Professional Documents
Culture Documents
Cemap 1 Final
Cemap 1 Final
Module 1
UNIT 1
UNIT 1
INTRODUCTION TO THE FINANCIAL SERVICES, ENVIRONMENT & PRODUCTS
SECTION 1: THE UK FINANCIAL SERVICES INDUSTRY 1.1 The Functions of the Financial Services Industry
Bartering = exchange goods and services - Problem: Size of some transactions unmatched MONEY () : Why use money? 1) Medium of exchange = Separate commodity to exchange for products 2) Unit of account (a/c) = Measure product value Acceptable to all parties
Sufficient in quantity
5 properties Of Portable
1. 1. 1
1.1.1 Intermediation
Surplus sector (1) Low interest rate (IR) given = cash rich - lend surplus fund to earn money
Money lent to
Disintermediation = cut out middle man e.g. company (Co.) raises funds from public by issuing shares
Why use the financial intermediary? Problem without Geographical location Aggregation
Locating lenders & borrowers Potential lender might not have enough
Solved with
Easy to find Retail deposits are low, whilst loans are high - aggregate small deposits
Maturity transformation
Borrower may need fund longer Most deposits are short term, whilst loans for than lender willing long term (e.g. mortgages: 20-25yrs) - range of deposit a/c not all depositor funds w/d at same time Individual depositors reluctant to Allow spreading risk over variety of lend all savings to individual/Co. borrowers if a few fail to repayintermediary absorbs loss
Risk transformation
FUND
Large payment out from insurance fund e.g. car insurance payments for car accident caused by a depositor from this insurance fund
Makes funds available when banking system short of liquidity maintain confidence Financial cover when gvt in: - Deficit BOE make automatic loan to gvt
Functions of BOE
- Surplus BOE may lend out as part of its Banker general debt management policy to
All major banks have a/c at BOE for: - deposit/obtain cash NOW: Debt Mgt Office (Treasury) - settling clearing BOE avoids conflicts of settling IR - other transactions high influence on IR Help formulate monetary policy (since 5/97) & full responsibility for settling IR Bank Monetary Policy Committee (MPC) - meet monthly - set base rate to ensure gvt inflation target met
Advisor to gvt
Mutual Organisations
Not Co. no shareholders Owned by members Some demutualised (i.e. became proprietary organisations) e.g. Norwich Union, Standard Life
E.g.
Life assurance Co. Building society Friendly society
Since Building Society Act 1986 building soc could demutualise (convert into banks Ltd Co.) - need approval by members readily given as members get a high number of free shares Problem: Carpet bagging = opening a/c in building soc to get subsequent shares Solution: building soc protect long-term members by restricting opening of new a/c
1.2.2
Wholesale Banking
Raise money via wholesale money markets where financial institutes & other large Co.s buy & sell financial assets e.g. financial houses main retail banks building soc Can raise up to 50% of their liabilities via wholesale banking Top up deposits from branch networks as required e.g. if bank has opportunity to make substantial profitable loan but doesnt have adequate deposit can raise money quickly on interbank markets - Includes ~400 banks - recycle surplus cash held in banks (between banks, specialist money brokers)
Telephone
New type a/c: simple, basic encourage more people to open a/c including those on: pension
1.2.4
state benefit
1.2.4.2 Clearing = process, at the end of each business day, of settling between banks the transfer of , due to customers using cheques, direct debit, debit card etc
transfer of net figure from 1 bank to another via a/c in BOE - Due to automated transfer methods: cheque volume
- Most banks have clearing system with other banks - those which do not: require an agency arrangement with a clearing bank Association of major banks & building socs which co-ordinates UK clearing services Name changed from Bankers Automated Clearing Services Ltd (BACS) Operates bulk electronic clearing (e.g. direct debits)
Clearing House Automated Payment Sys (CHAPS) Association for payment & clearing services (APACS)
Voca Ltd
1.3
1) Regulations
- general application - entirely binding - apply to all states (unless specified otherwise) - objective must be achieved in specific time - But how it is achieved is up to national authorities in each state
2) Directives
1.3.2 Regulations in UK
Effect
Impact UK financials industry Set laws via subsidiary law (statutory instruments) Monitor regulation & issue rules on how rules are to be met Ensure financial institutes themselves are operating legally & competently Customer complaints referred to
1.3.2
1.3.3 Taxation
Why tax? Raise revenue Control money supply
- If gvt
general tax less for investment & loan repayment less attractive for investors to invest
2 levels of tax on investments (e.g. unit & investments trusts): 1) fund managers taxed 2) investors taxed
1.3.3
1.3.3.1
Country individual treats as home, even if they live for a time in another country
Domicile
Domicile of origin = domicile of individuals father (or mother if unmarried) on date of their birth Domicile of choice = change to different domicile - Achieved by putting permanent roots in a different country & severing previous
Effects
Domicile UK?
Inheritance tax
Residence
Effects
Income tax on worldwide (un)earned & (un)brought to UK Capital gains tax (CGT) on worldwide gains
UK has double taxation agreement with other countries an individual is not taxed 2 times on the same income/gains
1.3.3.2 Income Tax = liability based on income received in a tax/fiscal year (6 Apr 5 Apr next year) Process of deciding income tax: Budget delivered (each yr) containing taxation proposal Finance Bill published Approved by parliament & receives Royal Assent Law made: new Finance Act (main law: Income & Corporation Taxes Act 1988)
R85 form filled to declare individual (children & adults) does not need to pay tax & can
received interest from certain deposits gross, without tax deduction at source - Childrens income from settlement by parents is treated as parents income for tax purposes cannot set childrens unused allowance against this income
Income taxed
Employment salary inc bonus, commission, taxable benefits Pensions & retirement annuities Profits from trade/profession Tips Interest on banks & building soc deposits Dividends from Co.s Income from trusts Income from gvt & local authority stocks Rents & other land & property income Value of benefits (if total income + benefits > 8500) (Co. cars tax based on CO2 emission rating)
Education grants to full time students War widow pension Some social security benefits Housing grants Interest on tax rebate
1.3.3.2.1 Allowances Personal allowance = income amount received each yr before tax
- Applies to all UK residence incl. children - Not transferable to anyone else
(2009/10) 6,475 9,490 people >65+ yrs 9,640 people >75+ yrs
For people >65yrs with income exceeding specific figure (22,900 - 09/10), personal allowance reduces 1 every 2 income over threshold (not reduce below under-65 allowance)
Taxable income
Taxable income () (09/10) Earned income Investment income 2,440 37,400 > 37,400 2,441 - 37,400 > 37,400
10 20 40
E.g. 1 Married man aged 30 earns 20,000pa (09/10) building society income, & no other income. His has a personal allowance of 6,475 Gross income: 20,000 Personal allowance: 6,475 Taxable income: 13,525 (20000-6475) 2,440 at 10%: 244 (2440*0.1) 11,085 (13525-2440) at 20%: 2,217 (11085*0.2) Total taxable: 2461 (244+2217)
E.g. 2 A single woman aged 40 earns 50,000pa (09/10). She is employed and has personal allowance of 6475 Gross income: 50,000 Personal allowance: 6,475 Taxable income: 43,525 (50000-6475) 2,440 at 10% 244 (2440*0.1) 34,960 (37400-2440) at 20%: 6,992 (34960*0.2) 6,125 (43525-37400) at 40%: 2,450 9,686 Total taxable: (244+6992+2450)
- Most investment income taxed at source at basic rate: 20% Non-taxpayers get tax-free interest (by signing declaration) Higher taxpayers pay further 20% of gross interest via tax return/coding
Gross rate =
(100%-20%)
- Share dividends receive net of nominal 10% tax Satisfy lower & basic rate taxpayers Higher taxpayer pays further 22.5% (32.5% total) Non-taxpayers can NOT reclaim 10%
Gross rate =
1.3.3.2.2 Employees
- Income tax paid via pay-as-you-earn (PAYE) system employers calc using tables by HM Revenue & Customs (HMRC) How calc? Employers supplied with tax code number for each employee Amount of free pay incl allowances, benefits etc & over/under payments from previous yr
P40 given to employee by employer in Apr each yr P45 to employee & HMRC by employer when leaving job Given to new employer for information about tax deductions
Total Revenue - total expenses - Capital allowance => Income tax paid to HMRC
based on net profits - Self-assessment rules: taxpayer calculate own liability & sends it to the tax authorities for approval /Accountant/HMRC
1.3.3.2.4 Classification of Type of Income Before: Classified under schedules A, D, E & F abolished Now: Income Tax (Earnings & Pensions) Act 2003 Income Tax (Trading & Other Income) Act 2005
Covers incomes in other schedules
Covers income previous in Schedule E: - Employment income - Pensions - Taxable social security benefits
Part 2
- Trading income (from self employment)
Part 3
Part 4
- Savings & investment income incl interest - Dividends
- Property income
loan stocks
1.3.3.2.8 Taxation of Proceeds from Unit Trust Collective investment under trust deed - Income generated via share dividend - Unit holders receive net of tax - no liability to basic rate taxpayer - further liability to higher rate taxpayer - Gilt interest & dividends on foreign shares do not pay UK tax Pay basic rate tax Pay corporate tax
- Exempt from CGT, although unit holder maybe liable if sell at profit
- Voluntary contributions by people who otherwise not allowed full basic pension or sickness benefits (e.g. career break, working abroad) - Flat rate 12.05/wk (09/10) - Additional contribution by self-employed in annual profits between minimum & maximum level - Paid to HMRC -yearly with income tax - Rate: 8% profits between 5,715 - 43,875 + 1% profits > 43,875
Gilts
Property disposed due to death (get inheritance tax) National Savings certificate & PAYE scheme
E.g.
Premium bond & lottery winnings Foreign currency for personal expenditure
- If a loss is made on asset when it is disposed, individual can offset it against gains elsewhere - How? 1st: Offset loss against gains in the year the loss occurred Then: Residual loss maybe carried forward to future years But capital loss can not be carried back to a previous year - Tax payable on net gains in tax year (after deducting allowable capital losses in same/previous year) - Each individual has annual CGT allowance (10,100 (09/10)) level of gains allowed in year before CGT start incl. to trustees of mentally disabled & personal representatives: 5,050 (09/10) - can not carry forward to next year if unused - Capital loss can be carried forward but annual exemption can not losses brought forward to extent required to reduce gain to level of annual exemption residual losses then carried forward
Subject to 18% tax - Low rate of 10% on the first 1million of cumulative gains from disposal of trading businesses & shares = Entrepreneurs relief To claim this relief: individual must own at least 5% of ordinary share capital of the business (most property letting businesses are exempt from this relief)
E.g. Vanessa brought 50,000 units in unit trust ( May04) & sold for 80,000 ( June 08). At the same time she sold 10,000 shares that she brought for 12,000. What CGT will she pay? - Gain on unit trust: 30,000 - Annual allowance: 10,100 (9,600) - Loss on shares: 2,000 - Taxable gain: 17,900 (30000 10100 2000) - Tax at 18%: 3,222
- Problem: CGT is due on the whole gain in the year when gain realised, even if the gain made was in a longer period, but only 1 annual exemption against years worth of gain - some shareholders & unit-trust holders sell holding each year & then repurchase the following day smaller gain covered by that years exemption = bed & breakfasting Out-lawed in 98 Budget: shares & unit trusts sold & repurchased within 30 days treated as if these 2 transactions did not occurred
Exemptions
Gifts on regulated basis from income which not affect donors standard living Up to 3000pa for gifts not covered by other exemptions. Any remainder can be carried only forward 1yr Wedding gifts up to 1000 (increased to 5000 for gifts from parents & 2500 from grandparents
-Stamp Duty Land Tax - dependent on property value Stamp duty rate (%) 0 1 3 4 Purchase price of the property () < 125,000 (150,000 in spec disadvantaged areas) 125,001 250,000 250,001 500,000 > 500,000
- Co.s in UK pay corporate tax on worldwide profits Co.s elsewhere only pay corporation tax on profits from their UK-based business Co.s rate Small Marginal Main Profit () 0 300,000 300,001 1.5 mil > 1.5 mil Rate 21% 09/10 Marginal 28% 09/10 When due 9 months after end of relevant accounting period 9 months after end of relevant accounting period Quarter-yearly instalments halfway through accounting period
Unemployment Gvt tries to expand economy so labour, land & capital Rising level of prices: Rate of money supply> growth of good/services
Price stability
into country = out - Linked to exchange rate - Gvt aim: currency price stable not so - high as to reduce export - low as to increase inflation
Need low, controlled inflation rate Economic output is growing in real terms over time & increasing standard of living UK economy grew fast in 2000 now onset of recession - 2006: annual growth of gross domestic product (GDP) at 3%
Measure of value of goods & services produced within country over specific period of time - Affects US & EU economy
1.3.4
- The four macroeconomic objectives work in 2 pairs: E.g if unemployment growth inflation improve balance of payment E.g unemployment inflation
- UK economic policy (until recently) was stop-go = gvt cause fast and slow economic growth Employment Growth Inflation Unemployment - Gvt aim: - aggregate demand in line with productive economic capacity - low inflation rate for long periods of sustained economic growth average annual rate of 2% (max divergence 1% either side) measured by consumer price index (CPI) replaced retail price index (RPI) derived in same way as harmonised index of consumer prices (HICP): used in eurozone Inflation Growth
Pass rate to borrowers & others - Disadv: borrower lose out if variable rate lowers below the fixed rate penalty if pay off mortgage within fixed rate period (protects lender) arrangement fee charged by lender for reserving sufficient fund at fixed rate - In UK: fixed rate mortgages short initial period variable rate remainder of term - Other EU countries: longer fixed term
manipulate finances of public sector influence Gvt, local authority, public corporations
- Public sector provide national/regional services e.g. education, healthcare, transport Funds from private sector Funds from individuals & firms via (in)direct tax - Changes in public & private sector affect the economy - Outcomes: Budget Balanced Surplus Deficit Amount of tax to public sector spending = > < Result on economy - Neutral Employment Money supply Employment Money supply (inflation)
Gvt borrow to finance the deficit Public Sector Net Cash Required (PSNCR) = cash measure of public sector short-term net financing required
- Aim of gvt: Increase sustainable level of growth & employment - Fiscal policy maintains sound public finances over the medium term 2 fiscal rules: 1) Golden rule = gvt borrow to INVEST, not fund current spending 2) Sustainable investment rule = public sector net debt, as proportion of GDP, is held over the economic cycle at a stable level - Fiscal policy outlined by gvt Chancellor of Exchequer in the annual Budget (March) Pre-budget report allow public to consult on policies Revenue plans (incl individual & Co tax) Gvt planned expenditure - Monetary policy acts on economy as whole - Fiscal policy can have macroeconomic & microeconomic effects & target specific parts of economy E.g. 1) Tax incentives to manufacturing Co.s to boost employment 2) Gvt grants to firms that move to underdeveloped geographic areas
- UK gvt provide assistance in need - Lots of critics, as it is expensive. But the system is envy of other countries - High number of benefits, but low amount benefits are only to get individual out of extreme poverty
1.3.5.1 Support for People on Low Incomes 1.3.5.1.1 Working Tax Credit
People (16+yrs) with children, work 16> hrs/wk People (25+yrs) with no children, work 30 hrs/wk
(= specifications)
- 16+yrs, work 16yrs/wk, disabled - they/partner 50+yrs & work 16 hrs/wk & return to work after out-of-work benefit
Contribution based
- payable for 6 months - fixed rate- irrespective of savings/partners earnings - paid gross but taxable dependent on having paid Class 1 NI contribution
Income based
seeking work for at least 40hrs/wk working <16hrs/wk 18 yrs pensionable work not in full time education signed JSA agreement steps to look for work
- Paid by Department of Work & Pensions (DWP) not employers - Disadv: lower rate than SMP - Adv: not subject to tax Rate: 1) Standard rate to those earnings > lower earning limits 2) 90% average earning paid to earnings < lower limit but > minimum threshold - High number of restrictions - Payable for 39 weeks - Earliest payment begins: 11 weeks before baby due, latest: baby born
1.3.5.3 Support for People Ill/Disabled 1.3.5.3.1 Statutory Sick Pay (SSP)
- Paid by an employer to an employee who is off due to illness for 4+ days - paid maximum for 28 weeks (spells of sickness with < 8wks between them) = 1 spell - to people with average earnings > NICs payable - taxed & NI deducted (like normal earnings)
3) Long-term rate
- initially offered on earnings-related basis, changing to a full flat rate basis - only to employed people paying Class 1 NI contribution, not self-employed - obliged to be S2P unless contracted out (themselves (full contribution paid but rebate by transfer to alternative pension arrangement) or employer (on membership of employers pension scheme pay lower NIC))
S2P
2.1 Deposits
- Deposit based investments: capital element fixed but investment income varies - Why? Adv Capital secure amount invested intact Readily accessible banks & building societies Disadv Inflation reduces value of capital (increased inflation causes value to reduce in real term) Risk of loss of capital if institute becomes insolvent (Financial Services Compensation Scheme)
2.1
- Some have higher IR, by may need minimum investment - Deposits can be subject to notice withdrawal e.g. 7 days - maybe waived subject to penalty e.g. Amount interest that could be earned over period - Investment fund for emergency/other - Less attractive long-term
- no 2) Notice a/c fixed term but need notice period to withdraw - bank given same period of notice of change in IR (e.g. 7 days, 6 months+) - for people with high amounts of cash to place on short-term deposit until required
3) 2.1.1.3 Interest Bearing Current a/c - Provide immediate access to funds without loss of interest
- Range of services: cheque-book & guarantee cards, cashpoint facility - Mass market caused by high competition between banks/building societies - IR (may have lower rates on phone/internet) - Some banks offered high-interest cheque a/c have higher IR, but require higher minimum level of investment (1000-10000)
2.1.1.4 Taxation - tax on interest = 20% e.g. 4% gross interest net = 3.2%
- lower & basic tax payer no further liability - higher rate tax payer liable for 20% more - interest paid gross/can reclaim tax for non-tax payers who complete R85 form - 10% taxpayers can reclaim additional 10%
- Tiered IRs (higher investment higher rate) - Short-term & immediate access - Taxation (2.1.1.4)
2.1.2
2.1.3
2.1.4 &
2 markets:
Main market - Allows Co.s to be quoted on SE - Requirements incl: - Financial & other information - Co. mustve traded for > 3yrs - > 25% issued shares in public hands Listing Rules by FSA (acts as UK Listing Authorities (UKLA)
Alternative Investment Market (AIM) - Separate market on SE (since 95) - for new Co.s with potential to grow - Enable Co. to raise capital by issuing share - high public audience & high profile by joining - less rules & rigidity than main market
Types
IR
Age (yrs)
Easy Access Tiered, *(gross paid & income taxable) Savings a/c Investment a/c Income Bonds Variable, Tiered 7 levels, *
Monthly regular income, No term & capital withdrawn at any time Interest paid monthly, net of basic rate income tax Lump-sum investment, 1,3 or 5 year term Lump sum, fixed term investment with growth potential linked to FTSE100 while security on original investment
Guaranteed Guaranteed 1,2 or 5 yrs at a time, Fixed IR 16+ income Bonds depending on term Guaranteed Calculated yearly but added to investment 16+ growth bonds at the end of the term Guaranteed equity bonds Savings Certificate Gross interest- no liability to income or CGT attractive to higher rate tax payers 18+
100 -15,000 Fixed interest certificate (FIC)= fixed IR on chos term (2/5 yrs) Index linked certificate = value with inflation (terms 3 & 5 yrs) 10030,000 /person Regular (monthly) draw for tax free prizes for investors, Prizes maybe worth lots of , Encash any time with 8 days notice Lump sum for 5> yrs, Encash <21 yrs, No interest paid after 21yrs
Premium Bonds
Childrens Fixed for 1st 5yrs + bonus on 5th yr, final Bonus Bonds bonus on 21st birthday
Short dated (shorts) - <5 yrs - 0-7 yrs (UK Debt Management Office)
Undated = No redemption date - at gvt discretion - Gvt under no obligation to ever redeem
- Interest paid at fixed rate = coupon - Index-linked gilts = interest payments & capital value move in line with inflation investors purchasing power of capital & interest received is constant (unlike other fixed interest stocks inflation reduces purchasing power) E.g. If gilts with coupon of 5% & redemption date 2021 = Treasury 5% 2021 - Interest normally paid -yearly E.g. If holder of 10,000 nominal of Treasury 5% 2021 250 interest per 6 months Paid grossly subject to income tax
2.2, 2.2.1
- Not redeemable by investors before redemption date, but can be sold to other investors Price depends on: 1) Market IRs 2) Nearness to redemption date 3) Supply & demand Gilts prices quoted: Cum dividend or Ex dividend Buyer acquires stock itself & entitlement to next interest payment While buyer acquires stock itself, forthcoming interest payment payable to previous owner of the stock (i.e. seller)
E.g. Higher rate taxpayer buys 100,000 par value Treasury 5% 2019 at price 80.0 i.e. pays 80,000 for stock Receives annual interest: 5,000 [2,500 per yearly] (5% of 100,000 = 5000) = represents yield 6.25% [5,000/800,000] Interest paid gross but 40% tax paid net annual interest = 3000 [5000*0.4 = 2000, 5000-2000= 3000] Later he sells stock for 90,000 no CGT on gain of 10,000 [90,000-80,000]
- issued by building society to raise capital Local authority can borrow by issuing stocks/bonds (fixed term, fixed interest securities) - Secured on local authority assets - Not negotiable (i.e. can not get lower price) & fixed return at maturity - Return of capital on maturity guaranteed - not as secure as gilts(as no gvt guarantee) - Guaranteed IR yearly - Paid net: - Basic:20% - Higher: 40% - Non-taxpayer: can reclaim - fixed IR yrly - paid gross taxable - PIBs rank below ordinary a/c in priority of payment if Co. becomes insolvent - Represent loans to commercial organisations - Fixed redemption dates, specific redemption value & fixed IR - Brought & sold at prices reflecting market IRs - Higher risk than gilts as no gvt backing tend to offer higher yields (profits)
2.2.2 2.2.4
- Share prices in: - short term fluctuate - long term outpaced inflation & provide higher growth than deposit type investments
2.3, 2
- Assess success of shares & future performance by: 1) Earnings per share = [Co.s net profit / No. shares] - not normally amount of dividends to shareholder on each share (as Co. retains some profit for e.g. expansion) 2) Dividends cover = how much of profit distributed as dividends - e.g. if 50% profit as dividends: covered twice - 2+ cover acceptable by investor <1 company paying dividends from retained surplus from previous year 3) Price/Earnings ratio (P/E) = share price / earnings per share - useful guide to shares growth prospect
E.g. Higher rate taxpayer receives net dividend of 900 from UK shares gross dividend is 1000 [900/(100%-10%)]. She pays further 22.5% of gross further 225 [1000*0.225]
- Gains subject to CGT - may offset against annual CGT exemption allowance
2.3.1.4 Ex-Dividend
- Dividend paid -yearly on dividend date - Lots of administration to ensure dividend paid on time Payment process begins a few weeks before - snapshot of shareholders anyone purchasing shares between then & dividend not receive between this period, share is ex-dividend (xd) - share expected to fall approximately by the dividend amount on the day it becomes xd
Other Shares
Cumulative preference shares = if dividend not paid, entitled to dividend accumulation until paid Convertibles = securities issued by Co.s to raise capital which can be converted to ordinary Co. shares at a later date - before: issued in form of a loan (lower IR than normal as can convert to equity) now: convertible preference shares
Types Adv
Property acceptable security for borrowing Risk of unable to find suitable tenants UK property market well developed Rents ( capital value) tend to move with values good against inflation Property management readily available Location very important Property less available than other forms of investment Property market affected by economic conditions Highly costly - High risk for small investors spread risk: Property bonds = underlying fund invested to range of properties & shares in property Co.s Real estate investment trusts (3.2.2.3)
2.4.1 Taxation
Property income - allowable expense deductions Income tax (Basic: 22%) On disposal of property CGT (can offset capital expenditure against CGT)
CHANGED
rental income excluded from borrowers income, when assessing ability to make mortgage repayments
Why? - Stimulate growth in private sector of rental market - Encourage borrowing at competitive IR to sustain income & capital growth - BTL mortgages scheme is a result of an initiative by the Association of Residential Letting Agents (ARLA) & mortgage lenders (introduced by Alliance & Leicester, Halifax & Natwest) - many schemes require agent to be member of ARLA involved in selecting suitable property, tenants, tenancy agreement, managing property - Gross rent needs to be 125-150% of monthly mortgage payment - Other costs e.g. wear & tear (10%/yr) (not incl. cost of furniture, fittings) offset against income tax (from rent)
2.4.3
2.5 Commodities
e.g. metals, foodstuff, electricity, timber, timber, music, art - Lots of opportunity - directly & indirectly: 1) Investment in precious metals 2) Lots of trade via forward contracts binding agreement where 1 party must sell & other must buy specific amount of commodity at specific price at specific date - Lots of traders do not need the commodities, but make profit by speculating price movement via purchasing & selling
- Changing price of 1 currency for another reflects demand & supply of the currency Due to: 1) international trading of: Goods raw materials from different countries Services financial services, individual to different country for jobs 2) Investment Short term Co. in surplus want to invest e.g. in country with current high IR Long term individual & Co. buy shares & long-term loans to borrowers of other countries - Currency speculators = trade in currency markets to speculate changes in exchange rates & buying/selling at appropriate time
E.g. Exchange 1million to $, at 55p exchange rate ( $1=55p) 1 million = $1,818,182 [1,000,000/0.55] Exchange $1,818,182 to , at 57p exchange rate Profit: 36,364 [$1,818,182 x 0.57 = 1036363.64, 1036363.64 - 1,000,000 = 36,364]
2.6
3.1, 3.2
3.1 Investments
- Main form of direct investment (Section 2)
High choice
Location (e.g. country) Industry (e.g. technology, energy) - Categories of investment funds Type (e.g.shares, gilts, etc) Other forms of specialisation (e.g. ethical investments etc) Aim (to produce ) income (& modest capital gains) capital gains (& modest income) Balance between growth & income - Managed funds = manager invests appropriate proportion in a range of Co.s to meet managed funds objectives Chosen by people seeking steady growth, where risk loss is minimum (e.g. pension provisions/mortgage repayments)
Investment trusts
3.2.1
- Investor may contribute via lump sum / regular contribution / both - Lots of unit trusts in UK: total funds = 450 billion - Trust is divided into units - Open ended manager can create more units in response to demand Valuing fund assets Fixing unit prices
Manager obliged to buy back units (under trust deed) Incl. investors who wish to sell
Hold & control trusts assets Set out trusts investment directives Issue unit certificate to investors Roles Ensure investor protection procedures adequate Approve proposed marketing Collect & distribute income from trusts assets
Ensure manager complies with terms of trust deed - Trustee roles carried out by institutions e.g. clearing banks/life Co.s
- Units can brought directly from manager/intermediaries via writing/telephone - Purchaser receives 2 documents from the manager: 1) Contract note = specifies fund, No. units, unit price, amount paid - gives purchase price (needed for CGT when units sold) 2) Unit Certificate = specifies fund & no. units held - proof of ownership - To sell units, unit holder must sign form of renunciation on the reverse of the unit certificate send it to the manager (new certificate sent to the unit holder if they still holds units)
3.2.1.5 Charges
1) Initial charges = cover cost of purchasing fund asset & commission payments to intermediaries - typically covered by bid-offer spread 2) Annual management charge = fee paid for use of professional investment manager - varies: 0.5 2% of fund value - deducted on monthly/daily basis
- Authorised unit trusts (except. fixed interest trusts) treated as Co.s for tax Corporation tax on income (not growth within fund) - Dividend income received already 10% taxed Lower & basic rate taxpayer no further liability Non tax payer not reclaim Higher rate taxpayer - further 22.5% of gross incomes ( 32.5%)
e.g. Distribution of 18 net to shareholders: gross = 20 [18/1-(10% tax)] - if higher taxpayer: further 4.50 taxed [20*22.5%]
- Income from overseas securities, cash & fixed interest securities have 20% corporation tax when this income is paid out Non taxpayer reclaims Lower rate taxpayer reclaim (liable 10% & reclaim 10%) Basic rate taxpayer no additional liability Higher rate taxpayer further 20% of gross income
e.g. Distribution of 40 net to unit holder (from overseas) Gross income = 50 (40 / (1-20%)) - if higher rate taxpayer - pay further 10 (50 * 20%) - if non-taxpayer reclaim 10 (50 - 40)
3.2.1.7.2 CGT
- None within unit trust - Maybe liable when unit cashed - Reduced liability due to annual exemption allowance, taper relief
= Collective investment, but unlike unit trusts, not unitised fund - Not actual trusts, but public limited Co.s whose business is investing in stocks & shares - To invest: Investor purchase shares of the IT Co. on the Stock Exchange To cash in: Sell to another investor - Closed ended = number of shares available is constant - Share price dependent on: Some extent on value of underlying investment (not so directly as unit trusts) Factors affecting demand & supply Lower than Net Asset Value (NAV) per share = total value of investment fund / number share issued - Discounted investor should receive higher income & growth level than obtained by investing directly in the same underlying shares - Can benefit from gearing = borrow to take adv of business investment opportunities (like other businesses) Unit trust can NOT use gearing High growth potential of rising market but can cause losses (e.g. in 2000s)
3.2.2.1 Taxation
- > 85% of income received by fund managers must be distributed as dividends to shareholders Lower & basic taxpayer no further liability Higher taxpayer 32.5% of grossed up dividends - CGT: Fund manager exempt Investors subject on sale of shares Net of 10%, with tax credit
75+% of gross income derived from property rent No corporation tax on income/growth need to meet requirements
Main features
Can be held in ISAs, child trust funds, self invested person pensions
= Pooled investment offered by a Co. that buys & sells shares of other Co.s, & deals in other investment - Issue shares (typically preference shares) can be brought & sold by investors - Operates as Co. but can NOT borrow to finance its activities, except for short term purposes - Popular in EU, available in UK since 1997 - Similar to unit & investment trusts (common FSA regulations on OEICs & unit trusts)
- types: income, capital growth, fixed interest access to oversees markets, specialist markets, index tracking
3.2.3.4 Charges
Initial charge 3-6% value of individuals investment Annual management charge based on the value of the fund - deducted from income OEIC generates - e.g. 0.5% (indexed funds) & 2% (more actively managed) Other administration costs maybe deducted from income
- CGT
- fund manager: not liable - investor: maybe liable when OEIC cashed in (mitigation by exemption, taper relief)
Types
Life assurance
Some taxable NS&I a/c excl. investment a/c & pensioners bonds
No longer available - Investor must be resident & ordinarily UK resident tax purposes - Only held in 1 name
- Distinction between mini- & maxi- ISA is removed 3.2.4.3 Transfer Arrangements
- Existing cash ISAs, TESSA-only ISAs & cash element of maxi-ISA cash ISA - In the future: possible to transfer funds from cash ISA stocks & shares ISA (not vice versa) - Personal equity plans (PEPs) stocks & shares ISA
3.2.4.4 Withdrawals
- Most have no withdrawal period - Some fixed-rate cash ISAs do not allow withdrawal in specific period - Cannot go beyond the maximum amount for that year (even if withdrawals are made during that year)
3.2.5.1 Endowment
= policy on which sum assured is paid out at the end of a specific term/early death (some open-ended can receive proceeds when wanted) - Most common type of life assurance savings contract - Investment made by regular premiums to the life assurance Co. throughout the policy term
- Co.s profits paid annually to policyholders bonus paid with policy benefits & sum assured
Co. can NOT remove once allocated (providing policy runs to term end) Declared each year
Reversionary
2 types of bonuses
Terminus
Some Co.s declare: 1) Simple bonus = annual bonus based on the % of sum assured
Most Co.s set at level they hope to maintain for some time Smooth out short term market variation
Not part of policy benefit until death/maturity (unlike reversionary) Co. can change/remove terminus bonus rate Intend to reflect level of investment gain Co. made over policy term Currently: reduced stock value reduced bonus
2) Compound bonus Over years: IRs & other investment = new bonus based on yields reduce reducing bonus the [sum assured + previously declared bonus]
Low-cost endowment variation of with-profit endowment, - used for mortgage repayment (3.5.1.3.1.1)
Chosen fund:
Premiums used to purchase units Pool of units builds up Fixed benefit on death before end of term (life cover). - Cost taken from policy each month by cashing in units At maturity date: policyholder receives amount equal to total value of all units allocated to policy
- (compared to with-profit endowments): Adv: In the long term unit linked shows better returns Disadv: no guarantee of minimum return at maturity High potential BUT high risk
dependent on the number of units allocated at the then current unit price Benefit paid out on a claim
Can NOT be removed once allocated (like reversionary bonuses) security Cause unit prices to increase
Unit prices can NOT fall & the policy value (if held until death/maturity) is guaranteed BUT if cashed before, a deduction is made from the unit value Depends on market condition at time of surrender = Market value adjustment
- To cash in: policy holder surrenders value of the policy = value of all units allocated
Based on bid price on the day of surrender - Adv easy to invest, surrender & switch to another fund (not get charged) range of funds similar to those in unit & investment trusts - some Co.s offer with-profit investment bonds (3.2.5.1.4) on death, policy ceases pay out 101% of bid value on date of death
3.2.5.2.1 Taxation
- Premium funds into internal life Co. funds the taxation is different from unit trusts - 20% CGT within fund non-recoverable - high taxpayer: additional 20% - investment bonds non-qualifying (1.3.3.2.7) - Since 6/4/08: single tax rate on CGT of 18% - Policy holder does not get dividends/distribution (investment & unit trusts), instead makes small regular capital withdrawal - Basic rate taxpayers: tax free - Higher rate taxpayer: can withdraw 5% of original investment/yr without tax liability (can carry forward & accumulate to 100% of original investment)
3.2.6
/500 if childs family eligible for full Child Tax Credit (1.3.5.2.4) Open CTF a/c, which is open until 18th birthday (access when 18yrs) Further additions by parents (max: 1200/yr: between childs birthday) - Parent responsible for a/c until child is 16yrs, after which child manages the a/c - Range of CTF providers incl. banks, building societies, friendly societies etc 3 types of a/c Deposit type savings Investing (in)directly in shares Annual max charge: 1.5% Stakeholder CTF - invest in a range of Co. shares (subject to gvt rules)
No limit on charges
From childs 13th birthday, invested into a lower risk asset, to protect claimant from market losses as 18th birthday approaches - Must decide which type of a/c within 12 month or HMRC opens stakeholder CTF a/c automatically - No income/CGT or tax relief
- Different forms: from one-off investment to generic - Offer element of protection of capital invested, while allowing participation in underlying assets - maybe high-performing but high risk (e.g. ordinary shares) - also appeal to cautious investors e.g. Issue 14 of Guaranteed Equity Bonds (from NS&I): 5yr bond offering return that matches growth in FTSA-100, but with a guarantee of return of capital if index falls - Precipice bonds = type of 3-5yr high income bond - provide v. high income yield on capital invested - return of capital linked to performance of particular stock market index - many specified particular index level below which value capital fell steeply (e.g. heavy losses in 2000s & FSA concerned whether investors understood risks)
3.3 Insurance
3.3, 3.3.1
- Protect against financial adversity - Sometimes compulsory (e.g 3rd party on vehicles) other times not, but best to (e.g. house)
Types
Flexible
* In (3.2.5.1)
- Suitable for person seeking max life cover on permanent basis at minimum cost
- Flexible, where cashing units pays for benefits more options available: e.g. take income, indexation of benefits & can add another life assured - High level investment, but should not be thought of primarily as investment, but as a protection plan 3 level of covers (others between)
Maximum Set at level where maintained for 10yrs All units used up & premium increased to continue cover
Balanced Level of cover, for given premium, Co. expects to be able to maintain throughout life assureds' lifetime
Minimum Minimum requirement for policy to remain qualifying Number units build up to substantial investment
- To calculate cover level, Co. makes assumptions about future growth rate of unit prices - Initial life cover guaranteed for a certain period (~10yrs) Co. has right to increase/decrease premiums/cover by taking account of increasing costs/unit prices not growing as anticipated - Death benefit guaranteed until next review (5 year/annually (for elder) interval) Important to reveal shortfalls
2 types
Sum assured = amount outstanding on repayment mortgage of same term, based on specific IRs
Sum assured set at the start of the policy, according to the amount of tax: 100% cover & IHT for 3 yrs 80% (4th yr) 60% (5th yr) 40% (6th yr)Scaling downyr)tapering relief ceased - 20% (7th = cover & IHT
Cover
Same amount of cover throughout the term Increasing cover throughout the term Decreasing cover throughout the term
5/4/07 insurers had to process this business medical evidence checked & commencement date of cover settled
Types of cover
Mortgage repayment
- Other factors: age, amount, current health, medical history, sex, length of deferred period
Premiums for F>M
- Self-employed should opt for short deferred period, as loss of income after short period of illness Employed opt for long period. If individual receives sickness benefit by employer, deferred period should match date sickness benefit ceases
- Set so: benefit income < working income ~ 60 65% pre-disability earnings (unless Incapacity Benefit) - Cover is permanent insurer can not cancer cover even if numerous claims made - Can be cancelled if premiums are not kept up or policy holder gets a hazardous job - Some policies allow benefits to be indexed before/during a claim 3-7% (based on inflation) - Paid until death, return to work or retirement - PHI is a standalone policy, as a.. Pure protection plan Unit linked basis
3.3.2.3.1 Taxation
- Tax free - No tax relief on contribution to policy whether arrange group/individual - If arranged on a group basis, any contribution employer made is set as an expense corporation tax Classed as a benefit for employees earnings > 8500/yr
- Benefits in non-emergency
- Way benefit paid varies between providers (full refund/impose upper limit in 1 year)
Medical care cost varies throughout country Location High age high morbidity
Age of person
3.3.2.4.1 Underwriting
- Cover scheme may excluding certain events, pre-existing medical conditions, general
3.3.2.4.2 Taxation
- Premiums subject to insurance premium tax - Benefits paid are tax-free - Employers contribution to PMI claim cost as allowable deduction in corporation tax - regarded as benefits for employee - maybe taxable if employees total income>8500/yr
- Normally: claimant has to be incapable of performing 2/3 ADLs before they can claim - Higher number of ADLs not performed require high amount of care higher benefit level paid
3.3.2.5.2 Taxation
Tax-free if: it is and was an immediate needs annuity when it was taken out Benefit paid directly to care provider for care of person protected under the policy
if on life of another basis & paid directly to care if any part of annuity benefits are paid to anyone provider & used solely for care of person protected other than care provider, or for any other purpose than for person protected policy if pre-funded No annuity but, premiums are paid to an insurance Co. to insure against possible future events
3.3.3
- Some policies combine 2+ types of risk e.g. comprehensive motor policies cover damage to policyholders & 3rd parties property
Interruption Business not continue due to one of other losses e.g. fire
3.3.3.1 Indemnity
In the event of a claim, insured persons should be restored to the same financial position after loss that they were in immediately before the loss occurred Claimant should NOT benefit from the loss - Life & personal accident policies are not indemnity contracts. They are benefit policies, as the loss can not measure as a financial loss
Methods indemnity achieved (up to insurance Co.): Cash (cheque) Repair (e.g. motor insurance) Replacement sometimes purchasing power of insurer may reduce cost Reinstatement e.g. insurance Co. arrange restoration of damage to premises
3.3.3.2 Average
- Policyholder may underinsure Insure for smaller amount actually required to replace/repair lost/damaged property Why? - Unaware of appropriate figure/inflation - Keep premiums down - If: Complete loss occurs: amount paid out is limited to the sum insured, even if the cost was higher Partial loss occurs: unfair if policyholder is indemnified in full - even if claim amount < overall sum insured Average = claim scaled down in proportion of premium paid vs full premium
e.g. Policyholder insured for 10,000 contents (although the true insurance is 15,000) claim for 300 damaged carpet insurer pays 200 [(10000/15000)*300)]
3.3.3.3 Excess
= Deduction made from any claim payment on many GI policies e.g. motor policies have excess of 100 on accident damage is part of cover - avoids admin cost of dealing with small claims - Maybe compulsory/voluntary to obtain reduction in premium
Storms & floods Damage by vehicles & aircrafts, animals Damage by trees/branches /television aerials
- Some cover subject to property not being left unoccupied for a specific period e.g 30 days - due to risk of vandalism, theft, burst of water pipes etc.
- Types of cover:
1) 2) 3)
Cover against Death, injury, damage when policyholder uses another vehicle & other drivers using policyholders car with permission Death/bodily injury to 3rd party inc. passengers in car, hospital charges, emergency medical treatment Damage to property Legal costs- in defence of claim Fire, lightening, explosion damage to vehicle Theft of vehicle, incl. damage caused & attempted theft Accidental damage to vehicle Loss/damage to personal items in vehicle Personal accident benefit Windscreen damage
Road Traffic Act 1988: unlawful to use motor vehicle on public road unless there is insurance policy with respect to 3rd party risk - No effect unless certificate of insurance given to policyholder evidence of contract of insurance
3.4 Derivatives
= financial product indirectly based/derived from another financial products
3.4
- Related to commitment to buy/sell that other product at a fixed price on a future date/between dates - Convey rights (e.g.right to buy at a different price from current market price), derivates themselves have value & maybe traded (e.g. ordinary shares, commodities, IRs, exchange rates) - Main forms: Options = Right (but not obligation) to buy/sell specific amount of assets (e.g. number shares) at specific price (exercise price) within specific period - Call option = option to buy Put option = option to sell - Buyer of option contract pays purchase price (option premium) to seller (writer) of the contract Futures = Similar to options, except an obligation to buy/sell at specific price date
- On the range of financial products & commodities (e.g. coffee) & currency, can use as a hedge against movement in exchange rate - Forward contract = contracts between 2 parties, not traded Warrants = Similar to call options, except generally issued by Co.s, & gives holder right to purchase that Co.s ordinary shares - Allows Co. to raise new capital
3.5.1 Mortgages
- Large, long-term mistakes are serious advisor must choose carefully: Wrong Lender, IR scheme Investment provider Protection Result for client Pay more than necessary Worst: mortgage not repaid at end of term Best: client miss out on possible surplus funds Family is destitute
Mortgage = house purchase loan - borrower mortgages property creates legal charge over title deeds or lender, as security for loan Mortgagor = individual borrower who transfers property to a lender for the duration of a loan Mortgagee = lender (bank, building soc) who has interest in property for duration of loan
If IR increases Monthly repayment increases (or can change mortgage term) - Repayment is calculated in a way it remains the same throughout the mortgage term the proportion of capital & interest varies throughout term: (ignoring IR changes) = interest = capital Term Monthly repayments consisting of Capital 1) Start 1 Term 2 2) End Low High Interest High Low
- The amount of capital outstanding decreases by smaller amounts each month at the start compared with towards end of term
Amount
- 2 important factors: Mortgage will be repaid at the term end, provided IR changes have been allowed for, & all repayments are made when due If borrower dies before term end, repayments continues/loan repaid life assurance is required
- Borrower should be aware of risks: Mortgage repayment depends on investment plan achieving pre-determined rate of return If not achieved, value of policy/plan < total debt
- If borrower dies before bonuses reach required level, they have an insufficient amount to repay Decreasing term assurance added to policy Additional benefit is calculated to be sufficient to makeup difference between: Current level sum assured + reversionary bonuses) - Mortgage amount - If total sum assured + bonus < loan amount at the end of term, it is up to the borrower to fund the difference Life Co.s help avoid this by including progress reviews of the endowment Check whether policy is on target - if not, recommendations are made: e.g. increasing premiums or other - If total benefit at maturity incl. bonus > amount to repay loan Surplus is given to the borrow tax free
Disadv
Minimum age lump sum can be taken usually 50yrs (55yrs in 2010) term of mortgage must run until then else mortgage not paid earlier even if have funds Only 25% can be taken as cash fund of 4x loan value required (remaining 75% for retirement pension) maybe: total contribution > borrower can afford/ permitted by regulation
Funds of investment contribution not subject to CGT Not automatically with life assurance (unlike endowment grow faster than endowment policy which subject policy) separate policy required (after 6/12/06 can not to income tax & CGT get pension term allowance for this (3.3.1.4)) Not assigned to 3rd party (loan security) lender can not take possession of the plan or directly receive benefits from it
3.5.1.4.1 Capital & interest Borrowers can not predict Variable Rate Monthly payments vary (without level of future payments limit) according to IRs 3.5.1.4.2 Discounted 3.5.1.4.3 Fixed Rate Discount off normal variable Penalty if repaid within rate (e.g. 2% discount for 3yrs) certain period Fixed interest for specific period e.g 1-5 (later variable) High arrangement fee Restrictions & penalty of changing lender Popular for 1st time buyers
3.5.1.4.4 Variable but IR upper fixed limit Capped Rate 3.5.1.4.5 Base Rate Tracker Variable rate linked to BOE base rate Charged premium above base rate e.g. 0.95%
Cap & collar = fixed lower & upper limit as well Review monthly & reflects cost of borrowing from Bank Of England
Type 3.5.1.4.6 Flexible 2.5.1.4.7 Cashback 2.5.1.4.8 Low-Start 2.5.1.4.9 Deferred Interest 2.5.1.4.10 CATStandard
Description Gives borrower scope to alter monthly payment to suit ability to pay quickly Lump sum paid to borrower immediately after completing mortgage Lower initial repayments (keep initial costs down)
Fixed amount/% of advance Lower loan:value get higher cashback Some/all cashback repaid if loan redeemed in certain period Deferring capital instalments initially (after this period premiums will increase)
Initially some interest not paid Useful for people expecting an increase in income but added to outstanding capital (not useful for people borrowing high loan:value especially when prices may decrease negative equity) Charges, access, terms For those who want clearly stated limits (FURTHER INFORMATION BELOW)
- Allow draw-down funds - lender will have limit on total borrowing - some lenders provide chequebook enable funds to be drawn Take priority over subsequent charges - Easier administration process
No separate charge allowed on mortgage indemnity guarantees Interest calculated on daily basis
All other fees must be disclosed in cash terms before customer commits Maximum early redemption charges apply on fixed & capped rate loans Variable-rate: No arrangement fees Fixed- or capped-rate: not charged > 150
Charges Variable IR < 2% above Bank of England base rate & must be adjusted within 1 month when base rate is low Limits on Access & Terms Normal lending criteria must apply Purchase of related products can not be made a condition of offer
Customer can choose on which day of month to pay All advertising & paperwork straightforward
- Borrower may use loan to purchase a lifetime annuity to augment retirement income - interest not built up but paid monthly from the annuity - as the debt is not increasing not decreasing remaining equity HIP allows for a higher loan-to-value ratio - Disadv: current annuity rates are decreasing when purchased, the borrower is locked into a fixed rate for life
3.5.2
3.5.3
3.5.3.2 Overdrafts
= Current a/c facility enabling customers to continue using a/c in normal way even though funds exhausted short-term temporary borrowing to assist customers over a period where expenditure > income - Limit set by bank - Interest calculated on a daily basis - Unauthorised overdraft: higher IR charged authorised overdrafts: can be inexpensive, though may have arrangement fee
3.5.4
3.6
- Not pay CGT, income tax & no higher rate income tax on income dividends - Unable to reclaim 10% tax credit on UK dividend - UK, <75yrs can receive income tax relief at highest marginal rate on contributions to occupational & private pension schemes, up to a maximum of 100% UK earnings or 3600 - But: annual allowance limit: 245,000 (2009/10) - If the total of employer & employee contribution in a year exceed this, tax is charged on the excess - Benefits normally taken from schemes when individual is 50+yrs (minimum age rise: 55yrs (6/4/2010)) - 25% of fund can be taken as tax-free cash but remainder taxable income Before 6/4/06: compulsory to buy annuity by 75yrs Now: draw down/pension fund withdrawal Can make regular w/ds of capital from fund (has limits)
Maybe taken by purchasing annuity Can buy from other providers who give higher annuity rate = open market option
- Additional contribution to occupational scheme - Sometimes: purchase additional years service in final salary scheme Most: operate as money purchase arrangements & employee have limited choice of funds - Employers cover some/all costs - Contribution to AVCs are deducted from the gross salary employee receive full tax relief
3.6.1
3.6.2, 3.6.3
- SHP is a private pension scheme, but in some circumstances the gvt makes it compulsory for SHP scheme to be provided by an employer e.g. employer has 5+ employees & no occupational pension scheme - Employees not obliged to join - Employer must provide payroll deduction scheme for those who join & pass employees contribution to the scheme - Personal pensions rules: Charges can not exceed 1.5% fund value per annum for the 1st 10yrs of term & 1% after No exit & entry charges Minimum contribution required not exceed 20 - Effect of charge restrictions means independent financial advisors do not receive commission individuals may find it a problem in obtaining advice on SHPs
To overcome: gvt made decision to make flowcharts (= decision trees) to determine if SHPs are appropriate for the individual
Cash Current a/c with guarantee card Secure, short-term investment e.g. instant access deposits High long term potential but short term risk Less flexibility & higher return investments e.g. fixed term bonds
High liquidity & safety: Income & savings e.g. Bank a/c, insurance
Move away from liquidity, & higher risk: Borrowing: e.g. credit cards/personal loan
4.1
Young family
Established family
Mature Household
Retirement
4.2
Previous employment details especially if they have pension entitlement Share-option scheme & profit related pay schemes - copies of payslips, P60, tax returns, notices of tax coding
- Income easier to calculate than expenditure (some easier (rent, bills) others hard (holidays, food & drink))
4.3.1.2.3 Assets
Ownership (joint/single) Purpose, type, size of investment Current value & projected value Rate & type of return Tax status of investment Options available & penalties Sum, lives assured & maturity dates
4.3.1.2.4 Liabilities
Lender Amount of loan Balance outstanding Original term & term remaining Type of loan (e.g. (un)secured) Amount monthly/periodic payments IR Repayment method Protection of capital/payment
Attempt to solve
Problem is specific & client unwilling to move? put it into perspective & stress other compensating factors (i.e. advantages of the chosen product)
4.6.3, 4.6.4
4.6.4 Documentation
- Adviser must explain the cancellation notice right to withdraw from arrangement within defined period Key features documents, Clients specific illustration, Product brochure (product features) Given business card - Transaction records must be kept securely but accessible (pension contracts & life policies kept for 5 years) (opt-outs & free standing AVCs kept indefinitely) - Where MiFID business involved: retention of 5yrs - Given to the client before the sale is closed - Provide all the information required to make a decision
5.2 Protection
- Important to have precautions e.g lives, health - although low number of people do - Probability of dying: <65yrs in UK: 1 in 5 males 20 65yrs: 150,000 males 600,000 males off work ill for 6 months
5.2.1
e.g. Goran is the production director of a firm. Gross profit: 4million Goran paid: 50,000 pa Firms total wage: 2million Sum assured on Gorans life: (50,000/2million) x 4million x 5yrs = 500,000 - Co. take out term assurance on the employees life for the period employee expected to be the key person e.g. until retirement/contract end - If term <5yrs: premiums allowed as a business expense (can be set against corporation tax) - In the event of a claim, policy proceeds taxed as business receipt & subject to corporation tax
Reduce overall monthly repayments - as unsecured loans now subject to lower IRs & longer term
Unsecured loans are now secured against property even bigger problem if borrower defaults
5.4.3 Accessibility
Instant/short access notice deposit a/c Not directly accessible until fixed maturity date gilts, shares
5.4.4 Taxation
- especially income & CGT Shares & unit trusts (both taxes) gilts (income tax not CGT)
- Important to consider tax regime of the product, & tax position of the investor
5.4.5
true purchasing power of invested funds e.g. investment paying 4% IR when inflation rate 3% RRR = 1% - if IR < inflation rate, the RRR is negative reduce investments purchasing power
- People suffer illusion as they do not adjust inflation with IR: Effect of low IR, on Savers: think they are receiving low return on savings react to lower inflation rates by putting their into riskier assets to get higher return problem at retirement Borrowers: think they are gaining from lower monthly repayments may take higher mortgages, as they think they can afford to Problem: 1) higher capital to be repaid 2) further problems if IR rise 3) increased demand for houses increase house prices threaten stability
- IHT (1.3.3.5) 40% on estate of deceased Nil-rate band (325,000 (09/10) anyone under this threshold is exempt Managing IHT: 1) Avoid having to pay: Reduce the estate to below the nil-rate threshold, by: - making use of various exemptions to make it tax-free - gift during ones lifetime potentially exempt
Place the asset in a trust (trust property is no longer part of a settlors estate)
- It is not possible to avoid IHT by giving the property away while continuing to live in it. Classed by HMRC: gifts with reservation rule = if the donor retains any benefit from the gifted assets, IHT is charged - Loophole in the rule: - By placing the property in a trust Closed in Schedule 15 of Finance Act 2004: liable to income tax each year on the benefit of occupying/using the asset previously owned but disposed after 17/3/86 (on annual rental figure: <5000 no tax charged) - Married couples & civil partners can now use whole of both their nil-rate bands to pass property tax-free to relatives/others - % of nil-rates bands unused on 1st death can be carried forward & used to increase nil-rate band on 2nd death
5.7, 5.8
- to avoid policy becoming part of the deceaseds estate IHT liable as well policy should be written in trust for the benefit of the beneficiaries (need a valid will)
6.1, 6.2
- if no will (or invalid): Administrator issued a grant of letter of administration e.g surviving spouse/relative Responsible to deal with the estate as prescribed in the rules of intestacy (6.2.1)
- Will = declaration of the individuals wishes regarding what happens after they die - e.g. disposal of assets, instructions on burial etc - clear, unambiguous, signed by testator in presence of 2 witnesses - Terms on the will are only undertaken when the testator dies - Before: can revoke (cancel) or modify at any time - To make valid in writing, properly executed - minimum age: 18 yrs - In the event of a marriage or remarriage or civil partnership will is automatically revoked unless specifically written otherwise - In the UK: 7/10 die intestate = no valid will - Cost of writing a will is reasonable - Advisers role: NOT writing the will but showing its benefits & recommending the client to draw up a will - Beneficiaries can vary the way the estate is allocated = execute a deed of variation All beneficiaries must: - >18 years old - Agree to the terms of variation (usually for tax purposes) e.g. could reduce IHT Can NOT be a beneficiary
6.2.1
6.2.1 Intestacy
Partial intestacy = valid provision for distribution of some assets but not of others - Distribution of the estate of intestate person has rules of intestacy - very specific & not flexible - in many cases, not distributed as deceased would want & spouse not always get - destination of the property under rules depends on the estates size & family circumstances Rules: Deceased have Children? 0 / Spouse? / / of the balance. Children Spouse 1st 200,000 + remainder 1st 125,000 + to trust Amount to Parents/ Siblings Remainder
Capital to the children Spouse gets income for life when the spouse dies / 0 0 0
6.3
- Must act:
accordance to the trust deeds. If the trust deed allows the trustee to exercise power (e.g. decide who will be beneficiaries) agreement between all trustees in the best interest of beneficiaries (e.g. fairly distributed) Trustee Act 2000 trustee required to: - be aware of need for suitability & diversification of assets - obtain & consider proper advice when making investments - keep investment under review
6.4 Co.s
= legal entities, separate from shareholders or individual employees - Shareholders of limited liability Co. are not personally liable for the Co.s debt - Limited to the amount they invested in Co. shares - Rules about what Co. can & can not do are set out in the memorandum & articles of association e.g. borrowing limits on amounts & purpose - When making a contract for lending to a Co., it is important to ensure the person signing is empowered to do so & is authorised
6.5 Partnerships
= arrangement between people carrying on business together for profit - (unlike Co.s) It is NOT a separate entity partners jointly own assets & liabilities (6.5.1) - Should have written agreement setting out details between partners incl. share proportions of profits & what happens if 1 partner leaves etc. (5.2.2.2)
6.6
Each party must have legal capacity to enter contract. Certain parties have limited power to enter contact e.g minors & people of unsound mind Financial services capacity to contract depends on authorisation of FSA
Must be offer made by offeror & unqualified acceptance by the other party, communicated to the offeror Offer & acceptance
Basic requirements for contracts to be binding: Contract not entered into as result of misrepresentation, under duress or undue influence
- Some contracts are recorded in a specific legal form e.g. sale of land is made in writing conveyances of land (transfer of ownership) is made in a deed - There is usually no duty of disclosure between the parties to a contract - Most contracts are based on caveat emptor (let buyer beware) - Exceptions e.g. insurance contracts on principle of utmost good faith: all material facts are disclosed if not, contract maybe void - Breach of contract = party fails to perform his side of contract & no legal excuse
To court: Seek damages = injured party seeks financial compo for losses, to position if contract had not been breached Order for specific performance e.g. party to complete contract Injunction = count order preventing someone from doing something
6.7
6.8
6.9
Enduring Powers of Attorney Act 1885 created enduring power of attorney power continues if the donor becomes mentally incapacitated Revoked with consent from Court of Protection Must be registered with the Public Guardianship Office Replaced by lasting power of attorney since Mental Capacity Act 2005 from 10/2007 (name change) Office of Public Guardian (10/2007)
Allows an individual to make health, personal & financial decisions for another person - Established when donor is of sound mind, - Only in force when donor is mentally disabled
6.10
- Bankruptcy cancels most debts & is a fresh financial start - But affects future credit & employment Unable to borrow other than nominal amounts Must disclose when applying for mortgage more difficult or higher IR charged to cover lenders risk
UNIT 2
UNIT 1
UNIT 2
UK FINANCIAL SERVICES & REGULATIONS
1) Deregulation e.g. banking & building societies in the mortgage market Before: gvt had a lot of regulation Later: barriers removed in 1980s promote competition (high range & low cost) 2) Lots of regulation
1.1
- 2 movements:
Different expertise of different consumers Consumers needs for accurate advice & info Different level of risks relating to different investments
Objectives
Money laundering Low scope for financial crime
Fraud & dishonesty incl e-crime Criminal market conduct incl. Insider dealing
Cost:Benefit Taking a/c of responsibilities of those who manage firms Facilitating competition
Taking a/c of international financial services & UKs competitive position - Undertakes role by setting rules, training, guidance etc via a range of sourcebook Sourcebook High Level of Standards Include - Principle for business - Senior management arrangements, systems, controls - Fit & proper test for approved persons - Threshold conditions - Statements of principle for approved persons - Rules & guidance for firms seeking authorisation & FSAs enforcement powers - Supervision manual: how FSA references & monitors compliance of authorised firms - Investor complaints & compensation procedures - Arrangements for professional firms e.g. solicitors - Money Laundering - Conduct of Business: Standards applied to marketing & sales of financial product - (2007): New Conduct of Business Rules Book (NEWCOB) introduced - Training & Conduct - Interim Prudential: Financial soundness & different types of firms (e.g. assets & liabilities, reserves, reporting)
1.2.5, 1.2.6
Significantly influential positions: 5) 6) 7) Business of firm organised & controlled Skill, care, diligence Steps to ensure business complies with standards & requirements
1.2.7
1.2.8
Compliance Chains of responsibility Competency & honesty of staff especially approved person Audit of systems & controls by independent person
1.2.8.4.1 Auditors
External auditors - especially concerned with published financial statements & a/cs free from misstatements, comply with law & accounting procedures - independent of institute whose a/c being audited e.g. accountants - conform to Auditing Practices Board & Accounting Standards Committee - in-house members of staff or out-sourced - review how firm is managing risk e.g. appropriate controls established, suggest improvements, check records are accurate & reliable
Internal auditors
1.2.8.4.2 Trustees
= person/organisation whose responsibility it is to ensure any property held in the trust is dealt with according to the trust deed for the benefit of the trusts beneficiaries e.g. Unit trust trustee: legally owns trusts assets on behalf of unit holders Occupational pension scheme trustee: rights & duties in Pensions Act of 1995 & 2004
- FSA established set criteria determining if person is fit & proper for controlled functions within the financial services industry under FS&MSA2000 (1.7.1) Criminal records Disciplinary proceedings Known to go against regulations/law Complaints/Dismissals Insolvency Competency/capability - meeting FSA training requirements Current financial position Financial soundness Previous bankruptcy/adverse credit rating
1.2.9, 1.2.10
1.3
defined in FS&MA2000 (regulated Activities Order 2001) (RAO) Regulated Debentures Shares Gilts Activities Include 1) 2) 3) 4) 5) 6) 7) Accepting deposits Effecting & carrying out insurance contracts (incl. funeral plans) Dealing in & arranging deals in investments Establishing & operating collective investment schemes Advising on investments Mortgage lending & administration Advising on & arranging mortgage & general insurance
Securities 2 categories Contractually based Options Life policies Personal Futures pensions
Investments 1) Deposits 2) E-money 3) Insurance contracts 4) Shares, Co. loan stocks, debentures & warrants 5) Gilts & local authority stocks 6) Units in collective investment schemes 7) Rights under stakeholder pension schemes 8) Mortgage contracts
- Permission given by listing the regulated activities & investments firm is allowed to carry out - via FS&MA2000 Part IV (Part IV permission)
- Aim of industry regulators: protect firms, customers, economy by establishing rules & principles - Different rules for deposit-takers, investment firms & life assurance Co.s
- Minimum requirement by solvency ratio = capital requirement denominated as a proportion of the banks assets (e.g. loans), with allowances made for the perceived risk level of different assets = Institutes own funds as a % of risk-adjusted value of its assets i.e. how much institute can cover its risks
1.4, 1.4.1
Currently solvency ratio is at least 8% (of the banks own funds of risk-weighted assets) Banks paid up share capital + any retained profits % contribution of less risky asset has less risk-weighted total than more risky asset - Basel II: is slightly more flexible to reflect the business of individual institutions Incl. capital requirements for operational risks risk of loss from failed/inadequate internal processes, people & systems or external events e.g. earthquakes, fraud Basic approach: capital required = institutes gross annual income (average over 3yrs) x 0.15 For larger organisations: more sophisticated system (standardised approach) applied - may use different multiplying factors Introduction of higher supervision system e.g. stress test extent of sufficient capital if unexpected adverse economic conditions occur - Backed by disclosure requirements to ensure bank publish information for risk profile
1.4.2
1.4.3
- Types FSA aims to reduce FSA not take responsibility, but aims to educate consumer Prudential risk e.g. risk of firm collapsing as incompetent management Bad faith risk = risk due to fraud, mis-representation, mis-selling Complexity/unsuitable risk = risk of customer not understanding product Performance risk = risk that investments fail to deliver hoped-for returns
- Assessment of risk: Probability factors = likelihood of problem occurring - Business risk e.g. business strategy, capital adequacy, a/cs - Control risk = quality of management, internal systems, controls - Consumer relationship risk e.g. marketing & advice practice Impact factors = effect of economy, industry, customer in specific event e.g. firm collapsing, compensation loss availability Risk: - Classification category: High impact firms, 65% market shares High <1% institutes Low Majority of institutes
ABCD
1.5
Controlled Functions
Systems & Controls function Finance Risk assessment Internal audit
1.7, 1.7.1
Invitations or inducements to engage in investment activity e.g. Personal visits, Non-written financial promotions telephone conversation Written financial promotions Newspaper adverts, internet sites Types
- Rules shifted to allow firms more discretion on marketing many existing provisions replaced More flexibility, but their responsibility their rules conform to the principles
1.7.2.1 Comparisons
- Must be meaningful & fair - MiFID firms require details of information source & assumptions made in comparison
1.7.2
- Clear & readily accessible - From advertisement information found in fact find Record for advice etc - Why? Demonstrate compliance to rules
1.7.3, 1.7.4
- No specific amount of time (~50hrs/yr) on continuing professional development (CPD) - Methods Conferences Private study Training courses
3)Retail client
1.7.5
Summary of clients responsibilities Detail of complaints procedure Detail of payment for services provided
1.7.5.2 Status of Advisers & Disclosure of Status 1.7.5.2.1 Polarisation & Depolarisation
Adviser is independent or tied must tell customer Advise & sell product for 1 (or group) Co. Give advice on the whole financial services market & select appropriate product for the client & provider - Problem: commission bias (i.e. adviser gives the product with higher commission) Jan 2002 Reforming polarisation Making the Market Work for the Consumer i.e. ended polarisation June 2005: Depolarisation= new way determining & explaining the way clients pay for advice (1.7.5.5) Change: 3 types of advisers Whole of market usually panel of Co.s Must have range of products Multi-tie Marketing groups Provide products from 1 provider
- Whole-of-market advisers have to offer (but not insist on) a fee based option (to show their decision is not influenced by commission) - If an adviser is tied to one product provider, however the products are not suitable, they are not permitted to sell the product should tell the client to seek independent advice
Includes
Details of ownership & regulation
Includes
Tax information on maturity dates/before Where additional information can be found Commission paid Client specific information relating to charges
- Client can withdraw from the contract within a specific period of receiving notice (~4 days)
Products
- Controlling risk: limit proportion of shares in stakeholder unit-linked & with-profit products to 60% of the fund remainder into fixed-interest securities & cash - Simplified selling product model: Adviser explains product nature Series of short questions Assessment - can be terminated at any stage Customers savings & investment objectives Risk assessment
1.7.7
- 2 types sales people: 1) giving advice 2) those only giving information on products - determined by questions to filter mortgage selection MCOB rulebook incl: MCOB 1 2 3 Purpose Application & Purpose Conduct of business standards Financial promotions Details Explains scope of rules i.e. who it applies to & what type mortgage Use of terminology, charging rules, record accessibility by FSA Distinguish between (non)real-time promotion Not contact customers at unsociable hours Details on promotions & say Home maybe repossessed if not keep up with repayments Incl.: type of adviser i.e. independent etc Suitable products for customer Records kept for 3yrs IDD information: whose mortgage offered, charges payable, FSA regulated details, claim & complain rules
MCOB 5
Details Details given when recommendation made & before application to lender Incl. APR, amount monthly instalments, amount instalments if increase 1% IR Lender provided detailed documents, incl. how long offer remain valid, point of no withdrawal, charges After 1st mortgage payment made, lender confirm: amount, dates, method payment & details of related product e.g. insurance, what customer do if falls into arrears - annual statement issued: amount, term, changes, type of mortgage Special rules to advising & selling Describes how APR calculated Show customers ability to pay Excessive charges not allowed, early repayment charges correspond to cost to lender & arrears charges reasonable to the cost of administration Try reach agreement with client in arrears Customers in arrears given information in 15 days: FSA worksheet on what to do, missed payments, total arrears incl. charges, debt, additional charges Repossession when all other measures fail
6 7
8&9 10 11 12
13
- FSA took control in 1/2005 - rules to adviser in Insurance Code of Business (ICOB) ICOB 1 2 3 4 Purpose The scope of rules General rules Financial promotion Advising & selling standards Details Rules & types of activities covered (incl. to intermediaries) Rules on communication, record keeping, inducement Advertisements clear, fair, & not misleading Information on status: [details of firms regulation (FSA), wholemarket product, producer, how to complain, information in IDD, combined initial disclosure document (CIDD)], Fees Advice suitability Excessive charges Unsolicited services contract renewal Product information, terms of contract, price, cancellation rights If customer cancels provider must return sums in 30 days - can deduct charges Insurance Co. ensuring rules complied to if adviser acting on behalf of them & customer must be told
5 6 7
1.7.8
2.1
2.2
2.2 Definitions
Money laundering = process filtering proceeds of criminal activity through series of a/c or financial products to give it apparent legitimacy
- EUs 3rd Money Laundering Directive (2005) definition incl. conversion of property, incl. knowing /and participating, to conceal origin to evade legal consequences concealing true nature, source, location, disposition, movement, rights wrt ownership acquisition, use of property knowing at time of receipt it was derived from illegal activity participating, committing, attempt to commit, aiding, abetting, facilitating illegal activity - Specifies money laundering within EU treated under directive, even if activities to generate property took place in a non-EU country Property = asset of every kind, (in)tangible, (im)movable, as well as legal documents giving title to such asset Criminal activity = crime specified in Vienna Convention United Nations Convention Against Illicit Traffic in Narcotic Drugs & other criminal activity as specified by each member state - 31/8/06: Money Laundering Sourcebook deleted, & firms given flexibility to structure controls & procedures around their specific risks (guidance from Joint Money Laundering Steering Groups)
2.3
Reporting Education Procedures & accountabilities Refrain from alerting investigated Report at least once a year & assess firms compliance to sourcebook Ways to prevent staff money laundering Training Money Laundering Reporting Officer (1.7.1) Identity evidence - for transaction >$15000 (~10000) - different for life assurance policies (2.4)
- FSA assess money laundering using: Joint Money Laundering Steering Groups guidance notes = steps to verify customer identity - made up of UK trade associations Financial exclusion guidance (2.4.1) FATF = highlight developments in ML & deficiencies in rules
2.3.1 FATF
2.3.1 2.3.4
- Coordinate international fight against money laundering - Established in 1989 - Main office: Paris, 33 full members incl: EU, US, East Europe, Far East - Work involved: Setting standards for anti-money laundering programs (40 recommendations) Evaluating the extent individual countries have implemented their standards Identifying money laundering methods -Inter-gvt policy making body is not a law enforcer, but have responsibilities of individual countries e.g. Serious Organised Crime Agency(SOCA) - in UK
2.3.2 SOCA
= public body sponsored by, but operationally independent, of Home Office - Responsible to reduce the impact of serious organised crime - Intelligence-led agency with law enforcement powers - 3 priorities: drug trafficking, immigration crime, money laundering
* = Areas of concern
2.4, 2.5
Entering into new business relationship New customer: when value > 15000/life assurance policy - 1000/yr (2500 single) premium If suspected of money laundering - If client is introduced via intermediary, written assurance by the intermediary is sufficient - Standard format e.g Association of Independent Financial Advisers(FA) - Acceptable forms: current passport, national ID card with photo, driving licence, utility/tax bill
- Firm must appoint a Money Laundering Reporting Officer (MLRO) co-ordinate anti-money laundering activities Reporting cycle SOCA Staff - 1+ times a year the senior management gets a report from the MLRO Information on money laundering Assess firms compliance submitted by staff with sourcebook Indicate how FAFT findings used
2.8 Enforcement
- FSA can discipline firms/individuals if they breach money laundering laws & can prosecute under the Money Laundering Regulation 2003
- 14 years imprisonment & fine - 5 years & a fine for tip off or failure to disclose
3.1
- Types of complaints: Hard = allegation of financial loss, material distress - records kept for 3yrs Soft = any other - same rules except hard complaints have deadlines & reported to FSA
Firms responds in final letter within 4 weeks of receiving complaint (if not, send interim letter) if 8 weeks pass Letter to explain Inform customer of Ombudsman Service within 6 months of the date of the letter - 6 monthly reports about progress of hard complaints
3.2
3.3
Claims against mortgage advice 100% of 1st 30,000 & arranging firms Claims against insurance intermediaries Depends on circumstances
- No compensation for other losses (e.g.negligence, poor advise etc) via FSCS could via civil courts
3.4
Pensions Ombudsman Legally binding - Communicate to Ombudsman via writing within 3yrs of the event (excl. internal complaints procedures)
4.1, 4.1.1
4.1.1 Definitions
Data subject = individual whose personal data is processed Personal data = information relating living individual who can be identified from information/ combination of information in possession of data controller Sensitive personal data = this data can only be processed if individual gives explicit consent - incl. racial origin, religious belief, political persuasion, physical & mental health Processing = all aspects of owning data- obtaining, recording, organising, disclosing, erasing Data controller = legal person determining purpose data processed & way its done - normal: organisation/employer - ensure requirements of Act carried out Data processor = person who processes personal data on data controllers behalf
4.1.2
4.1.3 Enforcement
4.1.3
- by Information Commissioner (IC) Responsibilities: educate the organisation & individuals about the Act & their rights take action to enforce the Act - IC can issue 2 types of notices to the data controller (if infringing terms of Act) 1) Information notice = require controller to specify organisation will take to comply to Act 2) Enforcement notice = require organisation to take specific/refrain from action - IC can prosecute controller if they do not comply to notices - 2 other criminal offences in the Act: failure to notify the IC. This is the way controller registers with the Office of the IC (acknowledge data held) process data without authorisation from the IC - Maximum penalty: 5,000- unless the case goes to Crown Court (unlimited fine)
SECTION 5: OTHER LAWS & REGULATIONS RELEVANT TO ADVISING CLIENTS 5.1 Consumer Credit Act 1974
= Regulate, supervise & control certain types of lending to individual & provide borrowers protection from unscrupulous lenders - Regulated by the Office of Fair Trading (not FSA) - Sets out the standards of how all lenders must conduct their business incl. safeguards potential borrowers, must be made aware of nature & condition of loans & rights & obligations - Affects most aspects of banks lending activities incl. loans & revolving credit Not all loans are included: - Loans >25,000 - regulated by Consumer Credit legislation (unless exempt (next slide)) - from Apr 2008 all loans are covered
Clients must receive a copy of the loan agreement for own records Prospective borrowers have cooling off period unless agreement signed on the lenders premises Main elements of Act Credit reference agencies must disclose information about an individual on request
- Introduced annual percentage rate (APR) system = compares the price of lending total cost of borrowing IR - 2 factors: Additional costs & fees
5.1.1
5.1.1 Changes
- due to 3yr review, to make law fair & competitive credit market: Consumer Credit Act 2006 (CCA06) - 3 improvements described by the Department of Trade & Industry: 1) Enhance consumer rights & redress 2) Improve regulation of consumer credit business 3) Make regulations more appropriate for all kinds of consumer credit transaction Law Primary Act CCA06 Changes - Parts changed incl. Financial Ombudsman Service (4/2007) - New licensing regime & transparency provision (4/2008) - About form & content of adverts for credit: Simple, intermediate & full-credit advert to a single list, incl:- new way to calculate APR & present prominently (2/3 of advert) - plain English & easy to read/heard - name of advertiser included - if secured loan advert clearly state the required security
CCR (Agreements) - Make agreements signed by customers clearer & easier to understand (Amendments) change content & layout CCR (Disclosure of Information) CCR (Early Settlement) - What information must be disclosed to prospective borrowers & the way - Confirm entitlement of borrowers to rebate when all/parts of the debt repaid earlier & the way to change calculation etc
5.2.2.1 Fairness
- Contracts should be fair, good faith, not cause significant imbalance on rights & obligations - Contracts written in plain language - Unfair terms are unbinding (the rest of contract may still be binding)
5.3, 5.3.1
- High risk situations require more monitoring Protect benefits of members of work-based pension schemes - 3 objectives Promote good administration Reduce risk
Informed quickly if scheme can not meet funding requirements can remedy quickly
Powers
Putting things right incl. Specific action to improve matters Disqualifying trustees who are not fit Recovering unpaid Fines/ prosecution Acting against avoidance = prevent employers from deliberately avoiding pension obligations & leaving Pension Protection Fund to cover pension liabilities
- Actions: Contribution notices require employer to make payment on debt to the scheme or Pension Protection Fund Financial support directions require financial support in place for under-funded scheme - Issue voluntary code of practice on range of subjects & expected standards of conduct Provide practical guidelines for trustees, employers, administration etc (4/2006): Must have knowledge of pension & trust law, scheme funding& investment, trust deed & other important documents
- Taken over responsibilities of the Pensions Compensation Board to provide compensation for defined-benefit & contribution schemes in fraud - To ensure compensation retains value over time, payments increased in line with retail price index (RPI) - up to a maximum 2.5% Compensation funded in 2 ways: Take over assets of pension schemes with insolvent employers Levy on all private sector defined benefit (element) schemes 5 parts Pension protection levy based on risk factors ~80% of PPF (incl. under-funding, credit rating) Pension protection levy based on scheme factors (incl. number of active & retired members) Fund compensation levy (replaced Pensions Compensation Board levy) PPF Ombudsman levy cover cost of PPF Ombudsman Administration levy cover set up cost & undergoing cost of PPF
5.4 EU Directives
5.4, 5.4.1
- Objectives set by EU but member states can achieve them by any method decided by national authorities
5.4.1 Banking
- Apr 2000: 2nd Banking Directive consolidated earlier directive
Gave institutions freedom to establish & pursue business of credit institutes Defines credit institution: undertaking whose business is to receive deposits/other funds from the public & to grant credit for its own a/c Minimum funding (& other) requirements for institutions to be authorised as credit institution Way institutes become authorised (e.g. FSA in UK) Activities authorised credit institutes can carry out incl. acceptance of deposits, lending, trading in money markets
5.4.2 Investment
5.4.2
- 1993 Directive on Investment Services in Securities Field - Investment Services Directive (revised) in force 1996 - Aim: enable investment firms to operate in different EU states in approximately the same way broaden markets across the EU - Firms must be authorised in their home state & can then operate in other states without further authorisation Obtain & retain by complying with certain roles: e.g. - good administration & accounts - safeguards on held data - internal control mechanisms
- UK firms are exempt from MiFID if: do not hold client /securities restrict business transmitting order & giving advice on transferable securities & collective investment schemes transmit orders to authorised credit institutions, investment trust Co.s, collective investment schemes & MiFID investment firms
Options Transferable securities (stocks, shares) Investments Financial futures contracts Forward IR agreements IR, currency, equity swaps Money market instruments
5.4.3 Insurance
5.4.3
2 objectives: 1) Widest range of insurance products to EU citizens, while ensuring high standard of legal & financial protection 2) Enable authorised Co. to act throughout EU
2002 Life Directive - Arrangements for regulation & supervision depends on why the policy is taken out: 1) If taken out on applicants own initiative countries regulation where insurance Co. is 2) If taken out as rules of state regulated & supervised by that state
- To obtain authorisation
Limit business activities to insurance only Submit scheme of operation Run by technically qualified people Possess minimum guarantee fund Notify identities of shareholders & amounts
- Financial supervision of insurer by its home state incl. valuation of assets, liabilities, verification & solvency - May need local legislation in the state where insurance is sold, in relation to marketing & contract - Premium tax applied are those of state the insurance is sold - in the UK, premium tax to general insurance not life assurance - Need harmonised EU laws, incl. Choice, valuation, diversification & location of assets to support Co.s liabilities - Increased freedom of capital movement Principles to calculate assets & liabilities - Policyholder can withdraw within the cooling-off period ~ 14-30 days from the start of the contract = Statutory cancellation notice (UK) - Policyholders must be told essential characteristics of product in the Key features document (UK)
1988: 2nd Non-Life Council Directive rules for cross-frontier non-life insurance - balance between freedom & customer protection 1992: 3rd Non-Life Council Directive completed process - head-office in one state & run elsewhere - Co. can be authorised in 1+ classes e.g. general insurance accident, sickness, land vehicles etc
- Rules to protect clients funds (incl. clients in separate a/cs) - intermediary required amount is 4% premiums received/yr (subject to minimum 15,000)
Intermediary hold 10% voting rights /capital of insurance Co.s or vice versa
- To give advice on products recommended - from a high number of contracts available on market - assess customers need (fact find)
5.5
5.6
Current a/c
Products covered by code Foreign exchange transactions Loans & overdrafts, but not mortgages Secure & reliable Code commitments Publicise code & train staff Help customer e.g. send statements
Marketing clear & not misleading Deal quickly & sympathetically if things go wrong
Clear, fair, reasonable, not misleading Personal details not passed on Customers not have to be contacted
Information in summary box card issued Reduce/increase/ opt out credit limits Rules
Communication
Charges IR
Procedures
Bank, branch closure procedures Assistance Sympathetic, positive Cheques Direct debits & standing orders Dormant a/cs rules Disclosure required
Information clarity ID proof New customers, products & services How? Timescales Rules on passing information to credit reference agencies Guarantors seek Refusal independent legal advice explanation Complaints Borrowing Repay ability A/c protection Business operation covered by Banking Code
Customers responsibility
Cooperation - Open to interpretation, code suggests use of common sense - Independent review of code began in Nov 2006
individual firms charge reasonable pries & supply good quality products - 1999: Replaced Monopolies Commission due to Competition Act 1998 - Investigates issues of concern - Referrals from Office of Fair Trading, regulators of utility Co.s & other public service organisations Areas of concern: Mergers where it will result in 1 Co. having >25% market share Markets where danger of restricted competition in specific market Regulations where major regulated industries may not be operating fairly
- Has sweeping powers to stop a situation causing damaging impact on competition e.g. prevent mergers taking place
END