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This chapter discusses the regulatory framework for the agreement between the investment firm and the client. The terms of the client agreement are the primary source for the investment firm’s private law duties to the investor. To arrive at a set of contractual duties, the client agreement needs to be construed. ‘Construction’, as a concept, may be divided into the process of interpretation of the express terms and the process of implication of terms into an agreement by law, by fact, or based on custom and usage. The chapter first considers the applicable standard of skill and care for client agreements before explaining the regulatory expectations around governance and control of risks arising from the appointment of sub-contractors (outsourcing). It also examines the investment firm’s liability to provide compensation to the investor for losses caused by breach of duty relating to a contract, tort, or equity.

This chapter focuses on the economic concept of financial assets and the notion of investment risk. After explaining what a financial asset is, it considers the various categories of financial assets and their risk and return properties. Primary financial assets, namely, equity and debt interests, are discussed, along with secondary financial assets such as collective investment and securitisation schemes. The chapter goes on to examine meta financial assets, such as derivatives; several financing techniques used by participants in the financial markets; investment risk and how it is measured; and the effect of covariance on the investment risk of a portfolio of financial assets, taking into account investment risk reduction through diversification and the practice of short selling. Finally, it analyses the use of the ‘Capital Asset Pricing Model’ (CAPM) to optimise risk and return relationships.

This chapter considers the operative legal and regulatory concepts underlying wealth and investment management. It begins with an overview of the legal characteristics of the investment management relationship, the function of the investment manager with respect to institutional versus retail investors, and collective (pooled) portfolio management. It then describes the investment manager’s specialisation in investment strategies and investment styles, the terms and conditions of the appointment of the investment manager, and the skill and care that a manager must apply in the exercise of investment discretion. It also examines trading by the investment manager and the investment manager’s best execution duties before concluding with an analysis of the range of wealth management services offered by investment managers, such as banking (deposit and savings accounts, payment services, foreign exchange services), custody services, investment advice, brokerage and order transmission services, dealer services, and portfolio management services.

This chapter provides an overview of key legal and regulatory concepts that operate to control the conduct of investment firms who provide financial advisory, portfolio management, brokerage, or dealer services, including the regulatory duty to act fairly and in the best interest of the client, the duty to provide information or to advise, and duties to manage conflicts. Drawing in particular on the relevant provisions of Markets in Financial Instruments Directive (MiFID) II, the chapter first explains the scope of the investment firm’s responsibility with respect to the provision of information on a certain investment service or investment product. It then considers caveat emptor versus duty to protect the interest of the investor, with emphasis on best interest and conflict rules in MiFID II. Finally, it examines the regulatory control framework for conflicts of interest, with a focus on inducements and remuneration policies in the financial services sector.

This book examines the legal and regulatory principles that govern investment in financial assets such as stocks, bonds and derivatives. The focus is on the roles of investment firms and banks during the investment cycle. The book also considers the level of protection — in terms of risk mitigation — against conduct and default risks that the operative legal and regulatory principles offer at the various stages of the investment cycle. This chapter describes the structure of the investment cycle, with emphasis on the professional character of the services and activities of investment firms, as well as the inherent risks of the investment cycle and the risk mitigating impact of the regulatory governance requirements. Furthermore, it explains the use of agency authority by investment firms to perform contracts for investment services. Finally, it provides a glossary of terms used throughout the book.

This chapter studies risk, risk management, and internal controls. Risk denotes a set of potential outcomes assessed against a specific objective, such as market risk, liquidity risk, or operational risk. The concept of risk and risk management is intrinsic to the design of a firm’s governance system. The governance of a firm is commonly understood to refer to the system by which that firm is directed and controlled. In that context, the system by which a firm is controlled is referred to as ‘internal controls’. Risk management is part of the internal controls of a firm. The internal controls may be described as the framework of checks and balances that is embedded in the organisational structure that provide reasonable assurance regarding the achievement of the organisation’s objectives, both in terms of the execution of the business model and in reporting terms.

This chapter examines the legal requirements for safeguarding money, book-entry securities, and central counterparty (CCP) cleared contracts. It first considers the duty of banks and investment firms to safeguard proprietary interests in account-based assets before discussing the equitable character of the investor’s interest in client assets received in trust by investment firms. In particular, it explains amounts owed as a bank and netting in current account versus amounts owed not as a bank but as an investment firm; creation of account-based securities entitlements through immobilisation or dematerialisation in the hands of central securities depositories (CSDs); safeguarding of proprietary rights throughout the custody chain; and settlement of the trust on a common fund of client securities. The chapter also analyses the safeguarding of contracts cleared through a CCP system, along with collateralisation and netting techniques used in mitigating default risk.