Study On The Three Stages Of Money Laundering Finance Essay - Free Essay Example

Money laundering refers to the process of cleaning dirty money or entering money and assets acquired illegally into the financial system by following a complex process in order to make them appear legally acquired. This process consists of three stages. On the first stage, called Placement, the money enters the financial system. Offenders use different methods of placement, among these are: money deposited in relatively small amount into several current and savings accounts so as not to arouse suspicion, and the use of businesses offering services where is common to receive cash payments therefore false payments from hypothetical clients can be recorded and money enters the system. The second stage is Layering. Once the money has entered the system is then moved around in a series of numerous and complex transactions with the purpose of obscure the trail. What follows then is the third and last stage, Integration. The dirty money is considered integrated after successfully entered the financial system and its origin made extremely difficult to trace therefore appear to be legal or clean (Upton and Hinton, 2010). What are the main features and purpose of the FSAs fit and proper test for financial firms and certain of their employees? The purpose of the FSAs fit and proper test is to assess whether an applicant, either an individual or a financial firm, has all the credential to perform a controlled function for which is applying. Under the fit and proper test the FSA assesses the individuals or firms against three main features. First, the applicant has to prove to be honest, reputable and of integrity, clear of wrong doing or criminal offence in particular associated to financial crime and dishonesty. Second, the applicant has to be competent and capable or having the expertise required by the FSA in relation to the controlled function. Finally, the applicant has to be financially stable. The FSA will assess the applicant against factors such as debts or bankruptcy restrictions (FSA, online). Question 3: What role does the Financial Services Compensation Scheme (FSCS) perform? The Financial Service Compensation Scheme (FSCS) acts as insurer should a financial company or firm become insolvent or has gone out of business and unable to pay its customers. The FSCS funds are acquired through the payments of levies on five categories of financial companies and firms. These are: insurance companies; general insurance firms; deposit-takers; investment firms and home finance firms. For instance, should an insurance company become insolvent the FSCS will compensate its customers by using funds acquired by payments of levies in the same category only (Upton and Hinton, 2010). Question 4: What is a defined contribution pension scheme? The defined contribution pension scheme is an arrangement where an individual or a company through a pension scheme, pays money into a fund at regular intervals. At retirement an annuity is purchased. The annuity purchased is based on the total amount of the fund after deduction of any charges from the scheme provider. The fund is calculated by totalling all contributions of the member and relative proceeds; proceeds from investments; and level of interest rate at the time of retirement. Words count: 468 Part B What factors led to the creation of the Financial Service Authority (FSA) and what factors have led to the decision of the current Government to re-assign its responsibilities to other bodies from 2012? The aim of this essay is to highlight the main factors that led to the creations of the Financial Service Authority (FSA) in the 1990s and the recent events that have induced the current Government to reassign FSAs responsibilities to other bodies from 2012. History of the FSA The 80s and 90s have witnessed very important developments that have influenced the fast evolution of the financial service industry. According to Upton and Hinton (2010, Session 5:7), globalisation, Big Bang and technological changes are the main three. These changes developed simultaneously, strongly influencing each other. Technology, in particular the internet, radically changed the way individuals and companies did business. It shortened distances through more immediate form of communication and faster means of exchanging data, which in turn favoured economic globalisation. Economies increasingly integrated with each other in a growing global market where foreign investments, companies takeovers and outsourcing became the norm. Technology and globalisation also influenced changes in the UK Stock Exchange leading to the Big Bang. All these developments increased the need for better regulation not only in relation to foreign markets but also within the UK. In the UK each fina ncial sector was self-regulated. In the mid 80s the Securities and Investment Board (BID) that already had the responsibility to regulate investment services was increasingly given more responsibilities also in other sectors. In 1997 the BID adopted a new name becoming the Financial Services Authority (FSA). In 2001, under the Financial Services and Market Act 2000 (FSMA) the FSA acquired the responsibility to regulate the financial services followed by the regulation of mortgages in 2004 and general insurance in 2005 (Upton and Hinton, 2010). FSA today The FSA is part of a tripartite system and shares responsibility with the Bank of England and the Treasury. The Bank of England is responsible for maintaining financial stability and it does this by assessing weaknesses and risks in the financial system, providing financial help when needed to keep the system operating. The Bank of England also manages monetary policies and oversees the financial system as a whole. The Treasury is responsible for managing economic and public finance policies. Each component of the tripartite has the need to communicate efficiently to the others in order to promote and maintain a healthy financial system. The FSA was the part of the Tripartite to come into scrutiny following the latest financial crisis. The FSA has two core responsibilities: a) prudential regulation: which involves supervising the financial firms making sure they are financially stable; b) business conduct regulation: supervising and making sure that business is conduct in the in terest of consumers (Upton and Hinton, 2010). The FSA achieves its responsibility by equally focusing on the four statutory objectives given by FSMA 2000, which are: Market confidence. The FSA is responsible for maintaining confidence in the UK financial system. Financial stability. The FSA has to protect the UK financial system against consequences of UK financial instabilities and against events outside the UK. It also has to ensure enhancement of effects on growth of the UK economy. Consumer protection. The FSA has to protect consumer according to their degree of expertise and experience when they are making financial decisions and educating them in regard to information available to them, risks and nature of different product at their disposal. Reduction of financial crime. The FSA has to reduce the possibilities of financial crimes in regulated businesses. (FSA, online) During the current financial crisis started in 2008, the FSA has been criticised for lack o f compliance with its responsibilities in preventing or reducing the impact of financial instability. One of the reasons that led to the financial crisis was the greediness of banks and financial firms to grow their money and the sub-prime mortgage market seemed to be the perfect solution. Sub-prime mortgages were very risky as the calculation of returns was based on assumptions of number of borrower defaults. Both the FSA and Bank of England should have assessed the risks and should have not allowed them at all or at least a stricter regulation should have been imposed i.e. verifying the actual income of borrowers rather than accept self certification . Furthermore, FSA should have had protect consumers from this high risk financial products. As defaults raised the sub-prime market predictably collapsed and so collapsed the market confidence in the financial system, the FSA once more failed to fulfil its objectives. FSA, the future Following the latest financial crisis events the Chancellor George Osborne, in his first Mansion House speech, said that the tripartite failed to identify the increasing levels of debt and said that no one was controlling levels of debt, and when the crunch came no one knew who was in charge. In his speech Mr Osborne highlighted the weaknesses of the current financial system and how these have led to the crisis, he also announced a proposal to reform the financial system in order to avoid similar situations in the future. The changes involve the abolishment of the tripartite with dismantle of the FSA. The Government will create a new prudential regulator operating as a subsidiary of the Bank of England. Within the Bank of England there will be two new regulators; one, it will be an independent Financial Policy Committee, responsible for the economic and financial stability. Two, a new Consumer Protection and Market Authority and it will be responsible for regulate the conduct of financial firms and businesses offering financial services in the UK both retail and wholesale. There will also be a new single agency that will be responsible for tackling economic crime. The reform is aimed to be completed by 2012 (HM Treasury, online). Words count: 944 Part C What roles are played by customer status classification and suitability reports in seeking to ensure that customers are not mis-sold financial products? The FSA provides principles and rules to businesses and individuals offering financial services. These principles and rules are comprised in the Conduct of Business Sourcebook (COBS), and aim to ensure that financial products are not mis-sold to customers. According to Upton and Hinton (2010, session 8:2) the relationship between financial firms selling financial products and their customers can be summarized in six key stages. The first of these stages, classification of customer status, leads to and influences the next five. One of the five stages requires the completion of the suitability report. This essay will examine how the customer status classification and the report help to minimise the risks of mis-selling financial products. Classification of customer status Under the COBS framework customers are divided into three categories or statuses: retail, professional and eligible counterparties clients. The status in which they fall is determined by the level of their knowledge and expertise in the financial market. Retail clients include small businesses and private individuals. This category is considered the one with lower knowledge in financial products. Professional clients include a diverse list of entities and firms which all have in common a good knowledge of transactions, products and services of the financial market. Therefore, they are able to make financial decision and understand related risks. Eligible counterparty clients include investment firms, insurance companies and any other large financial organisation with very high expertises in the financial market. The purpose of this classification is to determine and provide the right degree of protection to clients when selling financial services; the lower the knowledg e the higher the protection. COBS framework is applied only in the UK, when a EU company operates in the UK or a UK company operates in any other EU states the Market in Financial Instruments Directive (MiFID) regulation is applied. MiFID as well as COBS follows the same client classification. When a financial firm is in doubt on what level of classification to assign it should always use the level and the regulation offering the highest protection. The relationships between a financial firm selling a financial product and its client are based on this classification. The firm is obliged under the above regulations and customer classification to act on the clients best interest and maximum transparency in all stages of this relationship. The second and third stages following the customer status classification are respectively: Communication and Advertising on and selling products to customer (Upton and Hinton, 2010). On these stages firms will promote or sell their products to clients. Firms must communicate the features of the products clearly and explicit and use the highest level of protection when dealing with clients, according to the customer status classification. When a firm is directly involved in recommending financial products or managing clients investments has to comply with the COBS framework in completing a suitability report. Suitability report In order to act on the best clients interest, a firm must ensure that its recommendations and its decisions are suitable for its clients. The suitability report is designed to help the firms to collect all the information they need to give the right guidance on investment products to their clients. According to COBS (FSA, online, COBS 9.2) firms must obtain the following information from their clients: 1) knowledge and experience in the investments offered; 2) their financial situation and 3) what investment objective they have. Clients are obliged to provide accurate, up to date and complete information. The firms are responsible for verifying this information and if it is insufficient to assess clients suitability they should not make recommendation. Based on this information the firm will be able to decide which type of investment to offer that matches the clients objectives, it will also understand if the client is able to understand the risks related to the product and fina ncially bear these risks. Once the suitability has been assessed the firm must provide the suitability report to the client. The report will contain the investment recommendation that the firm is making and a detailed explanation of why it is suitable. It should clearly explain any possible disadvantages and risks of the investment and its transaction. If the client has been considered unsuitable for the product, the report will give a clear explanation on the reasons. The suitability report must always be clear, accurate and comprehensible to the client (FSA, online, COBS 9.4). Third stage: Disclosure requirements. In addition to the report the firm is also obliged to disclose very important information such as right to cancel, cooling-off periods and size of financial market where the recommendations were based on (Upton and Hinton, 2010). If the client decides to buy the financial product or to give the management of a financial portfolio to a firm, according to Upton an d Hinton (2010) the relationship moves on to the next two stages. One being Transaction and Management arrangements or rules on transaction and on management of portfolios; and the other Reporting to customers or rules and details of regular information sent to clients related to their investments. COBS and MiFID, as seen above, aim to protect the customers interests in all aspects of the financial transactions. While the customer status classification and the suitability report, are mainly to guide firms selling financial products to avoid mis-selling of these products. Words count: 886 Part D Outline the cases of: The near collapse of the Northern Rock Bank and The mi-selling of the precipice bonds Comment in both cases on how far these were the consequence of regulatory weaknesses. Northern Rock The Northern Rock originated as a building society in 1965 and as all building societies it has a limited access to the wholesale funds. In the late 1990s the Northern Rock was converted into a bank and as a consequence it had wider access to the wholesale market. From that point onwards, Northern Rock expanded rapidly and by 2007 almost 70% of its funding came from wholesale funds. With the new funds it increased competiveness as mortgage lender in the UK market, packaged up a very high percentage of its mortgage assets and sold them to companies. These companies converted the assets into mortgage-backed securities and in turn sold them to investors. When in 2007 the sub-prime mortgage market fell, the demand for securitised mortgage also dropped due to the wide-spreading lack of confidence in the financial market. The Northern Rock found itself increasingly short of liquidity and asked for help to the Bank of England. The news immediately reported its precariousness which caused a run on the bank, customer queued to withdraw their savings, thus worsening the liquidity crisis. Despite receiving help from the Bank of England to boost its liquidity, the British Government had to step in and rescue the bank. In 2008 Northern Rock was nationalised (Upton and Hinton, 2010). Words count: 211 ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¦.work incompleteÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¦