Chapter 10: Applications of legislative and regulatory frameworks (2) Flashcards
Key principles underlying legislation of financial services
FAM I R SIIC
- Financial resources
- Assets of customers
- Market practice
- Integrity
- Relations with regulators
- Skill, care and diligence
- Information about and for customers
- Internal organisation
- Conflicts of interest
Financial resources
Legislation of financial services
- Maintain adequate financial resources to meet investment business commitments and withstand risks subjected to.
Customer assets
Legislation of financial services
- Required to safeguard, it should arrange proper protection for them, by way of segregation and identification of those assets or otherwise, in accordance with responsibility it has accepted.
Market practice
Legislation of financial services
- A firm should observe high standards of market conduct.
- and comply with any code/standard in force.
Relations with regulators
Legislation of financial services
- Deal with regulator in open and cooperative manner and keep them informed.
Information about customers
Legislation of financial services
- Seek from customers advises any info about their circumstances and investment objectives which may be relevant in enabling it to fulfil its responsibilities to them.
Information for customers
Legislation of financial services
- Give customer it advises info needed to enable them to make a balanced and informed decision (comprehensible and timely manner)
- Ready to provide full and fair account of fulfilment of responsibilities to them.
Internal organisation
Legislation of financial services
- Organise and maintain internal affairs in responsible manner and keep proper records.
- Ensure staff are suitable, adequately trained and properly supervised
- Should have well-defined compliance procedures
Conflicts of interest
Legislation of financial services
- Avoid conflicts of interests arising.
- Ensure fair treatment to all customers by disclosure, internal rules of confidentiality, declining to act otherwise.
Principles underlying the legislation and regulation of institutional practices
REPEAT BAM CO.
- Regular reporting
- Expert advice
- Performance measurement
- Effective decision-making
- Activism
- Transparency
- Benchmarks appropriate
- Asset allocation focused on
- Mandates are explicit
- Clear objectives
- Operations are effective
Regular reporting
Regulation of institutional investment
- Publish Statement of Investment Principles and results from monitoring advisers and managers – send annually to fund members.
- Explain why fund decided to depart from any of these principles.
Expert advice
Regulation of institutional investment
- Contracts for actuarial services should be opened to separate competition.
- Prepared to pay sufficient fees for each service – attract broad range of potential providers
Performance measurement
Regulation of institutional investment
- Trustees should arrange for measurement of performance of fund and should make a formal assessment of their own procedures and decisions as trustees.
- Should arrange for formal assessment of performance and decision-making delegated to advisors and managers
Effective decision-making
Regulation of institutional investment
- Decisions taken by entities with skill, info and resources necessary to take them effectively
Activism
Regulation of institutional investment
- Set out circumstances in which to intervene in a company, the approach used in doing so and how to measure the effectiveness of the strategy
Transparency
Regulation of institutional investment
‘Statement of Investment Principles’
What does a Statement of Investment Principles set out?
- who is taking which decisions and why this structure has been selected
- the fund’s investment objective
- the funds planned asset allocation strategy, including projected investment returns on each asset class, and how the strategy has been arrived at
- the mandate given to all advisers and managers
- nature of the fee structure in place for all managers and advisers, and why this set of structures has been selected.
Purpose of a Statement of Investment Principles
Ensures:
- investment manager, trustees and investors have a clear understanding of the investment strategy
- clear legal framework for awarding fees, hiring and firing and reporting requirements
- trustees focus on their responsibilities towards investment
- trustees and investment managers understand and explain deviations from the strategy
Appropriate benchmarks
Regulation of institutional investment
- Consider whether index benchmarks selected are appropriate.
- Set limits on divergence from index.
- Active/passive management more appropriate for each asset class.
- Whether active management has potential to achieve higher returns.
Focus on asset allocation
Regulation of institutional investment
- Strategic asset allocation decisions should receive attention that reflects the contribution they can make towards achieving fund’s investment objective.
- Consider full range of investment opportunities.
- Asset allocation should reflect fund’s own characteristics not average allocation of other funds.
Explicit mandates
Regulation of institutional investment
Written mandate covering agreement between trustees and managers on:
- Objectives, benchmark(s) and risk parameters that agree with aggregate objectives and risk tolerance of fund.
- Managers’ approach in attempting to achieve objective.
- Clear time scales of measurement and evaluation
Clear objectives
Regulation of institutional investment
Trustees should set out overall investment objective that:
- Represents their best judgement of what’s necessary to meet fund’s liabilities.
- Takes account of attitude to risk and willingness to accept underperformance due to market conditions.
Objectives should not be expressed in terms which have no relationship to liabilities.
Effective operations
Regulation of institutional investment
- Consider operational aspects, e.g. separation of front-office and back-office functions
Directors’ responsibilities
- Ensure company meets all legal obligations
- Responsible for solvent trading of the company
- Account production
- Appointment of management
- Approving dividend payment
- Safeguarding assets of the company
- Prevent and detect fraud and other irregularities
Care needs to be taken to ensure directors act in the shareholders’ interests. This is achieved through:
- Formal audit committees
- Independent remuneration committees – for senior executives
- A proposed extension of directors’ liability
- Have non-executive directors
- Remunerating management in such a way as to align their interests with those of the shareholders
Main aims of IFRS
- Encourage reliable and consistent accounting data
- Transparency of accounting data
- To have a single set of standards world-wide that enables access to financial markets and prevent companies having to produce results on several bases
Main areas of difference across the world relate to the treatment of:
- assets and derivatives
- provisions
- funding of employee benefits
- income taxes
IFRS 9
For institutions trading in investments it requires:
- investments to be shown at fair value in statement of financial position
- any resultant profit/loss on revaluation to be shown in the statement of comprehensive income
