Chapter 9:Applicatioins of the legislative and regulatory framework 2 Flashcards
List the ten key principles relating to the provision of financial services, which govern the relationship between an intermediary and a customer
Integrity Skill, care and diligence Market practice Information about customers information for customers Conflicts of interest Customer assets Financial resources Internal organisation Relations with regulators
Explain what is covered by
Integrity
Skill, care and diligence
market practice
Integrity
Firms 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 customer
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 by ready to provide customers with full and fair account of fulfilment of its responsibilities to them
Explain what is required under the heading
Conflict of interest
Firms should either avoid any conflict of interest arising or, where conflicts arises, should ensure fair treatment to all its customers by disclosure, internal rules of confidentiality, decline to act or otherwise
Firms should
+Not unfairly place its interests above those of this customers
+Should place customer’s interest 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 mains 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 properly informed of anything concerning firm that might by reasonably expected to be disclosed to it
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 money on their behalf
Regular reporting Effective decision making Performance measurement Expert advice Activism Transparency Clear objectives Appropriate benchmarks Focus on asset allocation Explicit mandates
What is meant by effective decision making and clear objectives principle
Effective decision making
Decisions should only be taken by person 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 overall investment objective for fund that
Represents their best judgement of what is necessary to meet fund’s liabilities and
Takes account of their attitude risk
Objectives should not be expressed in terms unrelated to fund’s liabilities, eg performance relative to other funds or market index
Explain the principles underlying focus on asset allocation
State the 2 recommendations of the expert advice principle
Focus on asset allocation
Asset allocation should receive sufficient level of attention, especially as it typically has greater impact on results than stock selection
Decision makers should consider full range of investment opportunities, not excluding from consideration any major asset class
Asset allocation should reflect fund’s own characteristics (both nature of liabilities and appetite for risk) and not average allocation of other funds
Experts 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
State the recommendations of the explicit mandates principles
Trustees should agree explicit mandate with each investment manager setting out
Objective, benchmark 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 use of any set of financial instruments without clear justification in light of specific circumstances of fund
State the recommendations of the activism principle
Activism
Managers should incorporate explicit strategy on activism elucidating:
Circumstances in which they will intervene in a company
Approach they will use in doing so
How they measure effectiveness of this strategy
State the recommendations of the appropriate benchmarks principle
Trustees should
Explicit consider, in constitution with their investment managers, whether index benchmarks they have selected are appropriate
If setting limits on divergence from index, ensure they reflect approximations involved in index construction and selection
Consider explicitly, for each asset class, whether active or passive management 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 peruse genuinely active strategies
State the recommendations of the
Performance measurement principle
The regular reporting principle
Performance measurement
Trustee should arrange for measurement 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 should publish statement of investment of principles and results of their monitoring of advisers and mangers, and send them annually to members of fund
+Statement should explain why funds has decided to depart from any of these principles
State the recommendations of the transparency principle
A statement of investment principles should set out
+Who is taking which decisions, and why this structure has been selected
+Funds investment objective
+Fund’s planned asset allocation strategy, including projected investment returns on each asset class, and how this strategy has been arrived at
+Mandate given to all advisers and investment mangers
+Nature of fee structures in place for all advisers and investment mangers, why this set of structures has selected
List 8 main responsibilities of the board of directors
+Ensuring the company meets its legal obligations
+Overall direction of the company
+Arranging for the accounts to be produced
+approving dividend payments and proposing them to the shareholders
+ensuring the company remains solvent
+Appointing senior management
+setting the remuneration of senior executives
+running an audit committee to ensure that appropriate financial and risk controls are in place
