This question assesses knowledge of the specific tax treatment of UK Authorised Unit Trusts (AUTs), a core topic in the CISI Collective Investment Scheme Administration syllabus. Under UK tax law, specifically The Authorised Investment Funds (Tax) Regulations 2006, AUTs (and OEICs) are treated as tax-transparent for the purposes of capital gains. This means the fund itself is exempt from paying Corporation Tax on any chargeable gains it realises from the buying and selling of investments within its portfolio. The tax liability is effectively passed through to the investor. The investor will be liable for Capital Gains Tax (CGT) only when they dispose of (sell) their units in the fund, subject to their personal annual exempt amount as stipulated under the Taxation of Chargeable Gains Act 1992 (TCGA 1992). It is crucial to distinguish this from the fund’s income (e.g., interest received), on which the AUT is liable to pay Corporation Tax, but at a special rate equal to the basic rate of income tax (currently 20%). other approaches is incorrect as AUTs are not subject to the main rate of Corporation Tax on gains. other approaches incorrectly conflates capital gains with income. other approaches incorrectly introduces the concept of withholding tax on capital gains within the fund, which is not applicable.

In the context of the UK financial services industry, a Collective Investment Scheme (CIS) is specifically defined under Section 235 of the Financial Services and Markets Act 2000 (FSMA 2000). For an arrangement to be classified as a CIS, it must meet certain criteria: 1) It involves arrangements concerning property of any kind. 2) The purpose is to enable participants to receive profits or income from the management of that property. 3) The participants do not have day-to-day control over the management of the property. 4) The property is managed as a whole by an operator, and/or the contributions and profits are pooled. The absence of day-to-day control by investors and the pooling of assets are the most critical distinguishing features. Operating a CIS is a regulated activity, and firms must be authorised by the Financial Conduct Authority (FCA). The correct option describes a classic CIS where investors’ funds are pooled and managed professionally, and the investors cede day-to-day control, which is the core purpose of such schemes.

This question assesses the candidate’s understanding of the UK’s investor protection framework, specifically the Financial Conduct Authority’s (FCA) Conduct of Business Sourcebook (COBS). The core principle being tested is the requirement under COBS 4 for all communications to clients, particularly retail clients, to be ‘fair, clear, and not misleading’. The Key Investor Information Document (KIID) is a mandated pre-sale document for UCITS funds, designed to present essential information in a standardised and easily understandable format. Failing to ensure its clarity directly breaches this fundamental rule and undermines the FCA’s strategic objective of consumer protection. While the Senior Managers and Certification Regime (SM&CR) establishes accountability, the primary breach is of the communication rule itself. The Client Assets Sourcebook (CASS) and the Collective Investment Schemes Sourcebook (COLL) govern different areas (asset protection and fund constitution, respectively) and are not the most direct regulations being contravened in a marketing communication scenario.

This question assesses the understanding of risk-based asset allocation, specifically risk parity, within the context of a UK-domiciled UCITS fund and the administrator’s compliance role. The correct answer identifies that the observed portfolio is consistent with a risk parity strategy. In such a strategy, the goal is to equalise the risk contribution from each asset class, not the capital allocation. Therefore, assets with lower inherent volatility (like UK Government Bonds) require a much larger capital weighting to contribute the same amount of risk as a smaller allocation to a highly volatile asset class (like Global Emerging Market Equities). From a UK regulatory perspective, this is a critical compliance check. The FCA’s Conduct of Business Sourcebook (COBS), particularly COBS 4, requires that a fund’s investment objectives and policy are described in a way that is fair, clear, and not misleading. The administrator’s review confirms that the fund manager is adhering to the strategy disclosed in key regulatory documents like the prospectus and the Key Investor Information Document (KIID), as mandated under the UCITS Directive and the FCA’s Collective Investment Schemes sourcebook (COLL). The other options are incorrect because they misinterpret the strategy, misapply regulations (e.g., AIFMD to a UCITS fund), or misunderstand the administrator’s oversight role, which does not extend to dictating investment decisions.

This question assesses the core principles of Strategic Asset Allocation (SAA) within the context of UK fund management, specifically for a UCITS scheme regulated by the Financial Conduct Authority (FCA). SAA is a long-term investment strategy that involves setting target allocations for various asset classes and periodically rebalancing the portfolio to maintain those targets. The strategy is based on the investor’s long-term goals, risk tolerance, and time horizon, not on short-term market forecasts. The correct action is to rebalance the portfolio. The equity allocation has fallen below its strategic target (55% vs 60%) and cash is above its target (15% vs 10%). The principle of SAA dictates selling the overweight asset (cash) to buy the underweight asset (equities) to return the portfolio to its long-term target allocation. This is a disciplined approach that enforces ‘buying low’ and ‘selling high’. This action aligns with the FCA’s Principles for Businesses, particularly Principle 2 (conducting business with due skill, care and diligence) and Principle 6 (treating customers fairly). The fund manager’s duty is to manage the fund in accordance with its stated objectives as detailed in the prospectus and the Key Investor Information Document (KIID). Changing the SAA or attempting to time the market based on short-term volatility would be a deviation from this disclosed long-term strategy. The FCA’s Conduct of Business Sourcebook (COBS) requires that firms provide clear and fair information to clients; the rebalancing action is consistent with the pre-disclosed strategy.

The correct answer identifies the primary regulatory risk as the fund being a ‘closet tracker’. Under the UK regulatory framework, this presents a significant compliance issue. The Financial Conduct Authority (FCA) requires all communications to be ‘fair, clear, and not misleading’ as per the Conduct of Business Sourcebook (COBS 4). Marketing a fund as ‘actively managed’ and charging high active management fees, while its performance and holdings closely replicate a benchmark index, is considered misleading to investors. Furthermore, the FCA’s Assessment of Value (AoV) regime, a key component of the UK’s asset management market study remedies, mandates that Authorised Fund Managers (AFMs) must annually assess and justify their fees based on the value provided. A fund with a low tracking error and low active share would struggle to justify high active fees, likely failing its AoV assessment and attracting regulatory scrutiny. The other options are incorrect because while investor redemptions are a commercial risk, they are a consequence of the primary regulatory failure. The fee cap mentioned applies specifically to default workplace pensions, not all retail funds, and the scenario points towards a lack of active management (index hugging), not excessive concentration risk.

The correct answer is that the REIT has failed the 90% distribution of profits condition. Under the UK REIT regime, governed by Part 12 of the Corporation Tax Act 2010, a REIT must distribute at least 90% of the profits from its tax-exempt property rental business to its shareholders as a Property Income Distribution (PID) for each accounting period. In this scenario: 1. The property rental business profit is £96 million. 2. The minimum required distribution is 90% of £96 million, which equals £86.4 million. 3. The actual distribution made by CityScape REIT plc was £85 million. Since £85 million is less than the required £86.4 million, the REIT has breached this critical condition. The other options are incorrect because: – The 75% property rental business profits test was met: The property rental profits (£96m) constitute 80% of the total profits (£120m), which is above the 75% threshold. – The ‘close company’ test relates to the ownership structure (i.e., not being controlled by five or fewer participators), and there is no information in the question to suggest a breach of this rule. – The listing requirement refers to the REIT’s shares being admitted to trading on a recognised stock exchange, which is a separate condition not addressed by the financial data provided.

The correct answer is the Alternative Investment Fund Managers Directive (AIFMD). According to UK regulations, which incorporate EU directives, a collective investment scheme that does not qualify as a UCITS fund is classified as an Alternative Investment Fund (AIF). The key characteristics described in the question – a high concentration in illiquid assets like private equity and a target market of professional investors – explicitly fall outside the scope of the UCITS framework. The UCITS Directive is designed for retail funds and imposes strict rules on eligible assets, primarily limiting them to transferable securities and other liquid financial instruments, with stringent diversification requirements. AIFMD, as implemented in the UK by the FCA (primarily through the FUND and COLL sourcebooks in the FCA Handbook), was specifically created to regulate managers of non-UCITS funds (AIFs) and provides a framework for their operation, transparency, and marketing to professional investors across Europe. A Non-UCITS Retail Scheme (NURS) is a UK-specific regime for non-UCITS funds marketed to the general public and has its own asset and borrowing restrictions, which may not be suitable for this fund’s strategy, and AIFMD is the overarching directive. An Open-Ended Investment Company (OEIC) is a legal structure for a fund, not a regulatory regime itself; an AIF can be structured as an OEIC.

This question assesses understanding of the UK’s regulatory framework, specifically the Financial Conduct Authority’s (FCA) Principles for Businesses (PRIN). The core issue is the mismatch between the fund’s marketing and its actual investment strategy. According to the FCA’s COLL sourcebook and PRIN, all communications with clients must be ‘fair, clear and not misleading’. Principle 7 (Communications with clients) is the most relevant here, as it explicitly states a firm must ‘pay due regard to the information needs of its clients and communicate information to them in a way which is clear, fair and not misleading’. While the investment is technically permitted by the prospectus, the fund’s name and marketing materials create a misleading impression of its risk profile, which is a direct breach of this principle. The other options are incorrect: Principle 6 (Customers’ interests) is a broader principle, but Principle 7 is more specific to the communication failure. The CASS rules relate to the custody of client assets, not marketing. The UCITS diversification rules concern portfolio construction limits to mitigate concentration risk, not the accuracy of promotional materials.

In the United Kingdom, the Financial Conduct Authority (FCA) is the primary regulatory body responsible for the authorisation and supervision of collective investment schemes and the firms that operate them. This authority is granted under the Financial Services and Markets Act 2000 (FSMA 2000). For a firm to manage or market a UCITS fund, it must obtain a ‘Part 4A permission’ from the FCA to conduct regulated activities. Concurrently, the fund itself must be authorised by the FCA before it can be marketed to the public. The Prudential Regulation Authority (PRA) is responsible for the prudential regulation of systemically important firms like banks and insurers, not typically asset managers. The Securities and Exchange Commission (SEC) is the regulator for the United States, and The Pensions Regulator (TPR) oversees UK work-based pension schemes, not retail investment funds like UCITS.

The correct answer highlights the most significant governance failure, which is the board’s primary duty to act in the best interests of the scheme’s investors. Under the FCA’s Collective Investment Schemes sourcebook (COLL 6.6), the Authorised Fund Manager (AFM) has an overriding responsibility to act in the best interests of the unitholders. This includes providing robust oversight and effective challenge to any delegated functions, such as investment management. A passive board that ‘rubber-stamps’ reports, especially during periods of underperformance, is failing in its core duty of stewardship. This principle is further reinforced by the FCA’s Senior Management Arrangements, Systems and Controls (SYSC) sourcebook, which requires firms to have effective governance arrangements. The UK’s Assessment of Value (AoV) regime also places a direct obligation on the AFM board to annually assess whether the fund is providing value to investors, a process which requires continuous and active challenge of the investment manager. While incorrect minute-taking or over-reliance on the depositary are governance weaknesses, they are secondary to the board’s fundamental and non-delegable duty of oversight and acting in investors’ best interests.

This question assesses the fund manager’s core duties under the UK regulatory framework, specifically for a UCITS scheme. The correct answer correctly identifies the hierarchy of responsibilities. The primary duty of a fund manager, as stipulated by the FCA’s Conduct of Business Sourcebook (COBS 2.1.1R), is to act honestly, fairly, and professionally in the best interests of their clients (the fund’s unitholders). This overarching principle governs all actions. Furthermore, the manager is bound by the fund’s constitutive documents (the prospectus) and the specific investment and borrowing powers detailed in the FCA’s Collective Investment Schemes Sourcebook (COLL). For a UK UCITS, COLL 5.2 outlines strict rules on eligible assets and diversification. A 20% investment in a single unlisted security would almost certainly breach the UCITS ‘5/10/40’ diversification rule (COLL 5.2.11R) and rules on transferable securities. The conflict of interest (director’s ownership) also requires careful management under SYSC and COBS, but the fundamental issue is the suitability and compliance of the investment itself. Prioritising performance over compliance is a direct regulatory breach. Simply disclosing the issue to the depositary does not absolve the manager of their responsibility to reject a non-compliant and unsuitable investment.

This question assesses the candidate’s understanding of sector and geographic diversification as a core risk management principle within UK-regulated collective investment schemes, specifically UCITS. The Financial Conduct Authority’s (FCA) Collective Investment Schemes sourcebook (COLL) implements the UCITS Directive in the UK. A fundamental requirement under COLL 5.2 is that a UCITS scheme must be adequately diversified to spread investment risk. The scenario describes a fund with 80% of its assets concentrated in a single sector (technology) and a single geography (the UK). This creates significant concentration risk, meaning the fund’s performance is overly dependent on the fortunes of that specific sector and country. A downturn in the UK tech industry or a UK-specific economic crisis would have a disproportionately negative impact on the fund’s value. This strategy runs contrary to the principle of diversification, which aims to mitigate such unsystematic risks. The UCITS ‘spread and concentration’ rules (often referred to as the ‘5/10/40’ rule) are designed to enforce this diversification, limiting exposure to single issuers. While the scenario doesn’t confirm a breach of the specific issuer limits, the stated strategy makes compliance challenging and clearly violates the overarching principle of risk spreading. The other options are incorrect because while liquidity, operational, and counterparty risks are valid concerns in fund administration, the primary and most significant risk highlighted by the portfolio’s structure is concentration risk.

This question tests knowledge of the valuation principles under the UK’s Financial Conduct Authority (FCA) regulations, specifically the Collective Investment Schemes sourcebook (COLL). According to COLL 6.3, the Authorised Fund Manager (AFM) of a scheme is responsible for ensuring that the scheme property is valued at a fair and accurate price at every valuation point. For unlisted or infrequently traded securities, simply using the last traded price is often inappropriate, especially if a significant amount of time has passed or market conditions have changed. The AFM must have a robust valuation policy to determine a ‘fair value’ for such assets, which might involve using valuation models, broker quotes, or comparisons to similar listed securities. In this scenario, using a three-month-old price when market conditions have clearly deteriorated constitutes a failure to meet the obligation of fair valuation, which can lead to the Net Asset Value (NAV) being misstated and investors dealing at an incorrect price. While the administrator performs the calculation, the ultimate responsibility for the valuation policy and its fair implementation rests with the AFM.

This question assesses the administrator’s understanding of their overarching regulatory duties, which can supersede a direct client instruction. The correct answer is based on the Financial Conduct Authority’s (FCA) Principles for Businesses, particularly Principle 6: ‘A firm must pay due regard to the interests of its customers and treat them fairly’ (TCF). The fund manager’s instruction, while potentially meeting the minimum legal notice period outlined in the FCA’s Collective Investment Schemes sourcebook (COLL), is a clear attempt to disenfranchise shareholders and breaches the spirit of fair treatment. The administrator has a responsibility to not knowingly participate in an activity that contravenes regulatory principles. The most appropriate action is to advise the client of their regulatory obligations and the potential breach of TCF. Simply following the instruction would make the administrator complicit. Contacting shareholders directly would be a breach of client confidentiality and overstepping the administrator’s role. Refusing without providing a regulatory reason fails to address the core ethical and compliance issue.

This question assesses knowledge of the fundamental differences between the two main types of authorised retail funds in the UK: UK UCITS schemes and Non-UCITS Retail Schemes (NURS). The regulatory framework for these is primarily set out in the Financial Conduct Authority’s (FCA) Collective Investment Schemes sourcebook (COLL), which is created under the powers granted to the FCA by the Financial Services and Markets Act 2000 (FSMA). The correct answer highlights a key distinction in their borrowing powers as stipulated in COLL 5. A UK UCITS scheme’s borrowing is highly restricted; it must be for temporary purposes only (e.g., to manage liquidity for redemptions) and cannot exceed 10% of the scheme’s Net Asset Value (NAV). In contrast, a NURS has greater flexibility and is permitted to borrow up to 10% of its NAV on a permanent basis, which allows it to use gearing as part of its investment strategy. This difference is a critical consideration for fund managers when structuring a product and for administrators in monitoring compliance.

This question assesses understanding of the critical procedures and regulatory obligations under the UK’s Financial Conduct Authority (FCA) framework when a pricing error is discovered during the Net Asset Value (NAV) calculation process. The correct answer is to immediately halt the process, recalculate the NAV accurately, and document the incident. This aligns with the FCA’s Collective Investment Schemes sourcebook (COLL), specifically COLL 6.3, which mandates that the Authorised Fund Manager (AFM), and by delegation the administrator, must ensure the scheme property is valued fairly and accurately at each valuation point. Publishing a known incorrect NAV would be a direct breach of the FCA’s principle of treating customers fairly (TCF) and the requirement to act with due skill, care, and diligence. While reporting to the FCA is required for material errors that have affected investors (i.e., dealing has occurred at the wrong price), the immediate priority for an error caught pre-publication is correction and prevention. Issuing a correction the next day or initiating a disciplinary review are secondary actions; the primary, critical duty is to ensure the NAV published to the market is correct to protect the fund and its investors.

This question assesses the candidate’s understanding of the fundamental definition and purpose of a Collective Investment Scheme (CIS) as defined by UK law, which is a cornerstone of the CISI Collective Investment Scheme Administration syllabus. The correct answer directly reflects the key principles outlined in Section 235 of the Financial Services and Markets Act 2000 (FSMA 2000). FSMA 2000 defines a CIS based on four key elements: (1) arrangements concerning property, (2) the purpose is to enable participants to share in profits/income, (3) participants do not have day-to-day control over the property’s management, and (4) the contributions are pooled and/or the property is managed as a whole. The correct option encapsulates these points by highlighting the pooling of contributions, access to a wider range of assets (diversification), professional management, and the lack of day-to-day control by the investor. The incorrect options are designed to test common misconceptions. CISs do not offer guaranteed returns; their value fluctuates with the market, and promoting them as such would breach FCA Conduct of Business Sourcebook (COBS) rules. Investors in a CIS do not have direct ownership or day-to-day control over the underlying assets; they own units or shares in the scheme itself, which is a defining characteristic under FSMA 2000. Finally, while some schemes offer tax advantages, their primary legal purpose is investment, not tax minimisation or evasion.

This question assesses understanding of the IFRS 13 Fair Value Hierarchy and its application within the UK regulatory framework for Collective Investment Schemes, specifically UCITS, as governed by the FCA’s Collective Investment Schemes sourcebook (COLL). IFRS 13 Fair Value Hierarchy: Level 1: Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities. These are the most reliable and require the least judgement (e.g., a share traded on the London Stock Exchange). Level 2: Valuations based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (e.g., valuing a corporate bond using a yield curve or the price of similar, traded bonds). Level 3: Valuations based on unobservable inputs for the asset or liability. These require significant judgement and modelling, as market data is not available (e.g., valuing a private equity investment or an unlisted start-up using a discounted cash flow model with internal assumptions). In the scenario, the valuation of the unlisted start-up uses a proprietary model with key inputs (projected revenue, discount rates) that are internal to the fund manager and not observable in the market. This squarely places the asset in the Level 3 category. Regulatory Implications (UK CISI Context): Under the FCA’s COLL sourcebook, the Authorised Fund Manager (AFM) has a duty to ensure the scheme property is valued fairly and accurately. The Depositary (under COLL 5.5) has a crucial oversight role, which includes verifying that the AFM has appropriate and consistent valuation procedures. For Level 3 assets, this scrutiny is significantly heightened due to the inherent subjectivity. The Depositary must satisfy itself that the valuation methodology is appropriate, consistently applied, and properly documented. Furthermore, IFRS requires enhanced disclosures in the fund’s financial statements for Level 3 assets to provide transparency to investors about the valuation techniques and the uncertainty involved. While UCITS funds can hold such assets, it is typically limited to 10% of the fund’s Net Asset Value in unlisted securities, and the focus on robust valuation is paramount.

This question assesses the candidate’s understanding of the key regulatory drivers for a private equity fund administrator in the UK, specifically relating to valuation under the Alternative Investment Fund Managers Directive (AIFMD). The correct answer is based on the fact that AIFMD, as incorporated into UK regulation via the FCA’s FUND sourcebook, places a significant regulatory burden on the Alternative Investment Fund Manager (AIFM) to ensure that the fund’s assets are valued fairly, accurately, and independently. The AIFM must establish, maintain, and review well-documented valuation policies and procedures. The scenario describes a move from a manual, error-prone system to an automated one that enhances accuracy, consistency, and auditability. This directly supports the AIFM’s ability to demonstrate compliance with its core AIFMD obligations regarding valuation governance. The other options are incorrect for the following reasons: – The FCA’s Client Assets Sourcebook (CASS) primarily deals with the protection of client money and custody assets, not the methodology for valuing illiquid private equity investments. The requirement for daily reconciliation is not applicable to these types of assets in this context. – While improving Limited Partner (LP) satisfaction is a valid commercial objective, it is not the strongest regulatory compliance justification. The primary driver from a compliance perspective is the AIFM’s direct obligation to the regulator. – The Markets in Financial Instruments Directive (MiFID II) is primarily concerned with transparency and conduct in relation to liquid financial markets (e.g., equities, bonds) and investment services. While it has some peripheral impact, AIFMD is the principal regulation governing the operational and valuation functions of a UK AIFM.

This question assesses the critical oversight and escalation responsibilities of a fund administrator within the UK’s regulatory framework. According to the FCA’s Collective Investment Schemes sourcebook (COLL) and the principles embedded within the UCITS Directive, a fund must have a permanent and independent risk management function and operate in accordance with its documented Risk Management Process (RMP). The scenario describes a passive breach of the fund’s stated risk limits. The administrator’s primary duty is not to manage the fund or make regulatory reports unilaterally, but to perform oversight and escalate issues to the fund’s governing body, which for a UK UCITS is typically the Authorised Corporate Director (ACD). The ACD holds the ultimate responsibility for ensuring the fund complies with its prospectus, the RMP, and all relevant regulations (including COBS and COLL). The immediate and correct action is therefore internal escalation to the ACD and its risk function. This allows the responsible party to assess the breach and take appropriate corrective action, which may include rebalancing the portfolio or, if the breach is deemed material, reporting it to the FCA under the SUP (Supervision) manual rules. Instructing the custodian or calculating trades would be an overreach of the administrator’s segregated role, while reporting directly to the FCA bypasses the required internal governance and remediation process.

This question assesses understanding of the FCA’s rules on valuation and the impact of liquidity, a key topic for CISI exam candidates. Under the FCA’s Collective Investment Schemes sourcebook (COLL 6.3), the Authorised Fund Manager (AFM) is responsible for ensuring that the scheme’s property is valued at a fair and accurate price. When a significant holding is illiquid (i.e., it cannot be easily sold without depressing its price), the last traded price may not represent a ‘fair value’. In such a scenario, especially during large redemptions, using an unadjusted market price would overstate the NAV. This would unfairly benefit redeeming investors at the expense of those remaining in the fund. Therefore, the AFM must apply a fair value adjustment, such as a liquidity discount, to reflect the realistic price the asset could be sold for. This ensures that all unitholders are treated fairly. Suspending the fund is a measure of last resort, and while the depositary has an oversight role, the responsibility for the valuation policy and its application lies with the AFM.

This question assesses the understanding of a critical operational risk specific to Exchange-Traded Funds (ETFs) – the potential for the arbitrage mechanism to fail. In the UK, most ETFs are structured as UCITS funds and are therefore subject to the FCA’s Collective Investment Schemes sourcebook (COLL). The correct answer is that the ETF’s market price could trade at a significant premium to its Net Asset Value (NAV). The creation/redemption mechanism, involving Authorised Participants (APs), is the arbitrage process that keeps an ETF’s secondary market price closely aligned with its NAV. If APs cannot create new units (e.g., due to illiquidity in the underlying assets), they cannot satisfy excess market demand. This supply/demand imbalance on the exchange can cause the ETF’s share price to rise significantly above the value of its underlying holdings (the NAV), creating a premium. This is a primary risk that fund administrators must monitor, as it directly harms investors who buy at an inflated price. The prospectus, a key document under COLL 4.2, must disclose such risks. other approaches is incorrect as the scenario specifies a ‘physically replicated’ ETF, which holds the underlying securities directly and does not use swaps, thus eliminating swap-related counterparty risk. other approaches is incorrect because while tracking error is a risk, it relates to the NAV’s performance versus the index, not the market price versus the NAV. other approaches is a possible regulatory response to a severe market dislocation under COLL 7.2, but it is a consequence of the risk, not the initial risk itself.

This question assesses the candidate’s understanding of the regulatory distinction between active and passive management, a key area of focus for the UK’s Financial Conduct Authority (FCA). The FCA’s Conduct of Business Sourcebook (COBS), specifically COBS 4, mandates that all communications with clients, including fund documentation like the KIID/KID, must be ‘fair, clear, and not misleading’. A fund that is marketed as ‘actively managed’ implies that the fund manager is making specific investment decisions to outperform a benchmark, justifying a higher Ongoing Charges Figure (OCF). A passively managed, or ‘tracker’, fund simply aims to replicate a benchmark’s performance for a lower fee. The scenario describes a potential ‘closet tracker’ or ‘index hugger’ – a fund that charges active fees but whose portfolio construction and performance closely mirror a benchmark. The FCA views this as potentially misleading to investors, as they are not receiving the active management service they are paying for. Therefore, the primary regulatory concern is the breach of the ‘fair, clear, and not misleading’ principle, not issues related to concentration limits (UCITS rules), benchmark disclosure (PRIIPs/COLL), or the specific calculation of performance metrics.

This question assesses the fund administrator’s role within the UK’s regulatory governance framework, specifically concerning Tactical Asset Allocation (TAA). The correct action aligns with the FCA’s Principles for Businesses, particularly Principle 6 (A firm must pay due regard to the interests of its customers and treat them fairly – TCF) and Principle 7 (A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading). The fund’s prospectus and Key Investor Information Document (KIID) are legally binding documents. Significant and persistent deviation from the stated investment strategy, even under the guise of TAA, can render these documents misleading and may not be in the best interests of investors due to increased costs and risk profile changes. Under the FCA’s Collective Investment Schemes sourcebook (COLL), the Authorised Fund Manager (AFM) has ultimate responsibility for ensuring the scheme is managed in accordance with its constitutive documents and regulations. The administrator, as a key part of the scheme’s operational and governance structure, has a duty to escalate material issues to the responsible entity (the AFM). Reporting directly to the FCA is a step to be taken only if internal escalation fails. Simply processing trades ignores the administrator’s wider governance and oversight responsibilities, which are integral to investor protection and align with the CISI’s Code of Conduct, especially principles of Integrity and Client Focus.

This question assesses knowledge of the breach reporting procedures within the UK regulatory framework, specifically as defined by the Financial Conduct Authority’s (FCA) Collective Investment Schemes sourcebook (COLL). For a UK-authorised UCITS scheme, the Authorised Corporate Director (ACD) is responsible for managing the scheme in accordance with the regulations. The depositary has an oversight and safekeeping role. According to COLL 6.9, if the ACD becomes aware of any breach of the investment or borrowing limits (in this case, a passive breach of the ‘5/10/40’ rule under COLL 5.2), it has an immediate duty to inform the depositary. The depositary must then ensure the ACD takes appropriate remedial action in the best interests of the unitholders. While a significant breach may need to be reported to the FCA, the primary and most immediate notification is to the depositary, which acts as the scheme’s overseer. For the CISI exam, understanding the distinct roles and the prescribed communication channels between the ACD, the depositary, and the FCA during a breach is critical.

This question assesses the impact of gearing (borrowing to invest) on an investment trust’s performance, a key topic in the CISI Collective Investment Scheme Administration syllabus. Investment trusts, as closed-ended companies listed on a stock exchange (e.g., the London Stock Exchange), have the ability to borrow money, which is a significant differentiator from open-ended funds like OEICs. Under the UK’s implementation of the Alternative Investment Fund Managers Directive (AIFMD), an investment trust is classified as an Alternative Investment Fund (AIF) and is managed by an Alternative Investment Fund Manager (AIFM). The AIFM, under the oversight of the trust’s board of directors, implements the investment strategy, including the gearing policy. Gearing magnifies the returns of the underlying portfolio. In a rising market, the value of the invested assets (including the borrowed funds) grows, but the amount of debt remains fixed. This results in an amplified increase in the Net Asset Value (NAV) attributable to each share. Conversely, in a falling market, gearing magnifies losses. The other options are incorrect: gearing would not dampen returns in a rising market; its direct impact is on the NAV, not the share price’s discount or premium (which is driven by market sentiment); and the cost of borrowing actually reduces the income available for distribution, although the aim is for capital growth to far outweigh this cost.

This question assesses the candidate’s ability to identify and differentiate between key risk types within a Collective Investment Scheme (CIS) context, specifically focusing on liquidity risk. Liquidity risk is the risk that a fund cannot meet its liabilities, such as paying redemption requests, as they fall due without incurring unacceptable losses. This can occur when a fund holds assets that are difficult to sell quickly at a fair price. In this scenario, the UK-authorised UCITS fund has a significant holding in unlisted securities, which are inherently illiquid. The sudden wave of redemption requests creates an urgent need for cash, but the fund cannot easily sell its unlisted assets to raise this cash. This is a classic example of liquidity risk crystallising. Under the UK regulatory framework, the FCA’s Collective Investment Schemes sourcebook (COLL), specifically COLL 6.6, mandates that Authorised Fund Managers (AFMs) of UCITS schemes must have robust liquidity management policies and procedures in place. The administrator has a duty to monitor for such risks and report them to the AFM, whose responsibility it is to manage them in line with FCA rules, including potentially suspending dealing if necessary to protect the interests of all investors.

This question assesses understanding of fund board governance, specifically the critical concept of director independence and conflict of interest management, which is a cornerstone of UK financial regulation. The correct answer identifies that the primary issue is the non-executive director’s (NED) lack of independence due to their financial ties to a key service provider. According to the FCA’s Principles for Businesses, particularly Principle 8 (Conflicts of interest), an Authorised Fund Manager (AFM) must manage conflicts of interest fairly. A director who is a partner in the fund’s law firm, with remuneration tied to the fund’s fees, cannot provide the objective challenge and oversight required. This compromises the board’s effectiveness in acting in the best interests of the scheme’s unitholders, a core duty under the FCA’s Collective Investment Schemes sourcebook (COLL). While cost, SM&CR declarations, and tenure are relevant governance points, the fundamental and most critical risk is the structural conflict of interest that undermines the entire governance framework.

This question assesses knowledge of the regulatory requirements for handling valuation errors in UK-authorised funds, specifically under the Financial Conduct Authority’s (FCA) Collective Investment Schemes sourcebook (COLL). According to COLL 6.3, the Authorised Fund Manager (AFM) is responsible for ensuring fair and accurate valuation. When a significant pricing error occurs that exceeds the fund’s disclosed de minimis threshold (typically 0.5% of the Net Asset Value), the AFM has a regulatory duty to act. The primary and most critical actions involve protecting the interests of investors and fulfilling regulatory obligations. This includes promptly notifying the FCA of the breach, recalculating the incorrect NAVs for all affected dealing days, and creating a clear plan to compensate any investors who were financially disadvantaged (i.e., those who subscribed at an inflated price or redeemed at a deflated price). Suspending dealing is a severe measure reserved for situations where accurate pricing is impossible and is not the default first step. While updating internal procedures is vital for preventing recurrence, it is a corrective action that follows the immediate remediation for affected investors. The depositary’s role is one of oversight and safekeeping; they are not primarily responsible for funding compensation for an AFM’s valuation error.