Financial Conduct Authority (FCA) UK Regulation Sample Exam

In the context of discretionary management for a professional client, what can a firm assume?

1. Clients do not understand risk

2. Clients have necessary experience and knowledge

3. Clients will not require frequent updates

4. Firms can ignore requests

The correct answer is: Clients have necessary experience and knowledge

In the context of discretionary management for a professional client, it is appropriate for a firm to assume that clients possess the necessary experience and knowledge to engage in such investment activities. Professional clients are typically characteristics such as a financial institution, a large corporation, or an experienced private investor who has a deep understanding of investment risks, market conditions, and financial products. This understanding enables professional clients to engage in more complex investment strategies without the same level of oversight or guidance that may be appropriate for retail clients. Therefore, the firm's assumption about their experience and knowledge informs how it formulates its investment strategies and advisory services, leading to a more tailored and autonomous management approach. Considering the other alternatives, the assumption that clients do not understand risk is not suitable, as professional clients are expected to have a sophisticated comprehension of financial instruments and market dynamics. The notion that clients will not require frequent updates may not hold true, as even knowledgeable clients appreciate being kept informed of significant changes in their investments. Lastly, firms cannot ignore requests from clients, as doing so would undermine the fiduciary duty to act in the clients' best interests, which is fundamental to the client-firm relationship.