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Flashcards in applications of legislative and regulatory environment Deck (67):

Trusts are:

a relationship between persons in which one has the power to manage property and the other has the privilege of receiving the benefits from that property.


Trusts could exist in many different situations; examples include

  unit trusts – a trustee can act to oversee the selection and management of assets 

  pensions – in many countries it is a requirement that a company pension scheme’s assets are segregated from the company’s assets. Appointed trustees are responsible for safeguarding the assets, selecting investment managers and generally ensuring the smooth running of the scheme. 

  charitable bodies – whose trustees determine how funds raised can best be used 

  trust funds for children – a fund may be set up for a child to provide money 
when that child reaches a certain age, eg 21.


no precise equivalent to the trust in civil-law systems, although

There issome civil-law systems have created an institution like a trust. This has normally been done by adapting trust ideas from the Anglo-American system. 
Civil law systems are those inspired by Roman Law, the primary feature of which was that laws were written into a collection; codified, and not determined, as is common law, by judges. Civil law systems prevail in most western European states, including Scotland. 
In contrast, common law systems, which rely heavily on precedent, operate in England, Wales and Northern Ireland, most Commonwealth countries, the United States and the Republic of Ireland.


Legal and beneficial ownership

Fundamental to the notion of the trust is the division of ownership between legal and equitable. The legal owner of the property (the trustee) has the right to possession, the privilege of use and the power to convey those rights and privileges. The beneficial owner (the beneficiary) receives all the benefits of the property. The trustee has the fiduciary duty to the beneficial owner to exercise his rights, privileges and powers in such a way as to benefit the beneficiary.
The trust therefore results in a clear separation between the ownership of the assets and the benefits received from the assets. Fiduciary duty simply the means the responsibility placed upon the trustees to look after someone else’s (ie the beneficiaries’) money in a correct way.


In a company pension scheme set up under trust the trustees have responsibility for:

  exercising control over the investment and management of assets 

  the payment of benefits to the beneficiaries (the members of the scheme) 

  ensuring compliance with the trust deed and rules and pension legislation 

  exercising discretionary powers in the interest of the members 

  ensuring the smooth running and administration of the scheme. 
The trustees may delegate the tasks, eg to specialist investment managers and administrators, but the trustees retain responsibility.


The divisions between legal and beneficial ownership are normally created by

an express instrument of trust (usually a trust deed or a will). The trust deed will specify the purposes of the fund and how it is to be administered.


A bond indenture trust is operated by a trustee (for example a bank) representing the bondholders in dealing with bond issuers. Outline the areas you think would be covered in the trust deed.



Trustees are appointed

to carry out these provisions, and must operate solely within the provisions of the deed (although they may be allowed some discretion in this respect). The beneficiaries will also have been specified (by name or by class) in the original deed.
A unit trust for a child will specify the beneficiary by name. A pension scheme will specify the beneficiaries by class (eg active members or pensioners) because the membership of the scheme changes frequently.
Common law requires trustees to act in the best interests of the scheme’s beneficiaries. The standard of care required is that of the ordinary prudent person of business acting in the management of their own affairs. Subject to the terms of the trust deed, common law also requires trustees to exercise proper care when investing trust funds.
However, the standard of care which a trustee is obliged to take with regard to investment decisions is likely to depend on whether or not the trustee professes to be a professional trustee. A professional trustee will be assessed by a higher standard of care and must exercise the special skill and care which the role implies.
Many institutions provide trustee services as a commercial business. These institutions are staffed by professional trustees who provide trustee services in return for a fee.


List the main concerns of the trustee in carrying out his duties.



Collective representation and protection

Trusts are a means of segregating assets for the protection of beneficiaries, thus insulating them from any consequence of the settler’s actions subsequent to the settlement. Another function is to provide a mechanism for the collective representation and protection of members of a group of people linked by a common interest.
Good examples of such a mechanism are the unit trust and the bond or debenture trust deed. Under these, the individual interests of substantial numbers of holders are channelled into the trust and held and protected by the trustees for the benefit of all holders, so providing the collective mechanism without which efficient administration would be impossible. This mechanism is valuable even where there is no trust property in the normal sense, merely an aggregation of personal rights.


Example of benefits of trusts

Company XYZ runs a pension scheme for its members. The pension scheme is set up under trust and the scheme’s assets are segregated from those of the company. If Company XYZ (the settler) should become bankrupt, then its creditors are unable to claim the assets of the pension scheme when seeking recompense.
Operating as a trust will also have other advantages. For example, the trustees provide a powerful lobby for the pension scheme in representing views to the company, for example regarding the distribution of any surplus, or the level of funding.


Corporate governance refers to the

high level framework within which managerial decisions are made in a company.
Typically, the governance of a company is the responsibility of its board of directors. The board is collectively responsible for promoting the success of the company by directing and supervising the company’s affairs.
A board of directors will typically include amongst its members:
  executive directors – drawn from the senior management of the company and including the chief executive officer (CEO) 

  non-executive directors – one of whom will act as Chairman, in which role he will be responsible for the successful operation of the board. 
Non-executive directors who have no (current or past) relationship with the company other than as board members are sometimes referred to as independent directors. 


The aim of good corporate governance is that

a company should be managed in order to best meet the appropriate requirements of its stakeholders – the shareholders, employees, pensioners, customers, suppliers and others who may be affected by the company’s operations whilst not having any contractual relationship with the company at any time.
Good corporate governance requires management to make decisions based on the interests of relevant stakeholders rather than on their own personal interests. An example would be promoting a takeover bid that is in the directors’ interest rather than that of the stakeholders.
Good corporate governance can be enhanced by ensuring that remuneration incentivises management to act in the interests of stakeholders. Share options may be seen as part of this, though the lack of sufficient downside for management can limit how well share options perform this function.
The general aim here is the interests of management should be aligned as closely as possible with those of the shareholders in particular. The most obvious way to do this is by giving the management shares in the firm, as is often the case in a private company. An alternative is to provide share options. However, any incentive package needs to be carefully managed. There have been many examples of directors leaving companies after poor performance with healthy bonus packages.
In the UK over recent years, salary and bonuses of senior staff in major firms have caused controversy, sometimes public outrage.


role of the non-executives in corporate governance is to provide an impartial view and represent the shareholders’ interests. In practice, this is likely to involve:

  challenging and contributing to the development of strategy 

  monitoring the performance of management 

  playing a leading role in setting the remuneration for executive directors’ pay 

  playing a leading role in the nomination and appointment of new board members 

  playing a leading role in the audit committee. This committee aims to monitor the financial reporting of the company, together with its financial and risks controls and will meet with external auditors with no members of the executive present. 
Separate committees for each of the remuneration, nomination and audit functions may be set up consisting exclusively of non-executive directors.


listings authority

is responsible for ensuring that any new issue of shares is conducted in an orderly and fair way, and that the conduct of the company remains consistent with the listing of the shares after the issue. This would include an initial offering of shares in a company that was previously privately held.


A listed company’s shares

may be bought and sold by any member of the public, without any direct negotiations with a current holder. The negotiation when the shares are sold is purely a matter of price and, unlike a transaction for the sale of a share in a private company, no financial information is disclosed as part of this process. It is therefore important that a reasonable amount of financial information is in the public domain.


Information in the public domain will include:

  current and historical share price 

  audited company accounts 

  interim reports 

  forecasts and profit warnings 

  interest by potential takeover parties 

  analysts’ comments.


Give reasons why a privately held company would wish to publicly offer shares.



Listing authorities are normally concerned with:

  the production of relevant business and financial information on the issue of shares. 
This will be presented in the share prospectus. The prospectus will include:
–  details of the number of shares on offer and the offer price 

–  details of the number of shares (if any) currently in circulation 

–  the underwriters of the issue (if there are any) 

–  details of how shares will be allocated if the offer is over-subscribed 

–  how the money raised will be used 

–  the company’s intended dividend policy 

–  audited financial statements 

–  an outline of the aims and objectives of the company and any special factors 

–  details of the senior management and board directors and their salaries. 

  the process by which shares are offered to potential shareholders and the 
price is set for the issue of shares. 
Investment banks often lead the issue of shares for their clients (ie the companies looking to raise equity finance). The higher the price set, usually the higher the fee income generated. 

  the continuing production and dissemination of business and financial information on a timely basis on companies with listed securities. 
For example, companies listed on a stock exchange are typically required to make certain accounting information available each year. 

  the continuing conduct of the market in listed securities with a view to ensuring that the market is fair to all participants, and that the pricing process is fair and reasonable. 

  rules to ensure that companies with listed securities and connected parties continue to behave in a manner that does not conflict with other objectives of the listing authority. 
For example, market makers in the UK must be prepared to deal up to the normal market size at the prices they display on SEAQ, the Stock Exchange Automated Quotation system.


Ethical investment is

big business and an expanding area of the investment market.
Government, advocacy groups and the preferences of individual participants in investment markets have acted to ensure that the concern felt by the public on the environment, diversity and ethical issues impacts the behaviour of financial markets.
For example:
  listed companies now have to produce information on how they manage their behaviour on environmental, diversity and ethical issues. This is often referred to as Socially Responsible Investment (SRI). 

  SRI requires fund managers to consider a company’s ethical stance before deciding to invest in its shares. 

  UK pensions disclosure legislation requires pension trustees to disclose their social, environmental and ethical considerations in their Statement of Investment Principles. (This has been the main factor leading to the increase in the size of the UK ethical funds market.) 
Companies that want to be attractive to the widest possible universe of investors will want to be attractive to investors for whom environmental and ethical issues are part of the investment process and decision making. 
Operators of savings products (insurers, asset managers) have promoted products which aim to enhance the effect of the investment process on environmental and ethical issues. Products are sold which have a “socially responsible overlay” and the investment managers commit to engaging in a constructive dialogue with company management to promote environmental and ethical objectives. 
There are various definitions of “ethical” designed to meet different investors’ requirements. Some funds focus on the exclusion of investment in oppressive regimes or certain industries (eg tobacco, weapon manufacture). Other funds have a more stringent definition of ethical extending to only including companies that actively promote environmental and social issues, for example companies using alternative energy or promoting good employment practice. 
There is also an informal extent to which some investors will favour asset managers who appear more friendly to environmental and ethical objectives whilst making no formal commitments. Following the events of September 11 2001 and other acts of terrorism, many investors debated larger issues such as human rights abuse and its impact on terrorism. 


The primary reason for company mergers is to benefit from economies of scale. Outline the other main reasons why companies may merge.



Why are natural monopolies likely to persist in the utilities, telecommunications and transport sectors?



Regulatory concern is mostly aimed at protection of the interests of

customers (particularly individuals) and suppliers.
The aim of the regulators is to encourage competition and prevent mergers that would reduce competition through the exercise of market power.
Regulators are normally acting under national legislation and have responsibilities to national constituencies. (As a result of the move to a Single Market in Europe there are some barriers to mergers and acquisitions that apply across borders. ) On the other hand companies are often multinational. A company may therefore argue that a takeover resulting in a high market share in one territory will not confer unacceptable pricing power because of the potential entry of international competitors. It is up to the regulator as to how these arguments are treated.
The definition of the product is generally a second area of debate for competition decisions. A high market share in a narrowly defined product area may translate into a much lower share of a more widely defined product category that contains possible substitutes for the product under review.
For example, it may be acceptable for a company to have a 50% share in the market for “chocolate-covered ice lolly sales at seaside resorts”, but not acceptable to have “50% of the national confectionery market”.
Fair trading controls also aim to ensure that sellers do not exploit members of the public who may be in a weak bargaining position.


Mandate is the term often used to refer to the

authority given by the owner of investments to the investment manager whom they employ to manage their investments.


Fund managers may be engaged to invest:

  in one particular asset class, for example US fixed-interest bonds (a specialist 
mandate basis) 

  across a range of asset classes with certain restrictions (a balanced or multi-asset 
Looking at pension fund investment in particular, fund managers are increasingly employed on a “specialist mandate” basis to invest in a single asset class, rather than on a traditional “balanced” or “multi-asset” mandate. However, this still requires them to make operational decisions in relation to stock selection (unless a “passive” index-tracking approach is to be adopted). Managers will therefore need to be given instructions regarding any restrictions to be applied. 
The instructions will be set out in the mandate. 
Within balanced mandates this may include the extent to which the manager is allowed to depart from the benchmark strategic asset allocation at any time. For example, the mandate might specify that the US bond holding must be between 25% and 35% of the total value of the portfolio.


Other restrictions, applying to all mandates, might include:

  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 (to 
ensure diversification) 

  counterparty exposure limits for derivative investments 

  prohibitions on “self-investment” in the sponsor’s own securities 

  ethical or social limitations.

n some states there may be specific requirements such as holdings in government bonds and bills, or requirements to match assets and liabilities by currency. This is sometimes referred to as a localisation requirement. 
There may be restrictions on the choice of assets, such as a requirement that any equities held have paid dividends in recent years


Why is self-investment likely to be restricted?



Explain the rationale behind a government requiring:
. (i)  the holding of government bonds 

. (ii)  the matching of assets and liabilities by currency. 



The legislative (or regulatory) framework may take the form of the specification of

“admissible” assets, so that only those holdings which conform to the restrictions can be taken into account when demonstrating statutory solvency.
The Actuarial Education Company © IFE: 2018 Examinations
Page 18 F105-08: Applications of the legislative and regulatory framework (1)
Such an approach means that the fund can invest in a wide range of investments. However, since only a portion of the investments can be included when demonstrating solvency these admissibility regulations are an effective way of strongly encouraging the fund to hold the vast majority of its assets in the categories that the regulator has deemed to be admissible. (Such regulation applies to the UK insurance industry.)
This is a prescriptive approach because it will not be in a company’s interests to hold material amounts of inadmissible assets.
A less prescriptive approach is where the nature of any restrictions are left to the discretion of those awarding the fund management mandates, but with the requirement that such restrictions are set out in a “Statement of Investment Principles” for the information (and scrutiny) of the ultimate beneficiaries. This may include statements to highlight any departure from accepted “best practice” and justifications for such departures.
For example, UK pensions trustees set out a Statement of Investment Principles. The idea behind this form of regulation is that increased disclosure will enable the ultimate beneficiary to perform the regulatory function.
Underpinning such requirements, there is likely to be some measure of the standards against which fund management is to be judged, such as the standards of care, skill, prudence and diligence. The sanctions available for failure to meet these standards may range from withdrawal of authorisation to operate as a fund manager through to liability to make good shortfalls. There may also be provision for assets to be taken into custody or for funds to be managed by a statutory body.


The purpose of such restrictions can be seen as threefold:

1. to protect the ultimate beneficiaries from gross incompetence or mismanagement by fund managers 

2. to encourage confidence in investment schemes and the benefits they secure 

3. to promote the accumulation of investible funds. 

The first two of the above tie in with two of the three high-level aims of regulation as
discussed in Chapter 7.


The provision of information to investors is therefore often a key area addressed by financial services regulation.
The key principles underlying such legislation can be summarised as follows:

  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.



The firm should observe high standards of integrity and fair dealing. In other words, they should act in the best interests of their customers.


Skill, care and diligence

A firm should act with due skill, care and diligence.


Market practice 

A firm should observe high standards of market conduct. It should also comply with any code or standard as in force from time to time and as it applies to the firm (either according to its terms or by rulings made under it). 
For example, there may be a requirement that those carrying out financial practice have certain qualifications. 


 Information about customers

A 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. 
Just as individuals need information to make well-informed choices, so advisers need sufficient information about the circumstances and characteristics of their customers if they are to provide appropriate advice.


List the information a firm should seek when advising an individual wishing to save for his child’s school fees.



 Information for customers

A firm should take reasonable steps to give a customer it advises, in a comprehensible and timely way, any information needed to enable him to make a balanced and informed decision. A firm should similarly be ready to provide customers with a full and fair account of the fulfilment of its responsibilities to them. 
As noted above, good information is key if the customer is to make a balanced and informed decision. What is “reasonable” and hence what information is provided, will depend in part upon the characteristics of the customer concerned.


Conflicts of interest

A 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. 
An example of a potential conflict of interest would be an investment house that advises both Company A and Company B being approached by Company A regarding a takeover of Company B. 
If the firm is to continue to act in cases where there is risk of a conflict of interest, the firm should put necessary procedures in place, eg the use of Chinese walls and careful documentation of all actions carried out. 
A firm should not unfairly place its interests above those of its customers and, where a properly informed customer would reasonably expect that the firm would place their interests above its own, the firm should live up to that expectation.


Customer assets 

 Where a firm has control of, or is otherwise responsible for, assets belonging to a customer which it is required to safeguard, it should arrange proper protection for them, by way of segregation and identification of those assets or otherwise, in accordance with the responsibility it has accepted.


Financial resources

A firm should ensure that it maintains adequate financial resources to meet its investment business commitments and to withstand the risks to which its business is subject.
Hence the existence of capital adequacy requirements for the likes of insurance companies and banks, which aim to ensure that customers’ investments enjoy an appropriate degree of security. Again the exact requirements are likely to depend on the type of firm and the particular risks it faces.


internal organisation

A firm should organise and control its internal affairs in a responsible manner and keep proper records. Where the firm employs staff or is responsible for the conduct of investment business by others, it should have adequate arrangements to ensure that they are suitable, adequately trained and properly supervised and that it has well-defined compliance procedures.


Relations with regulators

A firm should deal with its regulator in an open and co-operative manner and keep the regulator promptly informed of anything concerning the firm which might be reasonably expected to be disclosed to it.


What type of risk are the requirements regarding internal organisation intended to limit?



Give examples of information which the firm might reasonably be expected to disclose to the regulator.



1.12 Other factors influencing the nature of legislation

The precise nature of the legislation or regulation will need to reflect the degree of asymmetry experienced, and so should distinguish between different classes of investor as well as different asset classes. For example, a professional trustee would be expected to have a greater understanding of the investment markets than a member-nominated trustee.
Regulations may include the form of documentation used to convey the principles and to record compliance.
Where cross-border business is concerned, there is a further complication: is regulation and compliance to be policed on a “home” or “host” country basis (or both)? Mutual agreement and recognition will be needed in this respect. However, modern electronic service delivery is threatening to undermine such agreements. For example, where is an internet company domiciled and who is responsible for regulating it?


the principles underlying the legislation and regulation of institutional investment practices are

  effective decision-making 

  clear objectives 

  focus on asset allocation 

  expert advice 

  explicit mandates 

  activism 

  appropriate benchmarks 

  performance measurement 

  transparency 

  effective operations 

  regular reporting.


Effective decision-making

Decisions should only be taken by persons or organisations with the skills, information and resources necessary to take them effectively.
In order to comply with this, trustees will need to appoint investment managers with the required expertise to manage assets under their custody and investment managers must have the necessary skills and experience to handle the particular investments.


 Clear objectives 

Recommendations for the principles underlying legislation and the regulation of institutional (pension fund) investment practices can be summarised as: 
Trustees should set out an overall investment objective for the fund that:
  represents their best judgement of what is necessary to meet the fund’s liabilities 

  takes account of their attitude to risk, specifically their willingness to accept under-performance due to market conditions. 
For example, the trustees of a mature pension scheme (a scheme where a high proportion of the membership are retired) might adopt a low-risk investment strategy and invest mostly in government bonds. Conversely, the trustees of a less mature scheme, perhaps one consisting of predominantly young and active members, might invest much more heavily in equities. 
Objectives for the overall fund should not be expressed in terms which have no relationship to the fund’s liabilities, such as performance relative to other funds or to a market index. 
The first two points result from key investment principles that you have already met in Subject A301 – namely, the matching of assets and liabilities (by nature, term, currency and uncertainty) and the need to maximise return given an acceptable level of risk. The last point means the decisions made by other investment funds must not be a primary driver behind the fund’s investment choice.


Focus on asset allocation

Strategic asset allocation is the process of determining the asset sectors that will be invested in and the guidelines within which the investment manager should operate. 
Strategic asset allocation decisions should receive a level of attention that fully reflects the contribution they can make towards achieving the fund’s investment objective. Asset liability modelling can be a powerful tool in helping to determine the optimal strategic asset allocation. Decision-makers should consider a full range of investment opportunities, not excluding from consideration any major asset class. Asset allocation should reflect the fund’s own characteristics (both the nature of the liabilities and the appetite for risk), not the average allocation of other funds.
Again it is the fund’s own characteristics that should be the key determinant of investment strategy and not the strategies of its competitors.


Why are the asset allocation decisions usually more significant than the stock picking decisions in determining whether a fund meets its objectives?



Expert advice

Contracts for actuarial services and investment advice should be opened to separate competition. So you ought to consider employing different advisors to help you:
  value the investment fund’s assets and liabilities. 

  choose the investment strategy 
and perhaps even to choose the investment managers. 
The fund should be prepared to pay sufficient fees for each service to attract a broad range of kinds of potential providers. The potential providers can then be assessed against each other to determine the most appropriate service providers. 
In addition, it might be sensible to regularly review your choice of service providers. 


Explicit mandates

Trustees should agree, with both internal and external investment managers, an explicit written mandate covering agreement between trustees and managers on:
  an objective, benchmark(s) and risk parameters that, together with all the other mandates, are coherent with the fund’s aggregate objective and risk tolerances 

  the managers’ approach in attempting to achieve the objective 

  clear time scales of measurement and evaluation (for example annual 
assessment against a benchmark index). 
The mandate should not exclude the use of any set of financial instruments without clear justification in the light of the specific circumstances of the fund.



Managers should incorporate an explicit strategy on activism, elucidating the circumstances in which they will intervene in a company, the approach they will use in doing so and how they measure the effectiveness of this strategy. As we saw in Chapter 8 there is a trend towards shareholders becoming more active as regards intervening in company activity, in order to ensure good corporate governance.


Appropriate benchmarks

Trustees should:
  explicitly consider, in consultation with the investment managers, whether the index benchmarks they have selected are appropriate. The benchmarks may be determined through an asset liability matching exercise. 

  if setting limits on divergence from an index, ensure that they reflect the approximations involved in index construction and selection 

  consider explicitly, for each asset class invested, whether active or passive management would be more appropriate given the efficiency, liquidity and level of transaction costs in the market concerned 

  where they believe active management has the potential to achieve higher returns, set both targets and risk controls that reflect this, giving managers the freedom to pursue genuinely active strategies.


Why is it important that the strategy for an actively managed or a balanced fund does allow the investment manager some scope to diverge from the benchmark?



What are the arguments for following a passive rather than an active investment strategy?



Performance measurement

Trustees should arrange for measurement of the performance of the fund and should make formal assessment of their own procedures and decisions as trustees.
This will include consideration of:
  any changes in the nature of the 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. 
They should also arrange for a formal assessment of performance and decision- making delegated to advisers and managers. 
Care needs to be taken in setting the performance benchmarks – in particular if comparisons are to be made against other funds. The measurement should take account of any investment constraints imposed by the trustees on the funds. 
Trustees should assess:
  how the fund has performed against the benchmarks or objectives set 

  how the fund manager has performed against similar funds. 
For example, if the benchmark set by the trustees was a return of 6% pa and this return was met by the managers, they will still want to review their choice of investment manager if other managers achieved a 7.5% pa return on similar funds! 



A “Statement of Investment Principles” should set out:
  who is taking which decisions, and why this structure has been selected 

  the fund’s investment objective 

  the fund’s planned asset allocation strategy, including projected investment returns on each asset class, and how the strategy has been arrived at 

  the mandates given to all advisers and managers – ie details of the investment objective, benchmark(s), allowable risk etc as set out in Section 2.6 above 

  the managers’ approach in attempting to achieve the objective 

  clear time scales of measurement and evaluation 

  the nature of the fee structures in place for all advisers and managers, and why this set of structures has been selected.


Effective operations

The selection of managers should also consider operational aspects, such as the separation of front office and back office functions.


Regular reporting

Trustees should publish their Statement of Investment Principles and the results of their monitoring of advisers and managers, and send them annually to members of the fund. The Statement should explain why the fund has decided to depart from any of these principles. 


What is the purpose of requiring a Statement of Investment Principles to be prepared?



it is the responsibility of directors to:

  arrange that accounts are produced in time giving a true and fair view of the company, in line with financial reporting standards. 

  appoint the management 

  approve dividend payments. 
They may also be responsible for other matters such as taking reasonable steps to: 

  safeguard the assets of the company 

  prevent and detect fraud and other irregularities. 
There is no necessity for directors to have any executive position, full or part time, in the company. Shareholder pressure groups have been active in ensuring directors use their power for the benefit of shareholders. In recent years many directors have suffered uncomfortable times at the annual shareholder meeting! 
Specific problems have arisen in connection with the principle of agency under which directors act on behalf of shareholders.


corporate governance frameworks:

Such a framework might include:
  The establishment of formal audit committees to ensure that the financial accounts give a “true and fair” view. 

  Independent remuneration committees to monitor the pay and benefits packages of senior executives. It is proposed that the membership of both of these committees would be drawn solely from the company’s non-executive directors. 
If the proposed extension of directors’ liability comes about it is likely that shareholders will be able to sue directors for any failure to act in accordance with their moral, ethical and fiduciary duties. 


The aims of the IFRS are:

  to encourage reliable and consistent accounting data 

  transparency of accounting data 

  to have a single set of standards world-wide that enables access to financial markets and prevent companies having to produce results on several bases. 
The main areas of difference across the world relate to the treatment of: 

  assets and derivatives 

  provisions 

  the funding of employee benefits (eg pensions) 

  income taxes.



close to UK GAAP – both are based on similar frameworks of principles – but there are a number of differences which may impact on earnings and net assets, including the revaluation of assets and liabilities to reflect the concept of “fair value” (broadly, market value).
The fair value of an asset is generally taken to be the amount at which a willing seller and a willing buyer, both with full information, would trade the asset. It is typically taken to be the market value where this is available. Alternatively, it is the present value of future cashflows from the asset, calculated at market rates of interest. As such fair values are typically more volatile than the book values and discounted cashflow values that have traditionally appeared in accounts for certain items.
In particular, for institutions trading in investments, IFRS 9 requires:
  investments to be shown at fair value in the statement of financial position 

  any resultant profit or loss on revaluation to be shown in the statement of comprehensive income 
This has proved controversial, with institutions arguing that their investments are part of a longer-term portfolio and so their values should not be viewed on one particular day, with resultant fluctuations in the asset and income figures. 


The arguments for a passive investment strategy are:

  the approach focuses on minimising risk of under-performance (relative to that of a particular market) 

  dealing costs are lower 

  a well-diversified portfolio is held if a well-diversified index is tracked. 
Whether an active or passive approach is most appropriate depends upon the skills of the active investment manager, ie whether he or she is able to generate a higher net (of expenses) return than could be achieved by a purely passive approach.


The requirement to have a Statement of Investment Principles ensures:

  the investment manager, trustees, and investors have a clear understanding of the investment strategy 

  trustees focus on their responsibilities towards investment 

  trustees and investment managers understand and explain deviations from the