Chapter 9: Applications of legislation and regulatory framework (2)

Question 1

List the ten key principles relating to the provision of financial services, which govern the relationship between an intermediary and a customer

Answer 1

• 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

This is SICI FOR MICI

Question 2

Explain what is covered by

• Integrity
• Skill, care and diligence
• market practic

Answer 2

Integrity

• Firms should observe high standards of integrity and fair dealing

Skill, care and diligence

• Firm should act with due skilll 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

Question 3

Explain what is covered by

• Information about customer
• Information for customers

Answer 3

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 smilarly by ready to provide customers with full and fair account of fulfilment of its responsibilities to them

Question 4

Explain what is required under the heading

• Conflict of interest

Answer 4

• 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, decling 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

Question 5

Explain what is required under the headings

• Customer assets
• Financial resources

Answer 5

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 ennsure it mains adequate financial reseources to meet its investment business commitments and to withstand risks to which its business is subject

Question 6

Explain what is required under the headings

• Internal organisation
• relations with regulators

Answer 6

Internal Organisation ​

• Firm should organise and control its internal affairs in respoonsible 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 complicance procedures

Relations with regulators

• Firm should deal with regulator in open and co-operative manner and keep regulator promoprly informed of anything concerning firm that might by resonably expected to be disclosed to it

Question 7

List the set of ten principles relating to institutional investment practices, which are relevant to any situatioin where an investor employs an investment manager to invest money on their behalf

Answer 7

• Regular reporting
• effective decision making
• performance measurement
• Expert advice
• Activism
• Transparence
• Clear objectives
• Appropriate benchmarks
• Focus on asset allocaiton
• Explict mandates

REPEAT CAFE

add effective operation / internal structure
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Question 8

Key principles underlying the legislation and regulation of institutional investment (11)

Answer 8

C - Clear objectives
A - Activism
P - Performance measurement
E - Expert Advice

R - Regular reporting
A - Appropriate benchmarks
T - Transparency
E - Explicit mandates

F - Focus on asset allocation
E - Effective decision-making
E - Effective operations

Question 9

What is meant by effective decision making and clear objectives principle

Answer 9

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 trsutees to set out overall investment objectuve for fund that
  
  • Represents their best judgeent 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

Question 10

Explain the principles underlying focus on asset allocation

State the 2 recommendations of the expert advice principle

Answer 10

Focus on asset allocation

• Asset allocation should recieve sufficient level of attention, espeically as it typically has greater iimpact on rsults than stock selection
• Decision makers should consider full range of investmet opportunities, not excluding from consideration any major asset class
• Asset allocaiton 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 acturial services and investment advice should be opened to seperate competition at regular intervals
• Fund should be preparted to pay sufficient fees for each service to attract broad range of kinds of potential providers

Question 11

State the recommendatons of the explicit mandates principles

Answer 11

Explict Mandates

• Trustees should agree explict 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 tolerancces
  • Manager’s approach in attempting to achieve objective
  • Clear time scales of measurement and evaluation
• Manadate should not exclude use of any set of financial instruments without clear justification in light of specific circumstances of fund

Question 12

State the recommendations of the activism principle

Answer 12

Activism

Managers should incorporate explict 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

Question 13

State the recommendations of the appropriate benchmarks principle

Answer 13

Trustees should

• Explicy consider, in constitution with their investment managers, whether index benchmamrks they have selected are approrpriate
• If seeting limits on divergence from index, ensure they reflect approximations involved in index construction and selection
• Consider explicity, 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 persue genuinely active strategies

Question 14

State the recommendations of the

• Performance measurement principle
• The regular reporting principle

Answer 14

Performance measurement

• Trustee should arragne 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

Question 15

State the recommendations of the transparency principle

Answer 15

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 pojected investment returns on each asset class, and how this strategy has been arrived at
• Mandate givenn to all advisers and investment mangers
• Nature of fee structures in place for all advisers and invesetment mangers, why this set of structures has selected

Question 16

List

• Four factors that have contributed to an increase in cross border markets and transatctions in the EU
• Four barriers to the integration of retail financial services across Europe

Don’t need to know this one just a nice to have

Answer 16

Four factors that have contributed to increase in cross - border markets and transactions in EU

• Remval of barriers
• Launch of Euro
• Global derefulation
• New technology

Four barriers to integration of retail financial services

• Different types of product offered
• Cost of regulation
• Tax systems that differentiate between local and foreign products
• Cultural preferences

Question 17

List 8 main responsibilities of the board of directors

Answer 17

• 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
• ensuuring the company remains solvent
• Appoointing seniorn management
• setting the remuneration of senior executives
• running an audit committee to ensure that appropriate financial and risk controls are in place

LOUD SARA

see if you can shorten the phrases using cards from other decks

Question 18

List the three main aims of the international financial reporting standards

State 2 main benefits from having standardised international financial reporting standards

Answer 18

Main aims of International Financial Reporting Standards

• ​To encourage reliable and consistent accounting data
• To produce transparent accounts, that give insigh into financial condition of firm
• to have single set of standards world wide, which enables access to financial markets and prevent companies having to produce results on several bases

Two main benefits from having standardised IFRS

• Easier for companies to obtain listings on different strock exchange as they wont have to produce multiple sets of accounts
• Helps investors to make comparisions between companies listed on different exchanges, when deciding how to invest

Question 19

Ensuring directors act in shareholders’ interests (3)

Answer 19

1. formal audit committees
2. independent remuneration committees
3. a proposed extension of directors’ liability

Question 20

g.ii)legislative and regulatory framework

Outline the need for IFRS and state the main areas of difference across the world of accounting standard.

Development of IFRS

Answer 20

Need for IFRS:
1. The globalisation of capital markets has intensified the need for IFRS (one set of financial reporting standards acceptable to all listing authorities in the major financial centers and which all investors use)

2. Makes it easier to list on different exchanges and help investors make comparisons between companies listed on different exchanges
3. lack of transparency and reliable financial information exacerbates loss of confidence in markets –> leading to uniformed decisions —> increase cost of capital

Main areas differences across the world relate to treatment of:
- assets and derivatives
- provisions
- the funding of employee benefits
- income tax

Question 21

g.ii)legislative and regulatory framework

List the three main aims of the International Financial Reporting Standard

Development of IFRS

Answer 21

1. to encourage reliable and consistent accounting data
2. to produce transparent accounts, that give insight into financial condition of firm
3. to have single set of standards world wide, which enables access to financial markets and prevent companies having to produce results on several bases.

Question 22

g.ii)legislative and regulatory framework

State two requirements of IFRS 9 for institutions trading in investments.

State arguments against these requirements.

Development of IFRS

Answer 22

For institutions trading investments, IFRS 9 requires:
1. Investments to shown at fair value on BS.
2. Any resultant loss or profit on revaluation to be shown on in the statement of comprehensive income.

Arguements against:
The requirements above have proved to be contravensial with the following arguments:
- Investments are a part of a long-term pf and so their value should not be viewed on one particular day
- …and with resultant fluctuations in the assets and income figures

Question 23

Directors are responsible for

Answer 23

MAC D’S Financial Accounts

The solvent trading of the company

Compliance with regulation

The production of accounts

The appointment of management

Approving dividend payments

Safeguarding the assets of the company

Prevent and detect fraud and other irregularities

Consider this acronym for directors

Question 24

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

Answer 24

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

Question 25

Describe the issues trustees should consider when reviewing an investment manager’s performance relative to a stipulated benchmark

Answer 25

The scope of the mandate (see notes to expand each section!)

If comparing with other funds then need to ensure they have been subject to the same constraints

Need to decide on the performance criteria

Consider when and how often performance will be measured

Performance should also be looked at net of tax and net of expenses

Trustees should always be aware that past performance is not necessarily a guide to the future

Question 26

Trustees should arrange for measurement of the performance of the fund and should make formal assessment of their own procedures and decisions as trustee. This will include consideration of:

Answer 26

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

Question 27

IFRS 9 requires that: (2)

Answer 27

1. investments are shown at fair value in the balance sheet.
2. revaluation profits and losses are show in the income statement

Question 28

Transparency - A ‘Statement of Investment Principles’ should set out: (5)

Answer 28

1. who is taking which decisions, and why this structure has been selected
2. the fund’s investment objective
3. the fund’s planned asset allocation strategy, including projected investment returns on each asset class, and how the strategy has been arrived at
4. the mandates given to all advisers and managers
5. the nature of the fee structures in place for all advisers and managers, and why this set of structures has been selected.

Question 29

The requirement of to have a Statement of Investment Principles ensures: (4)

Answer 29

1. the investment manager, trustees, and investors have a clear understanding of the investment strategy
2. there is a clear legal framework for awarding fees, hiring and firing, and reporting requirements
3. trustee focus on their responsibilities towards investment
4. trustees and investment managers understand and can explain deviations from the strategy.

Question 30

Directors (main responsibility)

Answer 30

Directors, including shadow directors, are responsible for the overall direction of the company, primarily for the benefit of shareholders.

It is ultimately the responsibility of directors to ensure a company meets all its legal obligations and to be responsible for the solvent trading of the company.

Question 31

main role of non-executive directors

Answer 31

The main role of non-executive directors is to provide an impartial view on the board of directors and in particular to represent the interests of the shareholders.

Question 32

Advantages of IFRS (2)

Answer 32

1. It will make it easier for companies to obtain listings on different stock exchanges as they not have to produce multiple sets of accounts.
2. It will also help investors making comparisons between companies listed on different exchanges.