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Financial services elective end-of-year wrap-up

Lead educators Noel McArdle and Larry Gordon share some final thoughts on the syllabus and draw together some familiar themes that should allow candidates to frame their studies around the exam in August.

Business lending credit risk assessment

At this stage, most candidates will have completed one or two workshops on business lending credit risk assessment. However, the mock examination and final examination are fast approaching. 

The business lending part of the examination is dominated by the case study which requires candidates to credit assess a request by an SME business for additional facilities from a bank. There are credit assessment techniques candidates need to master to get the best mark possible in this area.  This list is not exhaustive but provides insight as to the breadth of skills and techniques that candidates should be comfortable with using in order to assess a scenario and provide a recommendation. Candidates should: 

assess the economic, industry and business risks using SWOT and then give views on the implications for the prospects for the SME business;prepare an analysis of the management team, identifying strengths and weaknesses in terms of past performance and the challenges ahead;be able to analyse the historical and projected financial performance of the business under the following headings:profitability performance;liquidity position;working capital management performance;cash flow management performance as shown in the cash flow statements; andfinancial risk position.complete and comment on a sensitivity analysis on the businesses’ projected profit and loss figures by using conservative assumptions on key areas, such as sales growth, gross profit margin and overheads to sales percentage;prepare an analysis on the repayment capacity of the business and include a column to display the impact of the sensitivity analysis already completed;  use the credit risk analysis to identify both the strengths and credit risks of the businesses’ borrowing proposal to form a view as to whether the proposal should be recommended;be aware of debt instruments and consider their suitability, particularly when assessing the ability to repay – provided they are appropriate in the circumstances of the case studycalculate/suggest financial and non-financial covenants; andunderstand the role of security in lending and the various key security instruments to able to assess the security required for the business.

One indicator in the business lending section of the paper will require the student to look at a strategic high-level view of the management of credit risk in financial institutions. The key specific competencies in this area are:

2.1 Discuss the risk appetite frameworks of banks  2.2 Discuss credit risk appetite statements  2.3 Explain the Basel principles for the management of credit risk  2.4 Identify the components of the credit risk management framework  2.5 Explain the principles of credit portfolio management, stress testing and credit concentration risk  2.6 Demonstrate an understanding of the end-to-end credit process  2.7 Demonstrate an awareness of credit models 

This indicator is supported by a number of specific handouts, which are available on the Chartered Accountants Ireland website. These include short test questions that candidates should try to get the essential practice needed for this indicator. Finally, the third workshop will devote time on preparation for this indicator.

Focus on risks and risk management

It is useful to reflect on some aspects of the course which are vital components of the financial services FAE elective. Much of what we discussed revolves around financial risk and risk management.

There is risk in everything we do in life as well as in business. However, in financial services, risk is our actual business. Banks and insurance companies take risks when lending, insuring or offering any sort of financial hedging and product to their clients. They offer their clients these services in order to reduce the risks the clients face from their own commercial activities or investment needs. This is the backbone of the course.

When covering investment funds, we looked at the risks faced by investors and how such funds can help them find some suitable diversification and specialist management for their portfolios. In the international trade, risk management and strategies section, it was seen that commercial exporters and multi-national corporations all face risks caused by these activities. They can be political, economic, social, competitive, marketing, regulatory or legal; and a myriad of other risks which can all have an impact on their business activities.  

Risk management

This course links these risks with the possible role that the financial services industry can play to help reduce them. We want to ensure that these clients achieve the strategic and business targets they have set for themselves with their financial services provider sitting alongside them as an ally. It is important that candidates know how to link these two aspects together.  

Candidates should ask four questions:

What objectives do the clients want to be achieved? What are the risks they face? How do financial services companies help them to manage these risks and achieve their objectives?What are the types of products and services they use to do so?

Throughout the course, we linked all the areas covered to what is happening in the Irish financial services landscape, particularly concerning the international aspects of a business.  It appears to be clearly an area of interest to many young Chartered Accountants aspiring to either find a career or advise in the burgeoning financial services industry. 

Always remember there are two sides to every situation: taking risks in business and banking is what keeps the financial world turning.

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