CISI International Certificate in Wealth

& Investment Management (ICWIM)

Chapter 2
Industry Regulation
Chapter 2 CISI ICWIM Qualification

Models of Regulation
Rules Based • This approach involves a high degree of prescriptive procedures including very detailed
rules stipulating what individuals and firms must do to ensure they comply.
• It is typically inflexible and may result in a tick-box exercise.
• For regulators, maintaining a comprehensive rules-based model is challenging, particularly
in evolving and fast changing markets.
Principle Based • In this approach, the focus is on principles and therefore the types of behaviour and
outcomes, as opposed to just following the rules.
• A principles-based approach to regulation acts as a fundamental source of guidance on
how firms and individuals are expected to act.
• How the principles are met is the responsibility of the individual and the firm themselves.
Self Regulatory • In the financial services sector self-regulation is typically a unique combination of private
Organisations (SRO)
interests with government oversight, which is recognised as having delivered an effective
and efficient form of regulation for the complex and dynamic environment.
Chapter 2 CISI ICWIM Qualification

National Regulators
Methods used by regulators to authorise financial institutions:

Supervisory Tools • Diagnostic tools – designed to identify, assess and measure risk
• The setting of prudential requirements
• Monitoring tools – to track the development of identified risk,
wherever it arises
• Establishing business conduct rules
• Preventative tools – to limit or reduce identified risks and so
• Providing detailed product regulations prevent them crystallising or increasing

• The setting of requirements and processes • Remedial tools – to respond to risks when they have crystallised
for investigation, supervision and
enforcement of the rules
Chapter 2 CISI ICWIM Qualification

International Organisation of Securities Commission (IOSCO)

To ensure international cooperation between regulatory bodies

Objectives of IOSCO:

• Increasing the confidence and trust in financial markets, systems and products

• Establishing an environment to encourage economic development and wealth creation

• Reducing systemic risk of market and system failures including their economic consequences

• Enhancing consumer protection by giving them the reassurance they need to save and invest

• Reducing financial crime by ensuring financial systems cannot easily be exploited

Chapter 2 CISI ICWIM Qualification

Money Laundering (Criminal Offense)

Changing dirty (illegal) money to clean money. Offences involved in Money Laundering
• Hiding/disguising the true nature of property.
Illegal ‘Property’ is derived from: • Failure to disclose a money laundering suspicion.
• Drugs and narcotics • Arranging a deal that is involved in money laundering.
• Kidnapping, piracy and terrorism • Owning/using the property or the profits from the property.
• Breaking environmental laws
• Illegal dealing in firearms and ammunition AML requires firms to:
• Bribery and damage to public property • Carry out Identification procedures
• Fraud and breach of trust
• Train their staff
• Tax evasion
• Implement internal controls
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Chapter 2 CISI ICWIM Qualification

Money Laundering
Money Laundering Stages:

• Placement: depositing cash into account

• Layering: moving money around to hide its origins – cannot be linked to owner

• Integration: money is now clean and mixed with the rest

Reporting Money Laundering

1. Report to MLRO: Money Laundering Reporting Officer

2. MLRO reports to authorities: if he agrees there is laundering

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Chapter 2 CISI ICWIM Qualification

International coordination
• Financial Action Task Force (FATF)
-Recommendations aimed at setting minimum standards to ensure anti-money laundering efforts are
consistent internationally.

• United Nations (UN)

-Sanctions to deny access to the financial services sector to individuals and organisations from certain
countries.

• Wolfsberg Group of Banks

- Issue standards for private banking/KYC

• Examples of countries implementing AML laws:

• US Patriot Act
• UK Proceeds of Crime Act
• EU money laundering directives 7
Chapter 2 CISI ICWIM Qualification

Client Identification Procedures

In addition to Know Your Customer (KYC) rules, a firm must carry out customer due diligence (CDD) procedures as follows:

For individuals: official document with name and photograph, utility bill with name and address

For corporates: Articles/Memorandum of Association, financial accounts and in the case of small
companies, proof of identity for directors and shareholders.

A client should be check if they are Politically Exposed Person (PEP).

In such high risk cases, and if a customer is not present for verification, an enhanced due diligence (EDD) must be applied.

If a customer or transaction falls under an allowed category, Simplified Due Diligence (SDD) may be applied.

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Chapter 2 CISI ICWIM Qualification

Insider Trading (Criminal Offense)

An employee of a company owns shares in it.
The employee/relative knows secret news about company.
The news, if announced, will cause share price to go up/down.

News/information should be:

- Exact, specific
- Is not public
- If it becomes public, it will have effect share price

It is applicable to:
- Shares, Bonds & Warrants
- Derivatives on Shares & Bonds (Options & Futures)
- CFDs & ADRs
- Close-ended funds (REITs)

Not applicable to commodities, derivatives on commodities, or open-ended funds (mutual funds)

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Chapter 2 CISI ICWIM Qualification

Market Abuse (Civil Offense)

Based on rumours

The behaviour will give false or misleading signals to distort the market.

Insider Dealing and Market Abuse laws in the EU are covered under the Market Abuse Directive (MAD).

Example
- A trader shorts a stock

- In order to make a profit, the stock price should fall.

- So the traders spreads false rumours about the company.

- The market reacts negatively and the share price drops.

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Chapter 2 CISI ICWIM Qualification

CISI Code of Conduct

• Honest – have I been truthful about my action or decision with everyone involved, and told no lies or half-truths?

• Open – is everyone affected by my action or decision aware of the consequences?

• Transparent – have I been clear and not misleading to any party in reaching my decision?

• Fair – have I made sure that my action or decision will not result in any party being unknowingly disadvantaged or

unduly advantaged?

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