Free CISI ICWIM Practice Exam with Questions & Answers | Set: 3

Avoiding Conflicts of Interest:

By placing orders in the order they are received, the firm ensures fairness and transparency.

This approach avoids any preferential treatment and complies with regulatory obligations.

Elimination of Other Options:

A: Withdrawing services would not address the conflict and is impractical.

C: Disclosing orders breaches confidentiality agreements.

D: Prioritizing sell orders introduces bias and conflict.

References:

ICWIM Module 5: Discussion on ethics and conflict of interest mitigation in trading.

What is a Benchmark?

A benchmark is a standard against which the performance of a portfolio is measured.

Common benchmarks include stock indices like the S&P 500 or FTSE 100.

Why a Custom Benchmark is Required

When a portfolio spansseveral different asset classes, such as equities, fixed income, and alternative investments, a single pre-defined benchmark may not be sufficient.

A custom benchmark aligns with the specific composition and strategy of the portfolio, ensuring that performance is evaluated accurately.

Key Reason for Custom Benchmark

It reflects thediversity and allocationof the portfolio across asset classes.

Example: If a portfolio is 50% equity, 30% fixed income, and 20% real estate, the benchmark must reflect this mix, combining indices like MSCI World, Bloomberg Barclays Bond Index, and a real estate index.

ICWIM Study Material, Chapter on Performance Measurement: Highlights the necessity for custom benchmarks in multi-asset portfolios.

CFA Institute Standards: Custom benchmarks are required for complex portfolios spanning various classes.

ReferencesThus, the answer isD. The portfolio spans several different asset classes.

Wholesale Financial Sector Defined

Involves large-scale financial transactions and services for institutions like pension funds, hedge funds, and insurance funds.

Why the Answer is B

Managing portfolios of collective investment schemes and large funds is a hallmark of the wholesale sector, focused on institutional rather than retail clients.

Why Other Options are Incorrect

A. Retail financial sector: Caters to individual clients, not institutional portfolios.

C. Family offices: Focus on managing wealth for high-net-worth families.

D. Private banking: Primarily deals with individual high-net-worth clients.

ICWIM Study Guide, Chapter on Financial Market Segments: Differentiates wholesale and retail sectors.

Investment Management Literature: Describes wholesale services.

References

What is Withholding Tax?

Withholding tax is a tax levied by a foreign government on income, such as dividends or interest, paid to non-resident investors.

When a UK-based investor receives dividend income from overseas equity, the source country often deducts withholding tax before the payment is made.

Why the Other Options are Incorrect

A. Stamp Duty: This is a transaction tax levied in the UK on share purchases, not dividend income.

C. Value Added Tax: VAT is a consumption tax on goods and services, irrelevant to dividends.

D. UK Corporation Tax: This applies to company profits, not individual dividend payments.

ICWIM Study Guide, Chapter on Taxation: Explains withholding tax on cross-border investments.

UK Tax Regulations: Confirm the application of withholding tax on overseas income.

ReferencesThus, the correct answer isB. Withholding Tax.

Definition of Costs in Economics

Costs in economics are defined asopportunity costs, which represent the value of the next best alternative foregone when a decision is made.

Examples

If a business invests in Project A, the opportunity cost is the potential return from Project B, which was not pursued.

Why the Other Options are Incorrect

B. Financial: Financial costs are explicit, but economics considers opportunity costs as broader.

C. Normal Profit: Normal profit is a component of total costs but not the definition of "costs" itself.

D. MES (Minimum Efficient Scale): Refers to the production scale at which average costs are minimized, unrelated to cost definition.

ICWIM Study Guide, Chapter on Economic Principles: Emphasizes opportunity cost as the core definition.

Economic Textbooks: Widely recognize opportunity cost as the key concept in cost theory.

ReferencesThus, the correct answer isA. Opportunity.

A client who is the spouse of the head of a foreign state is classified as aPolitically Exposed Person (PEP). Firms are required to undertakeenhanced due diligence (EDD)for PEPs and their immediate family members due to the increased risk of corruption, money laundering, or misuse of public funds.

Simplified (A): This applies to low-risk clients, not PEPs.

Standard (B): Standard due diligence is insufficient for PEPs or their relatives.

Additional (D): This term is not a formal category under anti-money laundering (AML) regulations.

References:

International Certificate in Wealth & Investment Management: AML procedures and the treatment of PEPs.

FATF (Financial Action Task Force) guidelines on enhanced due diligence for politically exposed persons.

Offshore trusts are often set up in jurisdictions with favorable tax regimes, making them appealing to wealthy UK clients. The key feature is that the trust is generally only liable for taxes in the jurisdiction where it is established.

Advantages include:

Potential tax deferral or reduction.

Privacy due to less stringent reporting requirements.

However, beneficiaries must still comply with UK tax laws, especially on distributions or gains brought into the UK.

Understanding Negative Interest Rates:

Negative interest rate policies (NIRP) are used by central banks to stimulate the economy by discouraging banks from hoarding excess reserves.

Under NIRP, banks are charged interest for holding deposits with the central bank, incentivizing lending to businesses and consumers instead.

Elimination of Other Options:

A & B: Interest is still charged on loans, and consumers are not directly "paid" to borrow.

C: Discounting loan interest rates is a potential consequence but not the direct mechanism of NIRP.

References:

ICWIM Module 1: Economic Policy: Coverage of unconventional monetary policies like NIRP.

Offshore foundations are often considered alternatives totrusts, as both are used for wealth structuring, asset protection, and estate planning. However, unlike trusts, foundations are independent legal entities and can provide greater control to the founder.

Limited liability partnerships (A): LLPs are business entities, not typically used for wealth management.

Credit unions (B): These are financial cooperatives, unrelated to wealth structuring.

SICAVs (D): SICAVs are investment funds, not wealth-structuring vehicles.

References:

International Certificate in Wealth & Investment Management: Comparison of trusts and offshore foundations in wealth management.

Legal structures and their applications in estate and tax planning.

What is Key Person Protection?

A policy designed to compensate a company for financial losses incurred if a key employee dies or becomes disabled.

A prerequisite is that the company must prove aninsurable interestin the key person.

Why D is Correct

Insurable interest ensures that the company has a legitimate financial dependency on the key person, a requirement for taking out such a policy.

Other Options Analyzed

A. Ever-increasing premiums: Not a feature specific to key person policies.

B. Moving to a competitor: Irrelevant; this is not an insurable risk.

C. Undefined sum: Key person policies require a specific sum based on financial calculations.

ICWIM Textbook, Chapter on Business Insurance: Emphasizes insurable interest in key person policies.

Insurance Industry Standards: Insurable interest is a fundamental requirement.

References