IAD Level 1 - Mock 4 Flashcards
Where a firm becomes aware of a conflict of interest that may damage a particular client’s interests, which of the following procedures must the firm follow?
A. Disclose relevant details in a durable medium to the client, allowing the client to decide
B. Disclose relevant details orally to the client, allowing the client to decide
C. Manage the conflict and continue to deal
D. Refuse to deal for the client
C. Where a firm identifies a conflict of interest they must manage it. Only if they are unable to manage the conflict are they required to disclose it.
What is the main objective of the prudential regulation?
A. For firms to take responsibility for maintaining at all times an adequate level of capital, consistent with the risks to which they are exposed
B. Capital adequacy with regard to operations throughout the EEA
C. It stipulates that all regulators are required to ensure a firm’s financial resources are always in excess of their financial requirements
D. It deals with maintaining maximum levels of capital adequacy with regard to all designated investment business in the EEA and outside in the global market place
A. Firms should maintain a minimum level of capital to ensure the continuation of business.
Prudential regulation is risk based. The more risk the firm is exposed to the greater the capital requirement.
The FCA is pursuing an investigation into insider dealing. Which of the following would provide the accused with a special defence under the Criminal Justice Act against an accusation?
A. Did not expect the recipient to deal
B. Market maker acting in ordinary course of business
C. Believed the information was published
D. Would have dealt anyway
B. Market maker acting in ordinary course of business.
The other three are defined as general defences against insider dealing.
Consider the following three clients of a firm that offers investment services to:
- Peter, a retail client who has portfolio consisting of equity and fixed income only
- Graham, a retail client who has a leveraged portfolio
- Neil, a professional client who has a mixed portfolio
Which regard to the fair treatment of clients and the timely reporting rules which of the following is true?
A. Graham’s statements should be more frequent than Peter’s
B. All three clients statements must be retained for a period of least 3 years
C. Peter’s open contingent liability losses over an agreed limit must be reported by the end of the day
D. Graham and Neil should receive monthly statements
A. Graham’s statements should be more frequent than Peter’s.
Firms managing investments on behalf of clients must provide them with a periodic statement in a durable medium, unless these are provided by another party. For retail clients, this must be at least six-monthly, with the following exceptions:
- the client may request statements three-monthly instead
- if the client receives deal-by-deal confirmations, and certain higher-risk investments are excluded, the statement may be sent every 12 months
- if the client has authorised that his portfolio be leveraged, the statement must be provided monthly. A firm must make and retain a copy of any periodic statement
- for MiFID business, for a period of at least five years
- for other business, for a period of at least three years.
If firms manage investments for clients, or operate certain types of account for them which include uncovered open positions in a contingent liability transaction, they must report any losses over a pre-agreed limit to the client. They must do so by the end of the business day on which the limit is breached; if this happens on a non-business day, they must do so by the end of the next business day. Contingent liability investments include leveraged positions, such as derivatives. They do not include shares and bonds.
You are considering the productivity of the small nation of Workingtonia. The gross domestic product of the country is £18.9 million, the net property income from abroad is £2.8 million and the capital consumption is £1.9 million.
With this data, which of the following can you deduce?
A. The gross national product is £16.1 million
B. The national income is £18 million
C. The gross national product is £21.7 million
D. The national income is £17 million
C. The gross national product (GNP) = Gross domestic product (GDP) + net property income (NPI) from abroad.
GNP = 18.9m + 2.8m = 21.7m
National income (NI) = GNP - capital consumption.
NI = 21.7m - 1.9m = 19.8m
Which of the following is FALSE about the Joint Money Laundering Steering Group?
A. It comprises of organisations, including the British Banking Association
B. Breach of the guidance notes constitutes breach of FCA rules
C. It provides guidance on how the statutory regulations should be applied
D. The guidance notes provide an exception in respect of FCA regulations
B. The Steering Group is a trade organisation and as such the guidelines are best practice, not mandatory. Breach of the guidance notes does not constitute a breach of FCA rules.
The Australian Securities Exchange allows UK authorised firms direct membership to their trading facilities. This is regulated by which of the following?
A. London Stock Exchange
B. Financial Conduct Authority
C. Bank of England
D. AFCA
B. Financial Conduct Authority
Recognised Overseas Investment Exchanges, in contrast, are based outside the UK, but carry on regulated activities within the UK (for example, by offering electronic trading facilities to members in this country) and, to this extent, are regulated and supervised by the FCA. They do not have physical UK operations (except some support representation), so they are necessarily electronic marketplaces. They include the National Association of Securities Dealers Automated Quotations (NASDAQ), established in the US, and the Australian Securities Exchange (ASX).
An existing client approaches their firm and requests that they give him a lower level of protection. Which of the following would be appropriate action for the firm to take? The firm must:
A. Offer this level of protection based on specific client instructions
B. Only offer this level of protection if the client in question is already deemed a professional client
C. Not offer this level of protection as if it were appropriate to do so it would have categorised the client as such already
D. First assess the client and then, if necessary, warn them of the additional risks
D. A lower level of protection would involve a client asking for ‘elective’ status - or to opt up to the next category of client. This requires assessment by the firm involved before a decision is made.
In the event that a firm breaches the general prohibition, 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
B. Any agreements with the firm are unenforceable against the client.
In essence, contracts are voidable at the discretion of the client.
What must a firm do when a client has placed a limit order in respect of shares traded on a regulated market and the order is not immediately executed by the firm under prevailing market conditions? The firm must:
A. Make the order public with a view to having it executed as soon as possible
B. Immediately complete the transaction by acting as principal in respect of the unexecuted portion of the order
C. Use its best endeavours to match the order with another client order
D. Submit a report to the market operator by the end of the trading day
A. Any limit order that cannot be immediately executed by the firm will normally be made public by putting it on an order book trading system. Exceptions to this rule are when the client instructs the firm not to do so, or where the order is significantly large (approximately 10% of the average daily volume).
You are sold a regulated investment by a firm that is not authorised by the FCA. Which of the following is false?
A. The firm has broken the law
B. The contract is void
C. Relevant staff would be liable for up to two years in prison
D. You could sue the firm
B. Any contracts opened with an unauthorised firm are not automatically void. However, the contract is voidable, but only at the investor’s discretion.
Which of the following is a direct offer financial promotion?
A. A flyer detailing an investment opportunity which the client needs to sign and return
B. A prospectus for a company intending to list on the London Stock Exchange which sets out the details of the offer
C. A brochure which highlights the features of an authorised collective investment scheme
D. An advertisement which includes the past and future performance of the investment being offered
A. A direct offer is a financial promotion which specifies the manner of response needed in order to invest, or includes a form by which any response may be made. Typically, a direct offer is deemed to be one with an attached application form.
A Multilateral Trading Facility (MTF) is best described as:
A. A system that brings together multiple parties that are interested in buying and selling financial instruments and which allows them to do so
B. A market place for eligible buyers and sellers who trade on a firm commitment basis but do not meet the minimum EU standards set out in MiFID
C. An exchange which is given a recognition order by the local competent authority to conduct its activities in a Pan-European forum
D. An account that meets the requirements set out by Her Majesty’s Revenue and Customs for a Minor’s Trust Fund
A. ‘An exchange which is given a recognition order’ is a recognised investment exchange and ‘an account that meets the requirements of a Minors Trust Fund’ is a distracter that refers to a child trust fund. ‘A system that brings together multiple parties that are interested in buying and selling financial instruments and which allows them to do so’ is the correct answer.
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
A. The offence is contained within the CJA 1993, however the ability of the FCA to prosecute comes from FSMA 2000.
Harold sets up a life interest trust to allow a fair distribution of his assets on death. He appoints Bradley as the trustee and gives him the power to protect the assets and distribute the benefits to his wife, Mary. Harold and Mary’s grandchildren are named as remaindermen. In order to ensure Bradley performs his actions in the best interests of Mary, Harold appoints Michael as protector.
Assuming Harold dies and the trust is created, which of the following is FALSE?
A. On the death of the life tenant, Bradley has the power to distribute the assets to the remaining beneficiaries
B. Michael will have the power to modify and direct Bradley’s actions
C. If the trust property is a house, Mary can continue to live in it unchallenged by the remaindermen
D. Harold and Mary’s grandchildren will gain absolute vested interest in the assets at the point of Harold’s death
D. The trust set up by Harold is an interest in possession trust. This give the life interest (or life tenant) an entitlement to the benefits of the asset during a set period of time (often the life of the life tenant). After this the remaindermen gain possession of the assets. The protector of a trust can be both reactive to and proactive in the behaviour of a trustee.
