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Section 1 & 2

– All banks operate under the Bank Act, which is typically revised every decade

– Banks are designated as Schedule I, Schedule II, or Schedule III, each

designation having its own unique rules

oSchedule I banks are the “giants”, there are 22 in Canada

6 of them (RBC, CIBC, BMO, Scotia, TD, National Bank) are far

greater in asset size than any of the other banks in Canada

Most Schedule I banks are expanding their international

operations through acquisitions of other financial institutions

These banks offer services including banking products

(mortgages, loans), financial planning, and wealth management

There are controls over information sharing of different

business units regarding customer information, known as

“Chinese Walls”

oSchedule II banks are incorporated and operate in Canada as federally

regulated foreign bank subsidiaries

They can accept deposits and can engage in all types of

business that a Schedule I bank can partake in

These banks typically get most of their revenue from retail

banking and electronic financial services

Examples include Citibank Canada, AMEX Bank of Canada, and

BNP Paribas

oSchedule III banks are federally regulated foreign bank branches of

foreign institutions that have been authorized to do business in

Canada

These banks tend to focus on corporate and institutional

finance and investment banking

Examples include HSBC Bank, Comerica Bank, and The Bank of

New York Mellon

– Trust companies offer a broad range of financial services which often overlap

services provided by banks

oTrust companies are the only corporations in Canada authorized to

engage in a trust business (to act as a trustee in charge of corporate or

individual assets such as property, stocks, and bonds)

oUnlike banks, they are regulated at a provincial or federal level

– Credit unions and caisses populaires (people’s banks) are member-owned

unions formed from common interest groups that offer the services of a bank

oWere formed because people felt that chartered banks were too profit

oriented

oFinancial services from credit unions are limited to just their members

and cooperative credit societies

– The insurance industry has two main businesses: life insurance and casualty

insurance

oLife insurance includes insurance against loss of life or health (i.e.

health insurance, pension plans, life insurance)

The primary source of a life insurance company’s funds are

premiums on insurance policies, premiums paid for annuities,

interest on policy loans and mortgages, and interest and

dividends on securities and mortgages already owned

oProperty and casualty insurance includes protection against the loss

of property (i.e. home, auto, and business insurance)

The biggest premiums are from automobile insurance

oUnderwriting is the most importance aspect of the insurance industry

in Canada

Underwriting is the business of evaluating the risk a company

is willing to take from a client in exchange for insurance

premiums

oAnother important part of the industry is acting as an agent or

brokers for other underwriters (reinsurance)

oThe Insurance Companies Act is the federal legislation governing

insurance companies

It permits insurance companies to own trust and loan

companies

Also requires insurance companies to adhere to a prudent

portfolio approach

– An investment fund is a company or trust that sells shares (aka units) to the

public and invests the proceeds into a diverse securities portfolio

oClosed-end funds only issues shares at the start up

oOpen-end funds (mutual funds) continually issue shares

– Sales Finance and Consumer Loan Companies make direct cash loans to

consumers who usually repay principal plus interest in installments

Section 3

Federal Regulators

– The Office of the Superintendent of Financial Institutions (OSFI) is a

regulatory body for all federally regulated financial institutions

oThis includes banks, trust and loan companies, credit associations, life

insurance and casualty insurance companies, foreign banks, and

pensions plans

oThey do not regulate the Canadian securities industry

– The Canada Deposit Insurance Corporation (CDIC) is a federal Crown

Corporation that provides deposit insurance and contributes to the stability

of Canada’s financial system

oThey insure deposits up to $100,000 if held with a member institution

in Canada in Canadian currency

oAccounts/products insured by CDIC include savings and chequing

accounts, GICs, money orders, traveler’s cheques, and accounts that

hold realty taxes on mortgaged properties

Provincial Regulators

– Each province has its own security regulator, which together form the

Canadian Securities Administrators (CSA), their mission being to protect

investors from fraudulent practices

– Self-regulatory organizations (SROs) are private industry organizations that

regulate their own members by the provincial regulatory bodies

oSROs include the Investment Industry Regulatory Organization of

Canada (IIROC) and the Mutual Fund Dealers Association (MFDA)

– The IIROC was created through the Investment Dealers Association of Canada

(IDA) and the Market Regulation Services Inc. (RS) to do the following

oFinancial compliance (monitoring dealer members to ensure they

have enough capital to carry their operations)

oBusiness conduct compliance (monitoring dealer members to ensure

policies and procedures are in place to properly supervise the

handling of client accounts)

oRegistration (responsibility for overseeing professional standards and

educational programs designed to maintain a high competency)

oEnforcement (includes responsibility for enforcing the rules and

regulations under the IIROC’s jurisdiction)

oMarket surveillance (real time monitoring of trading activity on stock

exchanges)

– The Canadian Investor Protection Fund (CIPF) was created to protect

investors and oversee the self-regulatory system

oThe fund protects eligible customers in the event of the insolvency of

an IIROC dealer member up to $1M per customer account

oCustomers have 180 days to file a claim with the CIPF

– The MFDA Investor Protection Corporation (MFDA IPC) provides protection

for eligible customers of insolvent MFDA member firms

oThe fund protects eligible customers in the event of the insolvency of

an MFDA member firm up to $1M per customer account

– If a client feels that they have been treated unfairly by a firm that’s a member

of an SRO after discussing the problem with the firm, they can sue the firm or

request arbitration

oArbitration is a method of resolution in which an individual is chosen

to listen to the facts and arguments and make a decision on the

solution

The argument must be attempted to be resolved first

The claim cannot exceed $100,000

oAnother option is the Ombudsman for Banking Services and

Investments (OBSI)

It is an independent organization that investigates consumer

complaints against financial services providers

– The general principle underlying securities legislation is that of fu,, true, and

plain disclosure of all pertinent facts by those offering securities for sale to

the public

oIAs can be registered after taking the CSC and the Conduct and

Practices Handbook (CPH) course, as well as a 90-day training

program and the Wealth Management Essentials Course within 30

months of becoming licensed as an AI

– The National Registration Database (NRD) is a web-based system used by

investment dealers and employees to file registration forms electronically

when applying for approval by any one or more of the stock exchanges, the

CSA, or the IIROC

– Companies are required to release company disclosures including financial

statements, annual information forms, press releases, and insider trading

forms after going public

oTSX Venture companies must release quarterly financial statements

within 60 days and annual financial statements within 120 days

oTSX companies must release quarterly financial statements within 45

days and annual financial statements within 90 days

– A takeover bid is an offer to the shareholders of a company to purchase the

shares of the company that, with the offeror’s already owned securities, will

in total exceed 20% of the outstanding voting securities of the company

oIf successful, the offeror will obtain enough shares to control the

targeted company

oA takeover bid must be sent to all holders in the province of the class

of securities sought

oA press release is typically required after a takeover bid

– An insider is

oA director or senior officer of a company or its subsidiary

oA person or company beneficially owning, directly or indirectly, or

controlling or directing more than 10% of the voting shares

oInsiders are required to file reports of their trading in its securities

Section 4

– Economics the understanding of the choices individuals make and how the

sum of those choices determines what happens in our market economy

oMicroeconomics analyzes the market behaviour of individual

consumers and firms

oMacroeconomics focuses on the performance of the economy as a

whole

oThe three main groups that interact in the economy are consumers,

firms, and governments

– GDP is the market value of all final goods and services produced within a

country in a given time period

oNominal GDP is the dollar value of all goods and services produced in

a given year at the year’s prices

oReal GDP is the dollar value of all goods and services produced in a

given year at prices established in a base year

– Growth in GDP occurs from a variety of factors including:

oIncreases in population over time

oIncrease in the capital stock

oImprovements in technology

– The business cycle has the following stages

oExpansion (inflation is stable, corporate profits are rising, start-ups

outnumber bankruptcies, stock activity is strong, and job creation is

steady

oPeak (demand begins to exceed supply, labour and product shortages

cause wage increases and inflation to rise, interest rates rise and bond

prices fall, stock prices fall and market activity declines)

oContraction (real GDP decreases, firms begin layoffs, business failures

outnumber start-ups, falling employment erodes household income

and confidence, consumers spend less and save more)

oTrough (interest rates fall, triggering a bond rally, inflation falls,

consumers begin to spend more due to lower interest rates, stock

prices rally)

oRecovery (firms increase production to meet new demand, layoffs are

over but new hiring has not begin, unemployment remains high but

wage pressures are restrained)

– Economic indicators are statistics that are used to analyze business

conditions and current economic activity, and are classified as leading,

coincident, or lagging

oLeading indicators include housing starts, manufacturer’s new orders,

commodity prices, average hours worked per week, stock prices, and

the money supply

oCoincident indicators include personal income, GDP, industrial

production, and retail sales

oLagging indicators include unemployment, the inflation rate, business

loans and interest on borrowing, and labour costs

– There are three types of unemployment (unemployed being people looking

for work but can’t find any)

oCyclical unemployment, which is tied directly to the business cycle

oFrictional unemployment, which is the result of people entering and

leaving the workforce

oStructural employment, which is when workers cannot find jobs due

to lacking necessary skills, living in the wrong area, or not finding a

suitable wage rate

oThe minimal level of unemployment is called the natural

unemployment rate, where the economy is operating at near full

potential

– Interest rates represent the cost of borrowing money and are influenced by a

broad range of factors including:

oThe demand and supply in capital

oDefault risk

oForeign interest rates and the exchange rate

oCentral bank credibility

oInflation

– High interest rates raise the cost of capital for business investments,

discourages consumers from spending, and reduce the income available

– Money is any object that is accepted as payment for goods and services, and

that can be used to settle debts

oIt is a medium of exchange

oIt is a unit of account

oIt is a store of value

– Inflation in an economy-wide sense is a sustained trend of rising prices

oThe CPI is one of the most widely used indicators of inflation and is

considered to be a measure of the cost of living in Canada

– Inflation has many costs on the economy

oIt erodes the standard of living of those on a fixed income

oIt reduces the real value of investments such as fixed-rate loans

(which could be good for the borrower)

oInflation distorts the signals prices send to participants in market

economies (is the price increase due to inflation or a genuine price

change?)

oAccelerating inflation usually leads to rising interest rates and a

recession

– Inflation is caused by a discrepancy between the supply and demand of the

economy, i.e. the output gap, which is the difference between real and

potential GDP

– Disinflation is a decline in the rate at which prices rise (prices still rise, but at

a slower rate)

oThe sacrifice ratio is used to determine the cost of disinflation, which

is the extent to which GDP must be reduced with increased

unemployment to achieve a 1% decrease in the inflation rate

oA sacrifice ratio of 5 means that 5% of output would need to be

sacrificed to bring down inflation 1%

– The balance of payments is a statement of a country’s economic transactions

with the rest of the world for a given period of time, it has two components:

oThe current account records the exchanges of goods and services

between Canadians and foreigners, the earnings from investment

income, and net transfers such as for foreign aid

oThe capital and financial account records financial flows between

Canadians and foreigners related to investments by foreigners in

Canada and investments by Canadians abroad

– The foreign exchange market includes all the places in which one nation’s

currency is exchanged for another at a specific exchange rate – the price of

one currency in terms of another

oOver time, the currencies of countries with consistently lower

inflation rates rise, reflecting their increased purchasing power

relative to other currencies

oCentral banks can also influence the value of their exchange rates by

raising and lowering nominal interest rates, higher interest rates

attracts capital because returns to lenders increase, and vice versa

oA country with a current account deficit is spending more than it is

earning, meaning that it demands more foreign currency than it

receives, which puts downward pressure on its domestic exchange

rate

oA country with strong economic performance will be more attractive

to foreign investors and will increase the exchange rate

oCountries with large debt are less attractive to foreign investors due to

doubts of repaying them as well as an incentive for the government to

increase inflations