Thursday 16 October 2008

FSA Exams

The following article describes the story of one of the members of Nicube.com, an online community of students and junior professionals interested in Investment Banking, Consulting, Accounting, Law and other professions. Note: FSA exams are the exams you need to take in the UK to deal with securities and investments; the equivalent in the USA are Series 7 and Series 63K.

Life was f*cking good in August. I'd just got a Distinction in my Masters to complement by 1st Class Bachelors degree, and due to shortly start at a top investment bank with an estimated £60,000 salary and bonus in my first year. Thinking I’d never have to sit another exam for the rest of my life, finally ready to enter the real world at 22, things honestly couldn’t have been any better.

By October I wanted to die. In fact on numerous occasions the only thing stopping me leaping from the top of the five-story flat where I live was the chance that I wouldn’t manage to kill myself. You see, whilst others on my grad scheme had happily completed training, and were up-and-running working full-time for a desk, I’d just been fired two months into my first job, without even getting a chance to enter the trading floor, for failing my FSA exams twice.

Don’t be fooled into thinking that you don’t have any exams if you go into investment banking - whether that’s M&A, trading, sales or research. After a couple of months of internal training, often backed up with exams every week or two, you have to take the FSA exams. Most banks operate a “two strikes and you’re out” policy for these exams. Unfortunately for me, I failed one of them twice and was gone in a flash. Banks tend to have this harsh policy as an excuse to unceremoniously can graduates if they realise they’ve taken too many on, and as our FSA exams trainer told us every day, “Why should they keep someone on who fails exams when there’s 100 people out there who could instantly fill your shoes?”. The worst thing is that these really aren’t difficult exams, and it’s perfectly possible to get them all over with in just a week, but the wrong strategy results in on average 15% of 1st year analysts (and around 35% of all candidates) failing something at least once.

Getting fired was maybe a blessing in disguise - as of March, I had my own trading book at a Mayfair hedge fund, making twice as much as I would have on the grad scheme. But most ain’t so lucky. “Fired after 2 months for failing FSAs twice” doesn’t exactly look great at the top of a CV, at a time when many grad schemes for the year after are swiftly filling up. But enough about me, here’s my step-by-step strategy to ensure you pass your exams, the first time.

The Format

When people refer to “FSA exams” and whether or not you “passed your FSAs”, they are actually referring to exams set by the Securities & Investments Institute (www.sii.org.uk) which you must pass in order for the Financial Services Authority (FSA, www.fsa.gov.uk), a universal British finance regulator, to approve you to be an investment banker, essentially.

You need to pass the Regulations exam to speak to clients, and the Securities and Derivatives exams to deal in securities and derivatives respectively (you can take these two exams either together or separately - typically at your bank’s choice rather than your own), and there’s also certificates in Investment Management and Corporate Finance if you’re going down that route.

Most
London investment banks will use either 7city (www.7city.com) or BPP (www.bppfinancialservices.com) to give you the reading material and classroom courses to pass the exams. Whilst the exams are like a DVLA driving theory test in that they’re computer-based multiple choice from a massive question bank, the difference is that the Securities & Investments Institute for some stupid reason refuse to issue any sample questions or proper teaching content. Instead, 7city and BPP trainers go into exams, memorise as many questions as they can, come out and spew them out.

If you think that’s stupid then wait till you see some of the typical questions you get in FSA exams. A main reason that intelligent people with Oxbridge / Ivy League PhDs et al fail these is because they struggle with the sheer (b)anality of the content. Typical questions, I kid you not (these are q34 and q35 of 7city's Financial Derivatives Mock 3):

34. Products available on the CBOE include equity index options on the S&P 100 and the S&P 500. Which of the following is true with respect to the exercise style of these options?
a) S&P 100 index options - American and European style, S&P 500 options - European style only
b) S&P 100 index options - American and European style, S&P 500 options - American style only
c) S&P 100 index options - American style only, S&P 500 options - European style only
d) S&P 100 index options - European style only, S&P 500 options - European style only


35. Which of the following is true with respect to exercise deadlines for Euronext.Liffe's traded options?
a) The last date and time for exercise is the third Friday in the delivery month up to
6:00pm. However, these options may be exercised up to 4.30pm on any other business day during the life of an option
b) The last date and time for exercise is the third Friday in the delivery month up to 6:00pm. However, these options may be exercised up to 5.30pm on any other business day during the life of an option
c) The last date and time for exercise is the third Friday in the delivery month up to 6:00pm. However, these options may be exercised up to
5.20pm on any other business day during the life of an option
d) The last date and time for exercise is the third Friday in the delivery month up to
5:20pm. However, these options may be exercised up to 4.30pm on any other business day during the life of an option

I can’t believe I just typed all that out instead of doing a copy & paste jobby. Anyway, now you have some idea what you’re letting yourselves in for. An extensive study confirms that the average investment banker will need to know approximately 0.63% of content from these exams in their day-to-day work. Nonetheless, there’s no point having such a cynical mindset - the bottom line is you have to pass these exams to actually be able to do your job, there’s no way around it if you want to do front-office IB work.

My advice

Step 1 - Skim the Big Books
You’ll be given big A4 textbooks for Regulations (Regs), Securities and Derivatives before your 7city or BPP five-day training course. In the fortnight prior to starting the course, read them. Every word. Just the once through though, and don’t attempt to actively start memorising stuff. The aim is to make yourself fully familiar with all the content so it’s not all completely alien when you begin your course. Don’t waste too much time reading through it all though - make sure your mind doesn’t drift off and you’ll comfortably do it in some evenings and the weekend/s prior to training. Don’t bother with anything else like trying mock questions, leave that until your course begins...

Step 2 - Training: immense discipline required
Your five-day course with 7city or BPP will have 9-5 hours in the classroom, but with the work you need to do outside the classroom 5(am)-9(pm) is more realistic. The first time I failed it was because I fell asleep a couple of evenings after training, which completely messed up the whole revision schedule, putting me way behind. To guarantee a first time pass, you’ll need probably more discipline, efficient time management and consistent concentration than you had when taking your final degree exams.

You’ll all have started daydreaming at some point in the lecture hall before - here you can’t afford to. Jot down and highlight important points made and actively start trying to absorb stuff during the training. If you’re with 7city, leave the big books behind now and just cram everything you need to know into the slide packs. In the evenings and/or mornings, go through the slidepacks now in detail, actively memorising content, whether this requires you to stare at the pages repeatedly, say stuff out loud or whatever. At the end of each chapter, go through the end-of-chapter questions (Review Exercises with BPP) during the evenings. If there’s anything you’re stuck on, re-read the content from the big textbook, or look over the videos or hot topic tutorials on 7city/BPP Online Learning.

The typical structure is to spend a day doing Regulations, two days on Securities and two days on Derivatives. Regulations is the most boring, the one people seem to worry about, but the easiest to pass, with not that much to learn and a lot more common sense required, based around legislations. Securities is maybe the toughest one (it has the highest failure rate), with the greatest volume of anal, pointless content to learn, whilst Derivatives is the one people with financial backgrounds find the most straightforward.

Step 3 - DO THE F*CKING MOCKS!!
Typically you’ll have your Regs, Securities and Derivatives exams to do over Monday to Thursday of the week after your training course. This potentially leaves plenty of time if you’ve managed to be uber-efficient and go through all the reading material and chapter questions over the weekday evenings.

It’s most likely you’ll be a tad behind however so may need to cut into your weekend clearing stuff up. But thereafter, by a long way the most important part of your revision is to do the Practice Examinations. With 7city, the End-of-Chapter questions are a bit rubbish and not that representative of what you get in the real thing, BPP’s Question Bank is a lot better, but the closest thing you’ll get to the paper is the Practice papers.

Go through them all at least twice, remember the questions you got wrong (and the ones you were hazy on but got right), and you should be sailing - a good third and up to half of the questions in the real exam you should already be completely familiar with. With a 70% pass rate, getting others right by knowing the content but not seeing a question before, along with educated guesses, should be fine.

It sounds simple but has to be re-iterated - DO THE F*CKING MOCKS! Don’t waste all your time doing the textbook and chapter questions, just to find that you then don’t have the time to go through the mocks before the exam. And particularly good on the Online Learning site is additional/recent questions - these are the sort of things that have been out in the last few weeks, and a considerable chunk of them will be in your exam.

Step 4 - Go for it
It’s a computer based exam in the same style of a UK driving theory test - therefore it’s better to do practice questions online rather than using your book to get a feel for it. Avoid doing an all-nighter cramfest, you need a few hours sleep, otherwise your brain honestly does turn to mush. You’ll have time to go over all the questions again but don’t change loads of answers you’re unsure on at a second look - for whatever reason, your first guess is always more likely to be correct than your second.

Step 5 - If worst comes to worst
A fail. Not the end of the world, you join a pretty big club. Fail again though and at many places you’re going to be in a spot of bother. However, there’s a loophole around this - take the exam yourself, in your own time, without your employer knowing.

It may sound sneaky but it’s actually very commonplace. You can go to www.sii.org.ukandbook an exam yourself, fill in the QRF form stating that you don’t want your employer to know your result - it costs around £100-150 per paper. This may sound like a lot but its truly f*ck all compared to potentially losing your job. And that six-figure salary three years down the line. The small catch is that if you fail 3 times, SII ban you from resitting for 6 weeks, which may be tough to hide from your bank.

If you took Unit 4 (Securities & Financial Derivatives) and struggled then it’s definitely worth splitting them up - you can take Unit 2 (Securities) alone and take the Financial Derivatives module later on to get you the same qualification.

So there we go. I would strongly, strongly recommend people who have a few weeks off before starting a job in banking, or have a free holiday near the end of university, to take the FSA exams early - a few hundred quid will avoid the potential to have a very miserable first few months in the City.

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