05 - The regulatory, tax, and professional environment Flashcards
What is the primary justification for regulation of product providers in the financial sector?
To reduce information asymmetry between product or benefit providers and consumers. This is crucial because the financial literacy of most consumers is low while providers are sophisticated, products can be complex, the benefit may be intangible, and benefits may be received long after purchase.
Explain the concept of “market structure regulation” in health, social, and employee benefits.
Market structure regulation aims to establish the framework within which financial service providers can operate. It includes licensing requirements, capital adequacy rules, ownership and governance standards, and may also regulate the types of benefits an entity can offer and whether benefits are mandated or voluntary.
What is a “risk equalisation fund” and what is its purpose?
A risk equalisation fund is a mechanism to address the issue of community-rated schemes where one entity’s risk pool is better than another’s due to factors like geographical location. The fund redistributes contributions based on risk profiles, discouraging “cherry-picking”. These funds are often mandated by legislation to promote competition in the health benefits market.
Describe “prudential regulation” in the context of health, social, and employee benefits.
Prudential regulation focuses on the solvency of financial product providers, ensuring they can pay benefits when due. This includes requiring advance funding of benefits, regular checks on asset adequacy, minimum solvency requirements, and restrictions on the assets used to demonstrate solvency.
What are the two main types of product regulation?
Buy-side regulation: Where individuals may not purchase products that do not comply with certain standards.
Sell-side regulation: Where providers may not sell products that do not comply with certain standards.
Define market conduct regulation, and give examples.
Market conduct regulation governs the relationship between financial product providers and their customers, including rules around unambiguous product names, sales processes, policy wording, benefit arrangement rules, communication, fit and proper requirements for market participants, complaints procedures, and disclosure.
Explain “mandatory insurance for benefit arrangements”.
Due to the potential for failure, some countries mandate insurance schemes to cover beneficiaries. These schemes can be funded on a pre-funded basis or ex post through levies on surviving financial institutions.
What is the “I-E” basis of taxation?
The “I-E” basis is a method of taxing investment returns where a deduction is allowed for operating expenses. This approach effectively reduces returns actually available to policyholders.
What is the “exempt-exempt-taxed” (EET) system in the context of retirement benefits taxation?
In an EET system, contributions and investment returns are exempt from tax, but benefits are taxed. This is designed to be neutral from the point of view of the fisc assuming that tax rates on income paid as contributions and those received as retirement benefits are the same.
What are the main components of taxation that should be considered at a product or benefit level?
Contributions or premiums, investment returns and the ‘I-E’ basis, and benefits received.
Explain the concept of “tax incentives” in relation to health and employee benefits.
Tax incentives, such as tax deductions or credits, are used to encourage specific behaviours or take-up of products. The effectiveness of tax incentives may depend on the standard tax system in a particular country and can be limited by the state.
How are benefit arrangements generally taxed on an entity level?
Benefit arrangements run on a not-for-profit basis are generally exempt from taxes, apart from those applied to premiums or contributions, net investment returns, and benefits. Insurers may be subject to additional taxation based on the ownership structure and the insurance license.
What is the purpose of accounting standards for employee benefits?
Accounting standards provide guidance to auditors to ensure financial statements provide a true and fair picture of an entity’s financial affairs. They prescribe information that must be disclosed and the manner of disclosure, ensuring the profit-and-loss account reflects the cost of the employee benefits accrued in that year, regardless of the actual contributions paid.
What are the key aspects that accounting standards for employee benefits prescribe?
The benefits to be valued, the assumptions to be used, and the value of assets that can be offset against the liabilities.
What are the general principles that actuaries should uphold, according to the text?
Take personal responsibility for their own decisions, act with integrity and detachment, develop a direct and trusting relationship with clients, recognize other views, achieve and maintain competence.
