FAP CH1 Sep25

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25 – 29 September 2011 Financial Advice Programme Module I Financial Services Environment and Regulation In Collaboration with:

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Module 1 Financial Regulation in Bahrain Chapter 1 : Introduction to Financial Services Environment and Products Section 1 Financial Services in Bahrain Section 2 Financial Adviser – Roles and Responsibilities Section 3 Financial Planning and Advisory Process Section 4 Risk Assessment and Investment Rationale Section 5 : Products

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Section 1 Financial Services in Bahrain

Section 1 : Financial Services in Bahrain: 

Section 1 : Financial Services in Bahrain Sectoral Composition of Bahrain in 2009 (BHD millions) Source: Central bank of Bahrain, Statistical Bulletin

Section 1 : Financial Services in Bahrain: 

Section 1 : Financial Services in Bahrain Strategic Location Liberal Economic Policy Highly Skilled Workforce Advance Infrastructure Unrestricted Exchange / Transfer of Money Cosmopolitan Outlook Effective Legislation and Money Policy BAHRAIN’S SUCCESS FACTORS:

Section 1 : Financial Services in Bahrain: 

Section 1 : Financial Services in Bahrain Central Bank of Bahrain Regulator of Bahrain Financial System Succeeded the Bahrain Monetary Agency as the regulatory authority of Bahrain in Sep ‘06 CBB Objectives: Set and implement the monetary, credit & other financial sector policies for the Kingdom Provide effective Central Banking Services to the government and the financial sector of the Kingdom Develop the financial sector & enhance confidence therein Protect the interests of depositors and the customers of the financial institutions and enhance the Kingdom’s credibility as an international financial centre

Section 1 : Financial Services in Bahrain: 

Section 1 : Financial Services in Bahrain External Communication Unit Capital Markets Supervision Directorate Quality Assurance / Internal Auditor Director Insurance Directorate Executive Director Financial Institutions Supervision Executive Director Corporate Services Executive Director Banking Operations Executive Director Banking Supervision Licensing & Policy Directorate Financial Stability Directorate Director Inspection Directorate Director Human Resources & Administration Director Wholesale Banking Supervision Director Islamic Financial Institutions Director Reserve Management Director Financial Institutions Supervision Director Currency Issue Director Banking Services Director Retail Banking Supervision The Deputy Governor Director Compliance Directorate Director Accounts Director Information Technology Board of Directors Legal Unit The Governor CBB Organizational Structure

Section 1 : Financial Services in Bahrain: 

Section 1 : Financial Services in Bahrain

Section 1 : Financial Services in Bahrain: 

Section 1 : Financial Services in Bahrain BAHRAIN BOURSE (Formerly Bahrain Stock Exchange (BSE)) - the country’s first securities exchange established in 1987, that commenced operations in ‘89 Bahrain Bourse’s (BSE’s) Objectives Seek to develop the securities market in issuing & trading Develop & rationalize trading methods at the exchange Establish and promote ties and links with other Arab and international security exchange market Ensure saving & further citizens investment awareness Oversee the organization & regulation of securities trading on the market Provide the necessary finance for supporting the requirements of economic & social development

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Section 2 Financial Adviser – Roles and Responsibilities

Section 2 : Financial Adviser – Roles & Responsibilities: 

Section 2 : Financial Adviser – Roles & Responsibilities Financial Advisers / Financial Consultant - as defined by CBB “a person who performs the function of arranging deals (on behalf of the client) in financial instruments, and/or advising a client of financial instruments - contemporary job titles for what used to be called stockbroker, broker, account executive or registered representative - aims to help individuals achieve their financial goals by offering the appropriate products/services CBB Requirements to be recognized as FA/FC (Financial Intermediaries) - license to be secured from CBB - should adhere to specific standards of conduct - individuals undertaking controlled function should passed the Training & Competence Module

Section 2 : Financial Adviser – Roles & Responsibilities: 

Section 2 : Financial Adviser – Roles & Responsibilities Role of Financial Adviser - help client understand their current circumstances & their future goals - charting a course towards the achievement of those goals - act in good faith - with due skill and diligence in all dealings with the client

Section 2 : Financial Adviser – Roles & Responsibilities: 

Section 2 : Financial Adviser – Roles & Responsibilities THE FINANCIAL ADVISER & CLIENT REVIEW CYCLE

Section 2 : Financial Adviser – Roles & Responsibilities: 

Section 2 : Financial Adviser – Roles & Responsibilities Financial Adviser Responsibilities Communication with clients - fair, clear, & not misleading - services, cost are well-explained - rationale behind recommendation is sound, adequately addressed & meets the clients needs & requirements - potential risk & loss are explained thoroughly Relationship with client - fiduciary responsibility to act in the best interest of the client Information to client - sufficient information should be provided to the client Conflict of Interest - ensure that there is no conflict of interest between financial adviser and the client. Any conflict should be disclosed Professional integrity

Section 2 : Financial Adviser – Roles & Responsibilities: 

Section 2 : Financial Adviser – Roles & Responsibilities PRINCIPLES OF BUSINESS ISSUED BY CBB RULEBOOK 4 Refer to the handout Discussion

Chapter 2 – Sections 1 & 2: 

Chapter 2 – Sections 1 & 2 Review Questions – Please refer to the end of the Sections in the FAP Manual Clarifications

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Section 3 Financial Planning and Advisory Process

Section 3 : Financial Planning & Advisory Process: 

Section 3 : Financial Planning & Advisory Process

Section 3 : Financial Planning & Advisory Process: 

Section 3 : Financial Planning & Advisory Process Collect Data Personal Data Net Worth & Budget available for investment

Section 3 : Financial Planning & Advisory Process: 

Section 3 : Financial Planning & Advisory Process Identify Goals & Objectives - Help an individual meet financial objectives - Objective should be more specific

Section 3 : Financial Planning & Advisory Process: 

Section 3 : Financial Planning & Advisory Process Assess Capacity & Constraints - Evaluating the strengths & weakness of the client - Form a realistic picture of his career & earning potential Categories to consider in assessing capacity & constraints - Safety of principal - Income - Growth of capital

Section 3 : Financial Planning & Advisory Process: 

Section 3 : Financial Planning & Advisory Process Life Cycle Analysis / Stages Establishing Career Career Growth Pre-retirement Post-retirement - 25 to 35 years - Building a career - Focus on bank savings & minor investment - 35 to 50 years - Priority towards family - Income/savings level usually increase - 50 to 60 years - Safeguarding capital becomes important - over 60 years - Limited opportunity for employment - Provide low risk investment solutions

Section 3 : Financial Planning & Advisory Process: 

Section 3 : Financial Planning & Advisory Process Discuss & Develop Plan - Regular consultation will assure clients that financial adviser works for their welfare - Stay up-to-date with client’s financial decisions - Financial plan must be simple & easy to implement and maintain - May require additional inputs of other professional such as lawyers & accountants Financial Plan Outline - Clients goals and objectives - Financial Adviser’s recommendation - List of preferred investments options

Section 3 : Financial Planning & Advisory Process: 

Section 3 : Financial Planning & Advisory Process Implementation & Review - Timeline - Client’s approval (including changes) - Review periodically (revised quarterly/annually) - Under extreme circumstances, the necessity to revise the plan complete can take place

Chapter 1 – Section 3 : 

Chapter 1 – Section 3 Review Questions – Please refer to the end of the Sections in the FAP Manual Clarifications

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Section 4 Risk Assessment and Investment Rationale

Section 4 : Risk Assessment & Investment Rationale: 

Section 4 : Risk Assessment & Investment Rationale Risk / Return Diagram Return Risk Return – ratio of money gained or lost in an investment relative to the amount of money invested Risk – The possibility that the actual return on an investment will be different from its expected return Note: The riskier the investment, the higher the premium, hence higher the expected rate of return. Diversification – a technique wherein an investor constructs a portfolio of various instrument in attempt to reduce risk.

Section 4 : Risk Assessment & Investment Rationale: 

Section 4 : Risk Assessment & Investment Rationale Common Measures of Risk & Return Standard Deviation - statistical concept that captures the deviation from the expected value Beta - measures the riskiness of the security in terms of its contribution to the riskiness of an investment portfolio as a whole. Correlation - measures how two variables moves in relation to each other Covariance - statistical measure that captures the extent to which two random variables vary together

Section 4 : Risk Assessment & Investment Rationale: 

Section 4 : Risk Assessment & Investment Rationale Investment Objectives Steady Income - to have steady & stable income stream from reliable investment. Focus on protection rather than returns Income & Growth - strike balance between debt & equity. Debt generate steady returns while equity offer possibility of capital growth Moderate Growth - objective is wealth accumulation over a long period Growth - higher returns is the objective

Section 4 : Risk Assessment & Investment Rationale: 

Section 4 : Risk Assessment & Investment Rationale Matching Investment Objectives with Assets Class OBJECTIVE ASSET CLASS RETURN PROFILE Capital Preservation Cash / selective fixed income Guaranteed and fixed income Steady Income Fixed income Interest income on regular basis Income & Growth Fixed income (50%), Equity (40%), Alternatives (10%) Interest income, dividend income & capital gain Growth Equity (70%), Fixed income (15%), Alternatives (15%) Capital gain, dividend income, interest income

Section 4 : Risk Assessment & Investment Rationale: 

Section 4 : Risk Assessment & Investment Rationale Assets Allocation – involves determining the optimal diversification of an investor’s capital among different asset classes. - final stage of identifying suitable instrument within each class.

Section 4 : Risk Assessment & Investment Rationale: 

Section 4 : Risk Assessment & Investment Rationale S. No INSTRUMENT TYPE ALLOCATION 1 BGR Global Balanced Fund Equity 15% 2 Fidelity Asia Focus Fund Equity 14% 3 Templeton BRIC Fund Equity 10% 4 Bahrain Duty Free Equity 5% 5 Microsoft Equity 3% 6 Disney Equity 3% 7 Templeton Global Bond Fund Fl 15% 8 Abu Dhabi Electric (Taqa) Series maturing 2014 Fl 10% 9 CBB Sukuks – Due 2015 Fl 10% 10 Templeton Emerging Markets Bond Fund Fl 5% 11 US Treasuries Fl 5% 12 Blackrock Commodities Fund Alt 5% Total 100% Asset Allocation, Seeking Income & Growth

Chapter 1 – Section 4 : 

Chapter 1 – Section 4 Review Questions – Please refer to the end of the Sections in the FAP Manual Clarifications Sigma as a measurement of risk and the Empirical Rule

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Section 5 Products

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CASH Life Insurance Health Insurance Motor Insurance Critical Illness Insurance Home Insurance Travel Insurance Endowment Policies Real Estate Asset Backed Securities Derivatives Commodities Preferred Shares Ordinary Shares FIXED INCOME EQUITIES ALTERNATIVES INSURANCE Money Market Instruments Debentures Bonds Chequing account Notes & Coins Fixed Deposits FINANCIAL PRODUCTS Section 5 : Financial Products

Section 5: Financial Products - FIXED INCOME: 

Section 5: Financial Products - FIXED INCOME TYPICAL FIXED INCOME FEATURES Issuer of the bond – Corporate body of institution Face value of the bond – (Principal value of the bond) amount of money the bond holder will receive on maturity date Coupon or interest rates – Interest amount the issuer pays to the bond holder (coupon). Maturity of the principal/repayment date – Date on which the bond holder will receive the repayment on the bonds Security or collateral – Guarantee on the bond issued usually charge on the fixed assets of the issuer Rating of a bond – Helps the investor to know the bond’s credit risk

Section 5: Financial Products - FIXED INCOME: 

Section 5: Financial Products - FIXED INCOME MONEY MARKET INSTRUMENTS TREASURY BILLS (T-BILLS) - Short term government obligations - Used as monetary policy instrument by central banks worldwide COMMERCIAL PAPER - Corporation short-term financing - Backby access to a line of credit with bank - Yields is generally higher compared to T-bills BANKER’S ACCEPTANCE - Short-term debt instrument issued by corporations - Back by bank guarantees (BANKERS ACCEPTANCE (BA)) - Primarily issued to finance domestic/ international trade - Letter of Credit (LC’s), Manager’s cheque are the common example.

Section 5: Financial Products - EQUITIES: 

Section 5: Financial Products - EQUITIES EQUITY Capital acquisition by corporation thru shares issued. Shareholders are the investors in the corporation who buys a share in the company SHAREHOLDER’S RIGHTS Right to receive share certificate as proof of ownership Right to transfer their shares Right to inspect certain books & records of the company Right to attend & vote at the general assembly of the company

TYPES OF SHARES: 

TYPES OF SHARES Ordinary Shares – Represented by a physical share certificate issued to the investor Preferred Shares – Carry privilege right to receive a dividend over common (ordinary) shareholders. Section 5: Financial Products - EQUITIES

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ORDINARY SHARES PREFERRED SHARES VOTING RIGHT DIVIDEND DISTRIBUTION CLAIM ON ASSETS CAPITAL APPRECIATION Carry the right to vote at shareholder’s meeting Right to vote on resolutions affecting their interest Variable and uncertain depends on the profitability of the corporate Fixed and must be paid before any dividend is paid to ordinary shareholders In winding up they rank last in the list of priority Holds a higher priority in obtaining the company’s remaining assets in the winding up situation Value of shares can increase substantially Tends to stay relatively fixed ORDINARY / PREFERRED COMPARE Section 5: Financial Products - EQUITIES

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EQUITY DEBT 1. OWNERSHIP 2. RETURN 3. MANAGEMENT PARTICIPATION 4. RIGHT TO INCOME 5. REPAYMENT 6. SECURITY 7. INSOLVENCY PRIORITIZATION EQUITY / DEBT COMPARE Grants ownership to the holder Higher return, capital appreciation on sale Fixed return and capital value is fixed to the level of original investment Right to participate and vote at general assembly meetings/ Executive general meeting No right to participate unless nature of the resolution affects their interest Right to receive dividend The rate of return is fixed and not based on company’s profitability Repaid only on liquidation Repaid on maturity date Unsecured Secured/unsecured. However, security is charged on the assets of the issuer. Rank subservient to debt & last in the order of priority for repayment Generally high in the priority for repayment ranks superior to equity holder Does not grant ownership, only obligation to recognize by the corporate Section 5: Financial Products - EQUITIES

Section 5: Financial Products - ALTERNATIVES: 

DERIVATIVES - financial instrument whose value depends on the value of basic underlying assets - has no value of their own as they are value from another asset, index, or reference rate - TYPES: Options & Forwards ASSET-BACKED SECURITIES (ABS) - securities that is supported by assets such as credit card receivables or car loans. Section 5: Financial Products - ALTERNATIVES

Section 5: Financial Products - ALTERNATIVES: 

REAL ESTATE - investing funds in developing real estates - investing in mutual funds that finance real estate development COMMODITIES - risky though the returns can be higher compare to other investments. - prices fluctuate based on the demand & supply in the global markets - commodities such as gold, silver, crude oil, & natural gas, aluminum Section 5: Financial Products - ALTERNATIVES

INVESTMENT VEHICLES: 

INVESTMENT VEHICLES Hedge Funds - usually sued by wealthy individuals and institutions - allowed to use aggressive investment strategies such as, - leverage - long-shot strategies - derivatives - exempted from many rules & regulations governing mutual funds Mutual Funds - fund that pools the savings of a number of investors who share a common financial goal - investment are placed in capital market instrument - income earned are shared by its holders in proportion to the number of units owned by them Section 5: Financial Products - ALTERNATIVES

MUTUAL FUND FLOW: 

MUTUAL FUND FLOW Pool their money Generate Passed back to Invest Section 5: Financial Products - ALTERNATIVES

MUTUAL FUND: 

MUTUAL FUND Profession Management Diversification Low Cost Liquidity Transparency Limited risk Dividend Schemes of Mutual Fund Dividend Pay-out option – dividends is passed on to the investors Growth Option – earnings is reinvested aiming for higher return due to capital growth Advantages of Investing in Mutual Funds Section 5: Financial Products - ALTERNATIVES

Section 5: Financial Products - INSURANCE: 

Insurance Products - are designed to mitigate risk - taken to protect the insured party from the effects of an unforeseeable incident INSURANCE PRODUCTS LIFE INSURANCE NON-LIFE INSURANCE LIFE INSURANCE CRITICAL ILLNESS INSURANCE HEALTH INSURANCE ENDOWMENT POLICY TRAVEL INSURANCE HOME INSURANCE MOTOR INSURANCE Section 5: Financial Products - INSURANCE

LIFE INSURANCE: 

LIFE INSURANCE Life Insurance provides a measure of financial security for people who are financially dependent on the insured. Types of Policy: Family income benefit Increasing policy Decreasing policy Renewable policy

LIFE INSURANCE: 

LIFE INSURANCE Health Insurance covers the expenses incurred for medical treatment financial protection usually taken by the employer for employees in case of illness or accident

LIFE INSURANCE: 

LIFE INSURANCE Critical Illness Insurance pays a lump sum upon diagnosis of certain life-threatening or debilitating condition

NON LIFE INSURANCE: 

NON LIFE INSURANCE Motor Insurance covers some of all of the cost to repair damage to vehicles & injury to parties involved in an accident. Level of Coverage: Third party Third party, fire, and theft Comprehensive

NON LIFE INSURANCE: 

NON LIFE INSURANCE Travel Insurance – financial protection in case of sudden illness, accident, or loss of personal belongings while traveling abroad – business / vacation

NON LIFE INSURANCE: 

NON LIFE INSURANCE Home Insurance - Covers home and dwellings - Protection from losses arising due to fire, theft, storm, flood, & earthquakes.

NON LIFE INSURANCE: 

NON LIFE INSURANCE ENDOWMENT POLICIES – investment plan that is payable monthly wherein investments are placed in shares or bonds. TYPES OF ENDOWMENT POLICY: Non-profit endowment - insurance company pay a fixed amount in return for a fixed amount of premiums over a set periods. With profit endowment – long term investment that grows through adding bonuses - Annual Bonus – The insurance company decide the amount of annual bonus and will add to the policy - Final Bonus – Calculated when policy matures & used to top up the value of the policy Low-cost endowment – Combination of an endowment with estimated future growth rate that meet a target amount and reduce life insurance element. Unit-linked endowment – premiums are used to purchase units in one or more of the insurer’s investment funds

Chapter 1 – Section 5 : 

Chapter 1 – Section 5 Review Questions – Please refer to the end of the Sections in the FAP Manual Clarifications Refer to Appendix – Application of Concepts – Chapter 1