HKSI Licensing Examination Paper 1 (Regulation) — All Questions

A licensed corporation's handling of client complaints should be governed by:

• a.Proper internal procedures ensuring complaints are handled promptly, fairly and are properly recorded and escalated✓
• b.A standing firm policy of routinely ignoring all client complaints that happen to fall under a certain monetary size threshold
• c.The client's own lawyers only
• d.The Stamp Duty Ordinance

The Code of Conduct and internal-control guidelines require firms to have effective procedures for handling client complaints promptly and fairly, keeping proper records and escalating serious matters. Good complaints handling is part of treating customers fairly and sound operations.

Maintaining a separation between front-office (dealing) and back-office (settlement/record-keeping) functions is an example of:

• a.A breach of the Code of Conduct
• b.A specific requirement that is imposed directly by the Stamp Duty Ordinance on all firms
• c.An unnecessary duplication that firms should avoid
• d.A segregation-of-duties internal control that reduces the risk of error and fraud✓

Segregation of duties - separating those who execute trades from those who settle and record them - is a fundamental internal control that reduces the risk of undetected error or fraud. It is expected under the SFC's Management, Supervision and Internal Control Guidelines.

Under the AMLO, before establishing a business relationship a firm must identify the 'beneficial owner', which for a company generally means:

• a.The natural person(s) who ultimately own or control the customer (typically an ownership interest above a set threshold, such as more than 25%)✓
• b.The most junior employee
• c.The company's external auditor
• d.Any person at all who has at any time in the past ever bought even a single one of the customer company's ordinary listed shares on the open market

Beneficial ownership requires firms to look through legal entities to the natural persons who ultimately own or control the customer - commonly those holding more than 25% of the shares or voting rights, or otherwise exercising control. Identifying them is central to effective CDD under the AMLO.

Ongoing monitoring of a business relationship under the AMLO requires a firm to:

• a.Rely entirely on the SFC to monitor the client
• b.Verify the customer's identity only once at the point of account opening and then never again carry out any further review or monitoring of the relationship at all afterwards
• c.Keep customer information up to date and scrutinise transactions to ensure they are consistent with the firm's knowledge of the customer and their risk profile✓
• d.Monitor only transactions above HK$1 billion

Ongoing monitoring requires firms to keep CDD information current and to review transactions during the relationship to ensure they are consistent with what the firm knows about the customer, their business and risk profile. Unusual or inconsistent activity may trigger a suspicious-transaction report to the JFIU.