Chapter 7: Regulatory, legislative and taxation influences Flashcards
List the principle aims of regulation in financial markets.
Aims of regulation
- correct market inefficiencies and promote efficient and orderly markets
- protect consumers of financial products
- maintain confidence in the financial system
- help reduce financial crime.
Outline four types of regulatory regime that exist in financial markets.
Regulatory regime types:
Voluntary regulation
These operate effectively in many circumstances but are vulnerable to a lack of public confidence or to a few ‘rogue’ operators.
Statutory regulation
In statutory regulation the government sets out the rules and polices them. This has the advantage that it should be less open to abuse than the alternatives and may command a higher degree of public confidence. A disadvantage of statutory regulation is that outsiders may impose rules that are unnecessarily costly and may not achieve the desired aim.
Self-regulation
A self-regulatory system is organised and operated by the participants in a particular market without government intervention. The incentive is the fact that regulation is an economic good that consumers of financial services are willing to pay for. Also there is the threat by government to impose statutory regulation if a satisfactory self-regulatory system isn’t implemented. Mixed regimes (which are a mix of the above!)
List the five main areas covered by modern corporate governance codes.
Corporate governance codes
- board leadership
- operational effectiveness
- accountability
- remuneration
- relations with stakeholders.
List the three aims of the European Commission’s action plan on ‘sustainable finance’.
Sustainable finance main aims:
- Reorient capital flows towards sustainable investment in order to achieve sustainable and inclusive growth
- Manage financial risks stemming from climate change, resource depletion, environmental degradation and social issues
- Foster transparency and long-termism in financial and economic activity.
List the main advantages and disadvantages of imposing a ‘risk-based capital’ regulatory environment.
(#CRAMP MCRS)
Risk-based capital
(#CRAMP MCRS)
Advantages:
1. better profit Comparisons between divisions
2. consistent with direction of Regulator (can be applied consistently across different businesses and across the globe; higher risk equates to higher capital)
3. Allocates capital where needed
4. Management focus on risk costs of underwriting business
5. better Pricing of products (risky become more expensive to generate a greater profit)
Disadvantages:
1. uses VaR Models (with all associated problems)
2. uses Correlations to aggregate
3. Retrospective verification difficult
4. Subjective judgement still required (can become political)
List the common restrictions found in an investment mandate (from Subject SP5).
Common restrictions found in investment mandates
- asset classes that are entirely prohibited
- limitations on the use of assets and asset classes, such as a prohibition on the speculative use of derivatives
- maximum permissible holdings in individual assets or asset classes
- counterparty exposure limits for derivative investments
- prohibitions on ‘self-investment’ in the sponsor’s own securities
- ethical or social limitations where positions might harm the portfolio’s environmental, social or governance standards
In some states there may be specific requirements such as:
7. holdings in government bonds and bills
8. requirements to match assets and liabilities by currency
9. a requirement that any equities held have paid dividends in recent years.
List the four main advantages of adopting a more prescriptive approach to investment mandate controls.
Advantages of prescriptive controls on investment mandates
- to protect the ultimate beneficiaries from gross incompetence or mis-management by fund managers
- to encourage confidence in investment schemes and the benefits they secure
- to promote the accumulation of investible funds
- to promote the allocation of funds towards sustainable investments.
Promote. Encourage. Protect.
Explain what a listing authority is responsible for (from Subject SP5).
List the five main concerns of listing authorities.
Listing authority
Responsible for ensuring that:
1. any new issue of shares is conducted in orderly and fair way
2. conduct of company remains consistent with listing of shares after issue.
Five main concerns:
1. production of information on issue of shares
2. process by which shares are offered to potential shareholders
3. continuing production and dissemination of information on timely basis by listed companies
4. continuing conduct of market in listed securities
5. rules to ensure listed companies continue to behave in manner that doesn’t conflict with its other objectives.
State the main aims of competition and monopolies regulation.
Give two potential difficulties for competition regulators.
Competition and monopolies regulation:
1. Aim to protection of interests of customers and suppliers.
2. Aim is to encourage competition and prevent mergers that would reduce competition through exercise of market power.
Two potential difficulties for competition regulators:
1. Multinational companies that operate in many countries.
2. Definition of the product.
List the ten key principles relating to the provision of financial services, which govern the relationship between an intermediary and a customer.
(# SICI FOR MICI)
Ten key principles relating to provision of financial services
(# SICI FOR MICI)
- Skill, care and diligence
- Integrity
- Conflicts of interest
- Internal Organisation
- Financial resources
- Other factors
- Relations with regulators
- Market practice
- Information about customers
- Customer assets
- Information for customers
If you also include ‘Other factors (influencing the legislation)’ then the first letters can be used to spell SICI FOR MICI.
Explain what is covered by:
* integrity
* skill, care and diligence
* market practice.
Integrity
Firm should observe high standards of integrity and fair dealing
Skill, care and diligence
Firm should act with due skill, care and diligence.
Market practice
Firm should observe high standards of market conduct and comply with any code or standard in force and as it applies to firm.
Explain what is covered by:
* information about customers
* information for customers.
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 reasonably be expected to be relevant in enabling it to fulfil its responsibilities to them.
Information for customers:
Firm should take reasonable steps to give customer it advises, in comprehensible and timely way, any information needed to enable him to make balanced and informed decision.
Firm should similarly be ready to provide customers with full and fair account of fulfilment of its responsibilities to them.
Explain what is required under the heading:
* conflicts of interest.
Conflicts of interest
Firm should either avoid any conflict of interest arising or, where conflicts arise, should ensure fair treatment to all its customers by disclosure, internal rules of confidentiality, declining to act or otherwise.
Firm should:
* not unfairly place its interests above those of its customers
* should place customer’s interests above its own, where customer would reasonably expect this.
Explain what is required under the headings:
* customer assets
* financial resources.
Customer assets
If the firm is responsible for the customer’s assets, then it should arrange proper protection of them, by way of segregation and identification of those assets or otherwise.
Financial resources
Firm should ensure it maintains adequate financial resources to meet its investment business commitments and to withstand risks to which its business is subject.
Explain what is required under the headings:
* internal organisation
* relations with regulators
Internal organisation:
Firm should organise and control its internal affairs in responsible manner and keep proper records.
Where firm employs staff it should have adequate arrangements to ensure they are suitable, adequately trained and properly supervised and that it has well-defined compliance procedures.
Relations with regulators:
Firm should deal with regulator in open and co-operative manner and keep regulator promptly informed of anything concerning firm that might be reasonably expected to be disclosed to it.
