At the End of a Training Seminar on Risks and Risk Management Principles: Compliance Risk Management Assignment, ICTA, Singapore

Specimen EXAMINATION – Banking/Capital Markets/Insurance

Question 1

At the end of a training seminar on risks and risk management principles and framework, it had been suggested that the trainees be requested to analyze a case study to ascertain how well they can identify and analyze risks to which a firm may be vulnerable and develop strategies to mitigate such risk exposures to an acceptable level. You have been requested to provide a model answer that could be used to assess the responses.

The task involves two firms (Firm A and Firm B) being assessed with a view to identifying which one of the two is the better candidate for purposes of entering into a joint venture partnership with your Company. Your Company is within your Job Specialisation. Each firm would have to be assessed on a scale of 1 (unsuitable) to 5 (extremely suitable) and this would have to be followed by a specific recommendation identifying one firm.

In your response you should address the following:

1. the compliance vulnerabilities and the implications to your firm
2. strategies to mitigate risks to an acceptable level by applying knowledge of risk management principles and framework
3. recommendations to be implemented to mitigate the risks and vulnerabilities in the firm identified for the joint venture.

The profile of each firm is as follows:

Firm A

The firm has established for itself a reputation as the market leader in certain products which would be of interest to your company. The firm adopts an aggressive marketing policy but has been reprimanded a few times by the Regulator as well as by the Trade Association for violating the code of conduct. It conducts businesses, through intermediaries, with companies in countries that are on the UN sanctions list. The firm enjoys political patronage as the Chairman is the brother of the country’s Prime Minister and two directors have previously held positions as Ministers.

General elections are imminent and there is a likelihood of a change of government. The firm has declared attractive dividends and its shares are in heavy demand on the stock exchange. Reports have appeared in the press that the firm is able to perform so well because it receives massive loans at low rates of interest from a state-owned bank. Last year the firm was the recipient of the Best Corporate Governance Award and its annual report was commended by the Institute of Professional Accountants.

Two court cases are pending against the firm- one by a foreign company for non-payment of invoices for supplying a state-of-the-art I.T. system and another by a depositor who has alleged that the firm has failed to refund his fixed deposit of SGD two million. With regard to the latter, the firm maintains that the depositor was paid in cash but the depositor claims that his signature had been forged.

Firm B

The firm is run on the lines of a family-owned business and has declined requests to be listed on the stock exchange. It is relatively conservative in its business operations and adopts a low profile in marketing activities. It has an extensive branch network and manages to operate with a low advertising and marketing budget. The Chairman of the firm contested the last general elections held five years ago as the leader of the main opposition party and was unsuccessful.

He has since ceased to be actively involved in politics but his two sons are known to finance the opposition party which is likely to emerge victorious at the forthcoming elections. One of the firm’s directors was recently removed by an order of the court after he was convicted of the offense of insider dealing in the shares of a listed company.

Your Company’s Director of Finance has not been able to have access to the latest accounts but has been assured that the firm has substantial assets and is likely to make significant profits in the forthcoming quarter due to new business acquisitions. The firm has access to several lucrative foreign markets, a distinct advantage to your Company should a joint venture agreement be finalized.

The Office of the Regulator has pointed out that the firm must be more transparent in the way it conducts certain businesses involving the public and that a register must be maintained to record complaints by customers. The firm has maintained that there is no litigation involving the firm.

Question 2

In relation to two products and two services offered by firms within your Job Specialisation describe the following:

1. The key requirements governing product or service development or designing; distribution, advertising and marketing; and customer relations; and
2. The rationale underlying the key requirements and the severity of the compliance vulnerabilities that might arise in the event of any non-compliance or breach and the consequences.

In respect of the chosen product or service you should also address the following:

• the severity of compliance risks in product/ service development or issuance
• the severity of compliance risks in distribution through various channels, and
• the severity of compliance risks to end customers

Question 3

You have been requested to train newly recruited staff on how to evaluate the design adequacy of compliance controls specific to products and services of the firm within your Job Specialisation. For the purpose of the training program, you are required to develop a case scenario where the firm’s control systems have various deficiencies and suggest appropriate and effective corrective actions to mitigate the compliance risks to an acceptable level.