Investment Sight

A staggered system that is a bureaucratic nightmare

The fact that securities are staggered in the way that they are liquidated means that those who manage them will face a number of challenges. Central government has traditionally expressed an interest in regulating the payments that accrue from securities. The first area of concern is security in general with specific reference to anti money laundering arrangements.

The second issue is the desire on the part of the government to tax some of these revenues. There are specific challenges that will affect the investor, the investment manager and the overseeing authority. Government almost always sets up a regulatory body whose main focus will be to ensure that these revenues do not escape the tax regime. This article aims to highlight some of the important themes for all the stakeholders.

The investor

The first duty of the investor is to ensure that they are complying with the letter of the law. Normally the financial advisers will have some input as to how the process is managed but they will tend to forget certain things. If you are not a pro-active investor, you may end up falling foul of the regulatory system. It does not take much to miss the detail that will put you on the wrong side of the rules. As I said before the securities market can be very complicated for the investor and it is very easy to make a catastrophic mistake.

One of the contentious issues for investors is whether to declare income. They will know from experience that once you declare income, the government will try to inflate revenue in order to expand the tax bill. Thus the temptation to hide everything and hope for the best. This is a very dangerous strategy because if you are found out, the government will give you the mother of all fines and you might end up losing your investment. It is far better to have your securities portfolio in the squeaky clean corner than to face punitive measures.

The investment manager

The company that is advising clients on the purchase of securities has to be clear on what the latest procedures are. I know that from time to time the government will alter the regulatory framework for the securities industry and the results might take a long time to trickle down to the investors themselves. It is therefore up to the fund manager to do some pro active work by way of examining what the government has put out. This could even be on a daily basis.

The fee that the investors pay should include the proviso that the fund manager is responsible for doing the appropriate research and feeding back to the relevant parties. I sometimes wish there were liability clauses that would ensure the compliance of fund managers with this requirement. The stock exchange is also included in the fund manager in as much as it has a coordinating role. It also liaises with the government in terms of the implementation of any agreed protocols. Where the investor is absent, the stock exchange can represent them.