Capital markets are venues where financial securities and assets are bought and sold. Capital markets include both the primary market and the second market where existing securities are traded. Stocks and bonds are example of financial products and financial instruments that are part of capital markets.
Different players evolve within capital markets. One of them includes Fund Management Companies. In Singapore, Fund Management Companies are regulated under MAS (Monetary Authority of Singapore). Such funds must comply with the authority's regulation to protect themselves and their customers.
As such it is essential for companies to protect not only their employees, but also their long-term stability by covering themselves with the adequate insurance policy.
In this article, we will further develop the way Fund Management Companies evolve within Capital Markets. We will also go over the importance of Professional Indemnity in this field.
How do Fund Management Companies manage their Clients?
There are two methods that funds adopt to adequately manage their clients. The first method is through Managed Account set-up and the second one through Fund Vehicle set-up.
Managed Account set-up:
This is a fund management method that is usually preferred by Fund Management Companies.
This method enables funds managing many clients with differing strategies to maintain discretion over these separate accounts. The same method applies when dealing with clients that have different risk appetites and product preferences.
As such, fund managers must obtain a Limited Power of Attorney (“LPOA”) on an investor’s bank account. Besides, the LPOA is usually subject to the bank’s terms and conditions.
Fund Vehicle set-up:
This method is especially useful when a Fund Management Company has numerous investors with similar investment strategies and risk appetites. In this case, the managed account mechanism becomes expensive as each trade is made on each account and increases transaction costs.
As an alternative, an FMC may set up a pooling vehicle to gather all its investors. This pooling vehicle is known as a fund vehicle. It allows fund managers to trade on behalf of their underlying investors with similar interests as one large joint account. This method reduces the number of transactions made and help better allocating the fund's risk management across its base of investors.
Because risk is inherent to financial markets, mistakes such as misleading statements, defamation, dishonesty of employees can always happen.
As such, capital market players are required to cover themselves with a Professional Indemnity insurance. The policy may include various limits depending on the type of financial advisory services provided.
The importance of Professional Indemnity
Professional Indemnity is an insurance that protects professionals from bearing the cost of an action resulting from a negligence.
Professional Indemnity covers professional liability such as any actual or alleged breach of duty, negligent act, error or omission. A breach of duty occurs when a professional fails in a duty of care to its client, by making a mistake or offering a wrong advice.
This type of insurance also protects you in case of misleading statements and breach of confidentiality. All these incidents may occur in the performance of or failure to perform a professional service. Other factors such as the loss of documents, dishonesty of employees, defamation, defense costs and Intellectual property rights infringement may be included in this type of policy.
Similar to personal accidents covered by health insurance or life insurance policies, Professional indemnity protects capital market players by lowering their practice-related risk.
How can BLACAZ. help you?
Savings and investments poured into mutual funds are always subject to short term and long-term risks when invested in capital markets. If you provide professional advice or services as an individual or a company you are exposing yourself to many risks. Such risks include the risk of bearing the cost of a legal action as previously mentioned. Thus, professional indemnity is crucial when it comes to mitigating risk.
Opting for a Professional Indemnity insurance will protect your reputation, finances and clients. BLACAZ's unique knowledge of the international insurance landscape guarantees the most relevant risk protection anytime and anywhere. As an insurance intermediary, BLACAZ offers unique solutions for corporations in their insurance portfolio audit, structuring and management.
Contact us today to get our assessment of your situation. Our team will help you secure the best Professional Indemnity solution and walk you through the various policies available.