April 16, 2017 | Author: abshaw121086 | Category: N/A
18.05.13
DipFa
®
FinancialServices,Regulation and Ethics (FSRE) Exam - Style Questions 2012/13 Douglas James Training Consultants Limited
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[email protected] © Douglas James Training 2013
12.05.13
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The DipFA is an FSA-approved QCF Level 4 qualification comprising two compulsory units : Unit 1 - Financial Services, Regulation and Ethics (FSRE) Unit 2 -Advanced Financial Advice (AFA)
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Unit 1 comprises 90 multi-choice questions, plus two case studies, with 5 multi-choice questions per case study a total of 100 questions. Pass mark 70%. The 10 case study questions will largely be based on ethical behaviour. Approximate weighting of marks in the exam : Topics
Marks
1–3
10
4–9
10
10 – 11
10
12
10
13 – 14
15
15 – 16
15
17 – 18
15
19 – 20
5
21
10
There are 346 questions in this revision pack The figures in brackets at the end of the questions indicate the references in the IFS Text. Index NS&I quiz 33 The FSA Handbook 47 Controlled functions quiz 48 Cancellation period quiz 55 Initial disclosure and product disclosure quiz 57 Classification of risks 76 Record-keeping quiz 82 Solutions to the multi-choice questions 85 Tax tables 87 Risk category quiz 89
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Specimen Questions – Topic 1 The role and structure of financial markets 1)
Which of the following is not one of the ways in which new shares can be offered to the market ? (1.3.7) A B C D
2)
An equilibrium price is one that : (1.1.3) A B C D
3)
an unsecured secondary market where repossession contracts can be traded. a primary market for secured sale and repurchase agreements. an unsecured market in which banks lend to and borrow from each other. an unsecured primary and secondary market that brings together companies and investors.
When the securities in a repo agreement are transferred, the borrower retains the (1.3.1) A B C D
6)
4.35% 4.54% 9.09% 9.56%
A repo market is : (1.3.1) A B C D
5)
provides the highest return for the seller. ensures that regulatory requirements are met. is determined by the interaction of supply and demand. ensures both buyer and seller settle on a reasonable price.
What is the annual rate of interest on a repo agreement, where securities are exchanged for £5,500,000 and repurchased six months later for £5,750,000 ? (1.3.1) A B C D
4)
Public auction Private placement Rights issue Prospectus issue
legal title economic ownership equitable ownership right of subrogation
The price of a corporate bond is primarily determined by the : (1.3.6.1) A B C D
interest rate offered. term of the bond. company’s credit rating. the interest rate and the term of the bond. 4
7)
Which of the following correctly describes a rights issue ? (1.3.7) A B C D
8)
How are Treasury Bills issued ? (1.3.3) A B C D
9)
1.9% 4.75% 5.00% 5.26%
The Bank of England is a central bank because it (1.1.1) A B C D
12)
Gilts Treasury bills Local authority stock Permanent Interest Bearing Shares (PIBS)
If Richard pays £95.00 for a Gilt with a coupon of 5%, what is his yield ? (1.3.6) A B C D
11)
Guaranteed interest, with a discount to par value Short term, zero coupon, at a discount to par value Long-term, with the redemption amount at par value Deep-discounted, with the redemption amount at par value
Which one of the following types of investment does not pay interest ? (1.3.3) A B C D
10)
New shares are issued to existing shareholders at current market value . New shares are not offered to the general public, but placed with institutional investors. New shares are issued to the general public at current market value. New shares are issued to existing shareholders at a discount to current market value
deposits money with the International Monetary Fund. has been approved by the Treasury and lends money direct to other banks. holds reserves of foreign currency for other banks and institutional investors. acts as banker to the government, supervises the economy and regulates the supply of money.
Why would a client be interested in the coupon of a gilt-edged security ? (1.3.1.1) A B C D
It gives an indication of expected income and capital growth. It indicates the amount of capital repaid at maturity. It indicates the possible gain over the issue price at the redemption date. It indicates the interest rate payable over the term.
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13)
A large PLC company issued a corporate bond three years ago. There are two years remaining to redemption. The value of the bond has suddenly fallen by over 50%. What are the two main factors likely to have contributed to this fall in value ? (1.3.6.1) A B C D
14)
Which of the following correctly describes certificates of deposit ? (1.3.4) A B C D
15)
the right of an insurer to call on another to meet a claim. the agent acting outside the terms of an agency agreement. the unknown consequences of an event occurring. a risk-transfer method for insurance companies.
The Bank of England is the lender of last resort in the event of : (1.1.1) A B C D
18)
the major German stocks 40 representative blue chip US stocks 40 Hong Kong Shares the largest French shares
Reinsurance refers to (1.3.9) A B C D
17)
Medium term and non-tradeable Medium term and tradeable Short term and non-tradeable Short term and tradeable
CAC40 is a stock market index of: (1.3.7.3) A B C D
16)
a reduction in the company’s share price and credit rating an improvement in the company’s profits and credit rating the length of time until redemption and the reduction in the share price an increase in bank base rate and the company’s share price.
Illiquidity and insolvency Illiquidity and solvency Liquidity and solvency Liquidity and insolvency
Which is not a role of the Bank Of England ? (1.1.1) A B C D
Regulate the supply of money and manage gold reserves Supervise the Financial Ombudsman Service Act as adviser to the Government Act as lender of last resort
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19)
How are UK Government gilts issued and traded ? (1.3.1.1) A B C D
20)
Which of the following is not one of the traditional functions of money ? (1.1) A B C D
21)
large companies who need short-term unsecured borrowing smaller companies who need long-term secured borrowing large companies who need short-term secured borrowing large companies who need long-term unsecured borrowing
The term ‘commercial paper’ is used for securities issued by companies: (1.3.5) A B C D
24)
Securities repo market Equity repo market London Stock Exchange Gilt repo market
Commercial paper is used by : (1.3.5) A B C D
23)
A standard for advanced payment A unit of account Medium of exchange A store of value
The most important repo market in the UK is the : (1.3.1.1) A B C D
22)
New issues and subsequent trading are carried out on the London Stock Exchange. New issues and subsequent trading are both done through the Debt Management Office (DMO) New gilts are issued on the London Stock Exchange and subsequent trading is done through the Debt Management Office New gilts are issued by the Debt Management Office and subsequent trading is done on The London Stock Exchange
for a term of up to one year for terms of between one and five years for a term of more than five years for long-term borrowing
The main use of a foreign exchange market is : (1.3.8) A B C D
to act as a market where banks and other financial institutions can lend to each other in different currencies to enable banks and other financial institutions to convert one currency into another, on their own account, or for their customers to act as a market where banks can borrow or lend to each other in different currencies. to act as an exchange where intermediaries can find the best rates at which to deal in foreign currencies.
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25)
The main role of the Bank of England is currently to : (1.1.1) A B C D
act as the UK’s central bank be responsible for microprudential supervision be responsible for setting the Government’s inflation target. regulate the UK money supply.
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Specimen Questions – Topic 2 The Role of Government 1) Which of the following would not be considered to be one of the main economic objectives of modern governments ? (2.2.1) A) B) C) D)
Price stability Low unemployment Balance of payments equilibrium Expansionary fiscal policy
2) The Government outlines its fiscal policy in the annual Budget statement. When is this statement normally made each year ? (2.2.2) A) B) C) D)
January March April September
3) The Public Sector Net Borrowing Requirement (PSNBR) is a measure of the amount of money the Government needs to borrow in order to: (2.2.2) A B C D
Manage interest rates Finance its spending plans Determine the level of tax increases Ensure inflationary pressures are avoided
4) Which one of the following would not be used by the Government as part of its fiscal policy ? (2.2.2) A Interest rates B Spending C Taxation D Borrowing 5) The Government’s target for annual inflation is 2%. Which of the following statements is correct ? (2.2.3) A The target is based on RPI and the intention is to keep inflation within 1% (plus or minus) of the target. B The target is based on RPI with the intention that inflation is kept within 0.5% (plus or minus) of the target. C The target is based on CPI and the intention is to keep inflation within 1% (plus or minus) of the target D The target is based on CPI and the intention is to keep inflation within 0.5% (plus or minus) of the target.
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6) The two main functions of the Government in relation to financial markets are : (2.1) A B C D
Price stability and low unemployment Balance of payments equilibrium and economic growth Monetary and fiscal policy Managing the economy and regulation
7) When the Bank of England Monetary Policy Committee changes interest rates, what is actually changing is : (2.2.3) A B C D
The London Interbank Offered Rate (LIBOR) The 14-day Gilt Repo Interest Rate The average variable mortgage interest rate Long-term gilt yields
8) What will normally be the effect, if any, if sterling falls in value against other currencies ? (2.2.3.4) A B C D
Deflation Inflation Depression There would be no effect
9) Which of the following correctly describes the Retail Prices Index (RPI) and the Consumer Prices Index (CPI) ? (2.2.3.1) A B C D
House price movements are included in the CPI, but excluded from the RPI House price movements are included in the RPI, but excluded from the CPI Many housing-related costs are included in the CPI, but excluded from the RPI Many housing-related costs are included in the RPI, but excluded from the CPI
10) Inflation can be described as : (2.2.3.1) A B C D
A fall in the general level of prices and a rise in the purchasing power of money A rise in the general level of prices and a rise in the purchasing power of money A fall in the general level of prices and a fall in the purchasing power of money A rise in the general level of prices and a fall in the purchasing power of money
11) Which of the following is most likely to lead to an increase in the rate of inflation ? (2.2.3.1) A B C D
A reduction in interest rates A rise in the budget surplus An interest rate increase An exchange rate increase
12) What happens to prices during a period of disinflation ? (2.2.3.1) A B C D
They match trends in output and demand They rise, but at a slower rate than before. They start to fall across the entire economy There is negative inflation 10
13) During a period of deflation, prices tend to : (2.2.3.1) A B C D
rise, but at a slower rate than previously. fall significantly across the entire economy. fall dramatically only for identified industries. rise and fall in line with average earnings.
14) If the nominal rate of return on an investment is 3.5%, annual inflation is 1.5% and Bank base rate is 0.5%, what, roughly, is the real rate of return ? (2.2.3.2) A B C D
1.3% 1.5% 2.0% 3.0%
15) In terms of the money supply, which of the following measures is the broad money aggregate ? (2.2.3.3) A B C D
M0 M1 M3 M4
16) Financial services regulation in the UK is a five-tier process. Which of the following comprises the first level ? (2.3) A B C D
European legislation Acts of Parliament Regulatory bodies Arbitration schemes
17) The 1987 Single European Act specifies four main freedoms – which of the following is not one of them ? (2.3.1) A B C D
Freedom of movement for assets Freedom of movement for goods Freedom of movement of capital Freedom to provide services in other states
18) The European Union has issued a new DIRECTIVE. This means that the member state (2.3.1) A B C D
must implement the Directive immediately. can choose whether or not to adopt the Directive. has the choice of how to meet the Directive’s objectives. must implement the Directive, provided the member state is part of the Eurozone.
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19) The main difference between European Union Regulations and Directives is that EU Regulations : (2.3.1) A are binding as to the result to be achieved, with the choice as to exactly how they are achieved being left up to the national authorities in each state. B are binding in their entirety and directly applicable in all member states, unless particular states have specific dispensation. C have to be adopted by the national authorities of every state before they can be enforced across the whole Union. D must be achieved within a specific timescale – typically two years. 20)
Which approach is the Government likely to take if it is concerned about rising inflation during an economic boom ? (2.2.2) A B C D
21)
If the EU issues regulations in respect of the financial services industry, how would the UK be expected to respond ? (2.3.1) A B C D
22)
The need for exchange rates would be eliminated The European Central Bank would set interest rates All eurozone states would have the same inflation rate Interest rates would immediately reduce
Which of the following is most commonly an indicator of an increase in the M4 growth rate ? (2.2.3.3) A B C D
24)
It must implement them without any changes It may ignore them if existing national regulations already exist It will amend and then implement them through new UK legislation The regulations must be reviewed by the UK regulator, who will decide the merits of their implementation
If the UK adopted the euro, what would be the outcome ? (2.3.1) A B C D
23)
Contractionary monetary policy Contractionary fiscal policy Expansionary monetary policy Expansionary fiscal policy
Decreasing consumer borrowing Decreasing consumer spending Increased public confidence Increasing rates of inflation
The key component of monetary policy is : (2.2.3) A B C D
Interest rates Government spending Taxation Balance of payments 12
25)
Under the Freedom of Movement for capital under the Single European Act, restrictions on payments are prohibited for which of the following ? (2.3.1) A B C D
26)
Who sets the inflation target for the UK Monetary Policy Committee ? (2.2.3) A B C D
27)
The Governor of the Bank of England The Chancellor of The Exchequer The Financial Secretary to The Treasury The First Lord of The Treasury
Regulation of the UK financial services industry comprises five levels. What is the second level of regulation ? (2.3) A B C D
28)
Goods only Goods and services Services only Neither goods nor services
European legislation Regulatory bodies Acts of Parliament Arbitration schemes
What is the typical timescale within which the objectives of a European Directive must be implemented ? (2.3.1) A B C D
Six months One year Two years Three years
29) The real rate of interest is calculated by : (2.2.3.2) A B C D
The nominal rate of interest + the rate of inflation Inflation rate less the nominal rate of interest The nominal rate less the rate of inflation Inflation rate multiplied by the nominal rate of interest
30) Which of the following would the UK Government not consider in relation to correcting a trade deficit ? (2.2.2.1) A B C D
Reduce interest rates Borrow foreign currency Impose import tariffs Impose exchange controls
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31) Which of the following are the three main components of the Government’s fiscal policy ? (2.2.2) A B C D
Government spending, interest rates and taxation Taxation, borrowing and Government spending Interest rates, taxation, borrowing Government spending, interest rates, borrowing
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Specimen Questions – Topic 3 Financial services in the wider economy 1) Financial intermediaries can provide ‘maturity transformation’ because they: (3.1) A B C D
offer a wide range of deposit accounts to a wide range of depositors. aggregate many small deposits from a large number of clients. provide services to clients from many different geographical locations reduce the risk of default of fraud by lending to a wide variety of borrowers.
2) Which of the following is always a mutual organisation ? (3.2.1) A B C D
Bank Insurance Company Centralised lender Friendly Society
3) All of the following factors relate to the main reasons why companies and individuals need the services of financial intermediaries, with the exception of : (3.1) A B C D
geographic location maturity transformation risk transformation share disintermediation.
4) A bank can use small customer deposits to provide larger loans. This is an example of (3.1) A B C D
Aggregation Disintermediation Maturity transformation Risk transformation
5) Since the Building Societies Act 1986, building societies have been able to ‘demutualise’. Such a change requires : (3.2.1) A B C D
the consent of its shareholders the society to have operated for at least three years at least 25% of its issued share capital to be available to the public approval by its members
6) What minimum percentage of their funds must building societies provide from their retail markets ? (3.2.2) A B C D
10% 25% 50% 75% 15
7) Which one of the following factors distinguishes building societies from other financial institutions ? (3.2.1) A B C D
they are mutual institutions owned by their members. they are owned by their shareholders. they only lend for mortgage purposes. they cannot make regulated loans.
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Specimen Questions – Topic 4 Industry obligations to the customer 1)
An independent financial adviser has given investment advice to an investment firm which requires advice as well as the execution of the transaction. The firm would be treated as which of the following categories of client ? : (4.1) A B C D
2)
Which of the findings of the Financial Services Trust Index 2009, is correct ? (4.3) A B C D
3)
have bought few if any financial products have significant financial wealth have a reasonable knowledge of financial matters are in the 35-55 age group
The target audience for a study which was commissioned by the FSA around its ‘basic advice’ regime, focussed on which of the following groups ? (4.3.1) A B C D
5)
Institutions gain the highest trust ratings in terms of shared values and the lowest in terms of skills and ability. Older customers tend to show significantly higher levels of trust than younger customers. Levels of trust amongst those who use the internet is higher, particularly for bank and credit card providers. Successful resolution of complaints does little to avoid the negative impact on trust.
A survey of consumer attitudes and buying experiences carried out by the Financial Services Consumer Panel in 2006 found that negative perceptions of the industry are higher among those who : (4.3) A B C D
4)
a retail client an execution-only investor a professional client an eligible counterparty
Less sophisticated consumers with annual incomes below £30,000 The self-employed Those who had purchased Stakeholder products Those in the 35-55 age range
Of the three categories of customer, which requires the lowest level of protection ? (4.1) A B C D
Eligible counterparty. Retail client Professional client Execution-only
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6) One of the findings of the Financial Services Trust Index survey was that although there was a reasonable level of trust in financial services providers, there was low trust indicated by what percentage of consumers ? (4.3) A B C D
10% 20% 30% 40%
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Specimen Questions – Topic 5 Types of customers and their needs 1)
Which of the following is true ? (5.4) A B C D
2)
Trustees have automatic borrowing powers, irrespective of the contents of the trust deed. Trustees have no legal capacity to borrow because of the duty of care they owe to the beneficiaries. Trustees can only borrow if the loan is to be used specifically for dealing with probate matters. Trustees can only borrow if they are specifically empowered to do so by the trust deed.
Which one of the following is usually the priority financial need for young families ? (5.5.4) A B C D
Savings Investment Income and life assurance protection Pension planning
3)
The usual financial priority of a retired individual is to : (5.5.7) A build a capital reserve. B increase income from investments. C minimise capital gains tax liability. D produce income from capital.
4)
Albert, a widower aged 66, is reviewing his financial needs and priorities with his financial adviser. If his attention is particularly being drawn to tax planning issues, this would most likely be because he has : A B C D
5)
amended his will to include his grandchildren. a current annual income of £20,000 recently downsized his house to fund for long term care. total assets valued at £750,000
Damian and Collette have been business partners for over 20 years and are reviewing their finances with Jack, their financial adviser. They are keen to mitigate the risk of being personally responsible for any debts of the business over and above any capital that they have invested ; Jack has advised them to consider : (5.3.2.1) A B C D
becoming a limited liability partnership becoming sole traders and employing each other taking out a re-insurance policy to ring-fence future profits taking out separate indemnity insurance policies and assign them to the other partner
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6)
Tom and Bobby both run their own businesses, but only Tom is personally liable for the debts of his business, because : (5.3.1) A B C D
7)
Which of the following would not be seen as a typical financial need for a limited company ? (5.3.3) A B C D
8)
B C D
pension provision savings and investment long term care family protection
Ashley is aged 40 and earns £57,000 per annum as a musical director. What is his income tax liability for the 2012/13 tax year ? (5.8.1) A B C D
11)
if one partner disappears, the other partners will be responsible for the debts of the business. a limited liability partnership is not a legal entity in its own right. requirements for financial and accounting information are far more onerous. a limited liability partnership does not have the ability to borrow.
For mature households, which of the following is seen as a priority ? (5.5.6) A B C D
10)
Business banking IHT planning Business insurance Loan protection
One of the key drawbacks of a limited liability partnership (LLP) compared with an ordinary partnership, is that : (5.3.2.1) A
9)
Tom is self-employed and Bobby is a company director Bobby is self-employed and Tom is a company director Tom is in a limited liability partnership and Bobby is a company director Bobby is in a limited liability partnership and Tom is a company director
£ 12,284 £ 12,684 £ 15,860 £ 19,558
Martin, a basic rate taxpayer, sold some shares after all deductions and allowances and made a gain of £5,000. If his taxable income in 2012/13 was £25,300, what capital gains tax, if any, will he be required to pay ? (5.8.2) A B C D
£ Nil £ 900 £ 1,400 £ 2,646
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12) Howard died in Dec 2007 and left his entire estate of £150,000 to his son, when the nil-rate band was £300,000. Hilda, his widow, subsequently died in May 2012, when the nil rate band was £325,000. By how much, if any, was her nil-rate band increased ? (5.8.3) A B C D
Nil £150,000 £162,500 £325,000
13) Mike recently made a potentially exempt transfer to his son Freddie for £30,000. What is the minimum period he must survive from the date of the transfer before any inheritance tax is charged at a reduced rate ? (5.8.3) A B C D
2 years 3 years 4 years 7 years
14) A person’s domicile mainly affects which of the following forms of taxation ? (5.8.3) A B C D
Capital gains tax Income tax Corporation tax Inheritance tax
15) Veronica made a gift to her son Jack in excess of the nil-rate band for inheritance tax purposes and then died five years later. What relief, if any, would apply to the gift ? (5.8.3) A B C D
None Roll-over relief Indexation relief Taper relief
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Specimen Questions – Topic 6 Meeting customers’ needs – protection 1) All other factors being equal, which one of the following statements is correct in relation to life assurance premiums ? (6.1.1.1) A B C D
Men pay higher premiums than women because of higher morbidity risk Men pay higher premiums than women because of higher mortality risk Women pay higher premiums than men because of higher morbidity risk Women pay higher premiums than men because of higher mortality risk
2) John’s employer has an annual gross profit of £500,000 and an annual wage bill of £100,000.John’s salary is £50,000 per annum and his loss would be felt by the firm for three years. What key person cover could the firm apply for on John’s life ? (6.4.1) A B C D
£250,000 £500,000 £750,000 £850,000
3) Which of the following methods of arranging partnership protection gives the remaining partners the right, but not the legal obligation, to purchase the deceased partner’s share ? (6.4.2) A B C D
The automatic accrual method The buy and sell method The cross-option method The qualifying shareholder method
4) Which one of the following is the most tax-efficient method for establishing a share protection scheme, from an inheritance tax perspective ? (6.4.2) A B C D
Key person insurance The buy and sell method The cross-option method Automatic accrual
5) Which one of the following protection products is designed to provide benefits on death only? A B C D
Mortgage payment protection insurance Critical illness cover Income protection insurance Term assurance
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6) Which one of the following is unlikely to be considered a financial priority for a young, single adult A B C D
Life assurance Accident, sickness and unemployment cover Savings Critical illness
7) Jack and Vera are in their late 50s and their children are now financially independent. Which of the following financial planning needs is likely to be the lowest priority for them ? A B C D
Inheritance tax planning Family protection Private medical insurance Long-term care insurance
8) The main use of a joint life second death policy is : (6.1.1.4) A B C D
to pay a lump sum on diagnosis of a terminal illness. to provide a tax-efficient savings vehicle to provide funds to pay an inheritance tax liability to repay a joint mortgage
9) Paul and Heather have now decided to divorce. They have two children, George and Stella, aged seven and nine. What actions, if any, should be taken with regard to existing life, accident and health insurance policies ? A B C D
No action need be taken until a decree absolute is issued by the court. All insurances will need to be re-evaluated, which should take place before the next review date. Arrangements should be appraised at the next review meeting. Life assurance protection should be reviewed and adjusted, because the level of insurable interest will now be reduced.
10) Which of the following benefits and options would not be added to a Universal Whole of Life policy ? (6.1.2.2.1) A B C D
Income Protection Insurance Critical Illness Cover Accident and Sickness cover Hospitalisation Benefit
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11) What is the assumption where a company decides to adopt the standard formula when calculating the appropriate level of key person cover for an employee whose loss would have an adverse impact on the profitability of the company ? (6.4.1) A B C D
That the key employee’s contribution to profit is in the same proportion as his/her remuneration bears to the company’s total wage bill. That the key employee’s remuneration is in the same proportion as his/her overall contribution to the company’s annual turnover. That it would take one year for the company to recover from the financial impact of the loss of the employee. That the key employee’s contribution to profit is in the same proportion as his/her remuneration bears to the annual turnover of the company.
12) Which one of the following regarding waiver of premium benefit on a life assurance policy is false ? (6.1.2.2) A B C D
Waiver is not an automatic feature of the plan. Benefits are usually payable immediately. There is a small additional monthly charge The waiver of premium option is particularly attractive to the self-employed.
13) What is the deferred period under an income protection insurance policy ? (6.2.2) A B C D
The time before the policy cover takes effect. A period of sickness during which no benefit is payable. The period before the start of the policy and completion of underwriting. A period during which no premiums are allocated to purchase units.
14) Derek made a claim on his critical illness policy, but later recovered and returned to work. How was his policy affected ? (6.2.1) A B C D
He had the option to re-start the policy at a higher premium. The cover was reinstated, but his previous illness was excluded. No further premiums were required because the policy had ceased. The policy could be reinstated, provided he repaid the claim.
15) For whom is income protection insurance (PHI) particularly important ? (6.2.2) A B C D
Self-employed Part time employees Full-time employees Part time self-employed
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16) On a with-profits policy, what is a reversionary bonus ? (6.1.2.1) A B C D
An irregular payment determined by the type of policy and the number of lives assured. A payment made on maturity at the discretion of the assurance company. One which reverts to a minimum level in the event of a claim. One which is declared regularly and once attached to the policy is guaranteed payable at the maturity of the policy.
17) There are three key elements to consider when advising on life cover – which of the following is not included ? (6.1.1.1) A B C D
The level of cover required The type of plan Potential inheritances The term for which cover is required
18) What will cause fluctuations in the value of a unit-linked policy ? (6.1.2.2) A B C D
Fluctuations in the value of the underlying investments. The amount of the reversionary bonuses which have been allocated. The length of time the policy has been held. The amount of terminal bonus added.
19) How would a life company underwrite premiums on an increasing term assurance plan (6.1.3.2) A B C D
On the initial level of cover By a fixed percentage each year On the level of cover halfway through the policy term On the final level of sum assured.
20) John is a self-employed bricklayer. To which benefit is he initially entitled if he is unable to work because of illness ? (6.2.6.2) A B C D
Statutory Sick Pay Employment and Support Allowance Short-term higher rate Incapacity Benefit Long-term Incapacity Benefit
21) Under the Employment and Support Allowance, an assessment phase rate is initially paid for what period of the claim ? (6.2.6.2) A B C D
Three days The first 13 weeks The first 14 weeks 28 weeks
25
22) Keith is considering using the conversion option under his convertible term assurance policy and can easily afford to increase his premiums. What factor is most likely to influence his choice of the two main options typically available under this facility ? (6.1.3.4) A B C D 23)
An insurance policy which includes accident cover would most likely be used in connection with which particular financial need ? A B C D
24)
11 weeks 26 weeks 33 weeks 39 weeks
In which of the following circumstances would a decreasing term assurance not be considered suitable ? (6.1.3.6.1) A B C D
27)
self-employed the trustee of an estate one of three business partners a discharged bankrupt
Statutory Maternity Pay is payable for a maximum of : (6.2.6.7) A B C D
26)
Estate planning House purchase Tax planning Retirement planning
Adam is married with three young children and following a financial review, the need for additional life assurance was identified, with the proceeds going to someone outside the family. This was justified because he is : A B C D
25)
The amount of disability cover he already has in place The degree of risk he is prepared to accept The duration of cover required The state of health of his wife
As part of a low-cost endowment policy. As a gifts inter-vivos plan. As cover for an interest-only loan. As a mortgage protection policy linked to a repayment mortgage.
Employers who contribute to private medical insurance for their employees : (6.2.4.2) A B C D
receive plan benefits that are taxed as trading receipts. can claim the cost as an allowable deduction against corporation tax. pay benefits to employees without deduction of income tax pay corporation tax on their contributions.
26
28)
Which of the following would not be considered a factor in the underwriting process ? (6.1.1.1) A B C D
29)
When a life policy is being taken out on a ‘life of another’ basis, which legal principle applies ? (6.1.1.4) A B C D
30)
Caveat emptor Utmost good faith Insurable interest Subrogation
The maximum life assurance cover that a person can arrange on themselves is : (6.1.1.4) A B C D
31)
Health Marital status Age Sex
unlimited £10 million 10 times their current salary Equivalent of the person’s lifetime income
Which of the following is generally the maximum benefit on an Income Protection Plan (PHI) ? (6.2.2) A B C D
50% - 65% of pre-disability earnings plus state benefits 55% - 60% of post-disability earnings less state benefits 50% - 60% of pre-disability earnings less state benefits 60% - 65% of post-disability earnings plus state benefits
32) Units in a unit-linked policy are purchased at the : (6.1.2.2) A B C D
Bid price Offer price Cancellation price Strike price
27
State Benefits summary People on low incomes
Means-tested income
Means-tested savings
Dependent on NI contributions
Taxable
Working Tax Credit Income Support Jobseekers’ Allowance: Contribution-based Income-based Child Tax Credit
Yes Yes
Yes Yes
No No
No No
No Yes Yes
No Yes Yes
Yes No No
Yes No No
People bringing up children Statutory Maternity Pay Maternity Allowance Child Benefit
No No Yes
No No No
Yes No No
Yes No No
Statutory Sick Pay Incapacity Benefit Employment & Support All. Attendance Allowance Disability Living Allowance Carer’s Allowance
No No No No No Yes
No No No No No No
Yes Yes Yes No No No
Yes Yes Yes No No Yes
People in hospital or residential/nursing care Income Support
Yes
Yes
No
No
People in retirement Basic State Pension Additional State Pension
No No
No No
Yes Yes
Yes Yes
Bereavement Bereavement payment Bereavement allowance
No No
No No
Yes No
No Yes
People who are ill or disabled
28
Specimen Questions – Topic 7 Meeting customers’ needs – savings and investment 1)
Mr and Mrs Green have three children aged 15, 17 and 19. Excluding Junior ISAs, what is the maximum monthly contribution the family can make to stocks and shares ISAs in the 2012/13 tax year ? (7.5.3) A B C D
2)
Which of the following National Savings and Investments products provides tax-free returns ? (7.6.7) A B C D
3)
£2,820 £2,670 £3,760 £4,700
Investment Account Guaranteed Growth Bond Fixed Interest Savings Certificates Income Bonds
The minimum opening deposit in a NS & I Direct Cash ISA is (7.6.6) A B C D
£ 10.00 £ 100.00 £ 500.00 £1,000.00
4)
A higher level of interest applies to NS & I Income Bonds with a balance of over : (7.6.5) A £10,000 B £15,000 C £25,000 D £50,000
5)
Jack encashed his two-year NS&I Fixed Rate Certificate after just 10 months. What did he receive back ? (7.6.7) A B C D
6)
Return of capital + tax-free interest Return of capital + taxable interest Return of capital only Return of capital only, less an early redemption penalty.
Public limited companies whose business is investing in the stocks and shares of other companies are known as : (7.4.3.4) A B C D
Unit trusts Investment trusts Venture capital trusts Corporate bonds 29
7)
The price at which clients buy units in a unit trust is known as the: (7.4.3.1.4) A B C D
8)
Margaret invested £30,000 in an insurance investment bond 15 years ago. The investment has now grown to £61,000. Which of the following withdrawals would have triggered a chargeable event ? (7.4.3.6.1.4) A B C D
9)
A maximum investment plan NS and I Guaranteed Income Bond A National Savings Fixed Interest Savings Certificate A Cash ISA
Which of the following pooled investments permits investment in unquoted private companies ? (7.4.3.4) A B C D
12)
25% 50% 75% 100%
Bob is aged 67, retired and wishes to save £80 per month for an event occurring in four years’ time. He wants a tax-efficient, risk-free environment. Which of the following savings products would you consider to be the most suitable for him ? A B C D
11)
£1,000 in year 11 £4,000 in year 12 £7,200 in year 15 £8,300 in year 5
The maximum overall investment into an Individual Savings Account (ISA) in the 2012/13 tax year is £11,280. What percentage of this figure can be invested in a cash ISA ? (7.5.3) A B C D
10)
Creation price Offer price Cancellation price Bid price
Investments trusts only OEICs and unit trusts OEICs only Unit trusts and investment trusts
In an Open Ended Investment Company (OEIC), the role of the Depository is to : (7.4.3.2) A B C D
manage the investments. buy and sell the OEIC shares. ensure the share price reflects the underlying net asset value of the OEIC investments. oversee the operation of the company and ensure compliance with the rules for investor protection. 30
13)
EIS shares are eligible for 100% Business Property Relief if they have been held for what period prior to the investor’s death ? (7.7.2) A B C D
14)
Who buys and sells the shares of an Open-Ended Investment Company (OEIC), as required by investors ? (7.4.3.2) A B C D
15)
B C D
EIS shares held for a minimum of two years qualify for IHT Business Property Relief Dividends from EIS shares are free of tax if held for five years Investors receive tax relief of 30% on investments up to £200,000 in each tax year Gains will not be subject to capital gains tax if shares are held for five years
An insurance company may pay a terminal bonus on a with-profits endowment policy in which of the following situations ? (7.4.3.6.2.1) A B C D
18)
her National Insurance record is not up to date she is in good health, with a family history of longevity the entire fund is to finance a round the world cruise her employer closed the company scheme several years ago
Which of the following statements relating to (EIS) Enterprise Investment Schemes is correct ? (7.7.2) A
17)
The Authorised Corporate Director The Depositary The Fund Manager The Trustee
Hannah wants to build a retirement fund and has been recommended a stocks and shares ISA, rather than a stakeholder pension. This was because : A B C D
16)
One year Two years Three years Five years
Death only Surrender only Death or maturity Death, maturity or assignment
In which of the following ways does a unit-linked endowment differ from a traditional with-profits endowment ? (7.4.3.6.2.2) A B C D
The sum assured relates only to the death benefit. The qualifying rules are different A potential capital gains tax liability exists for the investor They are more readily saleable on the traded endowment market. 31
19)
Which one of the following is true in relation to the manager of an investment trust ? (7.4.3.4) A B C D
20)
Since 6 April 2012, the maximum investment into an Enterprise Investment Scheme (EIS) that will attract tax relief, is : (7.7.2) A B C D
21)
£100,000 £150,000 £400,000 £1million
A higher rate taxpayer receives a net dividend of £90.00. What additional tax will be payable, if any ? (7.4.3.1.5)) A B C D
22)
He cannot borrow funds He can borrow to improve capital growth and income. He can issue more units or repurchase units according to demand. He can cancel units if the fund value falls sharply
Nil £18 £20 £22.50
The fixed price at which a put option can be exercised is known as the : (7.7.1.1) A B C D
Spot price At the money price Strike price Bid price
32
National Savings and Investments (NS&I) Here is a blank NS & I matrix with which to practice Product Premium Bonds Index – linked Certificates Fixed Interest Certificates Direct ISA
Tax
Min
Max
Basic criteria
Interest
Children’s Bonus Bonds
Guaranteed Income Bond Guaranteed Growth Bond Direct Saver Investment Account Income Bonds
33
National Savings and Investments (NS& I) These are a range of savings and investment products offered on behalf of the Government. All products guarantee a return of capital. Now one of the largest savings organisations in the UK, NS&I has almost 27 million customers and over £97 billion invested. The table below sets out the key NS&I products with which you will need to be familiar for the exam. The first 5 products in the table provide tax-free returns and can be remembered by the pnemonic – PIFI Kids
Product Premium Bonds Index – linked Certificates Fixed Interest Certificates Direct ISA
Tax Tax Free
Min £100
Max £30,000
Basic criteria Age 16
Interest
Tax Free
£100
£15,000
•
Fixed rate + RPI
Tax Free
£100
£15,000
•
Fixed rate
Tax Free
£100
£ 5,640
•
Variable rate
Children’s Bonus Bonds
Tax Free
£25
£ 3,000
Age 7 3 & 5 yrs Age 7 2 & 5 yrs Age 16 UK Residents Individuals Under 16
•
Fixed rate
Guaranteed Income Bond Guaranteed Growth Bond
Taxable
£500
£1 million
16
•
Taxable
£500
£1 million
16
•
Paid net of basic rate tax Paid net of basic rate tax at end of the term
Direct Saver
Taxable
£1
£2 million
16
Investment Account Income Bonds
Taxable
£20
£1 million
7
Taxable
£500
£1 million
7 Monthly income
• • • • • • •
Variable rate Gross Gross Variable rate Gross Taxable Variable rate
Refer to your study text for more details on these products (7.6)
34
Topic 8 – Specimen Questions Meeting customers’ needs – retirement and estate planning 1) Molly will receive the basic State pension in her own right next month when she retires. The pension she receives will be directly related to : (8.1.3.1) A B C D
her credited National Insurance contributions a percentage of her average band earnings over her working life. her age her pre-retirement salary
2) The Government is in the process of equalising the State retirement age for men and women. The equalisation will be fully implemented in : (8.1.3) A B C D 3)
Pensions and certain other investments, such as ISAs, offer tax advantages. Which of the following is an advantage that is enjoyed by pensions, but not by ISAs ? A B C D
4)
None 25% 50% 100%
What is the minimum number of qualifying years’ contributions or credits required to qualify for a full basic State pension ? (8.1.3.1) A B C D
6)
No capital gains tax in the fund The ability to take tax-free cash Tax relief on contributions No income tax liability, other than the tax credit on UK dividend income.
How much tax-free cash, if any, can be taken from a pension arrangement at retirement ? (8.1.1.3) A B C D
5)
2010 2015 2020 2023
20 25 30 35
What is the minimum age at which National Insurance Contributions can be made ? A B C D
There is no minimum age 16 18 or the end of full-time education 21 35
7)
Robert, an additional rate taxpayer, makes a contribution to a pension scheme which exceeds the annual allowance by £15,000. What tax charge, if any, will be applied ? (8.1.1.2) A B C D
8)
Which of the following has the effect of restricting the amount of tax-relieved contributions in an individual tax year ? (8.1.1.2) A B C D
9)
The individual’s final salary The number of years for which the individual is a member of the scheme The investment performance of the pension fund The scheme’s accrual rate
From April 6th 2011, the basic State pension increases each year by: (8.1.3.1) A B C D
12)
Corporate bonds to ordinary shares Ordinary shares to corporate bonds Ordinary shares to preference shares Property to preference shares
Which one of the following will not affect the level of retirement benefits received by an individual in a defined-benefit scheme ? (8.1) A B C D
11)
Annual allowance Lifetime allowance Pension input amount Earnings cap
Richard’s pension fund growth will become totally free of taxation if he switches from : A B C D
10)
Nil £3,300 £7,500 £8,640
the increase in the Retail Prices Index (RPI) the greater of the annual increase in earnings and RPI the greater of the annual increase in earnings, Consumer Prices Index and 2.5% 2.5%
On a stakeholder pension taken out in 2008/9, annual charges must not exceed what percentage of the value of the fund ? (8.1.2.2.1) A B C D
0.5% 1.0% 1.5% 2.0%
36
13)
A SIPP can borrow up to what percentage of the net value of the fund with which to buy a commercial property ? (8.1.2.2.2) A B C D
14)
Teresa, 60 has no net relevant earnings. Assuming she has funds to invest in both a stakeholder pension and a stocks and shares ISA, she can invest how much more, if any, in the ISA than the stakeholder pension in 2012/13 ? (8.1.1.2) A B C D
15)
£2,400 £2,880 £3,000 £3,600
The ‘flexible drawdown’ facility is available to those with secure retirement income of what annual amount ? (8.1.1.3) A B C D
17)
The contributions are the same £ 2,040 £ 7,080 £ 7,680
Jill has relevant earnings of £3,000 per annum in the 2012/13 tax year. What is the maximum net annual tax-relievable contribution she can make to a personal pension or stakeholder plan ? (8.1.1.2) A B C D
16)
25% 50% 75% 100%
£ 20,000 £ 25,000 £ 30,000 £ 50,000
A Stakeholder Pension has which one of the following features ? (8.1.2.2.1) A B C D
Guaranteed returns Proceeds easily accessible Low charges Early retirement age
37
Topic 9 – Specimen Questions Meeting customers’ needs : borrowing 1) Which of the following might be regarded as a disadvantage of an interest-only mortgage? (9.1.1.2) A B C D
The interest rate charged is usually higher than for a repayment mortgage. The outstanding capital remains constant throughout the mortgage term. The mortgage cannot be arranged on a monthly or a daily rest basis. The mortgage term cannot be longer than that of any repayment vehicle.
2) Charles has a capital and interest tracker mortgage - which of the following is a correct description ? (9.1.2.5) A B C D
capped fixed. LIBOR -linked variable rate
3) Anne has a mortgage with a 2% discount over the first two years. At the end of the discount period her payments : (9.1.2.4) A B C D
are expected to increase. are expected to decrease. are expected to stay the same. could decrease or increase, depending on prevailing interest rates.
4) Personal loans are offered by banks, building societies and some finance houses. The purpose of the loan determines whether it is regulated under the terms of the (9.3.1) A B C D
Consumer Credit Act 2006 Financial Services Act 1986 Investment Services Directive Financial Services Action Plan
5) Which of the following would be a benefit to a couple who have a tracker mortgage linked to a stocks and shares ISA ? (9.1.2.5) A B C D
The addition of reversionary bonuses A rise in the rate of inflation A rise in the FTSE 100 index A rise in interest rates
38
Topic 10 – Specimen Questions Regulatory authorities in the UK 1) Supervisory powers for the financial services industry are delegated to the Financial Services Industry under the Financial Services and Markets Act 2000 by the : (10.3) A B C D
Chancellor of the Exchequer Secretary of State for the Department of Business, Innovation and Skills EU Commissioner for Financial Markets Governor of the Bank of England
2) Which of the following defines regulated investments ? (10.3.3) A B C D
FSMA 2000 The Regulated Activities Order 2001 The Regulated Investment Act 2002 The Bank of England
3) Which of the following is not one of the FSA’s Statutory objectives ? (10.5) A B C D
EU harmonisation of financial services Market confidence Consumer protection Reducing financial crime
4) Which of the following would be exempt from the Consumer Credit Act 2006 regulations ? (10.7.1) A B C D 5)
A loan to a small partnership for £26,500 A loan to a self-employed builder for £15,500 A loan to a small business for £30,000 A loan to an individual for £25,000
Which of the following is not deemed to be included in the terms of the Supply of Goods and Services Act 1982 ? (10.7.4) A B C D
The work will be done to a specified standard. The work will be done with reasonable care. A reasonable charge will be made The work will be done within a reasonable time
39
6)
Any firm applying for permission to carry out a regulated activity must satisfy the FSA that it is fit and proper, by meeting a set of threshold conditions. Which of the following is not one of those conditions ? (10.3.1) A B C D
Close links Adequate resources Legal status Accountability
7) The tripartite system of regulation comprises : (10.4) A B C D
HM Treasury,The Office of Fair Trading and The FSA The FSA, The Bank of England and the Home Office The Bank of England, HM Treasury and The FSA The FSA, HM Treasury and the Department for Trade and Industry (DTI)
8) What is the function of the Pensions Regulator ? (10.7.2) A B C D
To advise the FSA on the regulation of occupational pension schemes. To deal with complaints about the running of pension schemes. To give advice and general information about pension schemes. To protect the benefits of members of work-based pension schemes.
9) Jack’s complaint to his credit card company under the Unfair Terms in Consumer Contracts Regulations Act 1999 is still unresolved – to whom can he now take his complaint ? (10.7.5) A B C D
The Office of Fair Trading The Financial Ombudsman Service The Consumer’s Association The FSA
10) Which one of the following contracts would be subject to the Unfair Terms in Consumer Contracts Regulations 1999 ? (10.7.5) A B C D
A contract between two businesses for the supply of metal sheeting. A contract for the sale of a house between a private seller and buyer. An individually negotiated contract for the sale of a fitted kitchen. A standard service contract between an electrical company and a consumer.
40
Topic 11 – Specimen Questions International regulation 1)
The implementation of financial regulation across EU member states is carried out under which overarching programme ? (11.4.1) A B C D
2)
Regulations concerning minimum capital adequacy requirements for banks, are focused on which of the following ? : (11.1.1) A B
C D 3)
Depositors Directors Regulators Shareholders
The Basel Committee on Banking Supervision is a multinational committee of which of the following institutions ? (11.1.1) A B C D
5)
Basel Accord Banking Act 1987 Financial Services and Markets Act 2000 FSA Conduct of Business rules
The effect of the 1988 ‘Basel Accord’ was that any losses made when bank customers defaulted on their loans should be borne by the bank’s : (11.1.1) A B C D
4)
Financial Services Action Plan Financial Services and Markets Act 2000 Markets in Financial Investments Directive (MiFID) Insurance Mediation Directive
The Bank of England The Bank of International Settlements The European Parliament The European Central Bank (ECB)
Which one of the following is not one of the specific objectives of the Financial Services Action Plan ? (11.4.1) A B C D
Open and secure retail markets A single market for financial services State of the art prudential rules and supervision A single regulatory authority for all financial services in the UK
41
6)
The Life Directive of 2002 stipulated that for policies that carry an investment risk, a life assurance company’s required minimum solvency margin is what percentage of its mathematical provisions ? (11.2) A B C D
7)
4% 99% 100% 104%
Under Basel 11, the minimum capital requirements are calculated by multiplying the institution’s gross income by : (11.1.1) A B C D
0.1 0.15 4% 8%
42
Topic 12 – Specimen Questions The FSA’s responsibilities and approach to regulation 1) Caroline and Anne are both approved persons, but only Caroline performs a significant influence function, which means that: (12.7.4) A B C D
Caroline’s requirement to exercise due skill, care and diligence, is broader Caroline’s requirement to observe proper market conduct standards lasts longer only Caroline can be personally fined for an offence only Caroline can be imprisoned for an offence
2) Stuart, an employee of an investment management company, is subject to an ongoing fit and proper test because he: (12.7.4.1) A B C D
is an administration manager undertakes a controlled function is a senior manager does not require individual registration
3) An authorised firm’s senior management controls should : (12.7.2.2) A B C D
be approved by the Financial Services Authority annually form part of the firm’s disclosure documentation be reviewed regularly by the firm conform to accepted industry practice
4) If the FSA discovers a contravention of its rules, one of the steps it may take is to ‘vary a firm’s permissions’ – this means that : (12.6.1) A B C D
the firm may have one of its regulated activities removed. the firm will be required to sell assets to provide restitution. the firm will need to vary its authorisation from a different regulator. the firm will need to submit each sale to the regulator for approval.
5) An authorized person has made a direct profit of £500,000 by contravening an investment regulation. The FSA is now seeking restitution from the Court. The restitution order will require the person to forfeit the profit to whom ? (12.6.1) A B C D
The Police Authority The Financial Services Compensation Scheme The Regulator The Stock Exchange Council
43
6) Phil has been asked by his firm’s senior management to carry out an audit of their systems and compliance procedures. Under FSA regulations, Phil must have: (12.7.2.2) A B C D
no operational involvement. been a former member of the firm’s sales team. been an employee for at least 5 years. a governing function.
7) The Public Interest Disclosure Act 1998 covers which of the following ? : (12.7.2.3) A B C D
Data protection Disclosure Whistle-blowing Prevention of crime
8) There are eleven Principles for Business which apply to the behaviour of firms and those that carry out the firm’s activities; the principle covering ‘conflicts of interest’ means that firms must : (12.4) A B C D
take reasonable care to ensure the suitability of its advice. arrange adequate protection for clients’ assets when conflicts of interest arise. deal in a fair way between itself and its customers. deal with its regulator in a way that does not cause conflicts of interest.
9) A ‘prudential’ risk is described as : (12.1.2) A B C D
The risk of the firm collapsing because of incompetent management. The risk of loss due to mis-selling or misrepresentation. The risk of a customer not understanding a product. The risk that investments fail to deliver the expected returns.
10) Which part of the FSA Handbook contains the Principles for Businesses (12.3.1) A B C D
Prudential standards High level standards Specialist standards Business standards
11) Which one of the following roles in a regulated firm would be classified as a ‘customer function’ ? (12.5.1) A B C D
John, a director of a multi-national insurance company. George, the manager of a department dealing in risk-assessment. Paul, in charge of a claims department. Stuart, a pension transfer specialist.
44
12) Which set of criteria has the FSA established in order for an individual to be approved to undertake a controlled function ? (12.7.4.1) A B C D
Authorisation Fit and Proper test Part 4 Permission Eligibility Controlled Functionality test
13) Which of the following types of risk is closely associated with fraud, in relation to the selling of investment products. (12.1.2) A B C D
Prudential risk Fraud risk Provider risk Bad faith
14) Any firm applying for permission to carry out a regulated activity must satisfy the FSA by meeting a set of : (12.7.3) A B C D
high level standards threshold conditions OFT guidelines statutory objectives
15) In which category of controlled function would insurance underwriting be listed ? (12.5.1) A B C D
significant management governing systems and control required
16) The concept of Treating Customers Fairly developed from which of the following FSA initiatives ? (12.4.1.) A B C D
Threshold Conditions for approved persons Statutory objectives Principles for Business Prudential standards
17) Which of the following is not one of the FSA’s Statutory objectives ? (12.1.1) A B C D
To maintain confidence in the UK financial system To promote financial stability Secure an appropriate level of protection for consumers To employ a risk-based approach to regulation
45
18) Which of the following roles is not included in the categories of ‘controlled functions’ ? (12.5.1) A B C D
Head actuary Mortgage adviser Investment adviser Money Laundering Reporting Officer
19) Which of the five sections of the FSA handbook deals with the requirements firms must meet in relation to their financial soundness ? (12.3.2) A B C D
High Level Standards Prudential Standards Business Standards Regulatory Processes
20) Arrangements for the supervision of professional firms, such as accountants and solicitors, can be found in which section of the FSA Handbook ? (12.3.5) A B C D
High Level Standards Regulatory Processes Business Standards Specialist Sourcebooks
21) In which category of controlled function would a Money Laundering Reporting Officer be included ? (12.5.1) A B C D
Governing Required Systems and control Significant management
22) Effective balance sheet management is seen as a way of mitigating which one of the following risks ? (12.1.2) A B C D
Prudential risk Capital adequacy risk Credit risk Operational risk
23) Which of the following would not be a step that the FSA would take if it discovered a contravention of its rules ? (12.6.1) A B C D
Rendition Variation of a firm’s permissions Injunction Restitution
46
The FSA Handbook - 12.3 The main Handbook is divided into five sections as outlined below: 1 - The High Level Standards • The Principles for Businesses • Senior management arrangements, systems and controls – responsibilities of directors and senior management. • The threshold conditions – minimum standards for FSA authorisation • The statements of principle for approved persons • The ‘fit and proper’ test for approved persons
2 - Prudential Standards • Requirements of financial soundness that a firm must meet , including the valuation of a firm’s assets and liabilities
3 - Business Standards • The Conduct of Business Sourcebook – standards applied to the marketing and sale of financial products • The Market Conduct Sourcebook – covers investment firms and investment markets, will include issues such as insider dealing.
4 - Regulatory Processes • The rules and guidance for the authorisation of firms for firms seeking authorisation; includes the Supervision Manual, which sets out how the FSA regulate and monitor the compliance of authorised firms.
5 - Redress and Specialist Sourcebooks • Covers, redress, investor complaints and compensation • Specialist sourcebooks covering the arrangements for credit unions and professional firms, such as accountants, solicitors and the supervision of Lloyd’s of London
47
Approved persons and controlled functions Role
Governing
Required
Systems & Control
Significant Management
Customer
Manager – insurance underwriting Money Laundering Reporting Officer Investment adviser
Compliance officer
Corporate finance Adviser Chief executive
Chief Internal Auditor Actuary
Head of risk assessment
Manager of a claims department
Sole Trader
Director
Pension Transfer Specialist Business Operations Manager
48
Approved persons and controlled functions Role
Governing
Required
Systems & Control
Manager – insurance underwriting Money Laundering Reporting Officer
Significant Management a
a
Investment adviser
a
Compliance officer
a
Corporate finance Adviser Chief Executive
Customer
a a
Chief internal auditor a Actuary
a
Head of risk assessment
a
Manager of a claims department
a
Sole Trader
b
Director
b
Pension Transfer Specialist Business Operations Manager
b b
49
Topic 13 – Specimen Questions Principles and rules of the FSA Conduct of Business Sourcebook 1) Which of the following would not typically be found within a key features document ? (13.1.7.2) A B C D
Client-specific information relating to charges Details of where additional information can be obtained Essential elements of the product Money laundering requirements
2) Harrow Bank are about to begin an advertising campaign to promote fresh interest in their UK Equity Unit Trust Fund which was launched ten years ago. What is the minimum period for which performance figures must be shown ? (13.1.3.2) A B C D
5 years 7 years 10 years There is no specific period
3) When drawing up a client agreement, which of the following is least likely to be included ? (13.1.4.2) A B C D
Any restrictions to be placed on the adviser Details of options available in the recommended product How the agreement can be terminated The client’s aims relating to the service being provided
4) Regarding client communications, comparisons with other products must be presented: (13.1.3.1) A B C D
with skill, care and diligence adequately and reasonably accurately in a fair and balanced way
5) Which of the following statements relating to non-solicited real-time promotions (cold calls) is incorrect ? (13.1.3.3) A B C D 6)
The person receiving the call must have an existing client relationship with the firm. The person receiving the call expects to receive calls as part of the relationship. The call relates to a generally marketable packaged product that isn’t a higher volatility fund. A contact point must be given to the client at the beginning of the call
A financial promotion is defined as (13.1.3) A B C D
Mediation activity An offer to enter into pension activity An offer to enter into life assurance activity. An invitation or inducement to engage in investment activity 50
7) Advisers are permitted to operate in one of three categories. Which is the exception ? (13.1.4.1) A B C D
Whole-of-market advisers Multi-tied advisers Panel advisers Tied advisers
8) Which of the following is one of the main aims of the Retail Distribution Review ? (13.1.5) A B C D
Standardise the way in which advice is paid for Raising professional standards Reduction of financial crime Maintaining confidence in the UK financial system
9) With regard to a whole-of-life policy, for how long must fact find information be retained ? (13.1.6.1) A B C D
Indefinitely 3 years 5 years 10 years
10) Conduct of Business Sourcebook (COBS) 4 deals with client communications, particularly financial promotions. Which type of financial promotions are covered ? : (13.1.3) A B C D
internet and written written and non-written broadcast and non-broadcast verbal and written
11) Financial promotions can be communicated only if they have been prepared, or approved by : (13.1.3) A B C D
a suitably-qualified individual an approved person an authorised person a person who has a controlled function within the firm
12) The Retail Distribution Review, published in 2008 was implemented at the end of : (13.1.5) A B C D
2010 2011 2012 2013
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13) When must a suitability report be provided for an execution-only customer ? (13.1.6.3) A B C D
A suitability report is not required Before the transaction is effected Within 14 days of the transaction being effected No later than the cancellation notice
14) The cancellation period for a cash ISA is : (13.1.8) A B C D 15)
In which of the following areas are the fundamental requirements for mortgage advisers significantly less onerous than for pensions advisers ? (13.1.6.2) A B C D
16)
C D
five days after the initial interview as soon as possible after the transaction was effected and no later than the issue of the cancellation notice the end of the cooling-off period 14 days after the policy was effected
The FSA’s ‘KeyFacts’ logo can be incorporated in which of the following documents ? (13.1.4.1) A B C D
18)
Suitability reports Data protection Personalised illustrations Client affordability
With the sale of a monthly unit trust, a suitability report must be sent to the client no later than which of the following : (13.1.6.2) A B
17)
7 days 10 days 14 days 30 days
Annual Stakeholder Pension statements Annual with-profits documentation Suitability reports Services and costs disclosure documents (SCDD)
Which of the following statements regarding information provided by financial promotions to retail clients is incorrect ? Information supplied must : (13.1.3) A B C D
be accurate – giving a fair and prominent indication of risks. be understandable by an ‘average’ member of the target group. not disguise or obscure important terms or warnings. be tested in advance by representatives of the target group.
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19)
Which of the following information would not be included in a Services and Costs Disclosure Document (SCDD) ? (13.1.4.1) A B C D
20)
In terms of product design, the FSA considers that three of the following areas are particularly important – which is the exception ? (13.2.1.1) A B C D
21)
7 days 14 days 21 days 30 days
The overall principle of financial promotions to retail and professional clients, is that they must be : (13.1.3) A B C D
24)
7 days 14 days 21 days 30 days
The statutory cancellation period for an annuity is : (13.1.8) A B C D
23)
identifying the target market for which the product is likely to be suitable stress-testing the product the target group’s financial profile to fall within regulatory boundaries systems and controls in place to manage the risks posed by the product or service design.
The statutory cancellation period for a free-standing AVC is : (13.1.8) A B C D
22)
The name of the regulator The method of payment for the service How to obtain compensation How future unsolicited calls can be made
legal, decent, honest and truthful fair, clear and not misleading reasonable understandable by most of the target group.
Which of the following is covered in Section 3 of the Conduct of Business Sourcebook (13.1.2) A B C D
Client communications Suitability Client categorisation Conduct of business obligations
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25)
What’s covered in COBS 2 ? (13.1.1) A Financial promotions B Conduct of business obligations C Cancellation D Providing product information to clients
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COBS 15 - Cancellation Quiz Which Statutory cancellation (cooling-off) period applies to each product ? Product
14 Days
30 Days
Cash ISA Whole of Life policy Pension Transfer Personal Pension Enterprise Investment Scheme (EIS) Unit Trust Pension Annuity Endowment policy Free Standing AVC
(13.1.8)
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COBS 15 - Cancellation Solutions
Product
14 Days
Cash ISA
♥
30 Days
Whole of Life policy
♥
Pension Transfer
♥
Personal Pension
♥
Enterprise Investment Scheme (EIS)
♥
Unit Trust
♥
Pension Annuity
♥
Endowment policy
♥
Free-Standing AVC
♥
(13.1.8)
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COBS 6 and 8 From the table below, tick the relevant box which shows the information required to be given to the client (initial disclosure) and that required to be included in a key features document Information
Services and Costs Disclosure Doc
Key Features Document
Essential elements of the product The service offered, ie the range of products on which advice will based, eg whole of market Details of the risk factors associated with the product Client-specific information regarding charges and their impact on what the customer may receive, including projected maturity values. Which service is being provided, eg information only or advice and a recommendation The consequences of making the product paid-up Any commission, or equivalent, that will be paid Information regarding tax implications on encashment of the product at maturity, or before The method of payment for services – fees, commission or a choice Details of where additional information can be obtained How to obtain compensation from the Financial Services Compensation Scheme What to do in the event of a complaint Who regulates the firm
Product
A Key Features Document to be provided
Share purchase Life assurance policies Unit Trusts Investment Trusts Gilts National Savings products Pension policies Bank current account 30.01.11
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COBS 6 and 8 The hearts in the table indicate the information that is required to be given to the customer (initial disclosure) and that required to be included in a key features document Services and Costs Disclosure Doc
Information Essential elements of the product The service offered, ie the range of products on which advice will based, eg whole of market Details of the risk factors associated with the product Client-specific information regarding charges and their impact on what the customer may receive, including projected maturity values. Which service is being provided, eg information-only or advice and a recommendation The consequences of making the product paid-up Any commission, or equivalent, that will be paid Information regarding tax implications on encashment of the product at maturity, or before The method of payment for the service – fees, commission or a choice Details of where additional information can be obtained How to obtain compensation from the Financial Services Compensation Scheme What to do in the event of a complaint The name of the regulator Product Share purchase Life assurance policies Unit Trusts Investment Trusts Gilts National Savings products Pension policies Bank current account
Key Features Document
♥ ♥ ♥ ♥
♥ ♥ ♥ ♥ ♥ ♥ ♥ ♥ ♥
A Key Features Document to be provided
♥ ♥ ♥
♥
30.01.11
Check your understanding of this material in the text at 13.1.4.1 – Initial Disclosure and 13.1.7.2 – Product Disclosure
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Topic 14 – Specimen Questions Money laundering, data protection and complaints procedures 1)
A client has referred his complaint about the investment advice he received from his adviser to the Financial Ombudsman Service (FOS). The FOS has ruled that the advice was unsuitable and has recommended to the firm than an award of £155,000 plus £2,500 reasonable costs be paid. What is the maximum amount of compensation the adviser is obliged to pay ? (14.3.2) A B C D
2)
Which of the following does not apply to the work carried out by the Financial Action Task Force? (14.1.4) A B C D
3)
Acquiring Arranging Concealing Tipping off
Where ID has not previously been obtained, an identity check must be carried out if a bank deposit transaction exceeds : (14.1.7) A B C D
5)
Law enforcement Setting appropriate standards Identifying trends in money-laundering Evaluating how countries have implemented anti-money laundering programmes.
Which is not one of the principal money laundering offences ? (14.1.3) A B C D
4)
£100,000 £150,000 £152,500 £157,500
€ 1,000 € 2,500 €10,000 €15,000
At least how often must the senior management of a firm requisition a report from the Money Laundering Reporting Officer (MLRO) every : (14.1.10) A B C D
3 months 6 months year 3 years
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6)
Under the terms of the Data Protection Act, if a case is heard in the Crown court, the maximum fine for a successful prosecution for the misuse of data is : (14.2) A B C D
7)
In the event of the default of an insurance company, which type of policy would be treated as ‘compulsory’ insurance under the Financial Services Compensation Scheme (14.3.3) A B C D
8)
Bill paid his premiums by direct debit. Ben started his policy later than Bill This was Ben’s second claim in five years. Bill’s claim was in connection with his third party motor policy.
Records of complaints relating to MiFID business must be kept for what period after the complaint was received ? (14.3.1) A B C D
11)
£ 50,000 £ 80,000 £170,000 £190,000
Following the default of WNPO Insurance, Bill and Ben both lost £3,000. They both received compensation from The Financial Services Compensation Scheme, but Bill received £300 more than Ben – why was this ? (14.3.3) A B C D
10)
Personal pension Life assurance Third Party Motor Contents
Janet and John held a joint bank deposit account with a balance of £190,000. If the bank defaulted, what is the maximum the couple could claim under the Financial Services Compensation Scheme ? (14.3.3) A B C D
9)
Unlimited £ 5,000 £ 10,000 £100,000
Indefinitely 5 years 4 years 3 years
An authorised firm must produce a report on reportable complaints to the FSA how frequently ? (14.3.1) A B C D
Every three months Every six months Annually Bi-annually 60
12)
Which of the following transactions would not require satisfactory evidence of identification to be provided, under the Money Laundering regulations ? (14.1.7) A B C D
13)
Under money laundering regulations, evidence of identification must be retained for what period after the relationship with the customer has ended ? (14.1.9) A B C D
14)
Jack, who has applied for an insurance investment bond with an initial investment of €1,200. Joe, who wishes to apply for a with-profits endowment policy with annual premiums of €1,500. James, who is opening a bank deposit account with a gift from his mother of €17,000 John, who is buying shares in Marks and Spencer plc for €20,000.
1 year 3 years 5 years Indefinitely
Within a company, who is responsible for ensuring that the requirements of the Data Protection Act are met ? (14.2.3) A B C D
Data subject Data controller Data processor Information commissioner
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Financial Services Compensation Scheme – Claims post-1 Jan 2010 Insurance Company defaults Protection is triggered if an authorised insurer is unable to meet claims against it, for example if it has been placed in administration or liquidation General insurance advice and arranging The compensation scheme will safeguard policyholders if an authorised firm is unable to pay claims against it, e.g. the FSCS may provide: • A return of premium or compensation in respect of an outstanding claim • Compensation if a customer is not told of an exclusion which results in the insurer rejecting the claim. • Compensation in respect of insufficient cover • Compensation in the event of fraud, for example, if premiums were inflated • Compensation if a secondary intermediary becomes insolvent before passing premiums to an insurer Bank or building society deposits The compensation scheme is triggered if an authorised deposit-taker (eg a bank, building society or credit union) is unable to repay its depositors Investment business FSCS provide protection if an authorised investment firm is unable to pay claims against it e.g. • Losses arising from bad investment advice, poor investment management or misrepresentation • The firm goes out of business and cannot return investments or money Mortgage advice and arranging A claim on the FSCS depends on the suitability of the advice for the customer’s needs at the time:- e.g • If the customer is not advised about the different types of mortgage and loses money because of it • If the mortgage details are incorrect and the customer loses money as a result • If the customer was advised to switch mortgages without an adequate explanation of why the switch should be made and lost money because of it.
Claims for life assurance, pensions, home insurance, general insurance 90% of the claim, with no upper limit Compulsory Insurance – Third party motor or employer’s liability 90% of the claim, with no upper limit
£85,000 per person per firm
£50,000 per person per firm Includes : • Stocks and shares • Unit trusts • Futures and options • Personal pension plans • Long-term investments such as mortgage endowment policies 100% of the first £50,000 of a claim
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Topic 15 – Specimen Questions Important legal principles 1) Above what level is a bankrupt’s interest in a property included in their assets ? (15.5.2) A B C D
£ 250 £ 500 £1,000 £2,000
2) What is the minimum number of partners permitted in a Limited Liability Partnership ? (15.1.3) A B C D
2 4 6 10
3) By whom must an individual voluntary arrangement (IVA) be supervised ? (15.5.3) A B C D
An insolvency trustee An insolvency practitioner The Trustee in bankruptcy The County Court
4) In the context of financial services, which of the following would be treated as ‘legal persons’ ? (15.1) A B C D
Beneficiaries Executors, beneficiaries and trustees Executors and trustees Minors
5) In terms of contract law, the subject of a contract must be matched by : (15.3.1) A B C D
an invitation to treat an offer a consideration an acceptance
6) The two forms in which a lasting power of attorney can be arranged, are : (15.2.1) A B C D
protection and welfare personal welfare and property and affairs personal welfare and financial affairs enduring interests and protection
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7)
Which of the following maintains a register of those who have set up a lasting power of attorney ? (15.2.1) A B C D
8)
The trustee in bankruptcy can ‘attack’ prior transactions, where assets were gifted or sold at less than their true value, in what period before bankruptcy ? (15.5.2) A B C D
9)
Jackie and Joan both have realty Jackie has realty, Joan has personalty. Joan has realty, Jackie has personalty. Joan and Jackie both have personalty.
Contracts for which of the following transactions cannot be on a verbal basis ? (15.3.1) A B C D
12)
The donor marries The donor dies When any time limit specified expires The donor becomes bankrupt
Jackie has a property and Joan has a stamp collection. How does the law relate to these two types of property ? (15.4) A B C D
11)
1 year 2 years 4 years 10 years
In which one of the following circumstances would a donor’s power of attorney not be revoked ? (15.2) A B C D
10)
The Court of Protection The Public Guardian The FSA The Attorney Register
Shares OEICs Insurance Land
The Mental Capacity Act 2005 introduced two new criminal offences of ill treatment and wilful neglect of a person who lacks capacity. A person found guilty of these offences may be liable to a maximum prison term of : (15.2.1) A B C D
1 year 3 years 5 years 7 years
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13)
An individual voluntary arrangement (IVA) can only be set up if creditors who represent what percentage of the debts agree to the arrangement ? (15.5.3) A B C D
14)
The donor has the option of choosing up to how many people they wish to be told if an application for registration of a Lasting Power of Attorney is made ? (15.2.1) A B C D
15)
The managing director The finance director The creditors A liquidator
Financial advisers who act as company representatives, are acting as: (15.3.2) A B C D
18)
£ 500 £ 750 £1,000 £5,000
A company voluntary arrangement cannot be proposed by which of the following ? (15.5.5) A B C D
17)
One Two Five Seven
The minimum debt that can be subject to bankruptcy proceedings is : (15.5) A B C D
16)
25% 50% 75% 100%
principals agents of the product provider agents of the customer agents of the product provider and the customer
The relationship between a principal and their agent is governed by : (15.3.2) A B C D
Fiduciary law The law of tort The law of statute Contract law
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19)
Creditors that represent what percentage of a company’s debts must agree to a company voluntary arrangement (CVA) being set up ? (15.5.5) A B C D
50% 60% 75% 100 %
20) With regard to the bankruptcy rules, if the debtor’s family are living with them, the sale of the property can be delayed for 12 months so that alternative housing can be arranged. If the trustee in bankruptcy has not disposed of the property, obtained a charge over it, or sought a possession or charging order within three years from the bankruptcy order ,to whom will the property revert ? (15.5.2) A B C D
The bankrupt The County Court The creditors The trustee in bankruptcy
21) The value of a registered pension fund cannot be claimed by the trustee in bankruptcy, because it doesn’t form part of the bankrupt’s estate. The court could, however, apply an order which requires some of the bankrupt’s income, including pension income, to be paid to the trustee; this order is known as : (15.5.2) A B C D 22)
If an applicant for an insurance policy avoids the disclosure of material facts, the contract, at the option of the insurance company, could become : (15.3.1) A B C D
23)
A pension requisition order An income payments order A regulated activities order A trustee income order
an avoidance contract voidable void avoidable
One of the main provisions of a Debt Relief Order (DRO) is that the debtor : (15.5.4) A B C D
owes a maximum of £25,000 has disposable monthly income after tax, NI and normal household expenses of no more than £50.00 must be domiciled in an EU member state has gross assets of no more than £3,000
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Topic 16 – Specimen Questions Wills intestacy and trusts 1) Where the settlor is named as a potential beneficiary under the terms of a discretionary trust, this is known as a : (16.6.11) A B C D
back-to-back trust maintenance trust statutory trust revert to settlor trust
2) Where a trust is established by the person who owns the trust assets, the trustees are appointed by the : (16.5.3.1) A B C D
settlor executor testator Court of Trustees
3) Who is considered to be the legal owner of a life policy placed into trust ? (16.5.3.2) A B C D
The policyholder The beneficiary The trustee The settlor
4) For an interest-in-possession trust set up in 2010, how often could a periodic IHT charge be levied ? (16.7.3.3) A B C D
Annually Every 5 years Every 6 years Every 10 years
5) The Trustee Act 2000 imposes three special duties on trustees when making investments. Which of the following is not a requirement of trustees ? (16.5.3.2) A B C D
Avoidance of capital risk when investing for a minor beneficiary Awareness of the need for diversification The need to obtain and consider proper advice where appropriate The need to review investments
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6) Robert has taken out a policy on his own life, for the benefit of his wife. He has completed a declaration establishing a MWPA trust. This is an example of a : (16.6.12.1) A B C D
discretionary trust flexible trust maintenance trust statutory trust
7) George arranged a life policy, written in trust for the benefit of his wife. However, he died without making a will. What will happen to the proceeds of the life policy ? (16.5.5) A As there is no valid will, the policy proceeds will be added to George’s estate, but distributed to the beneficiary named in the trust deed B The policy proceeds do not form part of the estate and will be distributed by the trustees in accordance with the terms of the trust C The policy proceeds will be held outside George’s estate, but cannot be distributed to the beneficiary named in the trust, without the consent of the court. D The rules of intestacy override the provisions of the trust and the trust is nullified by the absence of a will. 8) Assets are held in an interest-in-possession trust and capital gains are realised. What CGT exemption, if any, can be claimed by the trustees ? (16.7.2) A B C D
None Half the individual rate The individual rate Twice the individual rate
9) Sarah, aged 19, is a beneficiary under an absolute (bare) trust. Trust assets are investments currently valued at £15,000. How is the income from the trust taxed, if at all? (16.7.1.1) A No income tax liability arises until Sarah becomes the legal owner of the assets which are currently held in trust. B Sarah is responsible for the payment of income tax and can use her personal allowances to offset any liability C The tax liability accumulates during the term of the trust and is paid by the settlor on the winding-up of the trust. D The trustees are responsible for settling any income tax liability and may sell trust assets to pay any tax due. 10) If a lifetime transfer above the nil rate band is made into an interest in possession trust, it will be immediately : (16.7.3.2) A B C D
free of any tax charge subject to a 10% tax charge subject to a 20% tax charge subject to a tax charge at 42.5%
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11) Which condition is not a requirement for a policy arranged under the Married Women’s Property Act ? ( 16.6.12.1) A B C D
It applies in England and Wales only It must be an own life policy It must be for the benefit of the spouse and children of the assured The wording of the policy must refer to the Act
12) Why might Mr Jones not wish to use the Married Women’s Property Act (MWPA) as a suitable trust for his life assurance arrangements ? (16.6.12.1) A B C D
The cost of the trustees’ services may be prohibitive. This type of trust is restricted to children and stepchildren only. The life policy he was planning to use is in the joint names of himself and his wife. The trust assets may not be protected in the event of his bankruptcy.
13) Which of the following is one of the three ‘certainties’, required for a valid trust ? (16.5.4) A B C D
Certainty of timing Certainty of effects Certainty of execution Certainty of objects
14) The trustees of discretionary trusts are generally liable to income tax at the rate applicable to trusts. There is an exemption on part of the income of discretionary trusts, which means that only basic rate tax is payable on the first : (16.7.1.3) A B C D
£ 500 £1,000 £3,250 £5,100
15) Shirley and Grant are trustees of separate trusts, but Shirley’s duties are much more straightforward than Grant’s. This is most likely to be because : (16.6) A B C D
Grant is also the settlor of the trust They are trustees of an absolute trust and a discretionary trust respectively. Shirley is also a beneficiary under her trust They are the trustees of a discretionary trust and flexible trust respectively.
16) William and George are creating a trust. William is certain who his beneficiaries should be, but George is not. Which type of trust(s) should William and George each create ? (16.6) A Both William and George should create absolute trusts B Both William and George should create discretionary trusts C William should create a discretionary trust and George should create an absolute trust D William should create an absolute trust and George should create a discretionary trust 69
17) Alfred died intestate aged 88, leaving a spouse and one sister. If his estate is valued at £500,000, how will it be distributed ? (16.2) A B C D 18)
It will all go to his spouse His spouse and sister will each receive £250,000 £325,000 will go to his spouse and £175,000 will go to his sister £475,000 will go to his spouse and £25,000 will go to his sister How is the loan part of a gift and loan trust treated for IHT purposes ? (16.6.8) A B C D
19)
The terms of a deceased person’s will can be changed by the beneficiaries by the use of a ? (16.4.2) A B C D
20)
chargeable lifetime transfers potentially exempt transfers (PETs) exempt transfers potentially chargeable transfers
With a gift-and-loan trust, which products are normally used ? (16.6.9) A B C D
22)
Deed of variation Disclaimer Codicil Deed of variation or a disclaimer
Transfers into interest-in-possession trusts which were set up prior to 22nd March 2006, were treated for IHT purposes as : (16.6.5) A B C D
21)
It isn’t treated as a transfer of value It is a potentially exempt transfer It is a chargeable lifetime transfer It’s a gift with reservation
Joint whole life policy in the names of the settlor and beneficiaries Whole life policy in the name of the settlor Joint life investment bond in the names of the settlor and beneficiaries Investment bond in the name of the settlor
Robin transferred a property into the name of his wife, Robina, with his children as contingent beneficiaries under the trust on her death. If the trust was set up in July 2010, what is the maximum period the trust can run, under the terms of the Perpetuities and Accumulations Act 2009 ? (16.5.2) A B C D
In perpetuity For a maximum of 80 years For a maximum of 125 years For the full lifetime of the children.
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23)
With which of the following types of trust is it not possible to defer a CGT liability ? (16.7.2) A B C D
24)
Which of the following types of will forms a legal contract between a couple and becomes binding on the death of the first party ? (16.1.4.2) A B C D
25)
her mother her brother her sister her brother and sister equally
The only gifts that Bob and Carol have made in recent years have come from surplus income. They are now considering giving £40,000 to each of their children, Ted and Alice, for a future house deposit. What is the inheritance tax treatment of these gifts ? (16.6.5) A B C D
28)
a child a charity their parents a mortgagee
Miss Black was unmarried and died intestate ; she had no children. She was survived by her mother and brother and sister. Under the laws of intestacy, who inherited her estate ? (16.2) A B C D
27)
Mirror Mutual Joint Back-to-back
A single person could arrange a policy under an MWPA (Married Women’s Property Act) trust for the benefit of : (16.6.12.1) A B C D
26)
Interest in possession Absolute Discretionary Flexible
Each gift will be a chargeable lifetime transfer with a value of £34,000 Each gift will be a chargeable lifetime transfer with a value of £40,000 Each gift will be a potentially exempt transfer with a value of £34,000 Each gift will be a potentially exempt transfer with a value of £40,000
If a will makes valid provision for the distribution of some of the assets of the estate , but not for others, this is known as : (16.2) A B C D
Intestacy Sequestration Partial intestacy Partial apportionment 71
Topic 17 – Specimen Questions Understanding risk 1) Which of the following is a non-business risk, but is also a type of event risk ? (17.4.2.1) A B C D
Reputation risk Macroeconomic risk Product risk Technology risk
2) Which of the following risks is not one that that is faced by customers of financial institutions ? (17.6.5) A B C D
Market risk Reputation risk Mis-selling risk Prudential risk
3) The two main categories of risk are : (17.2.1) A B C D
Financial and pure Speculative and financial Uncertain and pure Pure and speculative
4) Which of the following is a ‘business’risk ? (17.4.1) A B C D
Credit risk Market risk Technology risk Foreign exchange risk
5) Which type of risk is part of operational risk ? (17.6.1) A B C D
Governance risk Counterparty risk Concentration risk Market risk
6) Settlement risk is also sometimes known as : (17.5.8) A B C D
Herstatt risk Credit risk Maslow’s risk Counterparty risk
72
7) Hadham Bank are looking to raise funds of £10m by making an issue of bonds. Which risk does it face by doing this ? (17.6.11) A B C D 8)
Liquidity risk Credit risk Capital adequacy risk Gearing risk
Which of the following would be a non-business risk and also a financial risk ? (17.4.2.1) A B C D
9)
Business continuity risk Litigation risk Capital adequacy risk Credit risk
If a bank is owed £50,000, but the borrower might default and only repay part of this debt, this is known as which type of risk ? (17.5.1) A B C D
10)
Concentration risk Credit risk Market risk Counterparty risk
Which risks would be involved in the purchase of UK corporate bonds ? A B C D
11)
Which type of risk is involved with the purchase of unit trusts ? A B C D
12)
Interest risk only Interest risk, inflation risk only Interest risk, inflation risk and capital risk Interest risk, inflation risk, capital risk and exchange rate risk
Concentration risk Gearing risk Pure risk Two-way risk
The risk of loss resulting from someone making a legal claim against an organisation, is referred to as : (17.6.8) A B C D
bad faith risk credit risk litigation risk regulatory risk
73
13)
Capital adequacy risk is a type of : (17.4.1) A B C D
14)
Regulatory risk is a type of : (17.6.9) A B C D
15)
Speculative risk Two-way risk Pure risk Event risk
The risk for a company of having a high level of borrowing in proportion to its share capital, is known as : (17.6.11) A B C D
18)
Settlement risk Concentration risk Counterparty risk Systemic risk
The risk of an individual being involved in a car accident, would be : (17.2.1) A B C D
17)
bad faith risk event risk financial risk reputation risk
Lehman Brothers failed in September 2008 and were unable to repay the capital due on a number of structured investment products. This was an example of : (17.5.7) A B C D
16)
Business Continuity risk Event risk Business risk Liquidity risk
Gearing risk Capital adequacy risk Liquidity risk Market risk
The risk of employee misconduct or fraud, would typically be defined as : (17.6.1) A B C D
An operational risk A business continuity risk A litigation risk A macro-economic risk
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19)
The risk of a company failing because of weak internal systems and controls, would be an example of : (17.6.1) A B C D
20)
An investor’s shares have fallen in value ; which of the following risks has the investor been specifically subjected to ? (17.5.2) A B C D
21)
Technology risk Organisational Technology Business continuity
What type of risk could be caused by human error ? (17.4.2.2) A B C D
23)
Credit risk Interest rate risk Market risk Settlement risk
If the branch office of a bank is flooded, what risk could this represent ? (17.6.4) A B C D
22)
Concentration risk Counterparty risk Settlement risk Governance risk
operational risk bad faith risk governance risk counterparty risk
Which of the following risks did the Basel Accord seek to address ? (17.6.2) A B C D
Counterparty risk Capital adequacy risk Credit risk Gearing risk
75
CLASSIFICATIONS OF RISKS FACING BUSINESSES In broad terms, the risks facing a company can be seen as either business (internal) or non-business (external) We have categorised these risks below and hopefully the pnemonics will help you remember the structure. It is essential that these lists are learnt for the exam
BUSINESS RISKS
PMTLGC Product risk Macroeconomic risk Technology risk Liquidity risk Gearing risk Capital adequacy risk
NON-BUSINESS RISKS
FINANCIAL RISKS
MFICC Market risk Foreign Exchange risk Interest rate risk Credit risk Commodity price risk
OPERATIONAL RISK
EVENT RISKS
LBRR Litigation risk Business continuity risk Regulatory & political risk Reputation risk
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Topic 18 – Specimen Questions Managing risk 1)
Which of the following types of risk is the FSA not seeking to reduce ? (18.4) A B C D
2)
Which type of risk is a concern to investors in Gilts ? (18.5.2.4) A B C D
3)
removal retention sharing transfer
Which of the following is not a form of risk-sharing ? (18.2.2.1) A B C D
6)
Corporate bonds Equities Index-linked National Savings Certificates Property
Using a captive insurance company is a form of risk : (18.2.2.1) A B C D
5)
Counterparty risk Credit risk Inflation risk Non-systemic risk
Which of the following would not offer protection against inflation risk ? (18.5.2.4) A B C D
4)
Bad faith risk Performance risk Prudential risk Mis-selling risk
Finite risk insurance Partial reinsurance Self-insurance Using an excess
Which of the following cannot be reduced by diversification ? (18.2.4.1) A B C D
Concentration risk Exchange rate risk Non-systemic risk Systemic risk
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7)
Finite risk insurance is best described as : (18.2.3) A B C D
8)
Which of the following involves methods of risk containment, where an organisation bears the risk itself and if an adverse outcome occurs, will suffer the full amount of the loss ? A B C D
9)
Netting Offloading Securitisation Spreading
Risk neutralisation can include elements of risk control and risk containment. The methods of neutralising risk are : (18.2.4) A B C D
12)
Bad faith risk Performance risk Provider risk Prudential risk
Which technique is commonly used to hedge currency risk ? (18.2.4.2.1) A B C D
11)
Risk avoidance Risk control Risk retention Risk transfer
Which type of risk is closely associated with mis-selling of investment products ? (18.4) A B C D
10)
risk neutralisation risk retention risk sharing self-insurance
Pooling Hedging Pooling and hedging Pooling, diversification and hedging
The FSA has indicated several different types of risk faced by consumers. Which of the following is covered by ‘performance risk’ ? (18.4) A B C D
Administrative performance Performance of the contract Guaranteed product performance Investment performance
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13)
Which type of risk can be reduced by ‘netting’ ? (18.2.4.2.1) A B C D
14)
Car insurance is an example of : (18.2.3) A B C D
15)
Prudential Bad faith Complexity Event risk
Hedging is a technique which is designed to reduce or eliminate risk. Which of the following would be evident with this type of investment strategy ? (18.2.5) A B C D
18)
Full with-profits endowment Low-cost endowment Non-profit endowment Repayment mortgage
Which of the following reflects the risk to customers due to fraud ? (18.2.3) A B C D
17)
finite risk risk sharing self-insurance risk retention
In relation to mortgage repayment, with which of the following products could the policyholder face a shortfall risk when the policy matures ? (18.5.2.2) A B C D
16)
Credit risk Currency risk Idiosyncratic risk Systemic risk
Perfect positive correlation Negative correlation Positive alpha Negative alpha
Which of the following risks faced by consumers does the FSA aim to reduce ? (18.4) A B C D
Complexity and bad faith Performance and complexity Bad faith and prudential Prudential and performance
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Topic 19 – Specimen questions Gathering information from the client 1) The ‘know your customer’ requirements are usually met by completing a fact-find with a client. Details of which of the following would not be included ? (19.2) A B C D
Personal information Suitability Employment Objectives
2) As part of the fact-finding process, which of the following could be considered an ‘open’ question ? (19.5.1) A B C D
What is your date of birth ? Have you always been in good health ? For how long have you lived at this address ? What does retirement mean to you ?
3) If the adviser uses tools to assess the client’s knowledge, experience, attitude and personality, this type of approach to risk assessment is known as : (19.2.8.2) A B C D
a menu approach a psychometric approach stochastic modelling a portfolio approach
4) Open-ended questions are primarily used to establish: (19.5.1) A B C D
details of the client’s personal circumstances precise details regarding income and expenditure figures relating to assets and liabilities soft facts about a client’s attitudes and feelings
5) Closed questions are primarily used to : (19.5.1) A B C D
highlight the client’s plans and objectives establish factual information about the client. explore the client’s attitudes and feelings expand on information provided by the client
6) Under the ‘know your customer’ requirements, details about the client’s family are important, because : (19.2.1) A B C D
they are useful for possible referrals they may be financially dependent on the client they may have debts they may be a useful source of new business 80
Topic 20 – Specimen questions Addressing the client’s needs 1) The first stage in handling an objection, is to : (20.3.3) A B C D
Ignore it Agree with it Quantify it Qualify it
2) For what minimum period must an adviser keep records relating to MiFID business ? (20.4) A B C D
Indefinitely 3 years 5 years 7 years
3) When explaining a recommended solution, the first rule of presentation is : (20.3.2) A B C D
Caveat emptor Keep it simple Utmost good faith Clarity and simplicity
4) Which one of the following could be described as ‘proactive servicing’ ? (20.5.1) A A letter to a client asking the reason for non-payment of three premiums. B A strongly-worded letter to a client who is querying the charges on his unit trust. C A telephone call to a client’s wife who has contacted you to advise you of her husband’s death. D A telephone call to a client to arrange a pre-agreed review following a salary increase. 5) Roy, an IFA, is about to conduct his annual ‘clearout’ of old files. Under FSA rules, which one of the following records can he destroy ? (20.4) A B C D
A unit trust sale six years ago A pension transfer six years ago A free-standing AVC sale ten years ago A personal pension sale four years ago
6) Which of the following products, taken out on 1st May, still retained cancellation rights at 17th May ? (20.3.5.2) A B C D
Enterprise investment scheme Stocks and shares ISA Personal pension Investment trust 81
Record - keeping
(20.4)
Detailed records of transactions must be kept securely stored, but accessible. Complete the table below with the required length of time : 3 yrs
5 yrs
Indefinitely
FSAVCs Personal Pensions & Stakeholder Pension Transfers Life policies MiFID Business Unit Trusts / OEICs
Solutions on the following page
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Record - keeping Length of time for which detailed record of the transaction must be kept 3 yrs FSAVCs Personal Pensions & Stakeholder Pension Transfers Life policies MiFID Business Unit Trusts / OEICs
5 yrs
Indefinitely ♥
♥ ♥ ♥ ♥ ♥
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Topic 21 – Specimen questions Ethical behaviour 1) Under the FSA’s RDR requirements, from 1 January 2013 competent advisers must complete at least what number of hours Continuing Professional Development (CPD) each year ? (21.4.3) A B C D
21 35 50 75
2) James is subject to an annual ‘fit and proper’ test, because he : (21.10) A B C D
is the manager of an advertising department of an insurance company. is a member of an authorised firm’s compliance department performs a controlled function is the trustee of the firm’s pension scheme
3) John and Jack are both authorised IFAs with an authorised firm, but only Jack has a significant influence function. In terms of a ‘fit and proper’ test, who would have to demonstrate ‘capability’ ? (21.10) A B C D
John Jack Only Jack Both of them
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FSRE – Exam-style question solutions – by topic number 1 2 3 4 1 A 1 D 1 A 1 2 C 2 B 2 D 2 3 C 3 B 3 D 3 4 B 4 A 4 A 4 5 B 5 C 5 D 5 6 C 6 D 6 C 6 7 D 7 B 7 A 8 B 8 B 9 B 9 D 10 D 10 D 11 D 11 A 12 D 12 B 13 A 13 B 14 D 14 C 15 D 15 D 16 D 16 A 17 B 17 A 18 B 18 C 19 D 19 B 20 A 20 B 21 D 21 A 22 A 22 B 23 A 23 D 24 B 24 A 25 A 25 B 26 B 27 C 28 C 29 C 30 A 31 B
7 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21
A C B C C B B D B D A D B A C A C A B D D
8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
A C C B C B C A B C C C B D B A C
9 1 2 3 4 5
B D A A C
10 1 2 3 4 5 6 7 8 9 10
C B A A A B
A B A C A D C D A D
5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
D C D D A A B C A B B C B D D
11 1 2 3 4 5 6 7
A A D B D A B
6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32
B C C C D A B C B C A B B C A D C A D B B C B C D C B B C A C B
12 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21
A B C A C A C C A B D B D B A C D B B D B
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22
C
13 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
D A B D D D C B C B C C A C A B D D D C D D B C B
19 1 2 3 4 5 6
B D B D B B
14 1 2 3 4 5 6 7 8 9 10 11 12 13 14
C A D D C A C C D B B A C B
20 1 2 3 4 5 6
D C B D A C
15 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23
C A B C C B B B A B D C C C B C B A C A B B B
21 1 2 3
B C D
16 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
D A C D A D B B B C D C D B B D D A D B C C B B A A C C
17 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23
A B D C A A D D B C D C C B C C A A D C D A B
22 23
A A
18 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
B C A B C D C C A A C D B B B B B C
07.02.13
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Tax Table 2012 / 2013 For use in the following ifs examinations from 1 September 2012 to 31 August 2013: Certificate for Financial Advisers (CeFA®) Certificate in Mortgage Advice and Practice (CeMAP ®) Certificate in Financial Administration and Planning (CeFAP ®) Certificate in Regulated Equity Release (CeRER®) Certificate in regulated Complaints Handling (CeRCH®) Diploma for Financial Advisers (DipFA) This tax table provides information relating to the 2012/13 tax year, unless otherwise stated. Where rates and allowances are not specified in the questions, the following should be applied in answers where taxation is a relevant consideration and/or is required as part of the answer:
Income Tax Basic rate Higher rate Additional rate
Personal Allowances Personal Married couples age allowance Income limit for personal allowance (a) (b) *
Rate 20% 40% 50%
£ 0 to 34,370 34,371 to 150,000 150,001+
Age Under 65 65 - 74 75+ 75+
£ 8,105(a) 10,500 (b) 10,660 (b) 7,705(b)* 100,000
If income exceeds £100,000 the personal allowance will reduce by £1 for every £2 of additional income If income exceeds £25,400, these age-related allowances are reduced by £1 for every £2 of additional income. The personal allowance will not reduce below £8,105 Relief restricted to 10%.
Inheritance Tax Annual exemption Small gifts exemption Gross transfer First £325,000 Excess
£ 3,000 250 Rate Nil 40%
Chargeable lifetime transfer Gifts in consideration of marriage: from parents (per parent) from grandparents (per grandparent) from others (per person)
20%
Reduction on tax charge for gifts within 7 years of death
Years between gift and death
% of death rate tax payable
0-3 3-4 4-5 5-6 6-7
100% 80% 60% 40% 20%
5,000 2,500 1,000
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Capital Gains Tax
Rate
£
Personal allowance Chargeable gains
0% 18% 28%
10,600 non taxpayers and basic rate taxpayers higher rate and additional rate taxpayers
Stamp Duty Land Tax Rate
Value of property £
0% 1% 3% 4% 5% 7%
0-125,000* Over 125,000-250,000 Over 250,000-500,000 Over 500,000-1,000,000 Over 1,000,000 Over 2,000,000
National Insurance Contributions Class 1 (employees) Earnings up to £146 per week Earnings over £146 per week
Contracted-in Nil Nil on first £146 + 12% on next £671 + 2% on all over £817
Class 2 (self-employed) Over £5,595 annual profits
£2.65 per week (flat rate)
Class 3 (voluntary)
£13.25 per week (flat rate)
Class 4 (self-employed) On annual profits of On all annual profits above
£7,605 to £42,475 pa £42,475 pa
Contracted-out Nil Nil on first £146 + 10.6% on next £624 12% on next £47 + 2% on all over £817
9.0% 2.0%
Pension Allowances Annual Allowance 2008/2009 2009/2010 2010/2011 2011/2012 2012/2013
£235,000 £245,000 £255,000 £ 50,000 £ 50,000
Lifetime Allowance £1,650,000 £1,750,000 £1,800,000 £1,800,000 £1,500,000
Pension Credit Entitled to credit necessary to guarantee a minimum: Single person
£142.70 per week
Couple
£217.90 per week
Capital (savings, but not the value of the house) over £10,000 is deemed to produce income of £1 per week for every £500 (or part) over £10,000.
Pension Credit – savings credit Age 65 and over: Single person
Capped at £18.54 per week
Couple
Capped at £23.73 per week
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Risk Quiz Check your understanding of the risk categories by completing this exercise : The 2 basic risks
Business Risks
Non-Business Risks Financial risks
Operational risk Event risks
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Risks in Financial Markets
Risks in the management of financial institutions
90
Risk Quiz Solutions The two basic risks ♥♥ Pure risk ♥♥, or Downside risk
• • • • • •
One of the two main types of risk The risk of something going wrong The outcome is unknown Outcome could be better or worse than expected A gain or loss is possible Risk is usually uninsurable
Business Risks ♥♥ Product risk
•
Macroeconomic risk
• • • •
The risk that a product may not be successful on the market, because : It doesn’t suit customers’ needs It’s targeted towards the wrong segment External circumstances change The risk that changing economic conditions could affect sales and profits. e.g.unemployment increases – less money available for savings
Two-way risk, or Speculative ♥♥ risk
• Technology risk
•
Liquidity risk ♥♥
• • •
The risk that developments in technology will affect the company’s business. The risk is focused mostly on computerized systems The risk of having an unexpected cash shortage. The risk of not being able to raise cash and lending being reduced.
Gearing risk
•
A high level of borrowing in proportion to share capital
Capital adequacy risk ♥♥
• •
Having insufficient capital to support its volume of business. Not being able to maintain a certain percentage of their assets in equity capital. Insufficient capital to meet regulatory requirements
• Non-Business Risks Financial risks Market risk
• •
Foreign exchange risk
•
Interest rate risk
•
The risk of changes in the performance of a particular market The risk of a fall in the share prices in banking groups because of lack of liquidity in financial markets Making unexpected gains or losses from changes in foreign exchange rates The two-way risk of gaining or losing when interest rates change.
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Credit risk ♥♥
• •
Debtors will default on their payments when they’re due. The most basic of banking risks
Commodity price risk
•
Risk of higher or lower than expected commodity prices
Operational risk ♥
•
All the risks of direct and indirect losses from failed or inadequate processes or systems – both from human error and from external events The risk of a bank’s systems failing to work properly and causing a loss. Also includes governance risk – arising from the way a firm is operated internally ♥♥
• • Event risks ♥♥ Litigation risk Business continuity Risk Regulatory and Political risk
Someone will make a legal claim against the organisation The risk that an unexpected catastrophe, such as a fire, might occur. • Adversely affects the organisation’s ability to continue a business New regulations might be introduced that would affect the operations and profitability of an organisation •
Reputation risk
Activities of a firm could damage its reputation in the eyes of customers and investors
Systemic risk ♥♥
•
Non-systemic risk ♥♥
•
Risks in Financial Markets Credit risk
Market risk Price risk
Concentration risk ♥♥ Counterparty risk ♥♥
•
The risk that the problems of one group are passed on to others, causing a domino effect ♥♥ and threatening the confidence and stability of financial systems The risk of a particular share or sector failing to deliver the expected returns The risk can be reduced by diversification
• •
Debtors will default on their payments when they’re due. The most basic of banking risks ♥♥
Changes in the market price of shares, bonds and other financial securities The risk to investors that the price of equities and bonds will change while they are being held. •
• • • • •
The risk of putting all of your eggs in one basket The risk of concentration of staff or assets in one location An investor placing too high a proportion of funds in one company The risk to one party that the other party will not carry out their side of the agreement Sometimes known as default risk 92
Foreign Exchange
• •
Making unexpected gains or losses from changes in foreign exchange rates
Interest rate risk
•
The two-way risk of gaining or losing when interest rates change.
Settlement risk ♥♥
•
The risk that one party fails to settle under the terms of a contract The risk that one party meets its obligation to ‘deliver the goods’, while the other party does not
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