Topic 6 of HKSI Paper 1: business operations and practices

Here is my one strong opinion about Paper 1. Topic 6 is where candidates lose marks they did not need to lose. Not because it is hard, but because it looks like admin, gets left to the last weekend, and is then revised at the speed of skimming. The material is almost entirely memorisable lists with clean boundaries, which is the easiest kind of question to answer and the easiest kind to get wrong when you half-know it.

Six headings. Two of them carry most of the weight.

What does Topic 6 cover?

Who is responsible when controls fail?

Senior management. That is the organising idea of the whole topic, and it comes straight from the Code of Conduct principle placing primary responsibility for standards and procedures at the top of the firm. Controls can be delegated. Responsibility cannot.

The Management, Supervision and Internal Control Guidelines then set out what a sound control environment looks like: management and supervision, segregation of duties, personnel and training, information management, compliance, audit, operational controls, and risk management. Segregation of duties is the most examined of the eight. The person who executes a trade should not also be the person who settles it, reconciles it and records it, because that combination is how a single employee hides a loss for two years. Our internal control guidelines explainer walks through all eight.

How much anti-money laundering do you need?

More than most people revise. The regime imposes statutory customer due diligence and record-keeping duties on financial institutions, and licensed corporations are inside it. The approach is risk-based: assess the risk presented by the customer, the product, the delivery channel and the jurisdiction, then calibrate the diligence to that assessment. Simplified where the risk is demonstrably low. Enhanced where it is high.

Then the reporting duty, which is the part questions love. A person who knows or suspects that property represents the proceeds of an indictable offence, or is terrorist property, must report to the Joint Financial Intelligence Unit. Suspicion is enough. Proof is not required, and waiting for proof is itself a breach. At the same time, telling the customer anything likely to prejudice an investigation is the separate criminal offence of tipping off. Report, and say nothing. The full detail is in our anti-money laundering guide.

Data privacy: the six principles

The Personal Data (Privacy) Ordinance runs on six data protection principles covering collection, accuracy and retention, use, security, openness, and access and correction. They are short. They are numbered. They are the single most predictable thing in Topic 6, and a candidate who can recite all six in order has bought themselves an easy mark. The one that bites in a securities firm is the use principle: data collected to open an account cannot be repurposed for direct marketing without consent.

Electronic trading, in one paragraph

A firm using or providing an electronic trading system stays fully responsible for the orders that leave it. Outsourcing the technology does not outsource the obligation. The system must be adequately tested, sufficient in capacity, reliable, secure and backed by contingency arrangements. Where clients get direct market access, the firm needs pre-trade controls over what those clients can send and the ability to intervene. Alternative liquidity pools bring extra duties: tell clients their orders may be routed there, maintain a user register, and restrict who may participate.

A worked question

How to revise Topic 6 without wasting a week

1. Write out the six data protection principles from memory. Repeat until you can do it in under a minute.
2. Learn the customer due diligence steps as a sequence, then learn the one rule about timing: due diligence comes before the relationship starts.
3. Fix the report-and-do-not-tell pairing so firmly that a stem cannot shake it.
4. Skim the eight internal control areas and memorise segregation of duties properly.
5. Read the electronic trading material once and move on.

The concession, and it is worth saying: our estimated split may understate this topic. Anti-money laundering has grown in regulatory importance faster than the syllabus headings suggest, and if the examiners weight anything above its heading count, this is a plausible candidate. We do not know, because HKSI does not tell anyone. Sit a full mock and see what you actually get.