Chapter 10: Applications of the legislative and regulatory framework (2) Flashcards
g.ii)legislative and regulatory framework
List ten key principles relating to the provision of financial services, which govern the relationship between an intermediary and a customer.
Provision of services
- Skill, care and due diligence
- Integrity
- conflicts of interest
- Information for customers
- Financial resources
- Other factors influencing the legislation
- Relations with regulators
- Market practice
- Information about customers
- Customer assets
- Internal Organisation
g.ii)legislative and regulatory framework
Explain what is covered by:
- integrity
- skill, care and diligence
- market practice
Provision of services
Integrity:
Firms should observe high standards of integrity and fair trade (by acting in the best interests of customers)
Skill,care and diligence
Firms should act with due skill, care and diligence
Market practice
Firms should observe high standards of market conduct and comply with any code or standard in forms as it applies to the firm (either according to its terms or by rulings made under it)
g.ii)legislative and regulatory framework
Explain what is covered by:
- information about customers
- information for customers
Provision of services
Information about customers:
Firm should seek from customers it advises, or for whom it exercises discretion, any information about their circumstances and investment objectives which might be expected to be reasonably relevant in enabling it to fulfil its responsibilities to them.
Information for customers
Firm should take reasonable steps to give customer it advises, in a comprehensible and timely manner, any information needed to enable him to make a balanced and informed decision.
Firm should similarily be ready to provide customers with full and fair account of its fulfilment of its responsibilities to them.
g.ii)legislative and regulatory framework
Explain what is required under the heading:
- conflict of interest
Provision of services
Firm should avoid conflict of interest arising or, where conflicts arise, should ensure fair treatment of all customers by disclosure, internal rules of confidentiality and declining to act or otherswise.
Firm should:
- not place its interests above those of its customers
- place customers interest above its own, where customer would reasonably expect this.
Provision of services
g.ii)legislative and regulatory framework
Explain what is required under the heading:
- customer assets
- financial resources
c
Customer assets:
if firm responsible for customer’s assets, then it should arrange proper protection of them, by way of segreggation and identification of assets or otherwise
financial resources:
Firm should ensure it maintained adquate financial resources to meet its investment commitments and withstand riskss to which it is subject.
g.ii)legislative and regulatory framework
Explain what is required under the heading:
- Internal organisation
- relations with regulators
Provision of services
Internal organisation:
Firm should organise and control its internal affairs in a responsible manner and keep proper records.
Relations with regulators:
Firm shuld deal with the regulator in an open and co-operative manner and keep regulator informed of anything concerning firm that might be reasonably expceted to be disclosed to it.
g.ii)legislative and regulatory framework
List the set of ten principles relating to institutional investment practices, which are relevant to any situation where an investor employs an investment manager to invest moeny on their behalf.
Institutional Investment practices
- Regular reporting
- Effective decision-making
- Performance measurement
- Expert advice
- Activism
- Transparency
- Clear objectives
- Appropriate benchmarks
- Focus on asset allocation
- Explicit mandates
g.ii)legislative and regulatory framework
Explain what is meant by:
- effective decision-making
- the clear objectives principle
Institutional Investment practices
Effective decision making:
- Decisions should be taken by persons or organisations with skills, information and resources necessary to take them effectively.
- in particular, trustees should have appropriate knowledge to question advice of investment consultant.
Clear objectives:
- Requires trustees to set out overrall investment objectives for fund that:
- …represents their best judgement of what is necessary to meet the fund’s liabilities, and
- …takes into account their attitude to risk
- Objectives should not be expressed in terms unrelated to liabilities, e.g., performane relative to other funds or market index
g.ii)legislative and regulatory framework
Explain the principles underlying ‘focus on asset allocation.
State two recommendations of the ‘expert advice’ principle.
Institutional Investment practices
Focus on asset allocation:
- Asset allocation should receive sufficient level of attention…
- …that fully reflects the contribution they can make towards acheiving the fund’s investment objectives
- …especially as it typically has greater impact on results than stock selection
- Decisions makers should consider full range of investment, opportunities not excluding consideration of any major asset class.
- Asset allocation should reflect funds’ own characteristics ( both nature of liabilites and risk appetite) and not average allocation of other funds.
Expert advice
- Contracts for actuarial services and investment advice should be opened to separate competition at regular intervals.
- Fund should be prepared to pay sufficient fees for each service to attract broad range of kinds of potential providers.
- So ought to consider employing different advisors to help to:
- …value the investment fund’s assets and liabilities
- …choose the investment strategy
and perhaps choose the investment managers
g.ii)legislative and regulatory framework
Institutional Investment practices
g.ii)legislative and regulatory framework
State the recommendations of the ‘explicit mandates’ principle
Institutional Investment practices
- Trustees should agree explicit mandates with each investment manager, setting out:
-…objectives, benchmark(s) and risk parameters that, together with all other mandates, are coherent with fund’s aggregate objective and risk tolerances
-…manager’s approach in attempting to achieve objective
-…clear time scales of measurement and evaluation - Mandate should not exclude the use of set of financial instruments without clear justification in light of specific circumstances of fund.
g.ii)legislative and regulatory framework
State the recommendations of the ‘activism’ principle
Institutional Investment practices
Managers should incorporate explicit strategy on activism, elucidating:
- circumstanes in which they will intervene in a company
- approach they will use in doing so
- how they measure the effectiveness of this strategy.
g.ii)legislative and regulatory framework
State the recommendations of the ‘appropriate benchmarks’ principle
Institutional Investment practices
Trustees should:
- explicitly consider, in consulation with their investment managers, whether index benchmarks they have selected are appropriate
- if setting limits on divergence from index, ensure they reflect approximations involved index construction and selection
- consider explicitly, for each asset class, whether active or passive management is more appropriate given efficiency, liquidity and level of transaction costs in market concerned
- where they believe active management has potential to achieve higher returns, set both targets and risk controls that reflect this, giving managers freedom to pursue genuinely active strategies.
g.ii)legislative and regulatory framework
State the recommendations of the ‘transparency’ principle
Institutional Investment practices
The Statement of Investment Principles should set out:
- who is taking decisions, and why this structure has been selected
- fund’s investment objective
- fund’s planned asset allocation strategy, included projected investment returns for each asset class, and how this strategy has been arrived at.
- Mandates given to all advisers and investment managers
- nature of all fee structures in place for all advisers and investment managers, and why this set of structures has been selected
g.ii)legislative and regulatory framework
State the recommendations of the:
- performance measurement principle
- regular reporting principle
Institutional Investment practices
Performance measurement:
1. Includes considerations of:
- any changes in the nature of liabilities
- any changes affecting risk appetite
- the appropriateness of the performance measures imposed
- the trustees’ role and whether they are carrying out their duties to the required standards
2. Trustees should arrange for measure of performance of fund and should make formal assessment of:
- own procedures and decisions as trustees
- performance and decision making delegated to advisers and managers
Regular reporting:
- trustees publish SIP and results of monitoring advisers and managers
- send them annually to members of the fund
- SIP to explain why fund has decided to depart from any of these principles
