HKSI Licensing Examination Paper 1 (Regulation) Practice Test
In the HKSI LE Paper 1 (Regulation) guide: A full practice section and a cram sheet at the back, with the reasoning behind every answer. Practice here stays free.
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Sample practice questions
A few real questions from this free bank, with full explanations. Use the practice tool above for the whole set.
- 1. Regulatory Overview
Which body is the statutory regulator of Hong Kong's securities and futures markets?
- a.The Hong Kong Monetary Authority (HKMA)
- b.Hong Kong Exchanges and Clearing Limited (HKEX)
- c.The Securities and Futures Commission (SFC)
- d.The Financial Services and the Treasury Bureau
Answer: c
Explanation: The SFC is the independent statutory body established under Part II of the SFO to regulate Hong Kong's securities and futures markets. The HKMA regulates banks, HKEX operates the exchanges and clearing houses, and the FSTB is a government policy bureau.
- 2. The Securities and Futures Ordinance
An investment offer that is directed only at 'professional investors' can benefit from an exemption from the offer-authorisation requirement in s.103 of the SFO. Under the Securities and Futures (Professional Investor) Rules, an individual generally qualifies as a professional investor if they have a portfolio of at least:
- a.HK$1 million
- b.HK$8 million
- c.HK$40 million
- d.HK$100 million
Answer: b
Explanation: The Professional Investor Rules set the threshold for an individual at a portfolio of not less than HK$8 million (or its equivalent). Reaching the monetary threshold is only part of the test; intermediaries must still assess and document a corporate professional investor's knowledge and experience before disapplying certain protections.
- 3. Licensing and Registration
An individual who wishes to carry on a regulated activity on behalf of a licensed corporation must be licensed as a representative and must be:
- a.At least 30 years old
- b.A Hong Kong permanent resident
- c.A shareholder of the licensed corporation who holds a substantial stake in its issued and paid-up share capital
- d.Accredited to that licensed corporation as their principal
Answer: d
Explanation: A licensed representative must be accredited to a licensed corporation, which acts as the representative's principal and is responsible for supervising them. A representative may be accredited to more than one licensed corporation only with the SFC's approval.
- 4. Licensing and Registration
Which of the following best describes the relationship between the SFC and the HKMA for a bank that conducts SFC-regulated activities?
- a.The bank needs no independent oversight of its securities business at all, because it is already supervised as a deposit-taking institution by the authority
- b.The Stock Exchange is the front-line regulator of the bank's securities business
- c.The SFC licenses the bank's individual staff as representatives
- d.The HKMA is the front-line regulator of the registered institution, while SFC conduct standards still apply to its regulated activities
Answer: d
Explanation: A bank conducting regulated activities is a registered institution supervised on the front line by the HKMA under a memorandum of understanding with the SFC. SFC conduct standards, including the Code of Conduct, nonetheless apply to the bank's securities and futures business.
- 5. Business Conduct and Client Relations
General Principle 3 of the SFC Code of Conduct requires a licensed person to have and to employ effectively:
- a.Only such staff and systems as are required to maximise trading volume, regardless of its compliance obligations
- b.The resources and procedures needed for the proper performance of its business activities
- c.A guaranteed minimum level of annual profitability
- d.The largest possible sales team
Answer: b
Explanation: General Principle 3 (Capabilities) requires a licensed person to have and employ effectively the resources and procedures needed for the proper performance of its business activities. Adequate systems, staffing and controls are a licensing and ongoing obligation.
- 6. Business Conduct and Client Relations
If a client's investment objective changes from 'income' to 'aggressive growth', the intermediary should:
- a.Continue recommending the same income products as before, on the basis that a client's stated objectives are never relevant once the account is open
- b.Update the client's records and reassess the suitability of existing and future holdings
- c.Automatically liquidate the entire account
- d.Ignore the change until the next audit
Answer: b
Explanation: Under General Principle 4 and para 5.1, client information must be kept current. A material change in the client's objectives requires the records to be updated and the suitability of recommendations reassessed.
- 7. Business Operations, Internal Controls and AML
Sound operational controls expect a licensed corporation to maintain:
- a.Business continuity and contingency arrangements so that critical functions can continue after a disruption
- b.A policy of ceasing all client business permanently the first time any system outage or disruption occurs, however brief or minor
- c.No contingency plans, to save cost
- d.Plans that rely entirely on a single member of staff
Answer: a
Explanation: The Internal Control Guidelines expect firms to have business continuity and contingency planning so that critical operations, client access and records can be maintained or promptly restored following disruptions.
- 8. HK Law and the Companies Ordinance
In a winding up, the general order of distribution is that:
- a.Ordinary shareholders are paid first
- b.All claimants share equally regardless of their status
- c.Ordinary shareholders are paid in full before any creditor receives anything, on the principle that the owners of the company always have the strongest claim on its assets
- d.Secured creditors and preferential debts are paid ahead of unsecured creditors, with shareholders ranking last
Answer: d
Explanation: On a winding up, secured creditors realise their security, then preferential debts and unsecured creditors are paid in the statutory order, and shareholders rank last, receiving only any surplus after all creditors have been satisfied.
- 9. Market Misconduct
'Dealing' in securities, for the purposes of the insider-dealing provisions, includes:
- a.Only sales, never purchases
- b.Only transactions above HK$1 million
- c.Only outright cash purchases of listed shares made by an individual acting personally as principal for investment
- d.Buying, selling, subscribing for, or agreeing to buy or sell the securities, whether as principal or agent
Answer: d
Explanation: Dealing is defined broadly to include buying, selling, subscribing for or underwriting securities, and agreeing to do any of these, whether as principal or agent. This wide scope ensures the insider-dealing prohibition cannot be avoided through technical structuring (SFO Part XIII/XIV).
- 10. Participating in the Exchanges
Which entity acts as the clearing house (and central counterparty) for cash-market securities trades on the SEHK?
- a.The Hong Kong Futures Exchange
- b.The Securities and Futures Commission itself acting directly
- c.Hong Kong Securities Clearing Company Limited (HKSCC)
- d.The Hong Kong Monetary Authority
Answer: c
Explanation: HKSCC operates CCASS and acts as the central counterparty for SEHK securities trades. Separate clearing houses (SEOCH for stock options, HKCC for futures) handle the derivatives markets within the HKEX group.