R01 Prudential Standards and capital adequacy: free practice questions

1. Question 1 of 5

   Which prudential sourcebook sets out capital and professional indemnity insurance requirements for mortgage and general insurance intermediaries?

   Option A: INSPRUOption B: COBSOption C: MIFIDPRUOption D: MIPRU

   Show answer

   The answer is D: MIPRU

   MIPRU covers PII and capital resources requirements for home finance providers and intermediaries and general insurance intermediaries.

   Why the other options are wrong

   A

   INSPRU is the prudential sourcebook for insurers.

   B

   COBS is a conduct sourcebook.

   C

   MIFIDPRU covers investment firms under the IFPR.

2. Question 2 of 5

   What is the capital resources requirement for an exempt MiFID personal investment firm?

   Option A: The higher of £75,000 or 25% of fixed overheadsOption B: A flat £5,000Option C: 10% of client money heldOption D: The higher of £20,000 or 5% of income

   Show answer

   The answer is D: The higher of £20,000 or 5% of income

   For exempt MiFID (Category B3) personal investment firms, the requirement is the higher of a base £20,000 and a variable 5% of income, with extra for those also giving mortgage advice.

   Why the other options are wrong

   A

   £75,000 and 25% of fixed overheads relate to SNI MIFIDPRU firms.

   B

   £5,000 isn't the requirement.

   C

   The requirement isn't based on client money.

3. Question 3 of 5

   Which type of capital is considered the highest quality (Tier 1) for regulatory purposes?

   Option A: Bank overdraftsOption B: Equity share capitalOption C: Short-term subordinated debtOption D: Trade creditors

   Show answer

   The answer is B: Equity share capital

   Equity share capital is the most loss-absorbent and permanent capital, so it sits in Tier 1. Short-term subordinated debt is lower quality and sits in Tier 3.

   Why the other options are wrong

   A

   Overdrafts are liabilities, not regulatory capital.

   C

   Short-term subordinated debt is Tier 3.

   D

   Trade creditors are liabilities.

4. Question 4 of 5

   Why might a firm need to hold extra capital beyond its basic capital requirement?

   Option A: To cover professional indemnity insurance excesses and exclusionsOption B: To pay the dividends promised to the firm's shareholdersOption C: To pay future FCA application and variation of permission feesOption D: To fund staff bonuses that are due at the end of the year

   Show answer

   The answer is A: To cover professional indemnity insurance excesses and exclusions

   Firms must also hold additional capital for PII excesses and exclusions, calculated using tables in MIPRU 3.2 and IPRU-INV 13.1.

   Why the other options are wrong

   B

   Dividends reduce capital rather than requiring it.

   C

   Fees are operating costs, not a capital requirement.

   D

   Bonuses aren't part of the capital requirement.

5. Question 5 of 5

   How often are most FCA-regulated firms required to report capital calculations?

   Option A: Every five years, at authorisation renewalOption B: Mostly biannually or quarterlyOption C: Only on request from the FCAOption D: Weekly, by the end of each Friday

   Show answer

   The answer is B: Mostly biannually or quarterly

   Firms report their capital calculations regularly, mostly biannually or quarterly. Firms with only a small surplus over the minimum will concern the FCA.

   Why the other options are wrong

   A

   Five years is far too infrequent.

   C

   Reporting is regular, not only on request.

   D

   Weekly reporting isn't the norm.

R0 Exam Prep is an independent revision tool. It is not produced, endorsed by or affiliated with the Chartered Insurance Institute (CII). Questions and explanations are original. Use it alongside the official study text. About R0 Exam Prep