CMFAS CACS – Client Advisor Competency Standards (CACS) ​Paper 1 Exam

A beneficial owner refers to the natural person who ultimately owns or controls the customer or the natural person on whose behalf a transaction is conducted or business relations are established. A beneficial owner also includes any person who exercises ultimate effective control over a legal person or legal arrangement in the course of carrying on its business of providing a specified payment service.

Where the customer is a Singapore Government entity, the payment service provider shall only be required to obtain such information as may be required to confirm that the customer is a Singapore Government entity as asserted.

The audit committee comprises at least three directors, all of whom are non-executive and the majority of whom, including the audit committee Chairman, are independent. At least two members, including the audit committee Chairman, have recent and relevant accounting or related financial management expertise or experience.

The Board establishes a Nominating Committee (“NC”) to make recommendations to the Board on relevant matters relating to:

– The review of succession plans for directors, in particular the appointment and/or replacement of the Chairman, the CEO and key management personnel.
– The process and criteria for evaluation of the performance of the Board, its board committees and directors.
– The review of training and professional development programmes for the Board and its directors.
– The appointment and re-appointment of directors (including alternate directors, if any).

– There is a clear division of responsibilities between the leadership of the Board and Management, and no one individual has unfettered powers of decision-making.
– The Chairman and the Chief Executive Officer (“CEO”) are separate persons to ensure an appropriate balance of power, increased accountability, and greater capacity of the Board for independent decision making.
– The Board establishes and sets out in writing the division of responsibilities between the Chairman and the CEO.
– The Board has a lead independent director to provide leadership in situations where the Chairman is conflicted, and especially when the Chairman is not independent. The lead independent director is available to shareholders where they have concerns and for which contact through the normal channels of communication with the Chairman or Management are inappropriate or inadequate.

When in possession of inside information, covered persons are not to act upon it in a manner that includes but is not limited to the following ways:

– Influencing or inducing any client or any third party to enter into any transaction.
– Communicating such information to any client or third party.
– Engaging in unauthorized transfer of inside information and/or insider trading.

The disclosure requirement of quantifiable benefits would apply to all investment products and services that a Covered Entity sells, recommends, offers or refers to clients. This would apply to both bank-recommended and client-directed trades. The quantifiable benefits can be disclosed in the form of a fee range, and should include:

– Spreads/mark-up from over the counter (OTC) products.
– One-time placement/distribution fee paid to the PB (e.g. by private equity funds).
– One-time subscription fee and trailer fees paid to the PB by product providers (e.g. by fund management companies).
– Referral fees (e.g. where PB refers a client to an insurance broker).

PB’s should take reasonable measures to ensure that information communicated to the client are:

– Clear: Information provided should be reasonably understandable, in plain language, and not ambiguous. It should be clear on the purpose, features, and risk-reward characteristics of the financial product, where relevant.
– Adequate and relevant: Information provided should, to the extent possible, consider the needs of the particular target client segment(s).
– Not false and misleading: Information provided should be correct and balanced, and comply with applicable regulatory requirements.
– Timely: Information provided should be up-to-date and provided to the client on a timely basis, to the extent necessary. Clients should also be informed of any material changes that may affect the risks and returns of their financial products.

The Private Banking Code of Conduct (PB Code) comprises of two main pillars. They are competency and market conduct.

The Board and senior management of Covered Entities are expected to ensure that appropriate policies and procedures, as well as systems and controls, are in place to observe the standards of the Private Banking Code of Conduct and to ensure compliance with applicable laws and regulations, to the extent applicable.

A minimum of 15 hours of continuing professional development (CPD) in each calendar year is expected of all covered persons.

Periodic (usually annual) tax at a single tax rate on income or return is referred to as accrual tax. Accrual tax is tax incurred on the income-to-date, but which is to be paid at the end of the accounting period.

The following are the types of investor trading behavior:

– Traders
– Active investors
– Passive investors
– Exempt investors

Fully funded refers to a plan where the values of plan assets and liabilities are approximately equal. A fully funded pension plan is one that has the financial stability to make current and future benefits payments to pensioners.

In the United States, foundations have a minimum required spending rule but endowments can decide, change, or just fail to meet their spending rate. The three forms of spending rules are as follows:

– Simple spending rule.
– Rolling 3-year average spending rule.
– Geometric spending rule.

The geometric spending rule weights the prior year’s spending level adjusted for inflation by a smoothing rate, which is usually between 0.6 and 0.8, as well as the previous year’s beginning-of-period portfolio value. The geometric spending rule gives some smoothing but less weight to older periods.

The ability to take risk means the ability of the portfolio to sustain losses without putting the client’s goals in jeopardy; how much volatility the portfolio can withstand and still meet the client’s required expenditures. Generally, the client has an increased ability to take risk, if expenditures are small relative to the client’s portfolio.

The period when an individual is working and planning and ultimately building up the value of their investment through savings is referred to as the accumulation phase. The length of the accumulation phase will vary based on when an individual begins saving and when the person plans to retire.

Mortality tables show an individual’s expected remaining years based upon attaining a given age. A mortality table, also known as a life table or actuarial table, shows the rate of deaths occurring in a defined population during a selected time interval, or survival rates from birth to death.

The biased expectations theory is a theory that the future value of interest rates is equivalent to the summation of market expectations. Biased expectations are a cognitive error that can occur from overconfidence in predicting the future.

Behavioral finance models indicate that the investment valuation and decision process incorporates more than the traditional fundamental financial variables seen in portfolio theory. Behavioral finance assumes that investors exhibit the following characteristics:

– Investors are loss averse.
– Investors hold biased expectations.
– Investors practice asset segregation (i.e. portfolios are constructed in layers).

The annually accrued taxation rate that when applied to the pretax return, produces a given after-tax accumulation is referred to as accrual equivalent tax rate. The accrual equivalent tax rate is calculated as 1 – (accrual equivalent return / pretax return).

The investment policy statement (IPS), in fact the entire process of developing the IPS, is valuable for both the client and the investment adviser. For the client, the benefits of the IPS include:

– The IPS identifies and documents investment objectives and constraints.
– The IPS is dynamic, allowing changes in objectives and/or constraints in response to changing client circumstances or capital market conditions.
– The IPS is easily understood, providing the client with the ability to bring in new managers or change managers without disruption of the investment process.
– Developing the IPS should be an educational experience for the client.

For capital gains taxes, it can be generalized that:

– Unlike accrual taxation, there is no lost compounding of return due to paying taxes periodically. All tax is paid at the end of the time horizon.
– The tax drag amount will increase as the time horizon and/or rate of return increase because the tax will be on a larger pretax ending value.
– The relationship of the tax drag percentage and stated tax rate will depend on the basis (B) if there is no initial unrealized gain or loss and B equals 1.00, the tax drag percentage is equal to the tax rate.
– The relationship of the tax drag percentage and stated tax rate will depend on the basis (B) if there is an initial unrealized gain and B is less than 1.00, the tax drag percentage is greater than the tax rate because there is an additional initial gain subject to tax.
– The relationship of the tax drag percentage and stated tax rate will depend on the basis (B) if there is an initial unrealized loss and B is greater than 1.00, the tax drag percentage is less than the tax rate because the portion of the return earned during the period back to the cost basis is untaxed.

The Board and senior management should also identify the appropriate metrics for monitoring conduct across the organisation. These should include both quantitative and qualitative indicators of positive and negative conduct, as applicable to the financial institution. Examples of quantitative indicators include the following:

– Completion rates for training programmes.
– Employee turnover.
– The number of policy or risk limit overrides.
– New or repeat internal or external audit findings.
– Breaches of internal policies and procedures.
– Misconduct reports.
– Consumer complaints.
– Statistics on compensation adjustments that may be attributable to conduct.

The chief regulatory officer is principally responsible for overseeing the regulatory functions and changes to the business rules of the approved exchange, approved clearing house, or approved holding company in relation to an approved exchange, approved clearing house, or approved holding company, as the case may be.

MAS leverages data analytics to monitor complaints and misconduct reports. Peer group and time-series analyses are conducted to identify trends and outliers, which MAS takes into account on-going supervisory engagement with financial institutions.

The chief data officer is principally responsible for establishing and implementing the policies, systems, and processes of the financial institution as regards the governance, use, and analysis of data.

The MAS three-pronged approach include:
– PROMOTE AND CULTIVATE a culture of trust and ethics in the financial industry through regular engagement, active collaboration, and promulgation of good practices to promote sound industry norms.
– MONITOR AND ASSESS culture and conduct, focusing on both “hardware”( policies, and procedures) and “(tone at the top, leadership, attitudes, behavior, and group dynamics).
– ENFORCE AND DETER lapses in risk management, misconduct, regulatory breaches, or offenses through supervisory or enforcement actions.

MAS does not intend to prescribe specific management committees that FIs are required to set up. Financial Institutions would have the flexibility to establish the management committees that would be appropriate to their circumstances. It is also the responsibility of each senior manager to raise issues under his or her respective areas and provide constructive challenge at committee meetings.

MAS considered whether the application of the IAC guidelines should be tiered across the dimensions outlined above. However, proper accountability and conduct are fundamental elements of good governance and sound business practice. Even where FIs only serve non-retail customers or exclusively conduct wholesale market activities, the expectations on fair dealing as well as proper conduct remain relevant.

Private banking is banking, investment, and other financial services and products provided by banks and financial services firms to wealthy individuals with high levels of income or sizable assets.

Factors considered by financial institutions in determining the ML/TF risk classification of customers typically include the following:

– Political connections of the customer and related individuals.
– Involvement in high-risk countries/business industries.
– Complexity of structures used.
– Known adverse information on the customer.

External Fraud is the risk of unexpected financial, material or reputational loss as the result of fraudulent activities of persons external to the firm. A typical example of external fraud is a case where a financial institution receives fraudulent email instructions to release funds from their customers’ accounts to third party accounts at other financial institutions.

Financial institutions with higher inherent risks or specific transaction monitoring control deficiencies to address should perform more regular reviews in order to adequately mitigate their risks. These reviews should be targeted at sustaining system effectiveness by imbibing the changing risk environment.

An effective transaction monitoring system enables financial institutions to detect and assess whether customers’ transactions pose suspicion when considered against their respective backgrounds and profiles. An effective transaction monitoring system is comprised of the following elements:

– A well-calibrated framework
– Robust risk awareness
– Meaningful integration
– Active oversight

Financial institutions generally perform independent verification measures on the source of wealth to serve as a plausibility check on the information provided to them. Examples of independent corroboration measures include citing public information sources (e.g. company websites, corporate registration websites, journals and media reports) to verify net worth of customers/financial statistics of operating companies as well as obtaining documentary evidence, such as bank statements, confirmation from third party professionals (e.g. tax advisors), and financial statements or management accounts of operating companies. Financial institutions also assess the authenticity and reliability of the documents provided by the customers.

External fraud is another risk that financial institutions have to confront and manage. There have been cases where financial institutions received fraudulent email instructions to release funds from their customers’ accounts to third-party accounts at other financial institutions. Hence, financial institutions should pay special attention to, and put in place rigorous controls over third party account transfers and activities, particularly if they involve inactive/dormant and/or hold-mail accounts. Financial institutions should not carry out any transaction without proper verification.

Based on MAS’ inspections, there is scope for FIs to enhance their reporting and escalation of the following significant risk matters:

– System implementation delays.
– IT incidents or system limitations impacting the organisation’s TM capabilities.
– Results and remediation of compliance or QA reviews.
– Regular updates and follow-ups with regard to alert ageing statistics.

Persons exempt from holding a trust business licence include the following:

– Banks and merchant banks regulated by MAS.
– Holders of a capital markets services licence, or persons who are exempt from holding a capital markets services licence for providing fund management or custodial services under the Securities and Futures Act (Cap. 289).
– Lawyers and accountants.
– Private trust companies.
– Overseas persons.
– Persons engaging in trust business in connection with the issuance of debentures.
– Trustees of collective investment schemes approved under the Securities and Futures Act (Cap. 289).
– Persons carrying out introducing activities.