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UK Financial Regulations Easily Understood
Copyright© Ruksons
UK Financial Regulations Easily Understood Certificate in Mortgage Advice and Practice (CeMAP): Module 1 Certificate for Financial Advisors (CeFA): Module 1 Customer Service Professional (CSP) Certificate in Regulated Complaints Handling (CERCH) 2009/10 Financial Year
Written by
Tomi Omidiora BA Hons, MBA, CeMAP, CeFA
i
UK Financial Regulations Easily Understood
Copyright© Ruksons
Published by Rucksons Ltd, UK Financial Regulations Easily Understood Adetomi Omidiora Published In Great Britain 2009 Copyright © Adetomi Omidiora 2009 The Financial Regulations Easily Understood guide is to be used in addition to the main accredited Textbook and will never replace the detail contained there. It was written with an intention to the reader’s understanding of the main aspects of the text, and will serve as an appropriate revision guide to understanding investments and the risks involved. A thorough analysis, the detailed document could also provide clarity and understanding to an individual who needs a basic understanding of investments and risks. The Financial Regulations Easily Understood Book published in September 2009 provides information for the 2009/10 financial year. While the author has used all her efforts in preparing this book, there are no promises or warranties in respect of the accuracy or completeness of the content of this book with updated changes from the appropriate financial bodies. All rights reserved. Contents and or cover may not be reproduced in whole or in part. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means ---- electronic, mechanical, including photocopying, scanning and recording worldwide, without prior permission in writing from the author and/or publisher. Printed in the UK. Created and Designed By
Rucksons Ltd www.ruksons.com
Edition 2
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UK Financial Regulations Easily Understood
Copyright© Ruksons
Unit 1: Introduction to financial services Environment and products Money Inflation 2 Types of Policies to achieve long term objectives The Bank of England Financial Intermediaries Building Societies and Banks Building Society s Credit Unions Savings Gateway Clearings Offshore Deposits (Tax Havens) National Savings & Investments (NS&I) Individual Saving s (ISAs) Fixed Interest Securities Money Market Instruments Partnership Limited Liability Company Child Trust Fund (CTF) Investment Bonds Structured Products Real Estate Commodities Foreign Exchange Market Insurance Social Security Benefits Two Types of t Ownership Mortgages Endowment Table ISA Mortgage Mortgage Products CAT Standard Mortgage Equity Release for the Elderly Home Reversion Schemes Equity Release Table Shared Ownership Plans Property Insurance Other Secured Lending Second Mortgages Unsecured Loans Personal Loans Overdrafts Revolving Credits Charge Cards Debit Cards Commercial Loans Pension Products
1 1 2 4 4 5 6 6 7 7 8 8 10 11 13 14 14 18 18 19 19 20 20 20 27 31 31 34 36 37 39 40 41 41 42 42 43 43 43 43 43 43 43 44 44 44
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Occupational Pensions Derivatives Pooled or Collective Investments Unit Trusts Investment Trusts Open Ended Investment Company (OEICs) Collective Investments Table Financial regulation Taxes Income Tax Taxable/Non-Taxable Income Investment Income Tax Life Assurance Policies Capital Gains Tax Inheritance Tax (IHT) Value Added Tax Stamp Duty Reserve Tax Corporation Tax Withholding Tax National Insurance Tax Planning Tax Table Financial Planning and Advice Pattern in which Savers/Investors hold their assets Typical Financial Life Cycle – Age and Time of Life The Fact Find Advisor's Duty of Care Financial Needs & Objectives Agreeing Order of Priority Recommending Solutions Implementing Recommendations Documentation Financial Advice Family Protection Business Protection Death of a key employee Death of a Business partner Death of a Small Business Shareholder Insolvency Bankruptcy (Insolvency Act 1986) Loan Consolidation Individual Voluntary Agreements (IVAs) Wills Trustees Law of Contract Law of Agency Power of Attorney Lasting Power of Attorney
44 46 47 47 48 49 50 51 52 52 53 55 56 57 59 62 62 63 63 64 64 65 67 67 67 68 69 69 69 70 70 70 71 71 72 72 73 73 73 74 74 74 74 76 77 77 77 78
Question time for Unit 1
79
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UNIT 2: UK Financial Services and Regulations Regulation - Background FSA Objectives Protection Covers The 5 sourcebooks make up a Handbook to explain these activities Status of Provisions in FSA Handbook Principals for firms and Approved Persons Treating Customers fairly Senior Management - Arrangement, Systems and Control The "fit and proper" test for approved persons The Prevention of Crime Regulated Activities and Investments Two categories of Regulated investments Advertising and Financial Promotions Advertising Requirements Records Training and Competence Capital Adequacy Basel Committee of Banking Supervision Liquidity Assessing Liquidity Risks Liability Liquidity Risks faced by Financial Services Firms Risk Assessment Profile - Overall Level of Risk of Firm Discipline & Enforced Powers Available to the FSA Enforcement Powers Approved Persons in Controlled Functions The Banking Code Payment Service Directive Competition Commission European Union Directives Investment Business MiFID Banking Directive Insurance Directives Solvency Margins for Life Assurance Companies – Own Funds Regulation of Mortgage Advice MCOB Rulebook Regulation of General Insurance ICOB Rules Documentation and Advice Order of documentation Three Types of Client Polarisation Retail Distribution Review Suitability Requirements Cooling off and Cancellation (statutory cancellation period) Charges / Commission Risk Disclosure Product Disclosure Execution-only Contracts Stakeholder - Type Products (Ron Sandler)
82 82 83 83 84 84 85 86 87 87 87 88 89 89 90 91 91 92 93 93 94 94 95 95 96 96 97 99 99 100 100 100 101 101 104 104 105 105 106 107 107 107 109 110 110 111 111 112 112 113 113
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CAT Standard Mortgage Money Laundering Some Definitions Client Identification Financial Exclusion Complaints and Procedures Two types of Complaints Financial Ombudsman Service – FSMA 2000 The Financial Services compensation Scheme (FSCS) Pensions Ombudsman Other Issues - Occupational Pension Schemes Pensions Regulator The Pension Protection Fund (2004) Data Protection (Data protection Act 1998) Rules Regarding Data Other Legislation Relevant to Client Advice Unfair Contract
114 114 115 116 117 117 117 118 119 119 120 120 121 121 121 122 124
Question Time for Unit 2
125
Answers & Extras Answers for Unit 1 Answers for Unit 2
128 131
Acts Table European Directives Table
134 136
Abbreviation Table ADL APACS
Activities for Daily Living Association for Payment and Clearing services
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APR ARLA
Annual percentage Rate Association of Rental Letting Agents
ASU
Accident, Sickness, Unemployment
AVC
Additional Voluntary Contributions
BACS
Banking Automated Clearing Services
BOE BRT CAD CAT CCJ CD CeRCC
Bank of England Basic Rate Tax Payer Capital Adequacy Directive Charges Access and County Court Judgement Certificate of Deposit Certificate in Regulated Customer Care
CGT CHAPS
Capital Gains Tax Clearing House Automated Payment System
CIDD
Combined Initial Disclosure Document
D
Continuous Professional Development
I CRD CTF EEA EFTPOS
Consumer Price Index Capital Requirement Directive Child Trust Fund European Economic Area Electronic Fund Transfer at the Point of Sale
EPA EPS EU FATR
Enduring Power of Attorney Earnings Per Share European Union Financial Services Task Force
FIS FSA FSAVC
Fixed Interest Securities Financial Services Authority Free Standing Additional Voluntary Contributions
GDP GEB Gilts GSA HRT IDD IFA
Gross Domestic Product Guaranteed Equity Bond Gilt Edged Securities Guaranteed Sum Assured Higher Rate Tax Payer Initial Disclosure Document Independent Financial Advisor
IFA
Independent Financial Advisor
IHT ISA ISD IVA
Inheritance Tax Individual Savings Investment Services Directive Individual Voluntary Arrangement
LIBOR
London Interbank Offered Rate
LPA LTC LTR LTV MCCB
Lasting Power of Attorney Long Term Care Lower Rate Tax Payer Loan to value Ratio Mortgage Code Compliance Board
MCOB
Mortgage Conduct of Business Rules
Copyright© Ruksons
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MiFLD
Markets in Investment Services Directive
MIG
Mortgage Indemnity Guarantee
MLRO
Money Laundering Reporting Officer
MPP MPPI
Mortgage Protection Policy Mortgage Payment Protection Insurance
MPPP
Copyright© Ruksons
Mortgage Payment Protection Plan (same as above)
MVA NAV NIC
Market Value Adjuster Net Asset Value National Insurance Contribution
NS & I
National Savings and Investment
NTP OEIC
Non Tax Payer Open Ended Investment Company
OPAS
Office of Pensions Advisory Scheme
PA PAYE PE Ratio PEP PETS PHI PIBS
Personal Allowance Pay As You Earn Price Earnings Ratio Personal Equity Plans Potentially Exempt Transfers Permanent Health Insurance Permanent Interest Bearing Shares
PMI PPP PSNB PSNCR
Private Medical Insurance Personal Pension Plan Public Sector Net Borrowing Public Sector Net Cash Requirement
REIT RPI S2P SDLT SHEP
Real Estate Investment Trust Retail Price Index Additional State Benefit Stamp Duty land Tax Second Hand Endowment policies
SHIP SHP SOCA
Safe Home Income Plans Stake holder Pension Plans Serious Organised Crime Agency
SVR TCF TEP VAT
Standard Variable Rate Treating Customers fairly Traded Endowment Policies Value Added Tax
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PLEASE NOTE: THIS IS A SAMPLE FROM THE ORIGINAL COPY. PAGES WILL BE MISSING.
UNIT 1: FINANCIAL SERVICES ENVIRONMENT AND PRODUCTS Money In earlier civilisation exchange was by Barter. However, as transactions became bigger and complex, it became difficult for people to trade goods they had to offer against what other people had to supply them; hence a need arose for Money, which is a Common Denominator against which the value of all products could be measured. • Money is a medium of exchange – It must be sufficient in quantity, generally acceptable to all parties in the transaction, divisible into small parts and must be portable. • Unit of – All goods and services are valued at a particular price, this is only possible because of money. Moreover, money can also be used as a measure of payments of debts made in the future. • Store of value – Money serves as a store of value. For example, a thousand pounds stored in the house today remains a thousand Pounds next year. The purchasing power of the money could have decreased because of inflation, but that is another matter, the money is still £1,000.
Inflation Definitions • • • • • •
Steady increase in prices Decrease in the purchasing power of money Too much money in circulation. Too much money chasing few goods. The rate of inflation is the rate at which price levels increase. Inflation is measured by the Consumer Price Index (I).
Example If inflation were to run at 10% over an item of clothing that cost £100 at the start of 2007, at the start of 2008 the same item of clothing would cost £110. If the £100 were kept in a bank instead at the rate of 3% interest, the interest over the year would be £3 (total £103).
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This means that in 2008 the funds would be insufficient to purchase that item of clothing, indicating a decrease in the purchasing power of the money. • The Government’s target is to keep Inflation at an annual rate of 2% with maximum divergence either side of 1%.
Money Market Instruments Money market instruments can be described as short- term debt instruments issued by the Government, Banks, Building societies and several organisations for large investors. There is no interest paid to the investor during the term.
Treasury Bills • • • • • • • • • • •
They are low risk short-term securities issued by the Debt Management Office, backed by the UK Government. They are highly liquid assets, easily convertible to cash at little cost. Bills are usually purchased in large amounts and held by large or main corporations and financial institutions for liquidity purposes (surplus to requirements). They are bought and sold on the secondary market by the financial intermediaries (no centralised market place). They are issued for a 91- day period. Bills are issued at a discount to their par value. The par value (face value) is the amount payable at redemption. Treasury bills have Zero- Coupon; they do not pay any interest during the term. The price of the bill is affected by the issue price, redemption value, changes in interest rates and supply and demand. Changes in market rate must be significant enough to affect the price of the bill, as they are usually steady, being short- term securities. They are similar to gilts as they are both issued by the UK Government to raise capital, but defer because of their coupon and term.
Certificates of Deposit (CD) • • • • •
A bearer security (no name), with a fixed rate of interest, issued by building societies and banks. The bearer who holds the CD at the end of the term is the owner. A CD can be sold on and on. It usually has a 3 to 6 month term with a roll over option of 3-6 months (specific apply). A typical CD will be for £50,000 or more.
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• • • •
Copyright© Ruksons
The bank will issue a receipt to acknowledge deposit and capital and interest at the end of the term will be paid to the bearer. Banks also trade in CDs to manage their liquidity position. When a bank expects to have surplus funds (liquid) it will issue CDs to coincide with that time. When a bank projects that it might have a shortage of funds (illiquid), it will hold on to the CDs redeemable at the projected time.
Commercial Paper • Represents borrowing by firms for short-term purposes (working capital), with a term of between 5-45 days (average of 30-35 days) • It is possible to roll over this transaction, if the firm still needs the funds. • This roll over facility offers flexibility and the ability to re-arrange the interest rate. • The commercial paper is particularly favourable to the firm who has a good credit history, as borrowing is cheap. • A firm who has poor credit ratings can have it backed by a Letter of Credit. • The Letter of Credit, which is issued by the bank guarantees to make the payment if the firm defaults. • The bank backs this transaction in exchange for a fee. • Commercial papers are usually purchased by large institutions e.g. pension funds because of the huge sums involved. • They are also referred to as unsecured promissory notes. • Transactions can be made directly or through intermediaries.
Partnership • • • • •
In a partnership, the Partners tly own the assets and liabilities of the company, and are tly responsible for the profits and losses. Partnerships are subject to income tax and not corporation tax. The Partnership Agreement (Deed) provides the detailed information regarding the practice. Recently (2001) Limited Liability Partnerships (LLP) have emerged. They are set-up and run as limited companies (and have to be ed at the company house), but are still taxed as regular partnerships. In the LLP, profits and losses are still shared among the partners.
Limited Liability Company A company is a separate legal entity, owned by shareholders whose liabilities are limited to the amounts they have invested. The most common way in which a company can raise money, to expand its operations, is to float ordinary shares. These are usually bought by private investors but more so by institutions and life pension funds.
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The nature of the company, powers to borrow and rights attaching to shares are set out in the Memorandum and Articles of Association. Shares are also known as asset backed investments. In the long run, growth in these investments should generally outpace inflation. It is important that the investor proceeds with care as shares are generally considered to be high- risk investments.
Shares Investment in shares can prove risky but long-term investment will usually outpace inflation and provide higher return than deposit type investments. Share Indices Measure the overall performance of shares. Financial Times 30 - Share Index (FT 30) – 30 major industrial companies – ¼ of market value of UK equities. FTSE100 (footsie) – 100 top companies in capitalisation . Weighted according to market value. FTSE All Share Index – About 900 shares split into sectors. Index measures price movements, showing yields, financial ratios as well as return on share investment. Rights Issue New shares must first be offered to existing shareholders to avoid dilution of their holdings in proportion to the total shareholding. The rule is set by the stock exchange. Scrip Issue •
• •
It involves increasing the number of shares to reduce the share price, at no cost to existing shareholders. Existing share- holders are offered the free shares in the proportion of their shareholding and the price of the share is split accordingly (issue is also referred to as the stock split). It is achieved by transferring reserves (profits retained from previous years) into a company’s share . This is just a book entry. It is also called the bonus / capitalisation issue.
Buying and selling Shares There are two markets: Main Market – Shares can be bought and sold on the London Stock Exchange,
the main market, subject to full listing. The requirements include a 3 year trading period, ¼th of the firm’s shares must be owned by the public and the firm must act in accordance with the rules set by the FSA, which is the UK listing authority. Alternative Market – The smaller and newer firms can also be ed with
the stock exchange in an alternative market. The rules set here are less
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stringent, than those set for full listing. Benefits are that the firm can enjoy public finance, are easily exposed to investors and investors will tend to have a sense of confidence dealing with them. This will enhance their potential for expansion. Types of Equity Ordinary Shares – Share holders receive distributed profits (dividends) and
have voting rights (participation) Preference Shares – Dividends are payable from the company’s profits. They
rank before ordinary shares in priority of distribution but after loan stocks if a firm were to wind up. Preference shares are termed cumulative if unpaid dividends are accumulated until such a time as they can be paid. Preference shares do not carry voting rights but may acquire it if dividends have been delayed. A Convertible Preference Share is a share that carries the right but not the obligation to be converted into an ordinary share. Loan Stocks – A fixed rate of interest and not dividends is payable. The
interest would be paid whether or not profits are made. The loan is not secured on company property. Loan stocks have no voting rights. Loan stocks can also be issued with convertible rights, that is, a right but not an obligation to be converted to an ordinary share. Debentures – The same as loan stocks but secured on the company’s
property/assets. Order of Ranking if Firm becomes Insolvent Debentures – Loan Stocks – Preference Shares – Ordinary Shares Company Equity Table Debentures
Loan Stocks
Preference Shares Ordinary Shares
Fixed rate of interest paid
Fixed rate of interest paid
Dividends may be fixed, paid out of firm’s profits
Interest is paid whether or not the firm makes a profit.
Interest is paid whether or not firm makes a profit.
Can be Cumulative, Dividends are only which means paid when the firm dividends; have to makes a profit. be accumulated till they can be paid.
No voting rights.
No voting rights.
No Voting Rights, except dividends have not been paid
Dividends are paid, if profits are made.
Voting Rights Participation.
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in a while. Loan is secured on firm’s assets or property.
Loan is not secured on firm’s assets or property.
Shares
Shares
Taxed at 20% at source. NTP can reclaim 20% HRT pay extra 20%.
Taxed at 20% at source. NTP can reclaim 20% HRT pay extra 20%.
10% at source, not reclaimable by anyone, only HRT have an additional liability of 22.5%.
10% at source, not reclaimable by anyone, only HRT have an additional liability of 22.5%.
If the firm goes insolvent they are paid first.
If the firm goes insolvent they get paid next.
If firm goes insolvent they get paid after loan stocks.
If firm goes insolvent they get paid last.
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UK Financial Regulations Easily Understood Certificate in Mortgage Advice and Practice (CeMAP): Module 1 Certificate for Financial Advisors (CeFA): Module 1 Customer Service Professional (CSP) Certificate in Regulated Complaints Handling (CERCH) 2009/10 Financial Year
Written by
Tomi Omidiora BA Hons, MBA, CeMAP, CeFA
i
UK Financial Regulations Easily Understood
Copyright© Ruksons
Published by Rucksons Ltd, UK Financial Regulations Easily Understood Adetomi Omidiora Published In Great Britain 2009 Copyright © Adetomi Omidiora 2009 The Financial Regulations Easily Understood guide is to be used in addition to the main accredited Textbook and will never replace the detail contained there. It was written with an intention to the reader’s understanding of the main aspects of the text, and will serve as an appropriate revision guide to understanding investments and the risks involved. A thorough analysis, the detailed document could also provide clarity and understanding to an individual who needs a basic understanding of investments and risks. The Financial Regulations Easily Understood Book published in September 2009 provides information for the 2009/10 financial year. While the author has used all her efforts in preparing this book, there are no promises or warranties in respect of the accuracy or completeness of the content of this book with updated changes from the appropriate financial bodies. All rights reserved. Contents and or cover may not be reproduced in whole or in part. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means ---- electronic, mechanical, including photocopying, scanning and recording worldwide, without prior permission in writing from the author and/or publisher. Printed in the UK. Created and Designed By
Rucksons Ltd www.ruksons.com
Edition 2
ii
UK Financial Regulations Easily Understood
Copyright© Ruksons
Unit 1: Introduction to financial services Environment and products Money Inflation 2 Types of Policies to achieve long term objectives The Bank of England Financial Intermediaries Building Societies and Banks Building Society s Credit Unions Savings Gateway Clearings Offshore Deposits (Tax Havens) National Savings & Investments (NS&I) Individual Saving s (ISAs) Fixed Interest Securities Money Market Instruments Partnership Limited Liability Company Child Trust Fund (CTF) Investment Bonds Structured Products Real Estate Commodities Foreign Exchange Market Insurance Social Security Benefits Two Types of t Ownership Mortgages Endowment Table ISA Mortgage Mortgage Products CAT Standard Mortgage Equity Release for the Elderly Home Reversion Schemes Equity Release Table Shared Ownership Plans Property Insurance Other Secured Lending Second Mortgages Unsecured Loans Personal Loans Overdrafts Revolving Credits Charge Cards Debit Cards Commercial Loans Pension Products
1 1 2 4 4 5 6 6 7 7 8 8 10 11 13 14 14 18 18 19 19 20 20 20 27 31 31 34 36 37 39 40 41 41 42 42 43 43 43 43 43 43 43 44 44 44
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Occupational Pensions Derivatives Pooled or Collective Investments Unit Trusts Investment Trusts Open Ended Investment Company (OEICs) Collective Investments Table Financial regulation Taxes Income Tax Taxable/Non-Taxable Income Investment Income Tax Life Assurance Policies Capital Gains Tax Inheritance Tax (IHT) Value Added Tax Stamp Duty Reserve Tax Corporation Tax Withholding Tax National Insurance Tax Planning Tax Table Financial Planning and Advice Pattern in which Savers/Investors hold their assets Typical Financial Life Cycle – Age and Time of Life The Fact Find Advisor's Duty of Care Financial Needs & Objectives Agreeing Order of Priority Recommending Solutions Implementing Recommendations Documentation Financial Advice Family Protection Business Protection Death of a key employee Death of a Business partner Death of a Small Business Shareholder Insolvency Bankruptcy (Insolvency Act 1986) Loan Consolidation Individual Voluntary Agreements (IVAs) Wills Trustees Law of Contract Law of Agency Power of Attorney Lasting Power of Attorney
44 46 47 47 48 49 50 51 52 52 53 55 56 57 59 62 62 63 63 64 64 65 67 67 67 68 69 69 69 70 70 70 71 71 72 72 73 73 73 74 74 74 74 76 77 77 77 78
Question time for Unit 1
79
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UNIT 2: UK Financial Services and Regulations Regulation - Background FSA Objectives Protection Covers The 5 sourcebooks make up a Handbook to explain these activities Status of Provisions in FSA Handbook Principals for firms and Approved Persons Treating Customers fairly Senior Management - Arrangement, Systems and Control The "fit and proper" test for approved persons The Prevention of Crime Regulated Activities and Investments Two categories of Regulated investments Advertising and Financial Promotions Advertising Requirements Records Training and Competence Capital Adequacy Basel Committee of Banking Supervision Liquidity Assessing Liquidity Risks Liability Liquidity Risks faced by Financial Services Firms Risk Assessment Profile - Overall Level of Risk of Firm Discipline & Enforced Powers Available to the FSA Enforcement Powers Approved Persons in Controlled Functions The Banking Code Payment Service Directive Competition Commission European Union Directives Investment Business MiFID Banking Directive Insurance Directives Solvency Margins for Life Assurance Companies – Own Funds Regulation of Mortgage Advice MCOB Rulebook Regulation of General Insurance ICOB Rules Documentation and Advice Order of documentation Three Types of Client Polarisation Retail Distribution Review Suitability Requirements Cooling off and Cancellation (statutory cancellation period) Charges / Commission Risk Disclosure Product Disclosure Execution-only Contracts Stakeholder - Type Products (Ron Sandler)
82 82 83 83 84 84 85 86 87 87 87 88 89 89 90 91 91 92 93 93 94 94 95 95 96 96 97 99 99 100 100 100 101 101 104 104 105 105 106 107 107 107 109 110 110 111 111 112 112 113 113
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CAT Standard Mortgage Money Laundering Some Definitions Client Identification Financial Exclusion Complaints and Procedures Two types of Complaints Financial Ombudsman Service – FSMA 2000 The Financial Services compensation Scheme (FSCS) Pensions Ombudsman Other Issues - Occupational Pension Schemes Pensions Regulator The Pension Protection Fund (2004) Data Protection (Data protection Act 1998) Rules Regarding Data Other Legislation Relevant to Client Advice Unfair Contract
114 114 115 116 117 117 117 118 119 119 120 120 121 121 121 122 124
Question Time for Unit 2
125
Answers & Extras Answers for Unit 1 Answers for Unit 2
128 131
Acts Table European Directives Table
134 136
Abbreviation Table ADL APACS
Activities for Daily Living Association for Payment and Clearing services
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UK Financial Regulations Easily Understood
APR ARLA
Annual percentage Rate Association of Rental Letting Agents
ASU
Accident, Sickness, Unemployment
AVC
Additional Voluntary Contributions
BACS
Banking Automated Clearing Services
BOE BRT CAD CAT CCJ CD CeRCC
Bank of England Basic Rate Tax Payer Capital Adequacy Directive Charges Access and County Court Judgement Certificate of Deposit Certificate in Regulated Customer Care
CGT CHAPS
Capital Gains Tax Clearing House Automated Payment System
CIDD
Combined Initial Disclosure Document
D
Continuous Professional Development
I CRD CTF EEA EFTPOS
Consumer Price Index Capital Requirement Directive Child Trust Fund European Economic Area Electronic Fund Transfer at the Point of Sale
EPA EPS EU FATR
Enduring Power of Attorney Earnings Per Share European Union Financial Services Task Force
FIS FSA FSAVC
Fixed Interest Securities Financial Services Authority Free Standing Additional Voluntary Contributions
GDP GEB Gilts GSA HRT IDD IFA
Gross Domestic Product Guaranteed Equity Bond Gilt Edged Securities Guaranteed Sum Assured Higher Rate Tax Payer Initial Disclosure Document Independent Financial Advisor
IFA
Independent Financial Advisor
IHT ISA ISD IVA
Inheritance Tax Individual Savings Investment Services Directive Individual Voluntary Arrangement
LIBOR
London Interbank Offered Rate
LPA LTC LTR LTV MCCB
Lasting Power of Attorney Long Term Care Lower Rate Tax Payer Loan to value Ratio Mortgage Code Compliance Board
MCOB
Mortgage Conduct of Business Rules
Copyright© Ruksons
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MiFLD
Markets in Investment Services Directive
MIG
Mortgage Indemnity Guarantee
MLRO
Money Laundering Reporting Officer
MPP MPPI
Mortgage Protection Policy Mortgage Payment Protection Insurance
MPPP
Copyright© Ruksons
Mortgage Payment Protection Plan (same as above)
MVA NAV NIC
Market Value Adjuster Net Asset Value National Insurance Contribution
NS & I
National Savings and Investment
NTP OEIC
Non Tax Payer Open Ended Investment Company
OPAS
Office of Pensions Advisory Scheme
PA PAYE PE Ratio PEP PETS PHI PIBS
Personal Allowance Pay As You Earn Price Earnings Ratio Personal Equity Plans Potentially Exempt Transfers Permanent Health Insurance Permanent Interest Bearing Shares
PMI PPP PSNB PSNCR
Private Medical Insurance Personal Pension Plan Public Sector Net Borrowing Public Sector Net Cash Requirement
REIT RPI S2P SDLT SHEP
Real Estate Investment Trust Retail Price Index Additional State Benefit Stamp Duty land Tax Second Hand Endowment policies
SHIP SHP SOCA
Safe Home Income Plans Stake holder Pension Plans Serious Organised Crime Agency
SVR TCF TEP VAT
Standard Variable Rate Treating Customers fairly Traded Endowment Policies Value Added Tax
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PLEASE NOTE: THIS IS A SAMPLE FROM THE ORIGINAL COPY. PAGES WILL BE MISSING.
UNIT 1: FINANCIAL SERVICES ENVIRONMENT AND PRODUCTS Money In earlier civilisation exchange was by Barter. However, as transactions became bigger and complex, it became difficult for people to trade goods they had to offer against what other people had to supply them; hence a need arose for Money, which is a Common Denominator against which the value of all products could be measured. • Money is a medium of exchange – It must be sufficient in quantity, generally acceptable to all parties in the transaction, divisible into small parts and must be portable. • Unit of – All goods and services are valued at a particular price, this is only possible because of money. Moreover, money can also be used as a measure of payments of debts made in the future. • Store of value – Money serves as a store of value. For example, a thousand pounds stored in the house today remains a thousand Pounds next year. The purchasing power of the money could have decreased because of inflation, but that is another matter, the money is still £1,000.
Inflation Definitions • • • • • •
Steady increase in prices Decrease in the purchasing power of money Too much money in circulation. Too much money chasing few goods. The rate of inflation is the rate at which price levels increase. Inflation is measured by the Consumer Price Index (I).
Example If inflation were to run at 10% over an item of clothing that cost £100 at the start of 2007, at the start of 2008 the same item of clothing would cost £110. If the £100 were kept in a bank instead at the rate of 3% interest, the interest over the year would be £3 (total £103).
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This means that in 2008 the funds would be insufficient to purchase that item of clothing, indicating a decrease in the purchasing power of the money. • The Government’s target is to keep Inflation at an annual rate of 2% with maximum divergence either side of 1%.
Money Market Instruments Money market instruments can be described as short- term debt instruments issued by the Government, Banks, Building societies and several organisations for large investors. There is no interest paid to the investor during the term.
Treasury Bills • • • • • • • • • • •
They are low risk short-term securities issued by the Debt Management Office, backed by the UK Government. They are highly liquid assets, easily convertible to cash at little cost. Bills are usually purchased in large amounts and held by large or main corporations and financial institutions for liquidity purposes (surplus to requirements). They are bought and sold on the secondary market by the financial intermediaries (no centralised market place). They are issued for a 91- day period. Bills are issued at a discount to their par value. The par value (face value) is the amount payable at redemption. Treasury bills have Zero- Coupon; they do not pay any interest during the term. The price of the bill is affected by the issue price, redemption value, changes in interest rates and supply and demand. Changes in market rate must be significant enough to affect the price of the bill, as they are usually steady, being short- term securities. They are similar to gilts as they are both issued by the UK Government to raise capital, but defer because of their coupon and term.
Certificates of Deposit (CD) • • • • •
A bearer security (no name), with a fixed rate of interest, issued by building societies and banks. The bearer who holds the CD at the end of the term is the owner. A CD can be sold on and on. It usually has a 3 to 6 month term with a roll over option of 3-6 months (specific apply). A typical CD will be for £50,000 or more.
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• • • •
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The bank will issue a receipt to acknowledge deposit and capital and interest at the end of the term will be paid to the bearer. Banks also trade in CDs to manage their liquidity position. When a bank expects to have surplus funds (liquid) it will issue CDs to coincide with that time. When a bank projects that it might have a shortage of funds (illiquid), it will hold on to the CDs redeemable at the projected time.
Commercial Paper • Represents borrowing by firms for short-term purposes (working capital), with a term of between 5-45 days (average of 30-35 days) • It is possible to roll over this transaction, if the firm still needs the funds. • This roll over facility offers flexibility and the ability to re-arrange the interest rate. • The commercial paper is particularly favourable to the firm who has a good credit history, as borrowing is cheap. • A firm who has poor credit ratings can have it backed by a Letter of Credit. • The Letter of Credit, which is issued by the bank guarantees to make the payment if the firm defaults. • The bank backs this transaction in exchange for a fee. • Commercial papers are usually purchased by large institutions e.g. pension funds because of the huge sums involved. • They are also referred to as unsecured promissory notes. • Transactions can be made directly or through intermediaries.
Partnership • • • • •
In a partnership, the Partners tly own the assets and liabilities of the company, and are tly responsible for the profits and losses. Partnerships are subject to income tax and not corporation tax. The Partnership Agreement (Deed) provides the detailed information regarding the practice. Recently (2001) Limited Liability Partnerships (LLP) have emerged. They are set-up and run as limited companies (and have to be ed at the company house), but are still taxed as regular partnerships. In the LLP, profits and losses are still shared among the partners.
Limited Liability Company A company is a separate legal entity, owned by shareholders whose liabilities are limited to the amounts they have invested. The most common way in which a company can raise money, to expand its operations, is to float ordinary shares. These are usually bought by private investors but more so by institutions and life pension funds.
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The nature of the company, powers to borrow and rights attaching to shares are set out in the Memorandum and Articles of Association. Shares are also known as asset backed investments. In the long run, growth in these investments should generally outpace inflation. It is important that the investor proceeds with care as shares are generally considered to be high- risk investments.
Shares Investment in shares can prove risky but long-term investment will usually outpace inflation and provide higher return than deposit type investments. Share Indices Measure the overall performance of shares. Financial Times 30 - Share Index (FT 30) – 30 major industrial companies – ¼ of market value of UK equities. FTSE100 (footsie) – 100 top companies in capitalisation . Weighted according to market value. FTSE All Share Index – About 900 shares split into sectors. Index measures price movements, showing yields, financial ratios as well as return on share investment. Rights Issue New shares must first be offered to existing shareholders to avoid dilution of their holdings in proportion to the total shareholding. The rule is set by the stock exchange. Scrip Issue •
• •
It involves increasing the number of shares to reduce the share price, at no cost to existing shareholders. Existing share- holders are offered the free shares in the proportion of their shareholding and the price of the share is split accordingly (issue is also referred to as the stock split). It is achieved by transferring reserves (profits retained from previous years) into a company’s share . This is just a book entry. It is also called the bonus / capitalisation issue.
Buying and selling Shares There are two markets: Main Market – Shares can be bought and sold on the London Stock Exchange,
the main market, subject to full listing. The requirements include a 3 year trading period, ¼th of the firm’s shares must be owned by the public and the firm must act in accordance with the rules set by the FSA, which is the UK listing authority. Alternative Market – The smaller and newer firms can also be ed with
the stock exchange in an alternative market. The rules set here are less
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stringent, than those set for full listing. Benefits are that the firm can enjoy public finance, are easily exposed to investors and investors will tend to have a sense of confidence dealing with them. This will enhance their potential for expansion. Types of Equity Ordinary Shares – Share holders receive distributed profits (dividends) and
have voting rights (participation) Preference Shares – Dividends are payable from the company’s profits. They
rank before ordinary shares in priority of distribution but after loan stocks if a firm were to wind up. Preference shares are termed cumulative if unpaid dividends are accumulated until such a time as they can be paid. Preference shares do not carry voting rights but may acquire it if dividends have been delayed. A Convertible Preference Share is a share that carries the right but not the obligation to be converted into an ordinary share. Loan Stocks – A fixed rate of interest and not dividends is payable. The
interest would be paid whether or not profits are made. The loan is not secured on company property. Loan stocks have no voting rights. Loan stocks can also be issued with convertible rights, that is, a right but not an obligation to be converted to an ordinary share. Debentures – The same as loan stocks but secured on the company’s
property/assets. Order of Ranking if Firm becomes Insolvent Debentures – Loan Stocks – Preference Shares – Ordinary Shares Company Equity Table Debentures
Loan Stocks
Preference Shares Ordinary Shares
Fixed rate of interest paid
Fixed rate of interest paid
Dividends may be fixed, paid out of firm’s profits
Interest is paid whether or not the firm makes a profit.
Interest is paid whether or not firm makes a profit.
Can be Cumulative, Dividends are only which means paid when the firm dividends; have to makes a profit. be accumulated till they can be paid.
No voting rights.
No voting rights.
No Voting Rights, except dividends have not been paid
Dividends are paid, if profits are made.
Voting Rights Participation.
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in a while. Loan is secured on firm’s assets or property.
Loan is not secured on firm’s assets or property.
Shares
Shares
Taxed at 20% at source. NTP can reclaim 20% HRT pay extra 20%.
Taxed at 20% at source. NTP can reclaim 20% HRT pay extra 20%.
10% at source, not reclaimable by anyone, only HRT have an additional liability of 22.5%.
10% at source, not reclaimable by anyone, only HRT have an additional liability of 22.5%.
If the firm goes insolvent they are paid first.
If the firm goes insolvent they get paid next.
If firm goes insolvent they get paid after loan stocks.
If firm goes insolvent they get paid last.
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