CISI Education Trust Award and Corporate Finance Technical Foundations Module Assignment

What is the CISI Education Trust Award?

The CISI Education Trust Award
Each year the CISI asks us to nominate one of the students on the Corporate Finance Technical Foundations module for the CISI Education Trust Award. This year we will choose our nominated student as follows: Students with the best grades will be invited to an interview, with me and another colleague. In the interview we will ask you some questions on your assignment report, and some further questions on a selected topic of current interest. Candidates will be given the selected topic around a week before the interviews. Our nominated student will be the one who performs best in the interview.

 

What the assignment is about
In the CFTF module there is a strong emphasis on employability. As a finance professional you should have an intelligent and informed view on important things that are going on in finance, the global economy, politics, and, in particular, on professional ethics, financial regulation, sustainability,  and the role of professional bodies. This assignment gives you the opportunity to go through the process of thinking through and developing your own intelligent and informed views on financial regulation, business ethics, and the role of professional bodies such as the CISI and CFA.

 

Employability
In the CFTF module there is a strong emphasis on employability. Employers tell us that graduates are very good on academic material. However, in interviews, when they are asked to give their opinions on what is going on in the real world they are often unprepared. One of the aims of the assignment is to help you to be well-prepared when discussing real world issues related to financial regulation, business ethics, and the role of professional bodies.

Requirement of the assignment
Write an essay of 1,500 words on selected important issues in financial regulation, business ethics, sustainability, and the role of professional bodies in the financial services sector. 

It is important that you read the rest of this assignment for guidance on how you should go about addressing these issues.

 

Some background
This section is based on lecture video How to Study for your Corporate Finance Technical Foundations module in Topic 1 on the Moodle page. Please review this material when going through this section of the assignment.

 

The decades leading up to the financial crisis of 2008 saw a decline in standards of ethical conduct in finance and banking. Some commentators date this from as far back as the ‘leveraging of corporate America’ during the 1980s.

What is the Corporate Finance Technical Foundations Module Assignment About?

 

Typical of this unethical behaviour was the conduct of banks and other financial institutions in the US sub-prime market. A NINJA loan was a mortgage advanced to someone with No Income, No Assets and No Job. These loans were originated by unscrupulous salespersons to poor Americans who had virtually no chance of maintaining payments on the loan. Many of the sub-prime sellers were themselves people with few qualifications or job prospects. They saw it as their first opportunity to have a ‘proper’ career type job in the prestigious field of finance.

 

The banks lending the money charged low interest rates for the first couple of years, after which the rate would rise to levels that many borrowers would be unable to service.

 

Not wanting to be stuck with these loans on their books when they went sour, the banks re-packaged the loans into mortgage-backed bonds. For example, a bond issue might be backed by 10,000 mortgages; the interest on the mortgages was passed through to the bond-holders.

Bond rating agencies rated these toxic bonds AAA. A loop-hole in the regulations made this possible, provided the bond also contained a ‘sufficiently large’ proportion of genuine AAA securities. Bond rating agencies are paid by the bond issuer, in this case the banks issuing the toxic debt instruments.

These bonds were sold to other banks, pension funds, and insurance companies around the world, including to Japanese, Asian, UK, US and European institutions.

 

The NINJA borrowers were not always innocent victims either. This was a period in which the residential property market in the US was in a bubble. Many NINJA borrowers reasoned as follows: If the housing market doesn’t crash, in two years time the house I bought for $150,000 I can sell for $300,000. If the market does crash I’ll have nothing, but I already have nothing, so why not take the chance?

 

Other causes of the 2008 crisis
Neo-classical economics has dominated academic and professional economics and finance at least since the 1980s. It has always been one of the central theoretical frameworks in economics, and is still the dominant theory today.

The central assumption of neo-classical economics is a theory of human nature, namely, that a human being is essentially a rational self-interested decision maker. This is the so-called homo economicus model.

 

There are many other theories of human nature, including from disciplines such as psychology, sociology, anthropology, philosophy and theology, for example, as in Islamic economics and other faith-based economic theories. However, neo-classical economics remains by far the most wide-spread and influential framework in economics.

What is the Importance of Employability in CFTF Module?

 

It has been suggested that teaching economics students that the key to living a good life is to be a rational self-interested economic decision maker is not necessarily going to be a great help in maintaining high standards of ethical behaviour in the economics and finance professions.

Neo-classical economists have exerted immense influence, not only in the academy, but also in corporations, banks and government. The great waves of de-regulation since the 1980s were justified by neoclassical economists on the grounds that rational self-interested economic agents do not need regulators to protect them. They should be smart enough to look after themselves.

 

The response of governments and regulators to the financial crisis – Organisations such as the Chartered Institute for Securities and Investment, CISI, have been around since long before the 2008 crisis. However, since the financial crisis they have come into far greater prominence.

One of the responses of governments and regulators to the crisis has been to move towards making finance into a profession, with high standards of professional competence, honesty and integrity set by, maintained and enforced by mandated professional bodies. There are now statutory obligations for practitioners in finance to hold the professional finance qualifications relevant to their job role, both in the UK and throughout the world.

 

A long term aim of such professional bodies is to change the culture of the finance industry in order that it may better serve the needs of society.

 

Further guidance on assignment requirements

There is no one correct answer
There is no one correct answer. In particular, you do not have to agree with the remarks in the preceding sections. More than that, there are zero marks to be gained by agreeing with the above remarks or agreeing with what you think the lecturer thinks. For example, you may write an essay in support of the neo-classical economics world view. You may argue that free markets should be left to themselves. For example, you may argue that if people want professional bodies the free market will deliver them without any interference from governments.

 

At the other extreme, you may take the view that it is obvious that government mandated professional bodies and professional ethical standards are a good thing, so obvious that you do not need to argue for it, and focus your discussion on the practical problems of developing and implementing these standards.

Requirement of the Assignment

Your essay should be forward looking
You should give some brief background on how you think we got where we are today. You should also spend some time discussing the current situation. However, the main focus of your essay should be forward looking. This is the part that gives you the most scope for critical discussion. Here you can address questions such as; how are regulations, business ethics, and the role of professional bodies developing? How do you think things should be developing? What are the challenges and opportunities for the future? 

 

Critical discussion
The high grades are for critical discussion. Critical discussion means that you back up the claims you are making with arguments and evidence. This is what we mean by developing an intelligent and well-informed view. You have thought through the issues, you have decided what you think are the most important issues, you have worked out what you think about these issues, and you can back up your opinions with good arguments and evidence, and you have good arguments and evidence against opposing positions.

Take a critical approach to the role of professional bodies as well
Do not make your essay a marketing document for professional finance bodies. There are a number of criticisms of professional bodies. For example, some claim that professional bodies, at least to some extent, act in the interests of their members, rather than in the interests of society. For example, the requirement to hold professional qualifications puts up barriers to entry into the profession, and helps to maintain the high salaries of existing members. Other critics claim that professional bodies add further layers of unnecessary regulation, which adversely affects economic growth. In other words, be critical, and support your claims with arguments and evidence.

Take an international/global approach
Some useful sites are the CISI online resources you will have access to as a student member. Also, other websites, such as the CFA website and the website of the Financial Conduct Authority, the UK’s main financial regulatory body, may be useful.

But don’t just take a UK focus. Professional bodies such as CISI and CFA are global, and their ethical standards are promoted by these bodies round the world. So don’t make your essay just about the UK.

 

So what is the purpose of this assignment?
The point of the assignment is for you to go through the process of identifying and thinking through what you consider to be the most important issues, and to form your own intelligent and informed point of view.

 

A distinction level answer is one that demonstrates that you could hold an intelligent and informed discussion with a financial professional, regulator, government official, or informed member of the public.

 

It is part of the professional development of every financial professional to go through this process, and to hold an informed opinion on what you consider to be the essential issues on financial regulation, business ethics, and the role of professional bodies in the financial services sector.