Corporate Governance, Regulation and Ethics
What CB1 tests in corporate governance, regulation and ethics
This domain tests how organisations are directed and controlled, how regulators pursue prudential and conduct objectives, and how ethical judgement is applied. CB1 expects you to connect governance failures to incentives, disclosure and accountability.
Core rules and concepts
- Agency problems arise when managers’ interests diverge from shareholders’ or policyholders’. Governance tools include independent boards, audit committees, disclosure, remuneration design and shareholder rights.
- Prudential regulation protects solvency and system stability; conduct regulation protects customers and market integrity. Capital, liquidity and fit-and-proper requirements are prudential; disclosure and fair treatment are conduct.
- Principles-based and rules-based regimes differ in flexibility and certainty. Proportionality tailors requirements to risk and size.
- Ethics is not just legality: consider integrity, objectivity, competence, confidentiality and professional behaviour. Conflicts of interest must be identified, disclosed and managed.
- Remuneration should be risk-adjusted and deferred where outcomes are uncertain; clawbacks address ex-post misconduct.
Worked example
A bank pays a CEO a large annual bonus for short-term earnings. Lending standards fall and defaults emerge after two years. A better design defers part of the bonus, uses risk-adjusted return on capital, and permits clawback for later losses. The example shows how an incentive contract can create risk-taking that harms depositors and the regulator’s objectives.
Traps that cost marks
Do not confuse prudential and conduct issues. Independence does not mean having no opinion. Disclosure does not automatically resolve a conflict. Do not treat ethics as a separate “soft” topic: exam questions often ask for a justified decision, not a list.