Chapter 3: The Regulation of Financial Markets and Institutions p2.

Question 1

Under the Trustee Act 2000, how much of a fund should be invested into gilts and other fixed income securities?

Answer 1

There is no minimum. Under the default provisions of the Trustee Act 2000, trustees may make any investment of the kind that they could if the funds were their own, with the exception of overseas land.

Question 2

One of the conditions for a merger to qualify for investigation by the Competition and Markets Authority is where the merged company has a market share of more than what percentage?

Answer 2

25%. The CMA will consider whether a bid is against the public interest based on the market share of 25% (‘share of supply’ test). This is the criterion to suggest that there will be a ‘substantial lessening of competition’.

Question 3

A merger may be referred to the Competition and Markets Authority if the value of the turnover of the company being taken over exceeds what amount?

Answer 3

£70m. This is the ‘turnover test’.

Question 4

How many principles are there in the Takeover Code (the City Code) and how are the principles enforced?

Answer 4

The Code has six general principles and has statutory force.

Question 5

Following a takeover announcement by a company, what can the CMA do under the Enterprise Act 2002 if requests for information are not met?

Answer 5

The Competition and Markets Authority may impose fines if its requests for information are not met. Failure to comply with a request for information may result in a fine.

Question 6

What is true under the Trustee Act 2000?

Answer 6

a. The Act allows trustees to delegate functions to agents, including their powers of investment.
b. Restrictions in the trust deed will override the wider investment powers provided for in the Act.
c. Under the Act, trustees can make any investment of any kind that they could as if the fund were their own, except for investment in overseas land.

Question 7

What are the seven main blocks of the FCA Handbook?

Answer 7

High Level Standards, Prudential Standards, Business Standards, Regulatory Processes, Redress, Specialist sourcebooks, Listing Prospectus & Disclosure

Question 8

What are the threshold conditions for authorisation that is applied specifically by the FCA?

Answer 8

a. Appropriate resources
b. Effective supervision
c. Business model

Question 9

What are the mentioned principles in the FCA’s 11 Principles for Businesses?

Answer 9

1. Integrity, 2. Skill, care and diligence, 3. Management and control, 4. Financial prudence, 5. Market conduct, 6. Customer’s interests, 7. Communications with clients, 8. Conflicts of interest, 9. Customers: relationships of trust, 10. Client’s assets, 11. Relations with regulators.

Question 10

To whom do the Principles for Businesses of the FCA apply?

Answer 10

All authorised firms. The principles for Businesses are for the protection of all customers and apply to all authorised firms.

Question 11

Which of the regulators’ Principles for Businesses states: ‘A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgement’?

Answer 11

Principle 9: Customers: relationships of trust.

Question 12

SYSC rules on apportionment of responsibilities relate to, and expand on, the Principle for Businesses entitled what?

Answer 12

Management and control. SYSC states that a firm must take reasonable care to establish and maintain appropriate systems and controls.

Question 13

Who does the Conduct Rules (COCON) apply to?

Answer 13

Some apply to all certified staff and some apply to senior managers only. There are Individual Conduct Rules that apply to all certified staff (some rules are FCA-only), and are also second-tier Senior Management Conduct Rules.

Question 14

Retail investment advisers are required to hold a Statement of Professional Standing that is issued by who?

Answer 14

An FCA-accredited body. Retail investment advisers are required to hold a Statement of Professional Standing (SPS) if they want to give independent or restricted advice. This rule has applied since the end of 2012, when the RDR changes came into effect.

Question 15

What Statements of Principle apply only to persons carrying out controlled functions with significant influence?

Answer 15

a. Must comply with all of the regulatory requirements
b. Due skill, care and diligence in management
c. Business of the firm is organised and controlled effectively

Significant influence functions are those controlled functions that also have senior management responsibilities.

Question 16

Which Conduct Rule is a first-tier Individual Conduct Rule?

Answer 16

You must observe proper standards of market conduct.

Question 17

When a retail investment adviser has carried our 28hours of unstructured Continuing Professional Development (CPD) and 16 hours of structured CPD, what further CPD hours must they complete to meet the FCA annual requirement for CPD?

Answer 17

Retail investment advisers must carry out at least 35 hours of CPD annually, of which 21 hours must be structured. If you complete 5 hours of structured CPD, you will have met the requirement.

Question 18

What are the recognition requirements applying to an investment exchange?

Answer 18

The exchange must be authorised to conduct regulated activities.

Question 19

What is the main rationale for enabling the FCA to make product intervention rules that are temporary?

Answer 19

a. To avoid imminent possible detriment to consumers.

Question 20

When a discretionary manager buys and sells investments more than would be reasonably expected, given the client’s agreed investment strategy, the rule that is specifically being breached is the rule related to what?

Answer 20

Churning involves dealing too frequently than is the client’s best interests.

Question 21

When does appropriateness need to be established?

Answer 21

For non-advised sales in respect of complex instruments. Appropriateness rules apply where investment services are provided, other than making personal recommendation and managing investments and where the investments are deemed to be ‘complex’, such as warrants.

Question 22

What is a per se professional client?

Answer 22

An entity requiring authorisation or regulation to operate in the financial markets and a non-MiFID business with capital of £5 million.

Question 23

What are permissible goods and/or services in connection with the use of dealing commission arrangement?

Answer 23

Research providing original thought. Only research and goods or services relating to the execution of trades are permitted uses of dealing commission.

Question 24

What is the main purpose of client money rules?

Answer 24

To protect and segregate customer assets from those of the firm in case the firm gets into financial difficulties. The FCA’s Principle for Businesses 10 (Clients’ assets) requires a firm to arrange adequate protection for clients’ assets when the firm is responsible for them. An essential part of that protection is the proper accounting and treatment of client money.

Question 25

In 2009, the financial services regulator published a consultation paper and proposals for implementing the Retail Distribution Review (RDR). The RDR adviser charging does not apply to who?

Answer 25

Advisers using pre-scripted questions to advise on stakeholder products.

Question 26

What falls within the definition of retail investment products when seeking to give investment advice on an independent basis?

Answer 26

The category of ‘retail investment products’ (RIPs) extends beyond the existing definition of packaged products to cover products in a packaged form that modifies the exposure to underlying assets compared with a direct holding of the financial asset.

Question 27

P&Q Investments have prepared a research report on a small pharmaceutical company. They are planning to make the report available to their clients. Under which circumstances is the firm allowed to deal ahead of releasing the research report?

Answer 27

When acting as a market maker and when executing an unsolicited client trade. When research is provided to clients, the firm generally cannot act upon it until their clients have had the opportunity to act upon the research.

Question 28

You are considering an investment in an authorised UCITS fund but would like to see a short document helping you to understand the nature and risks of the fund to help with your decision to invest. What should you ask of the fund manager?

Answer 28

Obtain a key investor information document, which the fund manager must prepare. The fund manager must prepare both a prospectus and a KII document and, as a short document, the KII document is likely to better meet your requirements that the prospectus.

Question 29

What is the normal age at which an uncrystallised funds pension lump sum (UFPLS) becomes available and what percentage of the UFPLS payment is taxable?

Answer 29

Age 55 is the normal age at which UFPLS becomes available. 75% of a UFPLS payment is taxable; 25% of the payment is tax-free. The UFPLS option applies to defined contribution pension plans. Ad hoc UFPLS payments can be taken in the future while there are still funds in the plan.

Question 30

What is the criteria for the quantitative test:

Answer 30

a. The client has carried out at least ten ‘significant’ transactions per quarter on the relevant market over the last four quarters.
b. The client’s portfolio, including cash deposits, exceeds EUR500,000
c. The client has knowledge of the transactions envisaged from at least one year’s professional work in the financial sector.