Examiners’ commentaries

October–November 2020

LWM80 Corporate governance and compliance

Comments on specific questions

Module A: Governance – legal and regulatory framework
Question 1
Describe key benefits of having independent directors
on the board of directors, as well as limitations that
independent directors face. In your response, you
should refer to arguments articulated in various
corporate codes and reports mentioned in the Study
Guide and essential reading materials.
The answer to this question can be found in Section 4.4 of the
Study Guide. This Section expressly lists the benefits of having
independent directors on the board, as well as some of the
limitations that independent directors face. Moreover, it references
the way in which the view towards independent directors is
articulated in the Cadbury Report, the OECD Principles of
Corporate Governance, the UK Corporate Governance Code and the
New York Stock Exchange Manual.

Question 2
‘The effectiveness and credibility of the entire corporate
governance system and company oversight will, to a
large extent, depend on institutional investors that can
make informed use of their shareholder rights and
effectively exercise their ownership functions in
companies in which they invest.’
Discuss by reference to the UK Stewardship Code and
the ICGN Global Stewardship Principles.
The UK Stewardship Code sets out the principles of effective
stewardship by investors in a company, who also play an important
role in holding the board to account for the fulfilment of its
responsibilities. A good answer should critically discuss the core
principles of the Code, which state that institutional investors
should:
i. publicly disclose their policy on how they will discharge their
stewardship responsibilities;
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ii. have a robust policy on managing conflicts of interest in

relation to stewardship which should be publicly disclosed;
iii. monitor their investee companies;
iv. establish clear guidelines on when and how they will
escalate their stewardship activities;
v. be willing to act collectively with other investors where
appropriate;
vi. have a clear policy on voting and disclosure of voting
activity; and
vii. report periodically on their stewardship and voting activities.
In addition, the answer should then compare these principles with
those of the ICGN Global Stewardship Principles, which state that:
1. Investors should keep under review their own governance
practices to ensure consistency with the aims of national
requirements and the ICGN Global Stewardship Principles
and their ability to serve as fiduciary agents for their
beneficiaries or clients.
2. Investors should commit to developing and implementing
stewardship policies which outline the scope of their
responsible investment practices.
3. Investors should exercise diligence in monitoring companies
held in investment portfolios and in assessing new
companies for investment.
4. Investors should engage with investee companies with the
aim of preserving or enhancing value on behalf of
beneficiaries or clients and should be prepared to collaborate
with other investors to communicate areas of concern.
5. Investors with voting rights should seek to vote shares held
and make informed and independent voting decisions,
applying due care, diligence and judgement across their
entire portfolio in the interests of beneficiaries or clients.
6. Investors should promote the long-term performance and
sustainable success of companies and should integrate
material environmental, social and governance (ESG) factors
in stewardship activities.
7. Investors should publicly disclose their stewardship policies
and activities and report to beneficiaries or clients on how
they have been implemented so as to be fully accountable for
the effective delivery of their duties.

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 Examiners’ commentaries — October–November 2020

Module B: Compliance

Question 1
Critically discuss the key advantages and disadvantages
of self-reporting and the factors that companies should
consider in deciding whether or not to self-report.
The answer to this question can be found in Section 5.6 of the
Study Guide. In the answer, candidates should have identified the
following advantages of self-disclosure:
- More lenient treatment by regulators/prosecutors, albeit it is
not guaranteed. In your response, you should have
mentioned the OECD’s and SFO’s view on the
appropriateness of a more lenient treatment as a result of
self-disclosure.
- Company can retain a degree of control.
- Perception of acting ethically.
With respect to disadvantages of self-disclosure, in your answer you
should have indicated that:
- The government may never find out about the misconduct.
- Possible triggering of disclosure requirements for listed
companies.
- No defence for those individuals actually involved in
corruption.
Good responses would have mentioned OECD’s and SFO’s views on
self-reporting, as well as examples of settlements, which resulted in
more lenient treatment from the authorities (see Section 5.6.3 of
the Study Guide).

Question 2
Critically discuss the following:
(i) definition of the term “whistleblower”,
(ii) key pieces of whistleblowing legislation in the UK,
and
(iii) key provisions that a whistleblowing policy should
contain.
This was quite a straightforward question, the answer to which can
be found in Section 2.4 of the Study Guide and the accompanying
reading materials.
A whistleblower is someone who has personal knowledge of
misconduct within an organisation and who voluntarily comes
forward.
In the UK, the Public Interest Disclosure Act 1998 is the key piece of
whistleblowing legislation.
Key elements of an effective whistleblower policy are laid out in
response to Activity 2.2 of the Study Guide.

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Module C: Bribery and corruption, money laundering and

terror financing
Question 1
Critically discuss the purpose and key requirements of
the UK Money Laundering Regulations.
This was a very straightforward question, the answer to which can
be found in Section 3.3 of the Study Guide. Specifically, in 2017,
the Money Laundering, Terrorist Financing and Transfer of Funds
(Information on the Payer) Regulations (SI 2017/692) (the
Regulations) came into force, transposing the Fourth EU Money
Laundering Directive into UK law. In the answer, candidates should
have highlighted key requirements of the Regulations, together
with the key features from the HM Treasury’s consultation paper on
the transposition of the Fifth EU Money Laundering Directive and,
given that the question asked you to ‘critically discuss’, a good
answer would have discussed candidates’ own views on the
effectiveness of some of these provisions.

Question 2
Critically discuss principal offences (including tipping
off) and their defences under the Terrorism Act 2000.
The principal offences under the Terrorism Act 2000 are:
(i) fundraising for the purposes of terrorism, (ii) using or possessing
money or other property for the purposes of terrorism,
(iii) involvement in funding arrangements, and (iv) money
laundering – facilitating the retention or control of money which is
destined for, or is the proceeds of, terrorism.
The Act defines terrorism as the use or threat of serious violence or
other specified action to persons or property which is designed to
influence a government or an international governmental
organisation or to intimidate a section of the public for the purpose
of advancing a political, religious or ideological cause.
All of these, as well as the defences, are described in detail in
Section 4.2 of the Study Guide.
Just as in the case of Question 1, most candidates got the factual
part right, but not many went beyond the regurgitation of facts and
provided a critical analysis, which should have touched upon the
civil liberties groups’ arguments.

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 Examiners’ commentaries — October–November 2020

Module D: Regulated industries – compliance and risk

management in the financial sector
Question 1
Describe characteristics of an effective information
barrier regime within financial institutions and some of
the challenging issues that arise in practice in the
context of information barriers.
The answer to this question can be found in the Study Guide and
the ASIC v Citigroup case. This case outlines the following key
aspects of an effective information barriers policy:
• physical separation by departments
• educational programmes (that are regularly repeated)
• procedures for dealing with ‘crossing the information
barriers’
• monitoring by compliance officers
• disciplinary sanctions for breaching the information barrier
restrictions.
The challenging issues are described in Section 3.5.3 of the Study
Guide.

Question 2
Critically discuss the advantages and disadvantages of
open banking.
This question falls squarely within the learning outcomes and is
addressed in Section 4.4 of the Study Guide, as well as Activity 4.3.
Essentially, open banking complements the rules under the second
Payment Services Directive (PSD2) – that require banks, building
societies and other financial providers to let customers easily and
securely share their financial data, including transaction history and
spending behaviour with other banks and regulated third-party
providers. The aim is to encourage innovation and improve
competition, by making it easier for customers to hold multiple
accounts and compare or switch financial products.
Ultimately, it could allow customers to manage all of their financial
accounts and household bills through a single digital platform, with
the option of allowing apps to ‘plug in’ and offer more personalised
and intuitive services. For example, an app might help customers
avoid charges or boost their savings by automatically moving
money between various accounts. Open banking could also spur
action in other markets, by encouraging customers to look at their
energy or phone bills.
One key benefit of open banking Application Programming
Interfaces (APIs) is that customers can authorise third-party access
without having to reveal their login details to anyone other than
their bank. Sharing data via APIs is also more secure than screen-
scraping because customers know exactly what information is being
shared and can more easily revoke access.

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On the other hand, however, transfer of banking data to third-party

developers could raise concerns regarding data use, especially if
this data is monetised through onward sales. With the rise in cyber
threats and crime and when software/application is available for
free, it will be crucial to first check the authenticity of the software
before allowing it to connect to one’s banking information.
With multiple financial service providers, there will likely come a
point of saturation, where banks and financial institutions will have
to introduce innovative and unique services as differentiating factor
from competitors.