved by the firm

Explanation: Reference to any complaints resolution body is not necessary.

Which one of the following would automatically be treated as a per-se professional client for MiFID business?

A A company with a balance sheet of €13m and a turnover of €30m

B A Trust with a balance sheet of €22m and own funds of €1.5m

C A company with own funds of €2.5m and a balance sheet of €12.5m

D An authorised firm with a balance sheet of €18m and own funds of €32m

The correct answer is: D - An authorised firm with a balance sheet of €18m and own funds of €32m

Explanation:

All authorised/regulated firms are treated as per se professional for both MiFID and Non-MiFID business.
The quantitative tests for a large undertaking (company) to be treated as a per se professional for MiFID business are:
(2 out of 3)
- Minimum balance sheet: €20m
- Minimum turn-over: €40m
- Minimum own funds: €2m.

With regard to the approval of a non-real time financial promotion, which of the following is true? A firm:

A Can use any third party to approve the financial promotion but it remains the responsibility of the firm

B Cannot use a third party to approve the financial promotion

C Can use any third party authorised to approve the financial promotion and the promotion remains the responsibility of the firm

D Can use any third party authorised to approve the financial promotion and the promotion becomes the responsibility of the third party

The correct answer is: D - Can use any third party authorised to approve the financial promotion and the promotion becomes the responsibility of the third party

Explanation: In approving a financial promotion, the approving firm takes on responsibility for the promotion.

Which one of these is not an excluded communication under the financial promotion rules?

A An unapproved financial promotion by an unauthorised firm

B A financial promotion that is exempt under the FPO

C A one-off financial promotion that is not a cold call

D A personal quotation

The correct answer is: A - An unapproved financial promotion by an unauthorised firm

Explanation: This is not an excluded communication, and would be considered a criminal offence, as it would in fact be a breach of s21 FSMA.

A technology firm sells its shares to the public via the internet without the need to produce a prospectus. Which of the following rules would govern this offer?

A AIM rules for growth companies

B COBS financial promotions rules

C FCA prospectus regulation rules

D Recognised investment exchange rules

The correct answer is: B - COBS financial promotions rules

Explanation: Normally a company offering new shares would be subject to prospectus regulation rules. However, this only applies if a prospectus is required. In this case, the COBS financial promotion rules will apply.

Where an investment bank is providing research to a fund manager a firm must apply a separately identifiable charge for this research. The FCA implemented changes under UK MiFID that fund managers do not have to pay if the research provided relates a company with a market capitalisation below:

A £50 million

B £100 million

C £200 million

D £270 million

The correct answer is: C - £200 million

Explanation: With respect to the provision of research under UK MiFID, the following new rules came into effect from 1 March 2022 under  the Inducement Rules for small or medium enterprises. Research on companies with a market capitalisation of below £200 million will be exempt – meaning that UK-based fund managers do not have to pay for this research. UK asset managers can continue to pay for this research if they so wish – due to operational limitations.

A firm is considering putting its own buy order on the same ticket as one of its client's buy orders. Which of the following is true before the firm does this?

A The firm has obtained consent from the client that this is acceptable

B The firm truly believes that by aggregating the order, the terms of the trade will be improved

C The firm has disclosed to the client that aggregation may operate to the disadvantage of clients

D A firm may aggregate orders if it wishes

The correct answer is: C - The firm has disclosed to the client that aggregation may operate to the disadvantage of clients

Explanation: A disclosure that aggregation may operate to the disadvantage clients is essential.

When a firm communicates initially with a retail client, COBS requires it to provide 'appropriate information', which includes all of the following except:

A The firm's name and address

B A statement that it is FCA authorised or regulated

C The name and status of the person they can contact

D Who to refer complaints to if they cannot be resolved by the firm

The correct answer is: D - Who to refer complaints to if they cannot be resolved by the firm

Explanation: Reference to any complaints resolution body is not necessary.

A UK branch of a third-country firm executes a transaction outside the UK. Which statement best describes its obligation to report that transaction to the Financial Conduct Authority?

A It must report in every case by the next business day

B It must report only if settlement occurs in the UK

C It does not have to report because there is no UK effect

D It does not have to report if the client is a UK professional client

The correct answer is: C - It does not have to report because there is no UK effect

Explanation: Transactions made by UK branches of third-country firms do not have to be reported to the FCA when executed outside the UK. However, exceptions may apply depending on whether an individual based in the UK branch was involved in execution, pricing or client engagement.

According to client asset rules (CASS), a firm may deposit client money in which of the following?

A A central bank

B A credit granting institution unauthorised by the BCD

C A non-EEA registered credit granting institution

D A money market instrument

The correct answer is: A - A central bank

Explanation: Under the Client Asset Rules, client money can be deposited in a central bank, a BCD credit institution (one that is authorised through the Banking Consolidation Directive), a qualifying money market fund or a bank authorised in a third country.

What is MOST likely to be covered by the FCA rules on financial promotions?

A One-off financial promotions

B Promotion to investment professionals

C Promotion aimed at private investors

D Promotion to a sophisticated investor

The correct answer is: C - Promotion aimed at private investors

Explanation: Retail clients (of which 'private investors' are an example) are protected by the financial promotion rules contained within the COBS. One-off financial promotions, promotions to investment professionals, and sophisticated investors are normally exempt.

Who performs the regulatory check of a mail-shot sent by an appointed representative?

A The compliance department of the appointing firm

B The marketing department of the appointing firm

C The overseer of the appointed representative who authorised the mail shot

D The Financial Conduct Authority

The correct answer is: A - The compliance department of the appointing firm

Explanation: The general non-real time financial promotion rules require each promotion to be signed off by compliance or another employee with sufficient knowledge to do so.

A firm provides portfolio management to a professional client and wishes to consume third-party research. Which payment method is permitted under the rules?

A Paying for the research directly from the firm's own resources

B Receiving the research free where the provider also supplies execution services

C Charging the cost through general commission with no separate identification

D Recovering the cost through de minimus hospitality agreed with the research provider

The correct answer is: A - Paying for the research directly from the firm's own resources

Explanation: In-scope firms may receive research only if they pay for it either directly from their own resources or from a research payment account. The other options do not meet the permitted payment methods set out in the research payment rules.

In which of the following situations would a firm need to perform appropriateness checks?

A For all services in all products provided to both retail and professional clients

B For non-advised services in all products provided to both retail and professional clients

C For non-advised services in complex products provided to both retail and professional clients

D For non-advised services in complex products provided to retail clients only

The correct answer is: C - For non-advised services in complex products provided to both retail and professional clients

Explanation: Appropriateness rules protect all customer (both retail and profession) in respect of non-advised services in complex products. Complex products are best thought of as derivatives and other contingent liability investments or highly illiquid or opaque investment.

A buy-side firm wants to bundle payment for third-party research with execution services. What do the rules permit?

A Bundling is prohibited because research must always be paid from the firm's own resources

B Bundling is permitted if the firm meets the relevant requirements on execution and research costs

C Bundling is permitted only where the research relates to small-cap equity issuers

D Bundling is prohibited unless the research provider is outside the firm's financial group

The correct answer is: B - Bundling is permitted if the firm meets the relevant requirements on execution and research costs

Explanation: The FCA introduced payment optionality allowing UK buy-side firms greater flexibility, including bundling payments for third-party research and execution services, provided relevant requirements around execution and research costs are met. The other options contradict or narrow the rule incorrectly.

Which ONE of the following needs to be included in a firm's order execution policy?

A Standard settlement instructions

B Costs and charges

C Prices

D Execution venues

The correct answer is: D - Execution venues

Explanation: The firm must include information about the different execution venues that it uses.
The firm must include details of the execution venues that consistently achieve the best possible results for their clients.

When providing which of the following activities must a retail client be assessed for appropriate levels of knowledge by the firm?

A An execution only share transaction

B Executing a deal on an equity warrant

C Recommending a foreign exchange spot transaction

D Arranging a transaction on a corporate bond

The correct answer is: B - Executing a deal on an equity warrant

Explanation: Appropriateness needs to be assessed and risks need to be highlighted for non-advised services in complex products. Non-advised services include execution only and arranging. Complex products include derivatives and warrants.

What must be disclosed in all written communication with a retail client?

I The name and business address of the firm making the communication

II The fair and prominent indication of any relevant risks

III Sufficient information that is clear to the average person likely to receive it

IV Information that is consistent with the information that is in the prospectus

A I and II

B II and III

C I, II, III

D I, II, III, IV

The correct answer is: C - I, II, III

Explanation:

Firms must ensure that where they provide information about designated investment business, or issue and/or approve a financial promotion which is likely to be received by a retail client, they adhere to certain rules in COBS. These rules state that the:

• firm’s name is included on the communication

• information is accurate and does not emphasise potential benefits without also giving fair and prominent indication of any relevant risks

• information is sufficient for, and presented in a way likely to be understood by, the average member of the group at whom it is directed or by whom it is likely to be received, and

• information does not disguise, diminish, or obscure important items, statements or warnings.

Under FCA rules on client categorisation, which of the following would ALWAYS be considered a per se professional client?

A Special purpose vehicle

B A public company

C A public body

D An overseas individual

The correct answer is: A - Special purpose vehicle

Explanation: Special purpose vehicles come under the definition of 'any other institutional investor'. The other choices would need to fulfil certain criteria before qualifying as a per se professional client.

If a client is unwilling to provide sufficient information for a firm to assess suitability in respect of a personal recommendation, what should the firm do next?

A Act for a professional client on a non-advised execution only basis as long as the client provides instruction for the trades

B Send a suspicious transaction and order report on the client to the FCA for market abuse without delay

C Make an appropriate recommendation or take a decision to trade for him provided the client has accepted a risk warning

D Make an appropriate personal recommendation to the customer on a take it or leave it basis

The correct answer is: A - Act for a professional client on a non-advised execution only basis as long as the client provides instruction for the trades

Explanation:

There is no requirement to report the client to the FCA.
If the firm does NOT obtain sufficient information, it must not make a personal recommendation to the client or take a decision to trade for him.
It would not be possible for a firm to make a personal recommendation as it does not have sufficient information.
The firm can still act for a professional client on an execution only basis.

This question would work in exactly the same way if it was for a retail client instead

The firm is holding money belonging to clients. When would it NOT need to comply with the client money rules? If the money is:

A Coins held for the value of their metal

B Held in a central bank

C Interest paid by a Financial Conduct Authority authorised firm

D Being held in a money market deposit account

The correct answer is: A - Coins held for the value of their metal

Explanation: A firm does not need to apply the client money rules to coins held for the value of their metal on behalf of clients.

When carrying out client orders the firm must ensure:

A That professional clients must be informed of any material difficulties in executing the order

B The order of execution is based on an ad-hoc policy

C The order must be recorded within one business day

D Comparable orders must be carried out sequentially except in specific conditions

The correct answer is: D - Comparable orders must be carried out sequentially except in specific conditions

Explanation: Retail clients must be informed of problems. The execution policy must not be generated 'on the fly'. Orders must be promptly and accurately recorded - there is no specific timeframe given.

What information must always be included in a firm's order execution policy for retail clients?

A The process the firm uses to specify relative importance of the execution factors

B The exchange that the transaction will definitely be traded on

C The price that the firm will get for the transaction

D The foreign exchange rate that will be used in the transaction

The correct answer is: A - The process the firm uses to specify relative importance of the execution factors

Explanation: The firm will include a list of POSSIBLE venues... not necessarily the specific exchange. It will not have to specify the price nor the FX rate in the execution policy details.

A firm has given a personal recommendation to a client. For which of the following would a suitability report NOT be required?

A A life policy for a retail client where a savings element is included

B A transfer of, or opt-out from, an occupational pension scheme

C Transactions in a regulated collective scheme for a professional client

D A withdrawal by a retail client from short-term annuity

The correct answer is: C - Transactions in a regulated collective scheme for a professional client

Explanation: Suitability reports are only required for retail clients in respect of investment products. There is an assumption that the members of occupational pension schemes are retail clients.

When considering best execution criteria for a retail client, which of the following would NOT be considered when obtaining the best possible result?

A The characteristics of the order

B The characteristics of the investment

C The costs incurred by the client payable to the firm

D The costs incurred by the client payable to the execution venue

The correct answer is: C - The costs incurred by the client payable to the firm

Explanation: The characteristics of the client, the order, the investment and the execution venue will all be taken into consideration. In addition for a retail client, costs directly relating to execution - including execution venue fees and clearing and settlement fees - must also be considered.
Costs payable to the firm that the client is dealing with are not to be included in this assessment.

If the FCA is asked to pursue 'redress' it will:

A Consider the different methods of redress available to it

B Impose a maximum penalty of £100,000

C Refer the case to the FSCS

D Follow the thresholds set out in the Claims Level Guidance

The correct answer is: A - Consider the different methods of redress available to it

Explanation: A is the best possible answer as the FCA could seek a restitution order or require an investor to contact the FSCS/FOS.

According to the Regulated Activities Order 2001, which of the following are specified investments?

A Commercial property, including buy-to-let investments

B Gold bullion

C Insurance covering vehicle breakdown

D Units in a collective investment scheme

The correct answer is: D - Units in a collective investment scheme

Explanation: Tangible assets and car breakdown insurance are not specified investments.

A firm is deciding which oversight body is directly accountable to the UK Government through HM Treasury for how it carries out its functions. Which body fits this description?

A The Prudential Regulation Authority

B The Financial Policy Committee

C The Bank of England

D The Financial Conduct Authority

The correct answer is: D - The Financial Conduct Authority

Explanation: The Financial Conduct Authority is accountable to the UK Government via HM Treasury for how it carries out its functions. By contrast, the Prudential Regulation Authority is answerable to Parliament via the House of Commons Treasury Committee through the Bank of England, while the Financial Policy Committee is a Bank of England committee.

Which of the following is not a sanction available to the FCA in relation to a breach of the conduct of business rules?

A Public censure

B Fine

C Prohibition order

D Disqualification of directors

The correct answer is: D - Disqualification of directors

Explanation: Directors may only be disqualified through a court order.

Which of the following statements are correct?

I The FCA is responsible for ensuring consumers get a fair deal

II The FCA is responsible for stability of the markets

III The PRA is responsible for ensuring consumers get a fair deal

IV The PRA is responsible for stability of the markets

A I and III

B I and IV

C II and III

D II and IV

The correct answer is: B - I and IV

Explanation: The FCA is responsible for ensuring that financial markets work well so that consumers get a fair deal, whilst the focus of the PRA is on stability - the safety and soundness of deposit taking firms, insurers and systematically important investment firms.

According to the provisions under Senior Managers Regime, the responsibilities of directors must be:

A Clearly and appropriately apportioned

B Reviewed by external auditors on an annual basis

C Recorded and the records kept for twelve months from when the responsibilities change

D Clear, fair and not misleading

The correct answer is: A - Clearly and appropriately apportioned

Explanation: As part of the application process, firms need to include a statement of responsibilities setting out the aspects of the firm’s affairs the person will be responsible for managing when performing the function. The regulators expect that each responsibility will be allocated to a single senior manager. Where a responsibility is shared between more than one senior manager regulators expect the division of responsibility and accountability for that responsibility to be clearly articulated.

S56 of the Financial Services and Markets Act 2000 allows the FCA to prohibit individuals from carrying out specified functions in relation to regulated activities, i.e. a 'prohibition order'. What penalty can the FCA impose on an individual in breach of S56 FSMA 2000?

A 6 months in jail

B 2 years in jail

C A fine

D A jail term the regulator considers appropriate

The correct answer is: C - A fine

Explanation: S56 FSMA allows the FCA and/or the PRA to prohibit individuals from carrying out specified functions in relation to regulated activities, i.e. a 'prohibition order'. A prohibition order may be issued to anyone - whether they are approved or not. To issue a prohibition order, the regulator must first issue a warning notice followed by a decision notice. The individual may appeal to the Tax and Chancery Chamber of the Upper Tribunal. A breach of a prohibition order is a criminal matter, but is not an imprisonable offence.

S71 of the Financial Services and Markets Act 2000 allows private persons to claim damages for losses caused by which of the following?

A An authorised firm

B Any firm, whether authorised or not

C Authorised firms and approved individuals

D Approved individuals

The correct answer is: A - An authorised firm

Explanation: Under s71, a private person can sue an authorised firm for loss resulting from the employment of a prohibited individual or allowing an unapproved person to undertake a controlled function.

When the FCA grants an exchange with recognised status, it:

A Confers authorisation to do investment business

B Requires cooperation from the exchange with overseas regulators

C Requires that the exchange must be fit and proper

D Implies that all transactions will be settled in a timely manner

The correct answer is: C - Requires that the exchange must be fit and proper

Explanation:

In order to be recognised by the FCA, these exchanges and clearing houses need to be fit and proper for their purpose. Once recognised, the exchanges are referred to as recognised investment exchanges (RIEs), and the clearing houses are referred to as recognised clearing houses (RCHs). RIEs and RCHs are exempt persons in that they do not need to seek authorisation from the FCA to carry out regulated activities – they are, instead, recognised.

Which ONE of the following is a statutory objective of the FCA?

A Ensuring the UK financial markets are competitive worldwide

B Providing services that allow a firm to manage and control their risks

C Implementing and monitoring financial legislation

D Securing an appropriate degree of protection for consumers

The correct answer is: D - Securing an appropriate degree of protection for consumers

Explanation: This is one of the statutory objectives of the FCA.

Where a firm operates under the Senior Manager and Certification Regime, which ONE of the following roles always requires approval from the Regulator? Somebody:

A Recruiting staff

B Working in compliance

C Acting as a non-executive director

D With staff supervisory responsibilities

The correct answer is: C - Acting as a non-executive director

Explanation: All four could potentially require the regulator's approval as a Senior Manager Function, but only non-execs would always require such status.

The FCA guidance on electronic communication with a client states that a firm should do all of the following, except:

A Be able to demonstrate that the client wishes to communicate using this type of media

B If entering an agreement, make it clear to the client that a contractual relationship has legal consequences

C Have in place arrangements to ensure secure transmission and receipt of the communication

D Be able to demonstrate that it made it clear to the client that instructions communicated in this manner may not be acted upon immediately

The correct answer is: D - Be able to demonstrate that it made it clear to the client that instructions communicated in this manner may not be acted upon immediately

Explanation: The firm should also be able to verify the authenticity and integrity of the communication, together with the date and time sent and received.

To whom do the PRA's rule-making powers extend?

A Only PRA-authorised persons

B All authorised persons

C All regulated activities

D All regulated activities and also activities that are not regulated

The correct answer is: A - Only PRA-authorised persons

Explanation: Part 9A of the the Financial Services and Markets Act 2000 empowers the FCA to make rules that are legally binding on authorised firms concerning regulated activity and also activity that is not regulated. The PRA has similar rule-making powers, however the powers only extend to PRA-authorised persons.

Section 168 of the Financial Services and Markets Act 2000 permits the FCA to appoint competent persons to carry out investigations on its behalf if:

A An offence has been committed

B Too many complaints have been received

C The firm is being liquidated

D The Ombudsman insists that this is the case

The correct answer is: A - An offence has been committed

Explanation: S168 permits the FCA to do this if an offence has been committed. This could be for a wide range of offences including, but not exclusively, market abuse.

Under the individual accountability regime, which of the following is a conduct rule applying to certified persons?

A Act with due skill, care and diligence

B Combat financial crime

C Deliver the best possible result to clients

D Communicate information in a way which is clear, fair and not misleading

The correct answer is: A - Act with due skill, care and diligence

Explanation: This is Conduct Rule 2.

Which reform is identified as one of the aims of the Economic Crime and Corporate Transparency Act?

A Introducing a new retail conduct regime for insurance intermediaries

B Creating a new authorisation gateway for appointed representatives

C Reforming Companies House to prevent fraudulent companies being created

D Establishing a new compensation scheme for victims of market abuse

The correct answer is: C - Reforming Companies House to prevent fraudulent companies being created

Explanation: The Act is aimed at tackling economic crime and improving transparency over corporate entities, including reforms to Companies House to prevent the creation of, and shut down, fraudulent companies. The other options are not listed reforms under the Act.

Which of the following would not be considered a suspicious transaction under the Money Laundering Regulations?

A Customer services are asked to take payment from a different account than the account history shows is usual

B Payment is from a debit card account with a different card holder name

C The customer initiates several small transactions totalling less than €7,500; it is an unusual size for the customer's transaction history

D The customer is unable to prove his identity through the usual means, but is willing to offer other forms of identification

The correct answer is: D - The customer is unable to prove his identity through the usual means, but is willing to offer other forms of identification

Explanation: Any unusual behaviour exhibited by a customer that does not conform to their profile, characteristics or history may be deemed a suspicious transaction.

Market abuse is different from the criminal offence of insider dealing in all of the following ways except:

A Market abuse is based on the civil burden of proof, i.e. the balance of probabilities

B It should be easier for the FCA to demonstrate abusive behaviour

C It should be easier for the FCA to impose a custodial sentence

D It can apply to commodities as well as commodity derivatives

The correct answer is: C - It should be easier for the FCA to impose a custodial sentence

Explanation: The burden of proof is less difficult to establish than beyond a reasonable doubt and hence it should be easier to demonstrate abusive behaviour. However, only fines can be imposed. Market abuse is applicable across the board.

Under the Money Laundering Regulations a firm must ensure that they have appropriate internal controls. One of these is the appointment of a money laundering reporting officer. Which of the following is not true of the MLRO?

A They fulfil a senior manager function within the firm

B They are the internal and external point of contact for matters arising in relation to money laundering

C They are responsible for taking reasonable steps to establish and maintain adequate arrangements for awareness and training

D They are a member of the National Crime Agency

The correct answer is: D - They are a member of the National Crime Agency

Explanation: The MLRO is an employee of the firm, and although they pass on suspicions to NCA they are not members of this agency.

Which of the following is NOT true of insider dealing as defined under the Criminal Justice Act?

A It only covers UK regulated markets, UK MTFs and UK OTFs

B Gilts and other government bonds are included in the law on insider dealing

C The Financial Conduct Authority is responsible for prosecuting offences

D A defence exists if the individual would have acted in the same way had they not had the information

The correct answer is: A - It only covers UK regulated markets, UK MTFs and UK OTFs

Explanation: The legislation applies to MiFID instruments traded on UK/EEA/Gibraltar regulated markets, MTFs and OTFs, together with the NASDAQ, SIX and NYSE.

Which of the following is NOT one of the specified types of market abuse?

A Insider dealing

B Manipulating transactions

C Processing proceeds of crime

D Dissemination

The correct answer is: C - Processing proceeds of crime

Explanation: Processing proceeds of crime is the offence of money laundering.

Which of the following is least likely to supply information as an insider?

A A secretary

B A technician

C A director

D A small shareholder

The correct answer is: D - A small shareholder

Explanation: All employees may be guilty of insider dealing. Major shareholders may also have access to inside, price-sensitive information, but small shareholders are unlikely to enjoy such access.

Market abuse involving manipulating devices would cover:

A Life insurance

B Private company shares

C Unsecured personal loans

D Shares in an investment trust

The correct answer is: D - Shares in an investment trust

ExplanationI: nvestment trust shares are secondary market traded and are therefore covered.

he FCA will consult which of the following sources of information in relation to money laundering offences?

A The Criminal Justice Act

B The Joint Money Laundering Steering Group

C The FCA Handbook

D The Financial Services and Markets Tribunal

The correct answer is: B - The Joint Money Laundering Steering Group

Explanation: Guidance, produced by the JMLSG, is provided to firms on how they should interpret and implement the anti-money laundering provisions. They are not mandatory but do highlight industry best practice. They are also approved by the Treasury, which means that if a firm can show that it adhered to them, the courts will take this into account as evidence of compliance with the legislation.

Which of the following points is true in relations to the Proceeds of Crime Act 2002?

A All businesses must identify clients

B It is secondary legislation

C Money Laundering covers property related to all crimes

D JMLSG takes precedence over POCA 02

The correct answer is: C - Money Laundering covers property related to all crimes

Explanation: POCA 2002 is widely drafted. It specifies that money laundering relates to criminal property – that is, any benefit (money or otherwise) that has arisen from criminal conduct.

Which statement correctly describes accepted market practices under UK Market Abuse Regulation in the UK?

A They are established by trading venues for each instrument without regulatory approval

B They are established by issuers for liquid securities with regular institutional trading

C They are established by investment firms where clients have given prior written consent

D They are established by the Financial Conduct Authority, although none currently exist

The correct answer is: D - They are established by the Financial Conduct Authority, although none currently exist

Explanation: The source states that the FCA is responsible for assessing and establishing accepted market practices in the UK market, but currently no accepted market practices have been established. The other options assign that role to bodies not identified in the source.

Which of the following would not be considered market abuse?

A An employee of a firm trades on price-sensitive information that has been disclosed through an RIS

B A firm sells a large holding of bonds, a transaction that significantly reduces the market price, and then repurchases their holding at the lower price

C A firm unintentionally submits incorrect trade details, which leads to a significant move in the market

D A firm controls a large percentage of a company's shares and takes out a large up-bet on those shares with a spread-betting firm

The correct answer is: A - An employee of a firm trades on price-sensitive information that has been disclosed through an RIS

Explanation: Information disclosed through an RIS (regulatory information service), such as the LSE's Regulatory News Service, is considered to be public information. For B, the firm has engaged in a wash trade and D is an example of an abusive squeeze, both of which is a breach of the Market Abuse Directive. Market abuse does not need to prove intent, so C may also be a breach under the Market Abuse

With regards to money laundering, the FCA will check whether a firm is in breach of the rules on systems and controls with reference to the firm's adherence to:

A The conduct of business rules

B NCA reporting rules

C JMLSG guidance

D The Proceeds of Crime Act

The correct answer is: C - JMLSG guidance

Explanation: The Joint Money Laundering Steering Group provides guidance of how to implement strategies to mitigate the risks of receiving and processing money for the purpose of laundering. The FCA set out their own requirements and standards for authorised firms in their sourcebook covering senior management arrangements, systems and controls (SYSC). When considering a breach of these requirements the FCA will make reference to whether the firm has followed the JMLSG guidance.

Which of the following is an inter-governmental body which sets international standards that aim to prevent money laundering and terrorist financing activities and the harm they cause to society?

A Federation of Regulators Against Criminal Activities

B Financial Action Task Force

C European Securities Markets Authority

D International Anti-Money Laundering Commission

The correct answer is: B - Financial Action Task Force

Explanation: The Financial Action Task Force (FATF) was established in 1989 to initially examine and develop measures to combat money laundering. The FATF is the global money laundering and terrorist financing watchdog. It is an inter-governmental body which sets international standards that aim to prevent these illegal activities and the harm they cause to society.

At which stages of the money laundering process are investment firms generally most vulnerable to being involved in money laundering activities?

A Placement and layering

B Layering and integration

C Placement and integration

D None of these stages

The correct answer is: B - Layering and integration

Explanation: As a general rule, investment firms are most vulnerable to being involved in money laundering activities during the layering and integration stages of money laundering. Note: banks and building societies are most vulnerable at the placement stage.