With some good input from our very own test giants of Daniel_S, Jeff Nyman, cemkaner.
The general gist is that System Testing and Functional Testing mean different things to different organisations.
They should be defined within that organisation so everybody knows what you are talking about, but moving between organisations means you have to constantly check you are talking about the same things.
So the answer in an interview is that you should always define what you mean when you are using terms, and if they interviewer disagrees, explain the above and get them to explain what they mean and why.
A lot of people do, in interview, put a lot of stock on 'what does [insert test term]' mean and mark you down if you get it 'wrong'. This is mainly a hang over from interviewing devs were definitions are more hard defined.
Anyway a long answer to say you are both right (and wrong :-) ).
Makes perfect sense and I think I probably did OK by discussing my confusion with their interpretation. At least shows I know enough about testing to put forth one idea and evaluate another regarding the same topic.
As so often in testing - 1st we need to all determine what we mean when we use a certain term or phrase, then agree on a common definition!
Also sorry about posting in the wrong forum - will be more careful in the future.
“Seek not to follow in the footsteps of men of old; seek what they sought.”