Beruflich Dokumente
Kultur Dokumente
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
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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 support 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.
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Money 1
Inflation 1
2 Types of Policies to achieve long term objectives 2
The Bank of England 4
Financial Intermediaries 4
Building Societies and Banks 5
Building Society Accounts 6
Credit Unions 6
Savings Gateway 7
Clearings 7
Offshore Deposits (Tax Havens) 8
National Savings & Investments (NS&I) 8
Individual Saving Accounts (ISAs) 10
Fixed Interest Securities 11
Money Market Instruments 13
Partnership 14
Limited Liability Company 14
Child Trust Fund (CTF) 18
Investment Bonds 18
Structured Products 19
Real Estate 19
Commodities 20
Foreign Exchange Market 20
Insurance 20
Social Security Benefits 27
Two Types of Joint Ownership 31
Mortgages 31
Endowment Table 34
ISA Mortgage 36
Mortgage Products 37
CAT Standard Mortgage 39
Equity Release for the Elderly 40
Home Reversion Schemes 41
Equity Release Table 41
Shared Ownership Plans 42
Property Insurance 42
Other Secured Lending 43
Second Mortgages 43
Unsecured Loans 43
Personal Loans 43
Overdrafts 43
Revolving Credits 43
Charge Cards 43
Debit Cards 44
Commercial Loans 44
Pension Products 44
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Occupational Pensions 44
Derivatives 46
Pooled or Collective Investments 47
Unit Trusts 47
Investment Trusts 48
Open Ended Investment Company (OEICs) 49
Collective Investments Table 50
Financial regulation 51
Taxes 52
Income Tax 52
Taxable/Non-Taxable Income 53
Investment Income Tax 55
Life Assurance Policies 56
Capital Gains Tax 57
Inheritance Tax (IHT) 59
Value Added Tax 62
Stamp Duty Reserve Tax 62
Corporation Tax 63
Withholding Tax 63
National Insurance 64
Tax Planning 64
Tax Table 65
Financial Planning and Advice 67
Pattern in which Savers/Investors hold their assets 67
Typical Financial Life Cycle – Age and Time of Life 67
The Fact Find 68
Advisor's Duty of Care 69
Financial Needs & Objectives 69
Agreeing Order of Priority 69
Recommending Solutions 70
Implementing Recommendations 70
Documentation 70
Financial Advice 71
Family Protection 71
Business Protection 72
Death of a key employee 72
Death of a Business partner 73
Death of a Small Business Shareholder 73
Insolvency 73
Bankruptcy (Insolvency Act 1986) 74
Loan Consolidation 74
Individual Voluntary Agreements (IVAs) 74
Wills 74
Trustees 76
Law of Contract 77
Law of Agency 77
Power of Attorney 77
Lasting Power of Attorney 78
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Abbreviation Table
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UNIT 1:
FINANCIAL SERVICES ENVIRONMENT AND
PRODUCTS
Money
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 (CPI).
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.
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.
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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 jointly own the assets and liabilities of the
company, and are jointly 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 registered at the
company house), but are still taxed as regular partnerships.
• In the LLP, profits and losses are still shared among the partners.
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 terms. 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
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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.
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in a while.
Taxed at 20% at Taxed at 20% at 10% at source, not 10% at source, not
source. source. reclaimable by reclaimable by
NTP can reclaim NTP can reclaim anyone, only HRT anyone, only HRT
20% 20% have an additional have an additional
HRT pay extra HRT pay extra liability of 22.5%. liability of 22.5%.
20%. 20%.
If the firm goes If the firm goes If firm goes If firm goes
insolvent they are insolvent they get insolvent they get insolvent they get
paid first. paid next. paid after loan paid last.
stocks.
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