CH 2: External Environment

Question 1

What is Legislation?

Answer 1

Law that has been formally declared by a parliament or congress or other governing body

Question 2

What is Regulation?

Answer 2

A form of secondary legislation that is used to implement a primary piece of legislation appropriately or to take account of particular circumstances or factors

Question 3

Two aspects of state benefits that influence individuals’ financial planning need (2)

Answer 3

• Individuals may need to provide less for themselves
• There may be no savings incentive

Question 4

How can benefits be taxed? (4)

Answer 4

• Benefits can be received free of tax
• The excess of the benefits received over the contributions paid can be taxed, either as income or capital gains
• The benefit can be taxed as income
• Portion of the benefits received tax free with the balance being taxed

Question 5

How are contributions taxed? (2)

Answer 5

• Contributions receive a tax relief, with benefits being taxed
• Contributions paid from taxed income, with a tax relief on benefits

Question 6

How are returns taxed?

Answer 6

• If returns are taxed, there will likely be some tax relief on the contributions paid

Question 7

Examples of products that are heavily focused on a particular tax treatment? (6)

Answer 7

• Pension provision and lump sum payment on retirement
• Tax-free savings vehicles
• Tax-free governemtn savings schemes
• Retail savings bonds in SA
• Some investment vehicles like ETFs, unit trusts or fixed deposits
• ‘Qualifying’ life assurance policies, such as endowment policies, that benefit form reduced tax rates

Question 8

Aims of corporate governance

Answer 8

A company should be managed efficiently in order to meet the requirements of its stakeholders

Question 9

The roles of non-executive directors (3)

Answer 9

• Provide an impartial view and represent shareholders’ interests
• Play a leading role in setting the remuneration for executive directors’ pay
• Play a leading role in the audit committee

Question 10

Two ways in which mutual societies approach product pricing (2)

Answer 10

• Surplus distribution
• Pricing at cost

Question 11

Disadvantage of mutual societies

Answer 11

Finance cannot readily be raised from capital markets

Question 12

Advantage of mutual societies

Answer 12

Mutuals should be able to provide their members with better benefits for the same cost than proprietaries, because no funds are being diverted to provide a dividend stream to shareholders

Question 13

Benefit of proprietaries

Answer 13

• Easier access to capital markets for finance
• May have greater economies of scale
• More dynamic management