IAD Level 1 - Mock 2 Flashcards
Gertrude Humphery has just joined the ACE Investment Firm, joining in the role of Client Assets Oversight Officer. Reginald Madeley has been the head of the equities trading desk at ACE Investment Firm for the past five years. Which of the following statements is true?
A. Neither Gertrude nor Reginald is performing senior manager functions
B. Only Reginald is performing a certification function
C. Only Gertrude is performing a senior manager function
D. Both Gertrude and Reginald are performing senior manager functions
A. Client assets oversight function and head of the equities trading desk are likely to be certification functions. Although it is possible that the head of a significant business area is given SMF status, this was not an option given to us in the question.
Rachel Brown, a director of FCA-authorised CEA Ltd, has been accused of failing to implement the money laundering requirements within her firm. Mo Marley has been accused of providing misleading evidence to FCA enforcement officers engaged in a surveillance enquiry. Brooke Chaplen has been accused of offering to enter into funeral plan contracts, despite the fact that she has not been authorised to do so. Toni Duggan has been accused of passing on information relating to a hostile takeover bid to her friends and encouraging them to deal based on that inside information.
Which of the four individuals has committed an offence for which the maximum prison term is SEVEN years in prison?
A. Rachel Brown
B. Mo Marley
C. Brooke Chaplen
D. Toni Duggan
D. Toni Duggan is accused of insider dealing - this has a maximum prison term of 7 years under the Criminal Justice Act 1993.
Rachel Brown is accused of failing to implement the money laundering regulations - this has a maximum prison term of 2 years.
Mo Marley is accused of misleading FCA enforcement officers - this also has a maximum prison term of 2 years.
Brooke Chaplen is accused of breaching the general prohibition - this also has a maximum prison term of 2 years.
With respect to all designated investment business, when do the suitability rules apply?
A. To all clients if the firm is acting as investment manager
B. To retail clients and professional clients when providing personal recommendations and acting as an investment manager
C. To retail clients and professional clients where acting as an investment manager
D. To retail clients only where making personal recommendations and acting as investment managers
D. In respect of all designated investment business, the suitability rules only apply to retail clients.
Suitability rules do apply to professional clients, but in respect of MiFID business only.
Under European legislation of the financial services industry, which country’s regulator is responsible for the client information disclosure rules of a firm with multiple offices around the region?
A. Home regulator
B. Host regulator
C. Shared between home and host regulator
D. Neither regulator
B. As a broad rule of thumb you can say all rules are governed by the home state regulator except the COBS.
The regulator governing the COBS is dependent on how the activities are provided (i.e. local branch to local client = local (host) rules; cross-border selling = home state rules).
The information disclosure rules are part of the COBS and as the firm has multiple offices we assume local branch to local client, so host state rules is the best answer.
Note: shared responsibility suggests real-time co-ordination between regulators, and this occurs infrequently - it is too inflexible and time consuming.
If a client has their portfolio managed by a unauthorised firm, when does the contract become null and void?
A. As soon as the FCA becomes aware
B. At the discretion of the courts
C. Once suitability has been assessed for the client and the advice is deemed to be unsuitable
D. At the discretion of the client
D. In all cases if the client wishes to keep their money with an unauthorised firm it may do so, however the Financial Ombudsman and the Financial Services Compensation Scheme would not be available to the investor.
Which of the following items is not included within the Insider Dealing legislation contained within Part V of the Criminal Justice Act 1993?
A. Gilts issued by the Debt Management Office
B. Alternative Investment Market (AIM) listed shares
C. Crude oil futures traded on ICE
D. Equity warrants traded on the LSE
C. Commodity derivative contracts are not covered by insider dealing legislation.
Mina puts money into a trust, to be held in trust for twenty years for the benefit of her two ten-year-old grandchildren. Which of the following trusts would allow the trustees to decide how to invest or use the money and any interest it earns to benefit the grandchildren?
A. Bare trust
B. Interest in possession trust
C. Power of appointment trust
D. Discretionary trust
D. A discretionary trust is where the trustees chose when (if) and to whom they distribute the assets (where there will be no absolute vested interest).
An interest in possession trust would give the remaindermen absolute vested interest, after the life interest has ceased to benefit.
The bare trust gives the beneficiaries the ability to access the assets whenever they wish once they have reached 18 years old.
In a powers of appointment trust where the trustees choose whom they appoint as beneficiaries (at which point they gain absolute vested interest).
Which of the following investors would be committing an offence under the insider dealing legislation in the Criminal Justice Act (CJA) 1993?
A. Martin deals on inside information regarding barley options that he received from his brother, an investment manager, making a profit from the transaction
B. Angela buys CFDs on a particular company’s shares based on inside information provided by her friend, a research analyst, making a loss from the transaction
C. Holpar Ltd deals in a rival’s shares based on inside information received from an inside source, gaining a profit
D. Torpenhow Plc sells a large holding of an oil company’s shares based on inside information they received from an inside source, preventing a large loss
B. Martin’s trade is in wheat options. Commodity options are not covered by the CJA. It is also not possible for a company to commit an offence under the legislation. This leaves only Angela, who despite making a loss does commit an offence under the CJA.
Who is responsible for issuing notices on a ‘comply’ or ‘explain’ basis?
A. The PRA
B. The FCA
C. The FOS
D. The FPC
D. The Financial Policy Committee (FPC) makes recommendations and gives directions to the PRA on specific actions that should be taken. The PRA will responsible for implementing FPC recommendations on a ‘comply’ or explain’ basis.
What best describes the guidance notes from the Money Laundering Steering Group?
A. Breaching them carries a penalty of six months imprisonment and an unlimited fine
B. They must be implemented by authorised firms
C. They provide an indication of how firms should interpret the laws on money laundering
D. Breaching them carries a penalty of an unlimited fine
C. As the name suggests, these are guidance notes. Therefore, answer C is the correct answer.
For which one of these financial instruments is a firm required to assess appropriateness?
A. Money market instruments
B. Shares traded on a regulated market
C. Securitised debt embedding a derivative
D. Units in a UCITS scheme
C. The other instruments are considered to be simpler financial instruments and therefore the appropriateness test is not required.
COBS 10.4 defines a financial instrument as non-complex if it satisfies the following:
(a) it is not a derivative or other security giving the right to acquire or sell a transferable security or giving rise to a cash settlement determined by reference to transferable securities, currencies, interest rates or yields, commodities or other indices or measures;
(b) there are frequent opportunities to dispose of, redeem, or otherwise realise the instrument at prices that are publicly available to the market participants and that are either market prices or prices made available, or validated, by valuation systems independent of the issuer;
(c) it does not involve any actual or potential liability for the client that exceeds the cost of acquiring the instrument; and
(d) adequately comprehensive information on its characteristics is publicly available and is likely to be readily understood so as to enable the average retail client to make an informed judgment as to whether to enter into a transaction in that instrument.
The sourcebook ‘Senior Management Arrangements, Systems and Controls’ requires records to be retained by the firm regarding the apportionment of senior management responsibilities.
Which of the following statements is true in relation to this requirement? Records must be retained for:
A. Three years from the appointment in senior management role
B. Six years from the appointment in senior management role
C. Three years from any change in senior management responsibilities
D. Six years from any change in senior management responsibilities
D. Six years from any change in senior management responsibilities.
Note that Senior Management Arrangements, Systems and Controls (SYSC) is found in Block 1 of the Handbook - High Level Standards.
Robert, an equity analyst with an authorised firm, is accused of market abuse under the Market Abuse Regulation (MAR) as a result of the following transactions:
Transaction 1: Robert, acting alone, spread a rumour to the effect that a hostile takeover bid was about to be launched for a German-listed company, making himself a profit of £50,000.
Transaction 2: In collusion with Herbert, a UK person acting on behalf of a Finnish bank, Robert arranged an over-the-counter swap transaction and then put out misleading press announcements relating to the trade, earning a profit of £100,000 to be split equally between the two.
Which of the following statements are correct?
A. The FCA will prosecute Robert for market abuse in transaction 1, whilst the Crown Prosecution Service will prosecute both Robert and Herbert for market abuse in transaction 2
B. Since Herbert is working on behalf of a non-UK firm, it is not possible for the FCA to refer Transaction 2 to the Regulatory Decisions Committee - the FCA would need to pass the case to the Finnish regulator instead
C. The FCA must seek dispensation from FATF before taking any action against Herbert
D. Neither transaction will be held to account within the Crown Court
D. Sections 401 and 402 of FSMA2000 give the power to the FCA to prosecute for insider dealing under CJA93 in the Crown Court, not the Crown Prosecution Service. However, this question specifically refers to market abuse, not insider dealing. Therefore, as market abuse is not a crime (it is a civil offence), neither Robert nor Herbert will be ‘prosecuted’ anywhere, and the Crown Court does not get involved. The fact that Herbert works for a non-UK firm is irrelevant, and the Financial Action Task Force is also irrelevant to this question.
Who of the following is/are the stakeholder(s) of Principle 6 contained within the CISI Code of Conduct
A. Clients, market participants, regulator
B. Clients, profession, market participants
C. Society, colleagues
D. Self, clients, regulators, colleagues, market participants, firms, profession, society
B. Principle 6: Aware of Capabilities – to decline to act on any matter about which you are not competent or qualified unless you have access to such advice or assistance to carry out the work in a professional manner, taking into account the nature of the individual mandates given by your customers and counterparties.
The FCA is granted the power to enforce its rules and sanction and discipline those who do not follow them. Which of the following would the FCA NOT seek disciplinary action for?
A. Failure to get a financial promotion approved
B. Not following FCA guidelines
C. Not following FCA rules
D. Not following FCA principles
B. A firm may choose not to follow FCA guidelines (on cold calling hours for example) but failure to comply with rules and principles is an offence.
Ethical behaviour is that which is open, honest, transparent and fair. In this context ‘open’ is best described as:
A. Everyone whom your action or decision involves is fully aware of it or will be made aware of it
B. It complies with applicable law and/or regulation
C. It is clear to all parties involved what is happening
D. The action/decision is fair to everyone in it or affected by it
A. ‘Everyone whom your action or decision involves is fully aware of it or will be made aware of it’ describes Openness.
‘It complies with applicable law and/or regulation’ describes Honesty.
‘It is clear to all parties involved what is happening’ describes Transparency.
‘The action/decision is fair to everyone in it or affected by it’ describes Fairness.
Which one of the following is NOT true about the information that must be disclosed by a firm via an initial disclosure document (where relevant) to a client before providing services?
A. The rules apply to business done for all clients
B. The firm must disclose the name of the competent authority
C. The information must not be in a standardised format
D. The conflicts of interest policy must be disclosed
C. The information must be provided in a standardised format.
Which of the following would NOT be covered by the insider dealing legislation?
A. FTSE index option
B. Units in a unit trust
C. Debenture
D. FTSE futures contract
B. Insider dealing legislation (CJA 1993) does not cover unit trusts and life policies.
Which of the following is most likely to be TRUE in respect of designated investment exchanges?
A. They are based overseas or are international in character
B. They have a UK membership structure
C. The FCA is required to ensure that they provide fair prices
D. They can be accessed from the UK
A. Designated investment exchanges differ from Recognised Overseas Investment Exchanges because they are not exempt persons and they are also not required to be authorised. This is because they are not accessible from the UK.
Which of the following TWO responsibilities have all professional bodies operating in the field of financial services developed regarding the conduct of its members? Responsibility to:
A. The client and the profession
B. The employer and the profession
C. The client and to yourself
D. The client and to society
A. Although there are other responsibilities that have been identified, only these two are ones that all sampled codes of professional bodies have in common.
You work as a currency strategist at a major bank. Which of the following scenarios is most likely to lead you to the conclusion to buy UK sterling?
A. The UK’s current account deficit is being financed by rising debt
B. A recent announcement that the economy is likely to move towards recession
C. The UK’s unemployment figures are higher than expected
D. The Bank of England are concerned with deflationary pressures and have announced a new low interest rate
A. The increase in borrowing is likely to increase borrowing costs and push up interest rates thus making sterling more attractive to foreign investors. This may result in sterling increasing in value as the demand for the currency increases.
A trader at a stockbroking firm has mis-marked the valuation of his open positions in order to hide the losses that he has accumulated over the last two months. This has been possible as the profit and loss reporting system has been replaced with a new system which allows staff to manually input the settlement price of illiquid positions. The head of the trading desk, who commissioned the new system, has now discovered this cover up.
In terms of the conduct rules, which rule has the manager possibly breached?
A. Act with integrity
B. Take reasonable steps to ensure that any delegation of your responsibilities is to an appropriate person and that you oversee the discharge of the delegated responsibility effectively
C. Take reasonable steps to ensure that the business of the firm for which you are responsible complies with the regulatory system
D. Observe proper standards of market conduct
B. An approved person failing to supervise and monitor adequately the individual or individuals to whom responsibility for dealing with an issue or authority for dealing with a part of the business has been delegated is in contravention of Senior Manager Conduct Rule 3.
Which of the following market participants might have a defence against the accusation of market abuse?
A. An adviser who passed on a rumour about a potential takeover to a client in the belief that it was true. It wasn’t and the client lost a lot of money
B. An adviser who stated that an investment was low risk when it was medium risk when recommending it to a low risk investor. The investor subsequently made a lot of money from the investment
C. A private investor who spread rumours about the stock that he already held in order to inflate the price before selling it
D. A fund manager making a large purchase in a particular stock to inflate the closing price of the stock
A. If there are reasonable grounds for the person to believe that the behaviour in question did not amount to market abuse, this can be considered a defence. There was no belief that the rumour was false or misleading, and so this might constitute a defence. The other three statements definitely would not.
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 authorised third party to approve the financial promotion and the promotion remains the responsibility of the firm
D. Can use any authorised third party and the promotion becomes the responsibility of the third party
D. In approving a financial promotion, the approving firm takes on the responsibility of the promotion.
