Chapter 5 Qs

Question 1

• Of the following, which are FCA operation objectives
  i) Protect consumers
  ii) Reduce financial crime
  iii) Promote competition
  iv) Protect financial markets

A) I and ii
B) I,iii and iv
C) I,ii and iii
D) I,ii and iv

Answer 1

B) To protect consumers, to protect financial markets and to promote competition

These are the FCAs THREE OPERATIONAL OBJECTIVES

Question 2

If a personal applies to the regulator for direct authorisation, this is called applying for:

A) Part 3 permission
B) Part 4A permission
C) Part 6A permission
D) Part 2 permission

Answer 2

B) Part 4A permission

If a person or firm wishes to carry out regulated activities, they must apply to the relevant regulator for a part 4A permission for authorisation.

Question 3

• Under the FCAs three-pillar supervision model, the majority of firms are classified as:

A) Fixed portfolio firms
B) Flexible portfolio firms
C) Category 1 firms
D) Category 4 firms

Answer 3

B) Flexible portfolio firms

Under its supervisory regulation, the FCA categorises firms as either ‘flexible portfolio firms’ or fixed portfolio firms. Flexible portfolio firms make up the majority of firms within the industry and are supervised on a market based approach. Fixed portfolio firms tend to be larger firms who have a significant impact on the financial system. Therefore a more proactive approach to supervision is required.

Question 4

• The FCA has a power of intervention which includes banning products. It will only be allowed to use this power in relation to which of the following?

A) High net worth clients
B) Corporate clients
C) Retail customers
D) Institutional customers

Answer 4

C) Retail customers

The financial services act 2012 gave the FCA powers of early intervention, which includes banning products. This intervention only applies to retail customers. Other examples of interventions include withdrawal of promotional material that is considered misleading, publicising enforcement actions and gathering market intelligence.

Question 5

• How is capital adequacy assessed?

A) Risk identification and management processes
B) Monitoring the value of assets
C) Monitoring the firms liabilities
D) Monitoring the proportion of liquid assets over capital

Answer 5

A) Risk identification and management processes

A capital adequacy test assesses if a company has enough capital, as required by its regulator. This is tested via a risk identification and management process. The capital adequacy test is not just about monitoring capital and assets, although this will be part of the process.

Question 6

• Which of the following can the FCA impose if an insurance company’s financial strength falls below the minimum standard?

A) They would stop them accepting new business
B) They could amend their capital adequacy tests
C) They could request get re-perform their capital adequacy test
D) They could guarantee the life offices financial strength

Answer 6

A) They would stop them accepting new business

If a company’s financial strength fell below the regulatory standard, the FCA could stop them accepting new business

Question 7

Which of the following are threshold conditions within the FCA handbook?

I) Location of offices
II) Legal Status
III) Effective supervision
IV) Business model

A) iii and iv
B) I,iii and iv
C) I and ii
D) ii and iv

Answer 7

B) i,iii and iv (location of offices, effective supervision and business model)

All regulated firms must satisfy the ‘threshold conditions’ in order to retain their part 4A permission (required to carry out regulated activities).

The additional two threshold conditions are appropriate resources and suitability.

Legal status is not a threshold condition.

Question 8

• Within the FCA high level standards, regulated firms must comply with ‘common platform requirements’. What does this refer to?

A) The systems and controls a firm should have that are appropriate to its business
B) The use of mainstream platform and proprietary systems
C) The use of FCA technology e.g GABRIEL
D) The level and type of management information required

Answer 8

A) The systems and controls a firm should have that are appropriate to its business

One of the FCA high level standards is ‘Systems and Controls’ (SYSC 3). SYSC 3 lists the systems and controls (appropriate to their business) which a firm should establish and maintain.

Each of these is further details in the common platform requirements SYSC 4 to 10A.

Question 9

Which of the following would you expect to find in the revised remuneration code within the FCA handbook?

A) Reduce short term bonuses and base bonuses on longer term performance
B) Reward risk taking and outperformance to secure good quality staff
C) Ban overtime payments for staff who have a material impact
D) Avoid over reliance on high salaries, instead promote performance related pay

Answer 9

A) Reduce short term bonuses and base bonuses on longer term performance

The other answers are false

Question 10

*Under which of the following would it not be required to disclose your status?

A) E-mail
B) Fax
C) Text message
D) Letter

Answer 10

C) Text message

All authorised firms must disclose their regulatory status to clients. This must be included on all letters or electronic relevant such as email and fax. Best practises encourage this on business cards and compliment slips also, but it is not required on text messages.

Question 11

What are the rules regarding a firm taking out insurance indemnity itself for FCA penalties or enforcement costs>

A) A firm cannot indemnify itself against any FCA penalties, costs or enforcement action
B) A firm can only indemnify against a financial penalty imposed by the FCA
C) A firm cannot indemnify itself against an FCA penalty, but it can against the cost of defending enforcement action or costs it may be ordered to pay
D) A firm can only indemnify itself against any FCA costs it may be ordered to pay

Answer 11

C) A firm cannot indemnify itself against an FCA penalty, but it can against the cost of defending enforcement action or costs it may be ordered to pay

Question 12

How does the FCA determine the level of periodic fee to charge an authorised firm?

A) The periodic fees are based on the length of time the firm has been authorised
B) Periodic fees are a flat annual subscription
C) Periodic fees are based on the product areas a firm has permission to advise on and the income the firm receives under each product area
D) Periodic fees are based on the level of risk attributed to each firm

Answer 12

C) Periodic fees are based on the product areas a firm has permission to advise on and the income the firm receives under each product area

The periodic fee is the annual fee that is payable to the FCA by regulated firms. The periodic fee is not a flat fee or an annual subscription but based on amount and type of business.

Note: it is calculated: periodic fee = ‘tariff base’ (Based on the income the firm receives under each of its product areas) applied to the ‘fee-block tariff rate’ (Based on the product areas for which a firm has permission to advise on)’

Question 13

*How are IFA businesses affected by the FCAs ‘Capital adequacy rule’

A) Most IFA businesses are exempt from the ‘‘Capital Requirements Directive’’, but would be subject to a variety of financial tests
B) Most IFA firms are required to undertake detailed risk assessments and stress testing scenarios
C) Most IFA businesses are completely unaffected by any capital adequacy testing
D) An IFA is merely required to document all assets and liabilities

Answer 13

A) Most IFA businesses are exempt from the ‘‘Capital Requirements Directive’’, but would be subject to a variety of financial tests

The FCAs capital adequacy rules, that apply to most financial advisers, are a wide variety of financial tests dependent on their size and type of business. Most adviser firms are exempt from the Capital Requirements Directive, which requires detailed risk assessments and stress tests scenarios.

Question 14

What prompted the regulatory overhaul of liquidity requirements expected of firms in late 2009?

A) Developments in money market instruments
B) The 2007 credit crisis
C) The decreasing number of applications for authorisation
D) Reduced rates of return on asset classes

Answer 14

B) The 2007 credit crisis

The credit crisis prompted the regulatory overhaul of liquidity requirements for firms to ensure they can withstand a market crisis

Question 15

*Who does COBS apply to:

A) Friendly societies and life insurers only
B) Banks and building societies, Friendly societies and Insurers
C) Regulated life, pension and investment businesses, including bank and building societies in relation to their investment activities
D) Home finance and general insurance firms

Answer 15

C) Regulated life, pension and investment businesses, including bank and building societies in relation to their investment activities

COBS is the FCAs Conduct of Business Sourcebook which details the day-to-day conduct rules that apply to regulated life, pension and investment businesses, including bank and building societies business, hence the answer is C

Question 16

*Under COBS 2, providers can run training for intermediaries but what is the position regarding paying expenses?

A) They cannot pay expenses
B) They can pay reasonable expenses
C) They can pay up to £250 per annum
D) They can cover the cost of refreshments

Answer 16

B) They can pay reasonable expenses

As long as the training is open for all intermediaries, they can pay reasonable expenses (travel/accommodation)

Question 17

*Under FCA rules, the cooling off period for customers entering a sale and rent back scheme is:

A) 7 days
B) 14 days
C) 21 days
D) 30 days

Answer 17

B) 14 days

Question 18

• What is a ‘demand and needs statement’

A) Documentation used to allow the client to prioritise their requirements
B) The IFAs requirement in terms of charges for a product or time
C) A statement detailing the clients needs with the reasons for recommendations
D) A list of requirements for new clients with the services the client can expect

Answer 18

C) A statement detailing the clients needs with the reasons for recommendations

The IFA would have provided charges to the client on the initial disclosure document. A is relative to the question.

Question 19

Which of the following does NOT have any cancellation rights?

A) A 12 month ASU policy
B) A renewal policy for building and contents insurance
C) A term policy issued to an occupational pension scheme trustee
D) A 2 week travel insurance policy

Answer 19

D) A 2 week travel insurance policy

Cancellation notices are not required for short term contracts (less than one month).

Life policies for less than 6 months do not require having a cancellation notice, but most other policies under ICOBS do (including building and contents insurance & ASU policies).

Question 20

• Who carries the compliance responsibility for an appointed representative?

A) The individual carries their own responsibility
B) The FCA
C) The firms principle
D) The introducer

Answer 20

C) The firms principle

The compliance responsibility for an appointed representative lies with the firms principle

Question 21

• Under the Mortgage Credit Directive (MCD), what is the name given to the product disclosure document firms had to start issuing by 21st March 2019?

A) Key facts document
B) Key features illustration
C) Key investor information document
D) European Standardised Information Sheet

Answer 21

D) European Standardised Information Sheet

The MCD is the EUs conduct rules for Mortgage firms. The FCA have now implemented these rules and, as a result, since 21st March 2019, firms must issue a European Standardised Information Sheet, which has replaced the key features illustration.

Question 22

*If an adviser explains the general advantages and disadvantages of borrowing verses renting to a client, would this constitute advice?

A) Not if the adviser is presenting accurate and neutral facts without opinion
B) Not if the advisers opinion that borrowing is more suitable has been disregarded
C) Only where the client didn’t understand this information beforehand
D) Only where the adviser has used scripted questions

Answer 22

A) Not if the adviser is presenting accurate and neutral facts without opinion

Giving an opinion on the merits and suitability of a particular product and its suitability to the clients is deemed to be giving advice.

Question 23

*How do sale and rent schemes work?

A) The client sells their home and then obtains an agreement to remain there under an assured short hold tenancy for a set period
B) It is a scheme designed to match clients who can’t sell with potential new rental tenants
C) The scheme allows clients to rent their houses and raise a mortgage to purchase a new home
D) It is a scheme designed fo purchases with insufficient deposit, they can rent for a set period before purchasing

Answer 23

A) The client sells their home and then obtains an agreement to remain there under an assured short hold tenancy for a set period

Sells for (usually for less than market value), but then obtains an agreement to remain as a tenant for a set period (no less than 5 years, as introduced in 2010). There is no agreement to purchase or re-purchase the house in the future.

Question 24

• Who is subject to the client money rules?

A) Life offices with more than 20,000 customers
B) Intermediary firms who receive or hold money on behalf of clients
C) Friendly societies and life offices only
D) Banks and building societies

Answer 24

B) Intermediary firms who receive or hold money on behalf of clients

Question 25

• How often does the FCA expect firms to reconcile client monies?

A) daily
B) weekly
C) monthly
D) annually

Answer 25

A) Daily

Question 26

If the FCA has suspicions about a firm, can an enforcement officer enter premises and remove original documents from a firm without permission?

A) Only if the enforcement officer has a warrant to enter premises and take documents by force if necessary
B) The enforcement officer can only take copies of any documents
C) The enforcement officer needs a warrant to take documents and would need permission from the firm
D) The enforcement officer can access documents at the firms office but cannot take them away

Answer 26

A) Only if the enforcement officer has a warrant to enter premises and take documents by force if necessary

Question 27

*What is the FCA complaints commissioners role?

A) To determine whether to make any ex-gratia payments to FCA claimants
B) To investigate suspicious activity by regulated firms
C) To investigate complaints made against the FCA
D) To listen to appeals against the FCA disciplinary decisions

Answer 27

C) To investigate complaints made against the FCA

Question 28

*How did the Consumer Credit Act 2006 change the definition of an individual?

A) To apply to UK residents and other members of the EU
B) To include small partnerships with 5 or less partners
C) To include sole traders, small partnerships and unincorporated associations
D) To exclude those that lives abroad for more than 5 years

Answer 28

C) To include sole traders, small partnerships (3 or less traders) and unincorporated associations

Question 29

*How do the FCA and the Competitions and Markets Authority (CMA) work together in considering fairness of standard terms in financial services contracts?

A) The FCA refers all matters to the CMA
B) The CMA refers all unfair terms within the financial services sector to the FCA
C) The FCA considers fairness within authorised firms and the CMA considers the fairness of unregulated activities
D) The CMA investigates unfair terms and the FCA rectifies them

Answer 29

C) The FCA considers fairness within authorised firms and the CMA considers the fairness of unregulated activities

The FCA (fairness of most regulated financial services contracts). The FCA can challenge unfair terms, where as the CMA enforces the consumer rights act 2015, and therefore has the power to tackle unfair terms and takes action.

Question 30

*A firm categorised by the FCA as a ‘fixed portfolio’ firm will be subject to a programme of firm or group-specific supervision under..

A) Pillar 1
B) Pillar 2
C) Pillar 3
D) Pillar 4

Answer 30

A) Pillar 1

Fixed portfolios are those requiring the highest level of supervision and therefore are under the pillar 1 category, which means they will be proactively supervised by the FCA.

Question 31

*What are the three ways a mortgage Intermediary works to bring customers and lenders together?

A) Execution only, best execution or advised sale
B) Through estate agents, through solicitors or through financial advisers
C) Paper based applications, interest/web based or via the telephone
D) whole market, limited numbers of lenders or single lender

Answer 31

D) whole market, limited numbers of lenders or single lender

Mortgage adviser must make clear which way they use, similar to an adviser.

Question 32

*Within the customer credit act 1974, what obligations does a credit reference agency have?

A) to disclose information held about the consumer and to correct it if inaccurate
B) Make all relevant information available to interest parties free of charge
C) To provide consumers with a copy of their details evert time the information held changes

Answer 32

A) to disclose information held about the consumer and to correct it if inaccurate

A credit reference agency holds information about a person’s credit history. Under the Consumer Credit Act 1974, these agencies must disclose the information held about a consumer and correct it if it is inaccurate.

Question 33

*The FCAs strategic objective is to

A) Ensure that the relevant markets function well
B) Increase consumer protection for financial products and investments
C) Reduce financial crime
D) Work with the bank of England to increase financial stability

Answer 33

A) Ensure that the relevant markets function well (5:1)

Question 34

• What is the main purpose of the stress-testing which the FCA requires of certain authorised firms?

A) To asses firms ability to meet capital and liquidity levels during challenging economic circumstances
B) To asses the impact on investors returns when stock markets are subject to volatility
C) To measure firms levels of customer service when business volumes are high
D) To test firms disaster recovery procedures in the event of loss of data

Answer 34

A) To asses firms ability to meet capital and liquidity levels during challenging economic circumstances (5:1)

Question 35

*In relation to breaches of the current money laundering regulations, the FCA has the power to act against?

A) Any firms, but not individuals, regardless of whether they are on the FCA register
B) Any firms or individuals regardless of whether they are on the FCA register
C) Only firms on the FCA register
D) Only firms or individuals on the FCA register

Answer 35

B) Any firms or individuals regardless of whether they are on the FCA register (5:1)

Question 36

What is the maximum term of imprisonment which may be imposed, if any, on an individual who is found guilty of insider dealing?

A) One year
B) Five years
C) Seven Years
D) Unlimited

Answer 36

C) Seven Years

Question 37

Following a breach of their rules, the FCA has issued a public statement about a firms behaviour. The offence is most likely have been
A) Market manipulation
B) Insider dealing
C) Money laundering
D) A significant failure in financial reporting

Answer 37

D) A significant failure in financial reporting (5:1)

Question 38

A financial adviser is suspected of financial mis-conduct in relation to her regulated activities. How may the FCA deal with this matter?

A) It cannot deal with the matter directly and must instruct the Crown Prosecution Service
B) It may deal with the matter using Civil proceedings only
C) It may deal with the matter using criminal proceedings only
D) It may deal with the matter using civil or criminal proceedings

Answer 38

D) It may deal with the matter using civil or criminal proceedings (5:1)

Question 39

The objective of the Money Advice Service is to implement the National Strategy for Financial Capability by primarily providing information to

A) Any individual seeking information on financial products
B) Individuals who do not have their own financial adviser
C) Those on low income
D) Younger people who do not hold any financial products

Answer 39

A) Any individual seeking information on financial products (5:2)

Question 40

To assist in delivering the FCAs national strategy for financial capability, the main role of the Money Advice Service is to provide customers with

A) Generic information on relevant product types, excluding regular investments
B) Generic information on relevant product types, including regulated investments
C) Personalised recommendations on products of a limited number of providers, excluding regulated investments
D) Personalised recommendations on products of a limited number of providers, including regulated investments

Answer 40

B) Generic information on relevant product types, including regulated investments (5:2)

Question 41

How is an authorised firm affected by the FCAs fair treatment of customers requirements?

A) They must be evidenced in all areas of the firms
B) They only apply to customer facing staff
C) They only apply to senior management
D) They only apply to investment-related business

Answer 41

A) They must be evidenced in all areas of the firms

Question 42

*In the prudential standards section of the combined handbook of the FCA handbook and the PRA, which types of firms are covered by the MIPRU requirements?

A) All authorised firms
B) Discretionary fund managers only
C) Administrators, home finance providers, intermediaries and general insurance intermediaries only
D) Investment management firms only

Answer 42

C) Administrators, home finance providers, intermediaries and general insurance intermediaries only (5:2)

Question 43

• The rules in section 12 of the Prudential Sourcebook for banks, building societies and investment firms (FIBRU), are primarily aimed at dealing with the issues of?

A) Liquidity and the management of liquidity issues
B) Money laundering responsibilities
C) Professional indemnity insurance requirements
D) Training and competence requirements for approved persons

Answer 43

C) Professional indemnity insurance requirements (5:2)

Question 44

Gavin, a financial adviser, has sold a payment protection insurance contract to his clients. In respect of this sale, he should be aware that the sale is

A) Not regulated
B) Regulated by the provisions of the Insurance: Conduct of Business Sourcebook (ICOBS)
C) Regulated by the provisions of the Mortgages and Home Finance : Conduct of Business Sourcebook (MCOB)
D) Regulated by the provisions of the Financial Services Act 2012

Answer 44

B) Regulated by the provisions of the Insurance: Conduct of Business Sourcebook (ICOBS) (5:2)

Question 45

*A financial adviser may transact business without prior existence of a client agreement when

A) The client is a retail client
B) A stakeholder pension is being effected
C) Risk warnings are not required
D) The business is being transacted via telephone

Answer 45

D) The business is being transacted via telephone (5:2)

Question 46

*The clients best interests rule applies to

A) all types of client except those transacting execution-only business
B) Retail clients only
C) Execution clients only
D) Eligible counterparties only

Answer 46

A) all types of client except those transacting execution-only business (5:2)

Question 47

An indépendant financial adviser is comparing free asset ratios. This is most likely to be because she is

A) Considering her with profits investment
B) Completing her six-monthly FCA return
C) Compiling complaints data
D) Seeking to comply with data protection requirements

Answer 47

A) Considering her with profits investment (5:2)

Question 48

An authorised firm holding client money for designated investment purposes must carry out a reconciliation of client bank account records at least once

A) every business day
B) Every two business days
C) Per week
D) Per month

Answer 48

A) every business day (5:2)

Question 49

In an authorised firm, the services of a nominee company are being used. This would typically be to

A) Protect the assets of a client
B) Increase the returns on an investment or deposit
C) Reduce the level of client fees charges
D) Comply with data protection legislation

Answer 49

A) Protect the assets of a client (5:2)

Question 50

Whats the maximum financial penalty, if any, that the FCA can impose on an authorised advisory firm engaging in misleading conduct?

A) No financial penalties can be imposed
B) 5,000,000
C) 10,000,000
D) There is no upper limit

Answer 50

D) There is no upper limit (5:2)

Question 51

Which authorised firms undertaking financial advice actives in the UK are exempt from the FCAs training and competence rules?

A) Building societies only
B) General insurance intermediaries only
C) Non-MiFID firms only
D) Non-UK-domiciled firms only

Answer 51

D) Non-UK-domiciled firms only

Question 52

Danny is employed as a financial adviser by an appointed representative of an authorised firm. With them does the primary responsibility for assessing Dannys continuing competency lie?

A) Both Danny and the appointed representative
B) Both the authorised firm and appointed representative
C) The appointed representative only
D) The authorised firm only

Answer 52

D) The authorised firm only

Question 53

Following the cessation of her employment, for how long must training and competence records be kept in respect of an employee of a MiFID firm engaged in retail investment mediation only?

A) One year
B) Three years
C) Five years
D) Indefinitely

Answer 53

C) Five years

Question 54

Patrick has recently left an authorised firm where he advised on pension transfers. For what minimum period, if any, must have firm retain his training records.

A) Three years
B) Five years
C) Seven years
D) Indefinitely

Answer 54

D) Indefinitely

Question 55

How, if at all, does being made bankrupt affect an individual in terms of being fit and property to give financial advice that is regulated by the FCA?

A) Bankrupt individuals cannot give regulated advice in any circumstances
B) Bankrupt individuals can always give regulated advice, but cannot have any oversight responsibilities
C) Bankruptcy has no impact if a person is already authorised
D) Bankruptcy would not automatically preclude an individual from giving advice and each case is individually assessed by the FCA

Answer 55

D) Bankruptcy would not automatically preclude an individual from giving advice and each case is individually assessed by the FCA

Question 56

By what latest point must an authorised firm satisfy itself that a new employee meets the FCAs fit and property criteria?

A) On receipt of a completed job application form
B) Before the start date
C) Within 3 months of the start date
D) Within 12 months of the start date

Answer 56

B) Before the start date

Question 57

Martin has recently become a trainee financial adviser for the first time, although he has no financial services qualifications. In what circumstances, if any, may he be allowed to provide advice to clients without supervision?

A) In no circumstances
B) Only when advising existing clients of the firm
C) Only when providing advice and recommendations for auto enrolment-scheme provision
D) Only when conducting execution-only business

Answer 57

A) in no circumstances

Question 58

In relation to enforcement action against an authorised firm, the main options open to the FCA are

A) Civil proceedings and criminal proceedings only
B) Disciplinary action and civil proceedings only
C) disciplinary action and criminal proceedings only
D) Disciplinary action, civil proceedings and criminal proceedings

Answer 58

D) Disciplinary action, civil proceedings and criminal proceedings (5:3)

Question 59

If the FCA identifies an unfavourable trend in pension advice that may not be in the best interests of consumers, how is it most likely to react in the first instance ?

A) Complete an immediate programme of inspections across all authorised firm
B) Introduce a new minimum qualification level requirement for all pension advisers
C) Issue a guidance statement to all authorised firms
D) Temporarily prohibit all pension advice activities for authorised firms

Answer 59

C) Issue a guidance statement to all authorised firms (5:1)

Question 60

A director of a publicly quoted company has been found guilty of insider dealing and misconduct. What is the maximum fine, if any that may be imposed.

A) 250,000
B) 500,000
C) 1,000,000
D) Unlimited

Answer 60

D) Unlimited (5:3)