Regulations and Ethics

Question 1

International Organisation of Securities Commission (IOSCO)

Answer 1

IOSCO designs objectives and standards that are used by the world’s regulators as international benchmarks for all securities markets. These objectives and standards can be seen in most systems of securities regulation.

Question 2

What are the objectives and benefits of regulation:

Answer 2

1. It increases the confidence and trust in financial markets, systems and products.
2. It helps establish an environment that encourages economic development and wealth creation.
3. It reduces the risk of market and system failures (along with the economic consequences of such failures).
4. Consumers are better protected, giving them the reassurance they need to save and invest.
5. Financial crime is reduced, if the financial systems are not an ‘easy target’ for criminals to exploit.

Question 3

What are the main purposes and aims of regulation, in al markets globally?

Answer 3

1. Maintain and promote fairness, efficiency, competitiveness, transparency and orderliness
2. Promote understanding by the public of the operation and functioning of the financial services sector
3. Provide protection for members of the public investing in or holding financial products
4. Minimise crime and misconduct in the industry
5. Reduce systemic risks, and
6. Assist in maintaining the market’s financial stability by taking appropriate steps.

Question 4

Money Laundering

Answer 4

Money laundering is the process of turning money that is derived from criminal activities – dirty money – into money which appears to have been legitimately acquired and which can, therefore, be more easily invested and spent – clean money.

Question 5

What are the many forms of money laundering?

Answer 5

1. Turning money acquired through criminal activity into clean money
2. Handling the proceeds of crimes such as theft, fraud and tax evasion
3. Handling stolen goods
4. Being directly involved with, or facilitating, the laundering of any criminal or terrorist property, or
5. Criminals investing the proceeds of their crimes in the whole range of financial products.

Question 6

Stages of Money Laundering

Answer 6

1. Placement is the first stage and typically involves placing the criminally derived cash into an account with a bank or other financial institution.
2. Layering is the second stage and involves moving the money around in order to make it difficult for the authorities to link the placed funds with the ultimate beneficiary of the money. Disguising the original source of the funds might involve buying and selling foreign currencies, shares or bonds.
3. Integration is the third and final stage. At this stage, the layering has been successful and the ultimate beneficiary appears to be holding legitimate funds (clean money rather than dirty money). The money is integrated back into the financial system and dealt with as if it were legitimate.

Question 7

What are the two major differences between terrorist financing and other money laundering activities?

Answer 7

1. Often, only quite small sums of money are required to commit terrorist acts, making identification and tracking more difficult.
2. If legitimate funds are used to fund terrorist activities, it is difficult to identify when the funds become terrorist funds.

Question 8

Identity fraud

Answer 8

Is the use of a misappropriated identity in criminal activity, to obtain goods or services by deception. This usually involves the use of stolen or forged identity documents such as a passport or driving licence.

Question 9

Identity theft

Answer 9

(also known as impersonation fraud) is the misappropriation of the identity (such as the name, date of birth, current address or previous addresses) of another person, without their knowledge or consent. These identity details are then used to obtain goods and services in that person’s name.

Question 10

Telecom fraud

Answer 10

Criminals use telephone deception as a means of perpetuating financial fraud. This usually involves calling victims pretending to be someone else, eg, a friend, relative or someone in a position of authority, and are then tricked into parting with their money.

Question 11

Non-delivery fraud

Answer 11

Criminals accept payment for goods and never deliver to the customer.

Question 12

Romance scams

Answer 12

Criminals develop a ‘relationship’ with victims, usually through social media with the ultimate goal of obtaining money.

Question 13

Cybercrime

Answer 13

Although there is no single universal definition of cybercrime, law enforcement generally makes a distinction between two main types of internet-related crime:

1. Advanced cybercrime (or high-tech crime) – sophisticated attacks against computer hardware and software.
2. Cyber-enabled crime – many ‘traditional’ crimes have taken a new turn with the advent of the internet, such as crimes against children, financial crimes and even terrorism.

Question 14

Insider dealing

Answer 14

Criminal offence by people with unpublished price-sensitive information who deal, advise others to deal or pass the information on.

Question 15

What instruments are covered by the insider trading rules?

Answer 15

1. Shares
2. Bonds (issued by a company or a public sector body)
3. Warrants
4. Depositary receipts
5. Options (to acquire or dispose of securities)
6. Futures (to acquire or dispose of securities), and
7. Contracts for difference (based on securities, interest rates or share indices).

Question 16

UK and European regulation specifically prohibits three types of behaviour that may lead to market abuse. List them:

Answer 16

1. Insider dealing.
2. Public disclosure requirements.
3. Market manipulation.

Question 17

CISI Principles

Answer 17

1. Personal accountability
2. Client Focus
3. Conflict of Interest
4. Respect for Market Participants
5. Professional Development
6. Aware of Capabilities
7. Respect other and the environment
8. Speak up & Listen up

Question 18

What was the IOSCO set up to facilitate

Answer 18

IOSCO is a body that enables international co-operation between regulators and develops common standards that regulators can use to benchmark their own regulations against international standards.

Question 19

List three common aims of financial services regulators globally:

Answer 19

Regulators will typically be given a set of objectives by governments but they share common themes including ensuring markets work fairly, protecting consumers and minimising financial crime.

Question 20

What are the three stages of money laundering?

Answer 20

Placement, layering and integration.

Question 21

What is meant by the term inside information?

Answer 21

Inside information is specific information relating to securities that has not been made public and if it was, would have a significant effect on the price of the securities.

Question 22

What type of securities do the insider dealing rules apply to?

Answer 22

The insider dealing rules usually apply to securities traded on a stock exchange or derivatives exchange and includes securities such as shares and bonds and derivatives such as futures and options o such securities.

Question 23

What type of behaviour might lead to a charge of market abuse?

Answer 23

The types of behaviour that might lead to a charge of market abuse include insider dealing, attempting to generate a misleading impression concerning investments or any behaviour that is likely to distort markets.