You are on page 1of 93

1

18.05.13




DipFa


FinancialServices,Regulation
and Ethics (FSRE)


Exam - Style Questions

2012/13

Douglas James Training Consultants Limited



2

Douglas James Training Consultants Ltd believes that the sources of information on which this material
is based are reliable and has made every effort to ensure the complete accuracy of the text. However, neither
Douglas James Training Consultants Ltd, the author, nor any contributor can accept any legal
responsibility whatsoever for consequences that may arise from any errors or omissions, or any opinion or
advice given.

Whilst Douglas James Training Consultants Ltd makes every effort to ensure that all information (written
and verbal) provided is accurate and correct at the time, no liability for claims in relation to loss of business
or consequential damage incurred by a customer as a result of using or relying on the information will be
accepted. Douglas James Training Consultants Ltd shall not accept responsibility for loss or damage,
whether direct, indirect, incidental or consequential in connection with, or arising from your use of any
information provided by or omitted by Douglas James Training Consultants Ltd.

The documentation could include inaccuracies or typographical errors and is in no way intended to be an
official representation of the CII examinations. Douglas James Training Consultants Ltd may make
improvements and/or changes to documentation at any time, without notice.

All rights reserved. No part of this publication may be reproduced in any material form (including
photocopying or storing it in any medium by electronic means and whether or not transiently or incidentally
to some other use of this publication) without prior written permission of the copywright owner except in
accordance with the provisions of the Copywright, Designs and Patents Act 1988 or under the terms of a
license issued by the Copywright Licensing Agency Ltd. Applications for the copywright owners written
permission to reproduce any part of this publication should be addressed to the publisher at the following
address :

Douglas James Training Consultants Limited
Ravensthorpe House
London Road East
Amersham
Bucks
HP7 9DH

T 01494 722015
F 01494 725310
E info@douglasjamestraining.co.uk

Douglas James Training 2013












12.05.13

3

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)
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








4

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 Public auction
B Private placement
C Rights issue
D Prospectus issue

2) An equilibrium price is one that : (1.1.3)

A provides the highest return for the seller.
B ensures that regulatory requirements are met.
C is determined by the interaction of supply and demand.
D ensures both buyer and seller settle on a reasonable price.

3) 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 4.35%
B 4.54%
C 9.09%
D 9.56%

4) A repo market is : (1.3.1)

A an unsecured secondary market where repossession contracts can be traded.
B a primary market for secured sale and repurchase agreements.
C an unsecured market in which banks lend to and borrow from each other.
D an unsecured primary and secondary market that brings together companies and investors.

5) When the securities in a repo agreement are transferred, the borrower retains the
(1.3.1)

A legal title
B economic ownership
C equitable ownership
D right of subrogation

6) The price of a corporate bond is primarily determined by the : (1.3.6.1)

A interest rate offered.
B term of the bond.
C companys credit rating.
D the interest rate and the term of the bond.


5

7) Which of the following correctly describes a rights issue ? (1.3.7)

A New shares are issued to existing shareholders at current market value .
B New shares are not offered to the general public, but placed with institutional investors.
C New shares are issued to the general public at current market value.
D New shares are issued to existing shareholders at a discount to current market value

8) How are Treasury Bills issued ? (1.3.3)

A Guaranteed interest, with a discount to par value
B Short term, zero coupon, at a discount to par value
C Long-term, with the redemption amount at par value
D Deep-discounted, with the redemption amount at par value

9) Which one of the following types of investment does not pay interest ? (1.3.3)

A Gilts
B Treasury bills
C Local authority stock
D Permanent Interest Bearing Shares (PIBS)

10) If Richard pays 95.00 for a Gilt with a coupon of 5%, what is his yield ? (1.3.6)

A 1.9%
B 4.75%
C 5.00%
D 5.26%

11) The Bank of England is a central bank because it (1.1.1)

A deposits money with the International Monetary Fund.
B has been approved by the Treasury and lends money direct to other banks.
C holds reserves of foreign currency for other banks and institutional investors.
D acts as banker to the government, supervises the economy and regulates the supply of
money.

12) Why would a client be interested in the coupon of a gilt-edged security ? (1.3.1.1)

A It gives an indication of expected income and capital growth.
B It indicates the amount of capital repaid at maturity.
C It indicates the possible gain over the issue price at the redemption date.
D It indicates the interest rate payable over the term.








6

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 a reduction in the companys share price and credit rating
B an improvement in the companys profits and credit rating
C the length of time until redemption and the reduction in the share price
D an increase in bank base rate and the companys share price.

14) Which of the following correctly describes certificates of deposit ? (1.3.4)

A Medium term and non-tradeable
B Medium term and tradeable
C Short term and non-tradeable
D Short term and tradeable

15) CAC40 is a stock market index of: (1.3.7.3)

A the major German stocks
B 40 representative blue chip US stocks
C 40 Hong Kong Shares
D the largest French shares

16) Reinsurance refers to (1.3.9)

A the right of an insurer to call on another to meet a claim.
B the agent acting outside the terms of an agency agreement.
C the unknown consequences of an event occurring.
D a risk-transfer method for insurance companies.

17) The Bank of England is the lender of last resort in the event of : (1.1.1)

A Illiquidity and insolvency
B Illiquidity and solvency
C Liquidity and solvency
D Liquidity and insolvency

18) Which is not a role of the Bank Of England ? (1.1.1)

A Regulate the supply of money and manage gold reserves
B Supervise the Financial Ombudsman Service
C Act as adviser to the Government
D Act as lender of last resort








7

19) How are UK Government gilts issued and traded ? (1.3.1.1)
A New issues and subsequent trading are carried out on the London Stock Exchange.
B New issues and subsequent trading are both done through the Debt Management Office
(DMO)
C New gilts are issued on the London Stock Exchange and subsequent trading is done through
the Debt Management Office
D New gilts are issued by the Debt Management Office and subsequent trading is done on The
London Stock Exchange

20) Which of the following is not one of the traditional functions of money ? (1.1)

A A standard for advanced payment
B A unit of account
C Medium of exchange
D A store of value

21) The most important repo market in the UK is the : (1.3.1.1)

A Securities repo market
B Equity repo market
C London Stock Exchange
D Gilt repo market

22) Commercial paper is used by : (1.3.5)

A large companies who need short-term unsecured borrowing
B smaller companies who need long-term secured borrowing
C large companies who need short-term secured borrowing
D large companies who need long-term unsecured borrowing

23) The term commercial paper is used for securities issued by companies: (1.3.5)

A for a term of up to one year
B for terms of between one and five years
C for a term of more than five years
D for long-term borrowing

24) The main use of a foreign exchange market is : (1.3.8)

A to act as a market where banks and other financial institutions can lend to
each other in different currencies
B to enable banks and other financial institutions to convert one currency into
another, on their own account, or for their customers
C to act as a market where banks can borrow or lend to each other in different currencies.
D to act as an exchange where intermediaries can find the best rates at which to
deal in foreign currencies.




8

25) The main role of the Bank of England is currently to : (1.1.1)

A act as the UKs central bank
B be responsible for microprudential supervision
C be responsible for setting the Governments inflation target.
D regulate the UK money supply.













































9

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) Price stability
B) Low unemployment
C) Balance of payments equilibrium
D) 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) January
B) March
C) April
D) 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 Manage interest rates
B Finance its spending plans
C Determine the level of tax increases
D 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 Governments 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.



10

6) The two main functions of the Government in relation to financial markets are : (2.1)

A Price stability and low unemployment
B Balance of payments equilibrium and economic growth
C Monetary and fiscal policy
D 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 The London Interbank Offered Rate (LIBOR)
B The 14-day Gilt Repo Interest Rate
C The average variable mortgage interest rate
D 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 Deflation
B Inflation
C Depression
D 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 House price movements are included in the CPI, but excluded from the RPI
B House price movements are included in the RPI, but excluded from the CPI
C Many housing-related costs are included in the CPI, but excluded from the RPI
D 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 A fall in the general level of prices and a rise in the purchasing power of money
B A rise in the general level of prices and a rise in the purchasing power of money
C A fall in the general level of prices and a fall in the purchasing power of money
D 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 A reduction in interest rates
B A rise in the budget surplus
C An interest rate increase
D An exchange rate increase

12) What happens to prices during a period of disinflation ? (2.2.3.1)

A They match trends in output and demand
B They rise, but at a slower rate than before.
C They start to fall across the entire economy
D There is negative inflation

11

13) During a period of deflation, prices tend to : (2.2.3.1)

A rise, but at a slower rate than previously.
B fall significantly across the entire economy.
C fall dramatically only for identified industries.
D 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 1.3%
B 1.5%
C 2.0%
D 3.0%

15) In terms of the money supply, which of the following measures is the broad money aggregate ? (2.2.3.3)

A M0
B M1
C M3
D M4

16) Financial services regulation in the UK is a five-tier process. Which of the following comprises the first
level ? (2.3)

A European legislation
B Acts of Parliament
C Regulatory bodies
D 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 Freedom of movement for assets
B Freedom of movement for goods
C Freedom of movement of capital
D 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 must implement the Directive immediately.
B can choose whether or not to adopt the Directive.
C has the choice of how to meet the Directives objectives.
D must implement the Directive, provided the member state is part of the Eurozone.






12

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 Contractionary monetary policy
B Contractionary fiscal policy
C Expansionary monetary policy
D Expansionary fiscal policy

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 It must implement them without any changes
B It may ignore them if existing national regulations already exist
C It will amend and then implement them through new UK legislation
D The regulations must be reviewed by the UK regulator, who will decide the
merits of their implementation

22) If the UK adopted the euro, what would be the outcome ? (2.3.1)

A The need for exchange rates would be eliminated
B The European Central Bank would set interest rates
C All eurozone states would have the same inflation rate
D Interest rates would immediately reduce

23) Which of the following is most commonly an indicator of an increase in the M4
growth rate ? (2.2.3.3)

A Decreasing consumer borrowing
B Decreasing consumer spending
C Increased public confidence
D Increasing rates of inflation

24) The key component of monetary policy is : (2.2.3)

A Interest rates
B Government spending
C Taxation
D Balance of payments


13

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 Goods only
B Goods and services
C Services only
D Neither goods nor services

26) Who sets the inflation target for the UK Monetary Policy Committee ? (2.2.3)

A The Governor of the Bank of England
B The Chancellor of The Exchequer
C The Financial Secretary to The Treasury
D The First Lord of The Treasury

27) Regulation of the UK financial services industry comprises five levels. What is the
second level of regulation ? (2.3)

A European legislation
B Regulatory bodies
C Acts of Parliament
D Arbitration schemes

28) What is the typical timescale within which the objectives of a European Directive must
be implemented ? (2.3.1)

A Six months
B One year
C Two years
D Three years

29) The real rate of interest is calculated by : (2.2.3.2)
A The nominal rate of interest + the rate of inflation
B Inflation rate less the nominal rate of interest
C The nominal rate less the rate of inflation
D 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 Reduce interest rates
B Borrow foreign currency
C Impose import tariffs
D Impose exchange controls






14

31) Which of the following are the three main components of the Governments fiscal
policy ? (2.2.2)

A Government spending, interest rates and taxation
B Taxation, borrowing and Government spending
C Interest rates, taxation, borrowing
D Government spending, interest rates, borrowing















































15

Specimen Questions Topic 3
Financial services in the wider economy


1) Financial intermediaries can provide maturity transformation because they: (3.1)

A offer a wide range of deposit accounts to a wide range of depositors.
B aggregate many small deposits from a large number of clients.
C provide services to clients from many different geographical locations
D 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 Bank
B Insurance Company
C Centralised lender
D 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 geographic location
B maturity transformation
C risk transformation
D share disintermediation.

4) A bank can use small customer deposits to provide larger loans. This is an example of (3.1)

A Aggregation
B Disintermediation
C Maturity transformation
D Risk transformation

5) Since the Building Societies Act 1986, building societies have been able to demutualise. Such a
change requires : (3.2.1)

A the consent of its shareholders
B the society to have operated for at least three years
C at least 25% of its issued share capital to be available to the public
D approval by its members

6) What minimum percentage of their funds must building societies provide from their retail markets ?
(3.2.2)

A 10%
B 25%
C 50%
D 75%


16

7) Which one of the following factors distinguishes building societies from other financial institutions ?
(3.2.1)

A they are mutual institutions owned by their members.
B they are owned by their shareholders.
C they only lend for mortgage purposes.
D they cannot make regulated loans.












































17

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 a retail client
B an execution-only investor
C a professional client
D an eligible counterparty

2) Which of the findings of the Financial Services Trust Index 2009, is correct ? (4.3)

A Institutions gain the highest trust ratings in terms of shared values and the
lowest in terms of skills and ability.
B Older customers tend to show significantly higher levels of trust than younger
customers.
C Levels of trust amongst those who use the internet is higher, particularly for
bank and credit card providers.
D Successful resolution of complaints does little to avoid the negative impact on
trust.

3) 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 have bought few if any financial products
B have significant financial wealth
C have a reasonable knowledge of financial matters
D are in the 35-55 age group

4) 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 Less sophisticated consumers with annual incomes below 30,000
B The self-employed
C Those who had purchased Stakeholder products
D Those in the 35-55 age range

5) Of the three categories of customer, which requires the lowest level of protection ?
(4.1)

A Eligible counterparty.
B Retail client
C Professional client
D Execution-only


18

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 10%
B 20%
C 30%
D 40%











































19

Specimen Questions Topic 5
Types of customers and their needs


1) Which of the following is true ? (5.4)

A Trustees have automatic borrowing powers, irrespective of the contents of the trust deed.
B Trustees have no legal capacity to borrow because of the duty of care they owe to the
beneficiaries.
C Trustees can only borrow if the loan is to be used specifically for dealing with
probate matters.
D Trustees can only borrow if they are specifically empowered to do so by the trust deed.

2) Which one of the following is usually the priority financial need for young families ?
(5.5.4)

A Savings
B Investment
C Income and life assurance protection
D 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 amended his will to include his grandchildren.
B a current annual income of 20,000
C recently downsized his house to fund for long term care.
D total assets valued at 750,000

5) 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 becoming a limited liability partnership
B becoming sole traders and employing each other
C taking out a re-insurance policy to ring-fence future profits
D taking out separate indemnity insurance policies and assign them to the other
partner




20

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 Tom is self-employed and Bobby is a company director
B Bobby is self-employed and Tom is a company director
C Tom is in a limited liability partnership and Bobby is a company director
D Bobby is in a limited liability partnership and Tom is a company director

7) Which of the following would not be seen as a typical financial need for a limited
company ? (5.3.3)

A Business banking
B IHT planning
C Business insurance
D Loan protection

8) One of the key drawbacks of a limited liability partnership (LLP) compared with an
ordinary partnership, is that : (5.3.2.1)

A if one partner disappears, the other partners will be responsible for the debts of
the business.
B a limited liability partnership is not a legal entity in its own right.
C requirements for financial and accounting information are far more onerous.
D a limited liability partnership does not have the ability to borrow.

9) For mature households, which of the following is seen as a priority ? (5.5.6)

A pension provision
B savings and investment
C long term care
D family protection

10) 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 12,284
B 12,684
C 15,860
D 19,558

11) 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 Nil
B 900
C 1,400
D 2,646



21

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 Nil
B 150,000
C 162,500
D 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 2 years
B 3 years
C 4 years
D 7 years

14) A persons domicile mainly affects which of the following forms of taxation ? (5.8.3)

A Capital gains tax
B Income tax
C Corporation tax
D 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 None
B Roll-over relief
C Indexation relief
D Taper relief



















22

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 Men pay higher premiums than women because of higher morbidity risk
B Men pay higher premiums than women because of higher mortality risk
C Women pay higher premiums than men because of higher morbidity risk
D Women pay higher premiums than men because of higher mortality risk

2) Johns employer has an annual gross profit of 500,000 and an annual wage bill of 100,000.Johns
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 Johns life ? (6.4.1)

A 250,000
B 500,000
C 750,000
D 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 partners share ? (6.4.2)

A The automatic accrual method
B The buy and sell method
C The cross-option method
D 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 Key person insurance
B The buy and sell method
C The cross-option method
D Automatic accrual

5) Which one of the following protection products is designed to provide benefits on death only?

A Mortgage payment protection insurance
B Critical illness cover
C Income protection insurance
D Term assurance









23

6) Which one of the following is unlikely to be considered a financial priority for a young, single adult

A Life assurance
B Accident, sickness and unemployment cover
C Savings
D 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 Inheritance tax planning
B Family protection
C Private medical insurance
D Long-term care insurance

8) The main use of a joint life second death policy is : (6.1.1.4)

A to pay a lump sum on diagnosis of a terminal illness.
B to provide a tax-efficient savings vehicle
C to provide funds to pay an inheritance tax liability
D 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 No action need be taken until a decree absolute is issued by the court.
B All insurances will need to be re-evaluated, which should take place before the next review
date.
C Arrangements should be appraised at the next review meeting.
D 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 Income Protection Insurance
B Critical Illness Cover
C Accident and Sickness cover
D Hospitalisation Benefit











24

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 That the key employees contribution to profit is in the same proportion as his/her
remuneration bears to the companys total wage bill.
B That the key employees remuneration is in the same proportion as his/her overall
contribution to the companys annual turnover.
C That it would take one year for the company to recover from the financial impact of the loss
of the employee.
D That the key employees 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 Waiver is not an automatic feature of the plan.
B Benefits are usually payable immediately.
C There is a small additional monthly charge
D 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 The time before the policy cover takes effect.
B A period of sickness during which no benefit is payable.
C The period before the start of the policy and completion of underwriting.
D 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 He had the option to re-start the policy at a higher premium.
B The cover was reinstated, but his previous illness was excluded.
C No further premiums were required because the policy had ceased.
D The policy could be reinstated, provided he repaid the claim.

15) For whom is income protection insurance (PHI) particularly important ? (6.2.2)

A Self-employed
B Part time employees
C Full-time employees
D Part time self-employed









25

16) On a with-profits policy, what is a reversionary bonus ? (6.1.2.1)

A An irregular payment determined by the type of policy and the number of lives
assured.
B A payment made on maturity at the discretion of the assurance company.
C One which reverts to a minimum level in the event of a claim.
D 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 The level of cover required
B The type of plan
C Potential inheritances
D 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 Fluctuations in the value of the underlying investments.
B The amount of the reversionary bonuses which have been allocated.
C The length of time the policy has been held.
D 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 On the initial level of cover
B By a fixed percentage each year
C On the level of cover halfway through the policy term
D 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 Statutory Sick Pay
B Employment and Support Allowance
C Short-term higher rate Incapacity Benefit
D 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 Three days
B The first 13 weeks
C The first 14 weeks
D 28 weeks




26

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 The amount of disability cover he already has in place
B The degree of risk he is prepared to accept
C The duration of cover required
D The state of health of his wife

23) An insurance policy which includes accident cover would most likely be used in connection with
which particular financial need ?

A Estate planning
B House purchase
C Tax planning
D Retirement planning

24) 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 self-employed
B the trustee of an estate
C one of three business partners
D a discharged bankrupt

25) Statutory Maternity Pay is payable for a maximum of : (6.2.6.7)

A 11 weeks
B 26 weeks
C 33 weeks
D 39 weeks

26) In which of the following circumstances would a decreasing term
assurance not be considered suitable ? (6.1.3.6.1)

A As part of a low-cost endowment policy.
B As a gifts inter-vivos plan.
C As cover for an interest-only loan.
D As a mortgage protection policy linked to a repayment mortgage.

27) Employers who contribute to private medical insurance for their employees : (6.2.4.2)
A receive plan benefits that are taxed as trading receipts.
B can claim the cost as an allowable deduction against corporation tax.
C pay benefits to employees without deduction of income tax
D pay corporation tax on their contributions.



27

28) Which of the following would not be considered a factor in the underwriting
process ? (6.1.1.1)

A Health
B Marital status
C Age
D Sex

29) When a life policy is being taken out on a life of another basis, which legal
principle applies ? (6.1.1.4)

A Caveat emptor
B Utmost good faith
C Insurable interest
D Subrogation

30) The maximum life assurance cover that a person can arrange on themselves is :
(6.1.1.4)

A unlimited
B 10 million
C 10 times their current salary
D Equivalent of the persons lifetime income

31) Which of the following is generally the maximum benefit on an Income Protection
Plan (PHI) ? (6.2.2)

A 50% - 65% of pre-disability earnings plus state benefits
B 55% - 60% of post-disability earnings less state benefits
C 50% - 60% of pre-disability earnings less state benefits
D 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 Bid price
B Offer price
C Cancellation price
D Strike price












28

State Benefits summary


People on low incomes Means-tested
income
Means-tested
savings
Dependent on
NI contributions
Taxable

Working Tax Credit Yes Yes No No
Income Support Yes Yes No No
Jobseekers Allowance:
Contribution-based No No Yes Yes
Income-based Yes Yes No No
Child Tax Credit Yes Yes No No

People bringing up children
Statutory Maternity Pay No No Yes Yes
Maternity Allowance No No No No
Child Benefit Yes No No No

People who are ill or disabled





Statutory Sick Pay No No Yes Yes
Incapacity Benefit No No Yes Yes
Employment & Support All. No No Yes Yes
Attendance Allowance No No No No
Disability Living Allowance No No No No
Carers Allowance Yes No No Yes

People in hospital or
residential/nursing care

Income Support Yes Yes No No

People in retirement
Basic State Pension No No Yes Yes
Additional State Pension No No Yes Yes

Bereavement
Bereavement payment No No Yes No
Bereavement allowance No No No Yes











29

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 2,820
B 2,670
C 3,760
D 4,700

2) Which of the following National Savings and Investments products provides tax-free
returns ? (7.6.7)

A Investment Account
B Guaranteed Growth Bond
C Fixed Interest Savings Certificates
D Income Bonds

3) The minimum opening deposit in a NS & I Direct Cash ISA is (7.6.6)

A 10.00
B 100.00
C 500.00
D 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 Return of capital + tax-free interest
B Return of capital + taxable interest
C Return of capital only
D Return of capital only, less an early redemption penalty.

6) Public limited companies whose business is investing in the stocks and shares of other
companies are known as : (7.4.3.4)

A Unit trusts
B Investment trusts
C Venture capital trusts
D Corporate bonds


30

7) The price at which clients buy units in a unit trust is known as the: (7.4.3.1.4)

A Creation price
B Offer price
C Cancellation price
D Bid price

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 1,000 in year 11
B 4,000 in year 12
C 7,200 in year 15
D 8,300 in year 5

9) 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 25%
B 50%
C 75%
D 100%

10) 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 A maximum investment plan
B NS and I Guaranteed Income Bond
C A National Savings Fixed Interest Savings Certificate
D A Cash ISA

11) Which of the following pooled investments permits investment in unquoted private companies ?
(7.4.3.4)

A Investments trusts only
B OEICs and unit trusts
C OEICs only
D Unit trusts and investment trusts

12) In an Open Ended Investment Company (OEIC), the role of the Depository is to :
(7.4.3.2)

A manage the investments.
B buy and sell the OEIC shares.
C ensure the share price reflects the underlying net asset value of the OEIC investments.
D oversee the operation of the company and ensure compliance with the rules for
investor protection.


31

13) EIS shares are eligible for 100% Business Property Relief if they have been held
for what period prior to the investors death ? (7.7.2)

A One year
B Two years
C Three years
D Five years

14) Who buys and sells the shares of an Open-Ended Investment Company (OEIC), as required by
investors ? (7.4.3.2)
A The Authorised Corporate Director
B The Depositary
C The Fund Manager
D The Trustee

15) 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 her National Insurance record is not up to date
B she is in good health, with a family history of longevity
C the entire fund is to finance a round the world cruise
D her employer closed the company scheme several years ago

16) Which of the following statements relating to (EIS) Enterprise Investment Schemes is
correct ? (7.7.2)

A EIS shares held for a minimum of two years qualify for IHT Business Property
Relief
B Dividends from EIS shares are free of tax if held for five years
C Investors receive tax relief of 30% on investments up to 200,000 in each tax
year
D Gains will not be subject to capital gains tax if shares are held for five years

17) 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 Death only
B Surrender only
C Death or maturity
D Death, maturity or assignment

18) 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 The sum assured relates only to the death benefit.
B The qualifying rules are different
C A potential capital gains tax liability exists for the investor
D They are more readily saleable on the traded endowment market.


32

19) Which one of the following is true in relation to the manager of an investment trust ?
(7.4.3.4)

A He cannot borrow funds
B He can borrow to improve capital growth and income.
C He can issue more units or repurchase units according to demand.
D He can cancel units if the fund value falls sharply

20) Since 6 April 2012, the maximum investment into an Enterprise Investment Scheme (EIS) that will
attract tax relief, is : (7.7.2)

A 100,000
B 150,000
C 400,000
D 1million

21) 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 Nil
B 18
C 20
D 22.50

22) The fixed price at which a put option can be exercised is known as the : (7.7.1.1)

A Spot price
B At the money price
C Strike price
D Bid price





















33

National Savings and Investments (NS&I)

Here is a blank NS & I matrix with which to practice

Product Tax Min Max Basic criteria Interest
Premium
Bonds

Index linked
Certificates



Fixed Interest
Certificates

Direct ISA

Childrens
Bonus Bonds



Guaranteed
Income Bond

Guaranteed
Growth Bond


Direct Saver


Investment
Account

Income
Bonds























34

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 Tax Min Max Basic criteria Interest
Premium
Bonds
Tax Free 100 30,000 Age 16


Index linked
Certificates
Tax Free 100 15,000 Age 7
3 & 5 yrs
Fixed rate + RPI
Fixed Interest
Certificates
Tax Free 100 15,000 Age 7
2 & 5 yrs
Fixed rate
Direct ISA Tax Free 100 5,640 Age 16
UK Residents
Variable rate
Childrens
Bonus Bonds

Tax Free 25 3,000 Individuals
Under 16

Fixed rate

Guaranteed
Income Bond
Taxable 500 1 million 16 Paid net of basic rate
tax
Guaranteed
Growth Bond
Taxable 500 1 million 16 Paid net of basic rate
tax at end of the term

Direct Saver

Taxable 1 2 million 16 Variable rate
Gross
Investment
Account
Taxable 20 1 million 7 Gross
Variable rate
Income
Bonds
Taxable 500 1 million 7
Monthly income
Gross
Taxable
Variable rate

Refer to your study text for more details on these products (7.6)














35

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 her credited National Insurance contributions
B a percentage of her average band earnings over her working life.
C her age
D 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 2010
B 2015
C 2020
D 2023

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 No capital gains tax in the fund
B The ability to take tax-free cash
C Tax relief on contributions
D No income tax liability, other than the tax credit on UK dividend income.

4) How much tax-free cash, if any, can be taken from a pension arrangement at retirement ? (8.1.1.3)

A None
B 25%
C 50%
D 100%

5) 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 20
B 25
C 30
D 35

6) What is the minimum age at which National Insurance Contributions can be made ?
A There is no minimum age
B 16
C 18 or the end of full-time education
D 21

36

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 Nil
B 3,300
C 7,500
D 8,640

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 Annual allowance
B Lifetime allowance
C Pension input amount
D Earnings cap

9) Richards pension fund growth will become totally free of taxation if he switches from :

A Corporate bonds to ordinary shares
B Ordinary shares to corporate bonds
C Ordinary shares to preference shares
D Property to preference shares

10) 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 The individuals final salary
B The number of years for which the individual is a member of the scheme
C The investment performance of the pension fund
D The schemes accrual rate

11) From April 6th 2011, the basic State pension increases each year by: (8.1.3.1)

A the increase in the Retail Prices Index (RPI)
B the greater of the annual increase in earnings and RPI
C the greater of the annual increase in earnings, Consumer Prices Index and 2.5%
D 2.5%

12) 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 0.5%
B 1.0%
C 1.5%
D 2.0%





37

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 25%
B 50%
C 75%
D 100%

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 The contributions are the same
B 2,040
C 7,080
D 7,680

15) 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 2,400
B 2,880
C 3,000
D 3,600

16) The flexible drawdown facility is available to those with secure retirement income of what annual
amount ? (8.1.1.3)

A 20,000
B 25,000
C 30,000
D 50,000

17) A Stakeholder Pension has which one of the following features ? (8.1.2.2.1)

A Guaranteed returns
B Proceeds easily accessible
C Low charges
D Early retirement age











38

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 The interest rate charged is usually higher than for a repayment mortgage.
B The outstanding capital remains constant throughout the mortgage term.
C The mortgage cannot be arranged on a monthly or a daily rest basis.
D 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 capped
B fixed.
C LIBOR -linked
D 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 are expected to increase.
B are expected to decrease.
C are expected to stay the same.
D 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 Consumer Credit Act 2006
B Financial Services Act 1986
C Investment Services Directive
D 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 The addition of reversionary bonuses
B A rise in the rate of inflation
C A rise in the FTSE 100 index
D A rise in interest rates





39

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 Chancellor of the Exchequer
B Secretary of State for the Department of Business, Innovation and Skills
C EU Commissioner for Financial Markets
D Governor of the Bank of England

2) Which of the following defines regulated investments ? (10.3.3)

A FSMA 2000
B The Regulated Activities Order 2001
C The Regulated Investment Act 2002
D The Bank of England

3) Which of the following is not one of the FSAs Statutory objectives ? (10.5)

A EU harmonisation of financial services
B Market confidence
C Consumer protection
D Reducing financial crime

4) Which of the following would be exempt from the Consumer Credit Act 2006
regulations ? (10.7.1)

A A loan to a small partnership for 26,500
B A loan to a self-employed builder for 15,500
C A loan to a small business for 30,000
D A loan to an individual for 25,000

5) 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 The work will be done to a specified standard.
B The work will be done with reasonable care.
C A reasonable charge will be made
D The work will be done within a reasonable time










40

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 Close links
B Adequate resources
C Legal status
D Accountability

7) The tripartite system of regulation comprises : (10.4)

A HM Treasury,The Office of Fair Trading and The FSA
B The FSA, The Bank of England and the Home Office
C The Bank of England, HM Treasury and The FSA
D 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 To advise the FSA on the regulation of occupational pension schemes.
B To deal with complaints about the running of pension schemes.
C To give advice and general information about pension schemes.
D To protect the benefits of members of work-based pension schemes.

9) Jacks 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 The Office of Fair Trading
B The Financial Ombudsman Service
C The Consumers Association
D 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 A contract between two businesses for the supply of metal sheeting.
B A contract for the sale of a house between a private seller and buyer.
C An individually negotiated contract for the sale of a fitted kitchen.
D A standard service contract between an electrical company and a consumer.









41

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 Financial Services Action Plan
B Financial Services and Markets Act 2000
C Markets in Financial Investments Directive (MiFID)
D Insurance Mediation Directive

2) Regulations concerning minimum capital adequacy requirements for banks, are focused on which of
the following ? : (11.1.1)
A Basel Accord
B Banking Act 1987
C Financial Services and Markets Act 2000
D FSA Conduct of Business rules

3) The effect of the 1988 Basel Accord was that any losses made when bank customers defaulted on
their loans should be borne by the banks : (11.1.1)
A Depositors
B Directors
C Regulators
D Shareholders

4) The Basel Committee on Banking Supervision is a multinational committee of which
of the following institutions ? (11.1.1)

A The Bank of England
B The Bank of International Settlements
C The European Parliament
D The European Central Bank (ECB)

5) Which one of the following is not one of the specific objectives of the Financial
Services Action Plan ? (11.4.1)

A Open and secure retail markets
B A single market for financial services
C State of the art prudential rules and supervision
D A single regulatory authority for all financial services in the UK








42

6) The Life Directive of 2002 stipulated that for policies that carry an investment risk, a
life assurance companys required minimum solvency margin is what
percentage of its mathematical provisions ? (11.2)

A 4%
B 99%
C 100%
D 104%

7) Under Basel 11, the minimum capital requirements are calculated by multiplying the
institutions gross income by : (11.1.1)

A 0.1
B 0.15
C 4%
D 8%



































43

Topic 12 Specimen Questions
The FSAs 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 Carolines requirement to exercise due skill, care and diligence, is broader
B Carolines requirement to observe proper market conduct standards lasts
longer
C only Caroline can be personally fined for an offence
D 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 is an administration manager
B undertakes a controlled function
C is a senior manager
D does not require individual registration

3) An authorised firms senior management controls should : (12.7.2.2)

A be approved by the Financial Services Authority annually
B form part of the firms disclosure documentation
C be reviewed regularly by the firm
D 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 firms
permissions this means that : (12.6.1)

A the firm may have one of its regulated activities removed.
B the firm will be required to sell assets to provide restitution.
C the firm will need to vary its authorisation from a different regulator.
D 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 The Police Authority
B The Financial Services Compensation Scheme
C The Regulator
D The Stock Exchange Council







44

6) Phil has been asked by his firms senior management to carry out an audit of their systems and
compliance procedures. Under FSA regulations, Phil must have: (12.7.2.2)

A no operational involvement.
B been a former member of the firms sales team.
C been an employee for at least 5 years.
D a governing function.

7) The Public Interest Disclosure Act 1998 covers which of the following ? : (12.7.2.3)

A Data protection
B Disclosure
C Whistle-blowing
D Prevention of crime

8) There are eleven Principles for Business which apply to the behaviour of firms and those that carry
out the firms activities; the principle covering conflicts of interest means that firms must : (12.4)

A take reasonable care to ensure the suitability of its advice.
B arrange adequate protection for clients assets when conflicts of interest arise.
C deal in a fair way between itself and its customers.
D 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 The risk of the firm collapsing because of incompetent management.
B The risk of loss due to mis-selling or misrepresentation.
C The risk of a customer not understanding a product.
D 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 Prudential standards
B High level standards
C Specialist standards
D Business standards

11) Which one of the following roles in a regulated firm would be classified as a customer function ?
(12.5.1)

A John, a director of a multi-national insurance company.
B George, the manager of a department dealing in risk-assessment.
C Paul, in charge of a claims department.
D Stuart, a pension transfer specialist.






45

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 Authorisation
B Fit and Proper test
C Part 4 Permission Eligibility
D 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 Prudential risk
B Fraud risk
C Provider risk
D 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 high level standards
B threshold conditions
C OFT guidelines
D statutory objectives

15) In which category of controlled function would insurance underwriting be listed ? (12.5.1)

A significant management
B governing
C systems and control
D required

16) The concept of Treating Customers Fairly developed from which of the following FSA initiatives ?
(12.4.1.)

A Threshold Conditions for approved persons
B Statutory objectives
C Principles for Business
D Prudential standards

17) Which of the following is not one of the FSAs Statutory objectives ? (12.1.1)

A To maintain confidence in the UK financial system
B To promote financial stability
C Secure an appropriate level of protection for consumers
D To employ a risk-based approach to regulation






46

18) Which of the following roles is not included in the categories of controlled functions ? (12.5.1)

A Head actuary
B Mortgage adviser
C Investment adviser
D 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 High Level Standards
B Prudential Standards
C Business Standards
D 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 High Level Standards
B Regulatory Processes
C Business Standards
D Specialist Sourcebooks

21) In which category of controlled function would a Money Laundering Reporting Officer be included ?
(12.5.1)

A Governing
B Required
C Systems and control
D Significant management

22) Effective balance sheet management is seen as a way of mitigating which one of the following risks ?
(12.1.2)

A Prudential risk
B Capital adequacy risk
C Credit risk
D 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 Rendition
B Variation of a firms permissions
C Injunction
D Restitution





47

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 firms
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 Lloyds of London











48

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




49

Approved persons and controlled functions

Role Governing Required Systems &
Control
Significant
Management
Customer
Manager insurance
underwriting


a

Money Laundering
Reporting Officer


a

Investment adviser



a
Compliance officer



a

Corporate finance
Adviser


a
Chief Executive


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


b
Business Operations
Manager


b





50

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 Client-specific information relating to charges
B Details of where additional information can be obtained
C Essential elements of the product
D 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 5 years
B 7 years
C 10 years
D 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 Any restrictions to be placed on the adviser
B Details of options available in the recommended product
C How the agreement can be terminated
D The clients aims relating to the service being provided

4) Regarding client communications, comparisons with other products must be presented: (13.1.3.1)

A with skill, care and diligence
B adequately and reasonably
C accurately
D 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 The person receiving the call must have an existing client relationship with the firm.
B The person receiving the call expects to receive calls as part of the relationship.
C The call relates to a generally marketable packaged product that isnt a higher volatility fund.
D A contact point must be given to the client at the beginning of the call

6) A financial promotion is defined as (13.1.3)

A Mediation activity
B An offer to enter into pension activity
C An offer to enter into life assurance activity.
D An invitation or inducement to engage in investment activity


51

7) Advisers are permitted to operate in one of three categories. Which is the exception ? (13.1.4.1)

A Whole-of-market advisers
B Multi-tied advisers
C Panel advisers
D Tied advisers

8) Which of the following is one of the main aims of the Retail Distribution Review ? (13.1.5)

A Standardise the way in which advice is paid for
B Raising professional standards
C Reduction of financial crime
D 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 Indefinitely
B 3 years
C 5 years
D 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 internet and written
B written and non-written
C broadcast and non-broadcast
D verbal and written

11) Financial promotions can be communicated only if they have been prepared, or approved by : (13.1.3)

A a suitably-qualified individual
B an approved person
C an authorised person
D 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 2010
B 2011
C 2012
D 2013








52

13) When must a suitability report be provided for an execution-only customer ? (13.1.6.3)

A A suitability report is not required
B Before the transaction is effected
C Within 14 days of the transaction being effected
D No later than the cancellation notice

14) The cancellation period for a cash ISA is : (13.1.8)

A 7 days
B 10 days
C 14 days
D 30 days

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 Suitability reports
B Data protection
C Personalised illustrations
D Client affordability

16) 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 five days after the initial interview
B as soon as possible after the transaction was effected and no later than the
issue of the cancellation notice
C the end of the cooling-off period
D 14 days after the policy was effected

17) The FSAs KeyFacts logo can be incorporated in which of the following documents ?
(13.1.4.1)

A Annual Stakeholder Pension statements
B Annual with-profits documentation
C Suitability reports
D Services and costs disclosure documents (SCDD)

18) Which of the following statements regarding information provided by financial
promotions to retail clients is incorrect ? Information supplied must : (13.1.3)

A be accurate giving a fair and prominent indication of risks.
B be understandable by an average member of the target group.
C not disguise or obscure important terms or warnings.
D be tested in advance by representatives of the target group.





53

19) Which of the following information would not be included in a Services and Costs Disclosure
Document (SCDD) ? (13.1.4.1)

A The name of the regulator
B The method of payment for the service
C How to obtain compensation
D How future unsolicited calls can be made

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 identifying the target market for which the product is likely to be suitable
B stress-testing the product
C the target groups financial profile to fall within regulatory boundaries
D systems and controls in place to manage the risks posed by the product or
service design.

21) The statutory cancellation period for a free-standing AVC is : (13.1.8)

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

22) The statutory cancellation period for an annuity is : (13.1.8)

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

23) The overall principle of financial promotions to retail and professional clients, is that
they must be : (13.1.3)

A legal, decent, honest and truthful
B fair, clear and not misleading
C reasonable
D understandable by most of the target group.

24) Which of the following is covered in Section 3 of the Conduct of Business Sourcebook
(13.1.2)

A Client communications
B Suitability
C Client categorisation
D Conduct of business obligations





54

25) Whats covered in COBS 2 ? (13.1.1)
A Financial promotions
B Conduct of business obligations
C Cancellation
D Providing product information to clients














































55

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)














56

COBS 15 - Cancellation

Solutions


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)















57

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







58

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

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 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 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


Check your understanding of this material in the text at 13.1.4.1 Initial Disclosure and 13.1.7.2 Product
Disclosure




59

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 100,000
B 150,000
C 152,500
D 157,500

2) Which of the following does not apply to the work carried out by the Financial Action Task Force?
(14.1.4)

A Law enforcement
B Setting appropriate standards
C Identifying trends in money-laundering
D Evaluating how countries have implemented anti-money laundering programmes.

3) Which is not one of the principal money laundering offences ? (14.1.3)

A Acquiring
B Arranging
C Concealing
D Tipping off

4) Where ID has not previously been obtained, an identity check must be carried out if a bank deposit
transaction exceeds : (14.1.7)

A 1,000
B 2,500
C 10,000
D 15,000

5) 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 3 months
B 6 months
C year
D 3 years






60

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 Unlimited
B 5,000
C 10,000
D 100,000

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 Personal pension
B Life assurance
C Third Party Motor
D Contents

8) 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 50,000
B 80,000
C 170,000
D 190,000

9) 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 Bill paid his premiums by direct debit.
B Ben started his policy later than Bill
C This was Bens second claim in five years.
D Bills claim was in connection with his third party motor policy.

10) Records of complaints relating to MiFID business must be kept for what period after
the complaint was received ? (14.3.1)

A Indefinitely
B 5 years
C 4 years
D 3 years

11) An authorised firm must produce a report on reportable complaints to the FSA how frequently ?
(14.3.1)

A Every three months
B Every six months
C Annually
D Bi-annually

61


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 Jack, who has applied for an insurance investment bond with an initial investment of 1,200.
B Joe, who wishes to apply for a with-profits endowment policy with annual premiums of
1,500.
C James, who is opening a bank deposit account with a gift from his mother of 17,000
D John, who is buying shares in Marks and Spencer plc for 20,000.

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 1 year
B 3 years
C 5 years
D Indefinitely

14) Within a company, who is responsible for ensuring that the requirements of the Data
Protection Act are met ? (14.2.3)

A Data subject
B Data controller
C Data processor
D Information commissioner


























62

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
Claims for life assurance, pensions, home insurance, general
insurance
90% of the claim, with no upper limit
Compulsory Insurance Third party motor or employers
liability
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
90% of the claim, with no upper limit

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
85,000 per person per firm
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
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
Mortgage advice and arranging
A claim on the FSCS depends on the
suitability of the advice for the customers
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.

100% of the first 50,000 of a claim

63


Topic 15 Specimen Questions
Important legal principles

1) Above what level is a bankrupts interest in a property included in their assets ? (15.5.2)

A 250
B 500
C 1,000
D 2,000

2) What is the minimum number of partners permitted in a Limited Liability Partnership ?
(15.1.3)

A 2
B 4
C 6
D 10

3) By whom must an individual voluntary arrangement (IVA) be supervised ? (15.5.3)

A An insolvency trustee
B An insolvency practitioner
C The Trustee in bankruptcy
D The County Court

4) In the context of financial services, which of the following would be treated as legal
persons ? (15.1)

A Beneficiaries
B Executors, beneficiaries and trustees
C Executors and trustees
D Minors

5) In terms of contract law, the subject of a contract must be matched by : (15.3.1)

A an invitation to treat
B an offer
C a consideration
D an acceptance

6) The two forms in which a lasting power of attorney can be arranged, are : (15.2.1)

A protection and welfare
B personal welfare and property and affairs
C personal welfare and financial affairs
D enduring interests and protection



64

7) Which of the following maintains a register of those who have set up a lasting power
of attorney ? (15.2.1)

A The Court of Protection
B The Public Guardian
C The FSA
D The Attorney Register

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 1 year
B 2 years
C 4 years
D 10 years

9) In which one of the following circumstances would a donors power of attorney not be
revoked ? (15.2)

A The donor marries
B The donor dies
C When any time limit specified expires
D The donor becomes bankrupt

10) Jackie has a property and Joan has a stamp collection. How does the law relate to these two types of
property ? (15.4)

A Jackie and Joan both have realty
B Jackie has realty, Joan has personalty.
C Joan has realty, Jackie has personalty.
D Joan and Jackie both have personalty.

11) Contracts for which of the following transactions cannot be on a verbal basis ? (15.3.1)

A Shares
B OEICs
C Insurance
D Land

12) 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 1 year
B 3 years
C 5 years
D 7 years




65

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 25%
B 50%
C 75%
D 100%

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 One
B Two
C Five
D Seven

15) The minimum debt that can be subject to bankruptcy proceedings is : (15.5)

A 500
B 750
C 1,000
D 5,000

16) A company voluntary arrangement cannot be proposed by which of the following ?
(15.5.5)

A The managing director
B The finance director
C The creditors
D A liquidator

17) Financial advisers who act as company representatives, are acting as: (15.3.2)

A principals
B agents of the product provider
C agents of the customer
D agents of the product provider and the customer

18) The relationship between a principal and their agent is governed by : (15.3.2)

A Fiduciary law
B The law of tort
C The law of statute
D Contract law







66

19) Creditors that represent what percentage of a companys debts must agree to a
company voluntary arrangement (CVA) being set up ? (15.5.5)

A 50%
B 60%
C 75%
D 100 %

20) With regard to the bankruptcy rules, if the debtors 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 The bankrupt
B The County Court
C The creditors
D The trustee in bankruptcy

21) The value of a registered pension fund cannot be claimed by the trustee in bankruptcy,
because it doesnt form part of the bankrupts estate. The court could, however, apply an order which
requires some of the bankrupts income, including pension income, to be paid to the trustee; this order
is known as : (15.5.2)

A A pension requisition order
B An income payments order
C A regulated activities order
D A trustee income order

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 an avoidance contract
B voidable
C void
D avoidable

23) One of the main provisions of a Debt Relief Order (DRO) is that the debtor : (15.5.4)

A owes a maximum of 25,000
B has disposable monthly income after tax, NI and normal household expenses of no more than
50.00
C must be domiciled in an EU member state
D has gross assets of no more than 3,000





67


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 back-to-back trust
B maintenance trust
C statutory trust
D 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 settlor
B executor
C testator
D Court of Trustees

3) Who is considered to be the legal owner of a life policy placed into trust ? (16.5.3.2)

A The policyholder
B The beneficiary
C The trustee
D 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 Annually
B Every 5 years
C Every 6 years
D 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 Avoidance of capital risk when investing for a minor beneficiary
B Awareness of the need for diversification
C The need to obtain and consider proper advice where appropriate
D The need to review investments








68

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 discretionary trust
B flexible trust
C maintenance trust
D 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 Georges 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 Georges 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 None
B Half the individual rate
C The individual rate
D 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 free of any tax charge
B subject to a 10% tax charge
C subject to a 20% tax charge
D subject to a tax charge at 42.5%



69

11) Which condition is not a requirement for a policy arranged under the Married Womens
Property Act ? ( 16.6.12.1)

A It applies in England and Wales only
B It must be an own life policy
C It must be for the benefit of the spouse and children of the assured
D The wording of the policy must refer to the Act

12) Why might Mr Jones not wish to use the Married Womens Property Act (MWPA) as a suitable trust for
his life assurance arrangements ? (16.6.12.1)

A The cost of the trustees services may be prohibitive.
B This type of trust is restricted to children and stepchildren only.
C The life policy he was planning to use is in the joint names of himself and his wife.
D 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 Certainty of timing
B Certainty of effects
C Certainty of execution
D 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 500
B 1,000
C 3,250
D 5,100

15) Shirley and Grant are trustees of separate trusts, but Shirleys duties are much more
straightforward than Grants. This is most likely to be because : (16.6)

A Grant is also the settlor of the trust
B They are trustees of an absolute trust and a discretionary trust respectively.
C Shirley is also a beneficiary under her trust
D 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


70

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 It will all go to his spouse
B His spouse and sister will each receive 250,000
C 325,000 will go to his spouse and 175,000 will go to his sister
D 475,000 will go to his spouse and 25,000 will go to his sister

18) How is the loan part of a gift and loan trust treated for IHT purposes ? (16.6.8)

A It isnt treated as a transfer of value
B It is a potentially exempt transfer
C It is a chargeable lifetime transfer
D Its a gift with reservation

19) The terms of a deceased persons will can be changed by the beneficiaries by the use of a ? (16.4.2)

A Deed of variation
B Disclaimer
C Codicil
D Deed of variation or a disclaimer

20) Transfers into interest-in-possession trusts which were set up prior to 22
nd
March
2006, were treated for IHT purposes as : (16.6.5)

A chargeable lifetime transfers
B potentially exempt transfers (PETs)
C exempt transfers
D potentially chargeable transfers

21) With a gift-and-loan trust, which products are normally used ? (16.6.9)

A Joint whole life policy in the names of the settlor and beneficiaries
B Whole life policy in the name of the settlor
C Joint life investment bond in the names of the settlor and beneficiaries
D Investment bond in the name of the settlor

22) 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 In perpetuity
B For a maximum of 80 years
C For a maximum of 125 years
D For the full lifetime of the children.





71

23) With which of the following types of trust is it not possible to defer a CGT liability ?
(16.7.2)

A Interest in possession
B Absolute
C Discretionary
D Flexible

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 Mirror
B Mutual
C Joint
D Back-to-back

25) A single person could arrange a policy under an MWPA (Married Womens
Property Act) trust for the benefit of : (16.6.12.1)

A a child
B a charity
C their parents
D a mortgagee

26) 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 her mother
B her brother
C her sister
D her brother and sister equally

27) 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 Each gift will be a chargeable lifetime transfer with a value of 34,000
B Each gift will be a chargeable lifetime transfer with a value of 40,000
C Each gift will be a potentially exempt transfer with a value of 34,000
D Each gift will be a potentially exempt transfer with a value of 40,000

28) 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 Intestacy
B Sequestration
C Partial intestacy
D Partial apportionment

72

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 Reputation risk
B Macroeconomic risk
C Product risk
D Technology risk

2) Which of the following risks is not one that that is faced by customers of financial
institutions ? (17.6.5)

A Market risk
B Reputation risk
C Mis-selling risk
D Prudential risk

3) The two main categories of risk are : (17.2.1)

A Financial and pure
B Speculative and financial
C Uncertain and pure
D Pure and speculative

4) Which of the following is a businessrisk ? (17.4.1)

A Credit risk
B Market risk
C Technology risk
D Foreign exchange risk

5) Which type of risk is part of operational risk ? (17.6.1)

A Governance risk
B Counterparty risk
C Concentration risk
D Market risk

6) Settlement risk is also sometimes known as : (17.5.8)

A Herstatt risk
B Credit risk
C Maslows risk
D Counterparty risk






73

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 Liquidity risk
B Credit risk
C Capital adequacy risk
D Gearing risk

8) Which of the following would be a non-business risk and also a financial risk ?
(17.4.2.1)

A Business continuity risk
B Litigation risk
C Capital adequacy risk
D Credit risk

9) 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 Concentration risk
B Credit risk
C Market risk
D Counterparty risk

10) Which risks would be involved in the purchase of UK corporate bonds ?

A Interest risk only
B Interest risk, inflation risk only
C Interest risk, inflation risk and capital risk
D Interest risk, inflation risk, capital risk and exchange rate risk

11) Which type of risk is involved with the purchase of unit trusts ?

A Concentration risk
B Gearing risk
C Pure risk
D Two-way risk

12) The risk of loss resulting from someone making a legal claim against an organisation,
is referred to as : (17.6.8)

A bad faith risk
B credit risk
C litigation risk
D regulatory risk






74

13) Capital adequacy risk is a type of : (17.4.1)

A Business Continuity risk
B Event risk
C Business risk
D Liquidity risk

14) Regulatory risk is a type of : (17.6.9)

A bad faith risk
B event risk
C financial risk
D reputation risk

15) 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 Settlement risk
B Concentration risk
C Counterparty risk
D Systemic risk

16) The risk of an individual being involved in a car accident, would be : (17.2.1)

A Speculative risk
B Two-way risk
C Pure risk
D Event risk

17) 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 Gearing risk
B Capital adequacy risk
C Liquidity risk
D Market risk

18) The risk of employee misconduct or fraud, would typically be defined as : (17.6.1)

A An operational risk
B A business continuity risk
C A litigation risk
D A macro-economic risk








75

19) The risk of a company failing because of weak internal systems and controls, would
be an example of : (17.6.1)

A Concentration risk
B Counterparty risk
C Settlement risk
D Governance risk

20) An investors shares have fallen in value ; which of the following risks has the
investor been specifically subjected to ? (17.5.2)

A Credit risk
B Interest rate risk
C Market risk
D Settlement risk

21) If the branch office of a bank is flooded, what risk could this represent ? (17.6.4)

A Technology risk
B Organisational
C Technology
D Business continuity

22) What type of risk could be caused by human error ? (17.4.2.2)

A operational risk
B bad faith risk
C governance risk
D counterparty risk

23) Which of the following risks did the Basel Accord seek to address ? (17.6.2)

A Counterparty risk
B Capital adequacy risk
C Credit risk
D Gearing risk















76

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



P M T L G C

Product risk
Macroeconomic risk
Technology risk
Liquidity risk
Gearing risk
Capital adequacy risk



NON-BUSINESS RISKS



FINANCIAL RISKS OPERATIONAL RISK EVENT RISKS



M F I C C L B R R

Market risk Litigation risk
Foreign Exchange risk Business continuity risk
Interest rate risk Regulatory & political risk
Credit risk Reputation risk
Commodity price risk







77

Topic 18 Specimen Questions
Managing risk


1) Which of the following types of risk is the FSA not seeking to reduce ? (18.4)

A Bad faith risk
B Performance risk
C Prudential risk
D Mis-selling risk

2) Which type of risk is a concern to investors in Gilts ? (18.5.2.4)

A Counterparty risk
B Credit risk
C Inflation risk
D Non-systemic risk

3) Which of the following would not offer protection against inflation risk ? (18.5.2.4)

A Corporate bonds
B Equities
C Index-linked National Savings Certificates
D Property

4) Using a captive insurance company is a form of risk : (18.2.2.1)

A removal
B retention
C sharing
D transfer

5) Which of the following is not a form of risk-sharing ? (18.2.2.1)

A Finite risk insurance
B Partial reinsurance
C Self-insurance
D Using an excess

6) Which of the following cannot be reduced by diversification ? (18.2.4.1)

A Concentration risk
B Exchange rate risk
C Non-systemic risk
D Systemic risk





78

7) Finite risk insurance is best described as : (18.2.3)

A risk neutralisation
B risk retention
C risk sharing
D self-insurance

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 Risk avoidance
B Risk control
C Risk retention
D Risk transfer

9) Which type of risk is closely associated with mis-selling of investment products ?
(18.4)

A Bad faith risk
B Performance risk
C Provider risk
D Prudential risk

10) Which technique is commonly used to hedge currency risk ? (18.2.4.2.1)

A Netting
B Offloading
C Securitisation
D Spreading

11) Risk neutralisation can include elements of risk control and risk containment. The
methods of neutralising risk are : (18.2.4)

A Pooling
B Hedging
C Pooling and hedging
D Pooling, diversification and hedging

12) The FSA has indicated several different types of risk faced by consumers. Which of
the following is covered by performance risk ? (18.4)

A Administrative performance
B Performance of the contract
C Guaranteed product performance
D Investment performance





79

13) Which type of risk can be reduced by netting ? (18.2.4.2.1)

A Credit risk
B Currency risk
C Idiosyncratic risk
D Systemic risk

14) Car insurance is an example of : (18.2.3)

A finite risk
B risk sharing
C self-insurance
D risk retention

15) 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 Full with-profits endowment
B Low-cost endowment
C Non-profit endowment
D Repayment mortgage

16) Which of the following reflects the risk to customers due to fraud ? (18.2.3)

A Prudential
B Bad faith
C Complexity
D Event risk

17) 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 Perfect positive correlation
B Negative correlation
C Positive alpha
D Negative alpha

18) Which of the following risks faced by consumers does the FSA aim to reduce ? (18.4)

A Complexity and bad faith
B Performance and complexity
C Bad faith and prudential
D Prudential and performance








80

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 Personal information
B Suitability
C Employment
D Objectives

2) As part of the fact-finding process, which of the following could be considered an open
question ? (19.5.1)

A What is your date of birth ?
B Have you always been in good health ?
C For how long have you lived at this address ?
D What does retirement mean to you ?

3) If the adviser uses tools to assess the clients knowledge, experience, attitude and personality, this type
of approach to risk assessment is known as : (19.2.8.2)

A a menu approach
B a psychometric approach
C stochastic modelling
D a portfolio approach

4) Open-ended questions are primarily used to establish: (19.5.1)

A details of the clients personal circumstances
B precise details regarding income and expenditure
C figures relating to assets and liabilities
D soft facts about a clients attitudes and feelings

5) Closed questions are primarily used to : (19.5.1)

A highlight the clients plans and objectives
B establish factual information about the client.
C explore the clients attitudes and feelings
D expand on information provided by the client

6) Under the know your customer requirements, details about the clients family are
important, because : (19.2.1)

A they are useful for possible referrals
B they may be financially dependent on the client
C they may have debts
D they may be a useful source of new business


81

Topic 20 Specimen questions
Addressing the clients needs

1) The first stage in handling an objection, is to : (20.3.3)

A Ignore it
B Agree with it
C Quantify it
D Qualify it

2) For what minimum period must an adviser keep records relating to MiFID business ? (20.4)

A Indefinitely
B 3 years
C 5 years
D 7 years

3) When explaining a recommended solution, the first rule of presentation is : (20.3.2)

A Caveat emptor
B Keep it simple
C Utmost good faith
D 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 clients wife who has contacted you to advise you of
her husbands 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 A unit trust sale six years ago
B A pension transfer six years ago
C A free-standing AVC sale ten years ago
D A personal pension sale four years ago

6) Which of the following products, taken out on 1
st
May, still retained cancellation rights at
17
th
May ? (20.3.5.2)

A Enterprise investment scheme
B Stocks and shares ISA
C Personal pension
D Investment trust


82

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 :
















Solutions on the following page



























3 yrs 5 yrs Indefinitely
FSAVCs
Personal Pensions & Stakeholder
Pension Transfers
Life policies
MiFID Business
Unit Trusts / OEICs

83

Record - keeping

Length of time for which detailed record of the transaction must be kept














































3 yrs 5 yrs Indefinitely
FSAVCs
Personal Pensions & Stakeholder
Pension Transfers
Life policies
MiFID Business
Unit Trusts / OEICs

84

Topic 21 Specimen questions
Ethical behaviour


1) Under the FSAs 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 21
B 35
C 50
D 75

2) James is subject to an annual fit and proper test, because he : (21.10)

A is the manager of an advertising department of an insurance company.
B is a member of an authorised firms compliance department
C performs a controlled function
D is the trustee of the firms 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 John
B Jack
C Only Jack
D Both of them
























85

FSRE Exam-style question solutions by topic number
1 2 3 4 5 6
1 A 1 D 1 A 1 C 1 D 1 B
2 C 2 B 2 D 2 B 2 C 2 C
3 C 3 B 3 D 3 A 3 D 3 C
4 B 4 A 4 A 4 A 4 D 4 C
5 B 5 C 5 D 5 A 5 A 5 D
6 C 6 D 6 C 6 B 6 A 6 A
7 D 7 B 7 A 7 B 7 B
8 B 8 B 8 C 8 C
9 B 9 D 9 A 9 B
10 D 10 D 10 B 10 C
11 D 11 A 11 B 11 A
12 D 12 B 12 C 12 B
13 A 13 B 13 B 13 B
14 D 14 C 14 D 14 C
15 D 15 D 15 D 15 A
16 D 16 A 16 D
17 B 17 A 17 C
18 B 18 C 18 A
19 D 19 B 19 D
20 A 20 B 20 B
21 D 21 A 21 B
22 A 22 B 22 C
23 A 23 D 23 B
24 B 24 A 24 C
25 A 25 B 25 D
26 B 26 C
27 C 27 B
28 C 28 B
29 C 29 C
30 A 30 A
31 B 31 C
32 B

7 8 9 10 11 12
1 A 1 A 1 B 1 A 1 A 1 A
2 C 2 C 2 D 2 B 2 A 2 B
3 B 3 C 3 A 3 A 3 D 3 C
4 C 4 B 4 A 4 C 4 B 4 A
5 C 5 C 5 C 5 A 5 D 5 C
6 B 6 B 6 D 6 A 6 A
7 B 7 C 7 C 7 B 7 C
8 D 8 A 8 D 8 C
9 B 9 B 9 A 9 A
10 D 10 C 10 D 10 B
11 A 11 C 11 D
12 D 12 C 12 B
13 B 13 B 13 D
14 A 14 D 14 B
15 C 15 B 15 A
16 A 16 A 16 C
17 C 17 C 17 D
18 A 18 B
19 B 19 B
20 D 20 D
21 D 21 B

86

22 C 22 A
23 A

13 14 15 16 17 18
1 D 1 C 1 C 1 D 1 A 1 B
2 A 2 A 2 A 2 A 2 B 2 C
3 B 3 D 3 B 3 C 3 D 3 A
4 D 4 D 4 C 4 D 4 C 4 B
5 D 5 C 5 C 5 A 5 A 5 C
6 D 6 A 6 B 6 D 6 A 6 D
7 C 7 C 7 B 7 B 7 D 7 C
8 B 8 C 8 B 8 B 8 D 8 C
9 C 9 D 9 A 9 B 9 B 9 A
10 B 10 B 10 B 10 C 10 C 10 A
11 C 11 B 11 D 11 D 11 D 11 C
12 C 12 A 12 C 12 C 12 C 12 D
13 A 13 C 13 C 13 D 13 C 13 B
14 C 14 B 14 C 14 B 14 B 14 B
15 A 15 B 15 B 15 C 15 B
16 B 16 C 16 D 16 C 16 B
17 D 17 B 17 D 17 A 17 B
18 D 18 A 18 A 18 A 18 C
19 D 19 C 19 D 19 D
20 C 20 A 20 B 20 C
21 D 21 B 21 C 21 D
22 D 22 B 22 C 22 A
23 B 23 B 23 B 23 B
24 C 24 B
25 B 25 A
26 A
27 C
28 C


19 20 21
1 B 1 D 1 B
2 D 2 C 2 C
3 B 3 B 3 D
4 D 4 D
5 B 5 A
6 B 6 C


07.02.13


87




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 Rate
Basic rate 20% 0 to 34,370
Higher rate 40% 34,371 to 150,000
Additional rate 50% 150,001+

Personal Allowances Age
Personal Under 65 8,105(a)
65 - 74 10,500 (b)
75+ 10,660 (b)
Married couples age allowance 75+ 7,705(b)*
Income limit for personal allowance 100,000

(a) If income exceeds 100,000 the personal allowance will reduce by 1 for every 2 of
additional income
(b) 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 3,000
Small gifts exemption 250
Gross transfer Rate
First 325,000 Nil
Excess 40%

Chargeable lifetime transfer 20%
Gifts in consideration of marriage:
from parents (per parent) 5,000
from grandparents (per grandparent) 2,500
from others (per person) 1,000

Reduction on tax charge for gifts Years between % of death rate
within 7 years of death gift and death tax payable

0 - 3 100%
3 - 4 80%
4 - 5 60%
5 - 6 40%
6 - 7 20%

88

Capital Gains Tax
Rate
Personal allowance 0% 10,600
Chargeable gains 18% non taxpayers and basic rate taxpayers
28% higher rate and additional rate taxpayers

Stamp Duty Land Tax

Rate Value of property

0% 0-125,000*
1% Over 125,000-250,000
3% Over 250,000-500,000
4% Over 500,000-1,000,000
5% Over 1,000,000
7% Over 2,000,000

National Insurance Contributions

Class 1 (employees) Contracted-in Contracted-out
Earnings up to 146 per week Nil Nil
Earnings over 146 per week Nil on first 146 Nil on first 146
+ 12% on next 671 + 10.6% on next 624
+ 2% on all over 817 12% on next 47
+ 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 7,605 to 42,475 pa 9.0%
On all annual profits above 42,475 pa 2.0%

Pension Allowances

Annual Allowance Lifetime Allowance
2008/2009 235,000 1,650,000
2009/2010 245,000 1,750,000
2010/2011
2011/2012
2012/2013
255,000
50,000
50,000
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




89

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












90

Risks in Financial
Markets


























Risks in the
management of
financial
institutions







































91

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
Two-way risk, or
Speculative risk
Outcome could be better or worse than expected
A gain or loss is possible
Risk is usually uninsurable
Business Risks
Product risk The risk that a product may not be successful on the market,
because :
It doesnt suit customers needs
Its targeted towards the wrong segment
External circumstances change
Macroeconomic risk The risk that changing economic conditions could affect sales and
profits.
e.g.unemployment increases less money available for savings

Technology risk The risk that developments in technology will affect the companys
business.
The risk is focused mostly on computerized systems
Liquidity risk


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


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
Foreign exchange
risk
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.



92

Credit risk Debtors will default on their payments when theyre 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 banks 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

Someone will make a legal claim against the organisation
Business continuity
Risk

The risk that an unexpected catastrophe, such as a fire, might
occur.
Adversely affects the organisations ability to continue a business
Regulatory and
Political risk

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

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
Non-systemic risk

The risk of a particular share or sector failing to deliver the
expected returns
The risk can be reduced by diversification
Risks in Financial
Markets

Credit risk


Debtors will default on their payments when theyre due.
The most basic of banking risks

Market risk Changes in the market price of shares, bonds and other financial
securities
Price risk

The risk to investors that the price of equities and bonds will change
while they are being held.

Concentration risk

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
Counterparty risk


The risk to one party that the other party will not carry out their
side of the agreement
Sometimes known as default risk


93


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