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F105 Finance & Investment > Chapter 10: Applications of legislative and regulatory frameworks (2) > Flashcards

Chapter 10: Applications of legislative and regulatory frameworks (2) Flashcards

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1
Q

Key principles underlying legislation of financial services

A

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
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2
Q

Financial resources

Legislation of financial services

A
  • Maintain adequate financial resources to meet investment business commitments and withstand risks subjected to.
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3
Q

Customer assets

Legislation of financial services

A
  • 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.
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4
Q

Market practice

Legislation of financial services

A
  • A firm should observe high standards of market conduct.
  • and comply with any code/standard in force.
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5
Q

Relations with regulators

Legislation of financial services

A
  • Deal with regulator in open and cooperative manner and keep them informed.
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6
Q

Information about customers

Legislation of financial services

A
  • 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.
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7
Q

Information for customers

Legislation of financial services

A
  • 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.
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8
Q

Internal organisation

Legislation of financial services

A
  • 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
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9
Q

Conflicts of interest

Legislation of financial services

A
  • Avoid conflicts of interests arising.
  • Ensure fair treatment to all customers by disclosure, internal rules of confidentiality, declining to act otherwise.
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10
Q

Principles underlying the legislation and regulation of institutional practices

A

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
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11
Q

Regular reporting

Regulation of institutional investment

A
  • 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.
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12
Q

Expert advice

Regulation of institutional investment

A
  • Contracts for actuarial services should be opened to separate competition.
  • Prepared to pay sufficient fees for each service – attract broad range of potential providers
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13
Q

Performance measurement

Regulation of institutional investment

A
  • 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
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14
Q

Effective decision-making

Regulation of institutional investment

A
  • Decisions taken by entities with skill, info and resources necessary to take them effectively
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15
Q

Activism

Regulation of institutional investment

A
  • 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
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16
Q

Transparency

Regulation of institutional investment

A

‘Statement of Investment Principles’

17
Q

What does a Statement of Investment Principles set out?

A
  • 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.
18
Q

Purpose of a Statement of Investment Principles

A

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
19
Q

Appropriate benchmarks

Regulation of institutional investment

A
  • 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.
20
Q

Focus on asset allocation

Regulation of institutional investment

A
  • 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.
21
Q

Explicit mandates

Regulation of institutional investment

A

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
22
Q

Clear objectives

Regulation of institutional investment

A

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.

23
Q

Effective operations

Regulation of institutional investment

A
  • Consider operational aspects, e.g. separation of front-office and back-office functions
24
Q

Directors’ responsibilities

A
  • 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
25
Q

Care needs to be taken to ensure directors act in the shareholders’ interests. This is achieved through:

A
  • 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
26
Q

Main aims of IFRS

A
  • 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
27
Q

Main areas of difference across the world relate to the treatment of:

A
  • assets and derivatives
  • provisions
  • funding of employee benefits
  • income taxes
28
Q

IFRS 9

A

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

F105 Finance & Investment (21 decks)

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