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Regulatory Environment, Law Compliances - Coggle Diagram

- - - - Components of prudential regulatory system includes
        
        Prompt Corrective Action: When FI's capital level drops below the regulatory minimum level, regulatory scrutiny should increase and restrictions should tighten.
        
        Market Value Accounting: standard measurement frameworks those are inadequate and slow to recognize current values. Framework rely on current—i.e., market-based—values.
        
        Honesty and Competency: Financial institution’s (FI's) principal owners and senior management must be continuously scrutinized.
        
        Lender of Last Resort: Dealing with the instability problems of banks. It is an institution that offers loans to banks that are experiencing financial difficulty.
        
        Restrictions on Activities: All activities that are "examinable and supervisable". Any activities that are not examinable and supervisable should not be allowed, should be permitted for a separately capitalized affiliate, so long as transactions the two entities are tightly scrutinized.
        
        Deposit Insurance: assurance for depositors against regulatory failures.
        
        Minimum Capital Requirements: Capital is both direct buffer & indirect protection. higher capital levels means financial institution has more to lose from risk so take min capital to avoid risk. Emphasizes current values for assets and liabilities rather than the historical values.
        
        Personnel:
        
        Corporate Governance and Securities Regulation: These provisions should include the specification of creditor and stockholder rights, including minority stockholder protections and a bankruptcy code.
    - - 3.1. Regulators:
        
        International Organization of Securities Commissions—IOSCO, international body that brings together the world’s securities regulators and is recognized as the global standard setter for the securities sector. Similarly The International Association of Insurance Supervisors (IAIS) aims to do for the insurance industry.
        
        IAIS high-level 7 goals:
        
        Assessing and responding to insurance sector vulnerabilities
        
        IAIS as the global standard setter for insurance
        
        Contributing to financial stability in the insurance sector
        
        IAIS apply best practices for effective insurance supervision and supervisory cooperation.
        
        Implementation and observance of Insurance Core Principles.
        
        IAIS effectively promotes its interests with stakeholders and the production of high-quality deliverables
        
        Effective and efficient organization and operations
        
        3 goals or purposes of IOSCO’s regulatory approach:
        
        To cooperate in developing, implementing and promoting adherence to internationally recognized and consistent standards of regulation, oversight and enforcement to protect investors, maintain fair, efficient and transparent markets, and seek to address systemic risks;
        
        To enhance investor protection and promote investor confidence in the integrity of securities markets, through strengthened information exchange and cooperation in enforcement against misconduct and in supervision of markets and market intermediaries; and
        
        To exchange information at both global and regional levels on their respective experiences to assist the development of markets, strengthen market infrastructure and implement appropriate regulation.
      - 3.2. Legislation and Regulation
        
        Regulations are sometimes viewed as excessive or unnecessary aim of regulation is to encourage and support territorial and global economic well-being and growth.
        
        Also include the safety and stability of the entire financial system.
        
        General principles and expectations of practice.
        
        European Union (EU) purpose was to improve the EU financial markets’ competitiveness by creating a single market for investment services and activities
        
        MiFID II creates key rules:
        
        All investment firms to act honestly, fairly and professionally.
        
        Investment firms that provide advice on an independent basis.
        
        Investment firms to ensure that staff giving investment advice or information about financial instruments, investment services or ancillary services to clients
        
        Person’s financial situation including his ability to bear losses, and his investment objectives including his risk tolerance
        
        European Securities and Markets Authority (ESMA) suggest detailed rules & guidelines for MiFID II to specify criteria for the assessment of knowledge and competence of investment firms’ personnel.
        
        Section V.IV is targeted to financial firms, while
        
        Sections V.II and V.III focus on those interacting with clients.
        
        (V.II) provides guidance for staff providing information about investment products, investment services or ancillary services.
        
        (V.III) lists criteria for knowledge and competence for staff giving investment advice.
        
        A recognized differentiation between those who provide information and those who take the information and use it to provide advice
        Investment advisors must understand
        
        risk-related components of the investments
        
        ensure suitability of the product solutions recognize
        
        to understand all fees and costs, with the assumption
        
        Investment advisors must understand
        
        risk-related components of the investments
        
        ensure suitability of the product solutions recognize
        
        to understand all fees and costs, with the assumption
        
        investment performance criteria & limits related to forecasting
        
        All of this is in keeping with the goal of transparency and competency.
        
        In the European insurance sector, The European Insurance and Occupational Pensions Authority (EIOPA)
        EIOPA’s main goals are:
        
        Better protecting consumers and rebuilding trust
        
        Ensuring a high, effective and consistent level of regulation and supervision
        
        Strengthening oversight of cross-border groups
        
        Promote coordinated European Union supervisory response.
      - 3.3. ESMA Guidelines
        
        The Guidelines focus on staff and organizational knowledge and competence in the areas of:
        
        Giving information about investment products, investment services or ancillary services
        
        Giving investment advice
        
        Assessment, maintenance and updating of knowledge and competence
        
        While the Guidance is codified and targeted for the European Union, practices and concepts are applicable around the globe. Each territory has their own guidelines, but the ESMA document provides a good framework against which to consider territory-specific regulations
- - - - Fiduciary Standard: Financial advisor is putting the client’s interest first by ensuring a recommendation is suitable, based on the assessment of client requirements, such as the client’s objectives, needs and financial situation.
        ---FA considers a number of considerations---,
        like whether the fees are reasonable, whether the investments are adequately diversified, whether there are conflicts of interest, whether the investments are consistent with the provisions of the trust.
      - Suitability :
        Determine that a particular type of investment is suitable for client. Could equally recommend an investment option that pays more commission, or one that pays less. Suitability does not require choosing the lower-cost option. However, as a fiduciary, if a lower-cost option is available, and the investment provides the same benefits, the financial advisor should recommend the lower-cost alternative. This does not mean that the financial advisor cannot earn a living. It does mean, that in placing the client’s interest before his or her own, the financial advisor will choose the lower-cost option.
- - - - Three main tools to accomplish its monetary policy objectives:
        
        Discount (interest) Rate: Standard term used to identify interest rates.
        
        The discount rate is the interest rate the bank charges commercial banks to borrow money. When central bank (CB) wants to tighten monetary policy, it will increase rates, while a rate decrease indicates the bank wants to ease policy.
        
        CB adjustments to the discount rate affect inflation.
        
        Increasing money supply will ultimately lead to increased prices for goods and inflation.
        
        Reduction in money supply is likely to reduce consumer demand and the prices of goods and inflation.
        
        Open Market Operations: Primary tool to impact the supply of bank reserves (the amount of funds banks must hold against deposits in bank accounts).
        
        When the central bank (CB) wants to increase the supply of money in the economy, it will buy government bonds, thereby infusing additional cash into the system.
        
        When the central bank wants to remove money from the economic system, it will sell government bonds, taking in cash and reducing the available money supply.
        
        Reserve Requirements: Banks are required to maintain certain reserve levels to help assure soundness and the ability to function as anticipated by the public and required by the government.
        
        When CB wants to decrease money supply, it will increase its reserve requirement. Banks must hold greater amounts of deposits to maintain required reserves.
        
        When CB wants to put more money into circulation. it will reduce reserve requirements. This allows banks to lend more (increase credit).
    - - 2 Approaches to fiscal policy:
        
        Automatic Stabilization: Uses either fiscal drag or fiscal boost to stabilize the economy.
        Fiscal drag uses a progressive tax policy to enforce higher tax rates on higher income levels, reducing disposable income.
        Fiscal boost can be provided by lowering tax rates with the resulting increase in more available income.
        
        Discretionary Policy: Implemented by making a singular (i.e., one-off).
  - - - 1. Expansion:
        4 primary areas of spending: Consumer spending and housing, Business investment, Government spending and Exports.
        Consumer spending, including housing, may also be called consumption.
        Most consumer spending is a relatively short-term matter. Housing, car, business investment etc. as long-term.
        Exports - imports = net exports (can be +ve or -ve).
        
        Bubbles: A boom may result in a bubble i.e. consumer more than willing to pay ever-higher prices for the goods they desire such as in the investment area like housing. problem with bubbles is they eventually pop. First, it is not easy to identify a bubble, or to know where it is in its cycle. Second, it can be difficult to bring a bubble back under control.
      - 2. Downturn and Contraction: A popping bubble is one way for the business cycle to move into a downturn, but the truth is all periods of expansion are followed by periods of contraction.
        When process aids economic expansion, it eventually contributes towards a slowdown.
        central bank can also contribute to an economic slowdown.
      - 3. Downturn, recession/depression
        Recession and Depression: When continued economic decline, the business cycle will evolve into a recession or depression. A depression is usually defined as being a bad recession, but there is no explicit definition. One way to identify a recession is two consecutive quarters of a decline in GDP. When economy is in strong downward turn, the term “depression”. When economic recovery is weak, relapse into recession.
      - 4. Recovery. Recoveries are increases in demand for goods and services. People start purchases they delayed during the recession. Supplies are normally low after a recession but as the economy continues to grow. Stock market returns usually grow during this period,
    - - Leading Indicators:
        
        Average hourly workweek in mfg.
        
        rise or fall hrs. predict the hiring or firing.
        
        Average weekly initial claims for unemployment.
        
        When the economy gets stronger, unemployment will be less.
        
        Manufacturers’ new orders for consumer goods and materials
        
        Measures comfortable current inventory levels and projections.
        
        Vendor performance, or delivery times index
        
        longer to deliver, that means orders are flooding.
        
        New orders for non-defense capital goods
        
        Companies are less like to spend on new capital equipment and goods if slowdown.
        
        Stock prices
        
        Money supply in real (inflation-adjusted) terms (e.g., M2)
        
        Interest rate between government bonds and central bank funds
        
        Higher long-term rates indicate a growing economy,
        
        Higher short-term rates indicate a contracting economy
      - Lagging Indicators:
        
        Average duration of unemployment.
        
        More economic evidence available, companies are clearer whether they should be hiring or firing.
        
        Inventories and sales ratio, manufacturing and trade
        
        When ratio reaches its cyclical peak in the middle of a recession & then falls at the start of a recovery.
        
        Change in labor cost-per-unit of output.
        
        Labor costs increase when productivity fails
        
        Prime rate charged by banks
        
        Loans outstanding's
        
        After a recession, profits are slowing and debt service remains high.
        
        Changes in Consumer Price Index (CPI) for services
        
        Service inflation usually peaks several months after the onset of recession
        
        Ratio of consumer installment credit outstanding to personal income