HKSI LE Paper 2 common mistakes
HKSI LE Paper 2 · Understand the traps and how to avoid them.
Treating the Type 1 (dealing in securities) and Type 2 (dealing in futures contracts) licences as interchangeable when answering questions about which activity needs which licence, and applying Type 1 to futures or Type 2 to securities.
Candidates learn the licence types as a numbered list and memorise the numbers without anchoring each type to the specific regulated activity it authorises. Under exam pressure they default to 'Type 1 = the dealing licence' and apply it to every dealing scenario, forgetting that securities and futures dealing are separately licensed under the SFO.
What to do instead
Build a two-column mapping table from memory: for each licence type (1 through 12 plus the SFC's Type 13 for depositary services of relevant collective investment schemes), write the exact regulated activity and one concrete example of a transaction it covers. Redo the table weekly until you can produce it without notes, then answer every licensing question by first naming the asset class in the scenario, then the activity, then the licence type.
Assuming a licence or registration automatically covers all of a firm's staff and all of its business lines, instead of identifying the individual licensed representatives, the responsible officers, and the specific regulated activities each is approved for.
The corporate licence is the visible, memorable fact, so candidates answer at the entity level and skip the people-level requirements. Questions that test whether a particular individual may perform a particular role are then answered by reference to the firm's licence rather than the individual's approval status and the responsible officer requirement.
What to do instead
For every scenario question, force yourself to write three lines before choosing an answer: (a) what is the corporate licence, (b) who is the approved individual and for which regulated activity, (c) does the role require a responsible officer. Practise with questions that deliberately mix a properly licensed firm with an unapproved individual, and with individuals approved for a different activity than the one in the scenario.
Confusing the roles and liabilities of a sponsor, a financial adviser, and an underwriter in a listing transaction, and attributing sponsor-level due diligence obligations to whichever adviser appears in the question.
The terms overlap in ordinary usage and candidates rely on general commercial intuition rather than the specific regulatory definitions. They also underestimate how much of the sponsor's work is a statutory/regulatory obligation owed to the market and the SFC, not merely a contractual duty to the issuer.
What to do instead
Write a one-page comparison covering, for each role: who appoints them, what they owe and to whom, what due diligence is required, and what happens if they fall short. Then work through hypothetical deal timelines and label each task with the responsible party. Pay particular attention to sponsor independence and the sponsor's obligation to ensure the listing document is not materially inaccurate or misleading.
Answering corporate finance questions using the commercial merits of a transaction (is it good for the company?) rather than the regulatory test (does it require shareholder approval, independent financial advice, or a circular under the Listing Rules?).
Candidates with finance or banking backgrounds instinctively evaluate transactions on value and strategy. Exam questions are testing process and disclosure thresholds, so the commercially sensible answer is often the wrong one.
What to do instead
Before reading the answer options, classify the transaction on a decision tree: is it a notifiable transaction, a major transaction, a very substantial acquisition or disposal, or a connected transaction? Then check size tests, whether an independent financial adviser is required, and whether shareholder approval and a circular are needed. Drill the size-test arithmetic separately so the classification step is automatic.
Treating the SFC's fund manager code and the MPF/retirement scheme regimes as one body of rules, and applying the wrong conduct requirements to a discretionary account, a collective investment scheme, and a retirement scheme.
Asset management questions often describe a portfolio being managed and candidates pattern-match 'fund' to whichever rule set they studied most recently. The regimes differ in who regulates them, what disclosure is required, and what conduct standards apply.
What to do instead
Create a regime matrix with rows for discretionary accounts, authorised retail funds, private funds, and MPF/ORSO schemes, and columns for regulator, key code or ordinance, disclosure document, and conduct requirements. Fill it in from your own notes rather than copying, and test yourself by covering columns and reconstructing them.
Selecting an answer about product suitability based on the product's risk rating alone, without checking whether the suitability obligation was triggered by a solicitation or recommendation and whether the client's circumstances were properly assessed.
Candidates reduce suitability to 'match high-risk product to high-risk client' and skip the antecedent questions: was there a recommendation, was the client given the required information, was the assessment current, and were the client's objectives and risk tolerance actually known.
What to do instead
Answer suitability questions in a fixed sequence: (1) was there a solicitation or recommendation, (2) was a client risk profile obtained and is it current, (3) does the product match the stated objective, horizon, and risk tolerance, (4) was the rationale documented. Practise with scenarios where the risk rating matches but the investment objective does not, since those expose the shortcut.
Missing the distinction between market conduct rules that apply to the firm and those that apply to the individual, and answering as if a firm's policies discharge the individual's personal obligations.
Candidates study conduct rules as a compliance manual and treat them as organisational. Personal accountability for conduct, and the fact that internal policy cannot authorise conduct the rules prohibit, is under-weighted.
What to do instead
For each conduct topic (conflicts of interest, personal account dealing, gifts and entertainment, handling of client assets, confidentiality), write two short paragraphs: what the firm must do, and what the individual must do. Then answer questions by identifying whose behaviour the question describes before evaluating it.
Applying the general anti-money laundering and customer due diligence steps as a checklist without connecting them to the specific trigger in the scenario, such as a politically exposed person, a third-party payment, or a change in beneficial ownership.
Candidates memorise the CDD steps but not the risk-based triggers. When a question describes an unusual fact pattern, they answer 'conduct CDD' generically instead of identifying the enhanced measures, senior approval, or source-of-funds evidence that the specific trigger requires.
What to do instead
Study AML by trigger rather than by step: build a list of red-flag facts and, against each, write the specific enhanced measure and who must approve it. Include PEPs, correspondent relationships, unusual funding routes, and complex ownership structures. Then practise scenario questions where the correct answer is a specific escalation, not the generic CDD step.
Ignoring the notification and approval timing requirements - for example, when a change in shareholding, directors, or responsible officers must be notified to or approved by the regulator before it takes effect.
Candidates focus on the substantive rule (who may be licensed) and treat timing as administrative detail. Questions that hinge on whether an event required prior approval or subsequent notification are then answered on substance alone.
What to do instead
Build a timing table with three columns: event, prior approval required (yes/no), notification deadline. Cover changes in substantial shareholders, directors, responsible officers, and changes to business scope. Review it before each practice set and mark every timing question you get wrong with the specific deadline you missed.
Reading the question stem as asking for the best commercial outcome and choosing the answer that protects the client or the firm's reputation, rather than the answer that satisfies the specific regulatory requirement being tested.
Ethics-flavoured distractors are written to sound prudent and client-friendly, and candidates who are unsure fall back on 'the most ethical-sounding option'. This works on some questions but fails wherever the regulation prescribes a precise process, escalation route, or disclosure that is less intuitively 'nice'.
What to do instead
When two options both sound defensible, identify the exact rule the question is testing and choose the option that implements that rule precisely, including the required escalation and documentation. After each practice set, review every question where you chose on instinct and write the rule that should have decided it, so the instinct is replaced by a rule reference.