CeMAP 1 Notes

CeMAP 1
TRAINING COURSE
CONTENTS
Introduction……………………………………………. ……………5
Unit 1 – The Financial Services Environment & Products
The UK Financial Services Industry……………………………….. 8

Financial Assets………………………………………………………39
Financial Products…………………………………………………...55
The Financial Planning Advice Process……………………………101
The Main Financial Services Advice Areas……………………… 106
Basic Legal Concepts relevant to financial services……………… 111
Unit 2 – UK Financial Services Regulation
The Financial Services Authority……………………………………119

Money Laundering…………………………………………………....146
Complaints and Compensation………………………………………150
Data Protection………………………………………………………..154
Other advice related laws and regulation……………………………157
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INTRODUCTION
Examination Format
• CeMAP 1 is a multiple choice examination with 4 possible answers being given

from which you must select the correct answer
• There are two units each with 50 questions and you have a maximum of 1 hour to
complete each unit
• If you finish one unit early you cannot carry over any surplus time into the next
unit
• You must pass both units to achieve an overall pass on CeMAP 1 which is a
minimum of 35 out of 50 on both units (70%)
• If you fail one of the units you will be required to resit that unit only
• The grade boundaries are as follows:
 90% 45 – 50 correct - Pass with Distinction

 80% 40 – 44 correct - Pass with Merit
 70% 35 – 39 correct - Pass
Exam Preparation
• For all CeMAP exams these are some helpful tips which you should bear in mind.
 Always read the question very carefully, and the answers. Sometimes the
questions can be very woolly and ambiguous.
 Be very careful with answers including words like “must” or “always” or
“never”. These are absolute words which don’t allow for any discretion.
You may find that a lot of the correct answers will have words like
“usually” or “normally” or “sometimes”.
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 For all questions in all CeMAP exams, elimination is the best technique to
find the correct answer. Try and work out which answers have to be
wrong, which can leave you with an answer which might not be perfect,
but which is the best of all the answers on offer.
The Pearson Vue Electronic Exam
• All CeMAP exams use the Pearson electronic system
• There are over 150 centres at which you can take the exam but you might have to
wait a while if you want to take it at a specific centre.
• When you book your exam call Pearson and quote your personal IFS number
• We recommend that you take your exam within 14 days of completing this course
if possible. If you have a problem getting a date within this time scale, it shouldn’t
be a problem as long as you don’t lose your momentum by ‘going cold’. It is
vitally important to maintain the practise of answering CeMAP questions.
• On the day you will usually need to take 2 forms of ID, one of which should be
photo ID.You will be given a Taxation Table, calculator, mini whiteboard and pen
for any rough working out.
• You will be allocated to a desktop computer which will usually be operated by

mouse
• You will have the option of a practice session to familiarise yourself with the
system
• Once the exam starts and the questions appear, if you are sure of the answer you
use your mouse to choose the correct letter.
• If you are unsure of the answer and wish to move onto the next question, you can
choose the option REVIEW which will automatically move you onto the next
question. When you have completed all questions the computer will inform you
that you have flagged a number of questions, at which point you can then return to
those flagged questions.
• Once you have completed all the answers the computer will give you the option of
reviewing all your answers. There is often the temptation at this stage to start
changing some of your answers. This is extremely risky as your ‘gut instinct’ is
invariably correct. We would recommend that you only change answers if you
are absolutely sure that you have made a clear mistake.
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UNIT ONE
Introduction to the financial services environment and

products
Section 1 - The UK financial services industry
Section 2 - Financial assets
Section 3 - Financial Products
Section 4 - The Financial Planning Advice Process
Section 5 - Financial Services Advice areas
Section 6 - Legal Concepts relevant to financial services
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Unit 1 – Section 1
The UK Financial Services Industry (4 or 5 questions)
Money
• Money provides a way of paying for products and services and has two main
functions. It is a unit of account and a medium of exchange
• To be a medium of exchange money must be:
 acceptable to all parties

 sufficient in quantity
 divisible into small units
 portable
• Money can be either in cash or held in a bank account or other savings product
• The financial services industry provides different usages for money through
different vehicles such as current accounts, mortgages & protection(insurance)
Intermediation
Within the economy there are 2 sectors:
• The Surplus Sector – Those with more finance than they need
• The Deficit Sector – Those with less cash than they need who must therefore
borrow to meet their needs
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A financial intermediary such as a bank or building society is an institution that
borrows from the surplus sector at an agreed interest rate and then lends it to the
deficit sector at a higher interest rate. The difference between the two rates
represents the profit for the intermediary.
• Sometimes there is no need for an intermediary eg share offers to the general

public. This is called disintermediation.
• Intermediaries become necessary when:
 Geographic location make it difficult to find one another
 Amount mismatch requires aggregation – match the amounts needed
 Term mismatch requires maturity transformation- match the terms

needed and required eg able to offer a wide range of accounts
 Risk transformation – spreading the risk of default by either party
• Intermediaries bring together the lender and the borrower and include financial
advisers and mortgage brokers who are regarded as ‘product sales intermediaries’
Financial Institutions
The Bank of England
• Banker to the banks – all major banks have an account with the BoE and the BoE
has responsibility for setting the interest rates on these accounts held by the major
banks.
• Banker to the government – BoE is a central bank because it is banker to the

government and covers any government deficits through automatic loans to the
government.
• Set Interest Rates – Since May 1997 the Bank’s Monetary Policy Committee
(MPC) granted responsibility for the setting of UK interest rates. The Committee
meets monthly to decide the current base rate to help the government meet its
inflation target.
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• Lender of last resort – duty to ensure a satisfactory supply of money remains in
circulation and to make funds available if they are in short supply – to maintain
confidence in the system
• Foreign exchange – manage the country’s reserves of gold & foreign currency
• Since June 1998 regulation of UK banks has now passed to the Financial Services
Authority (FSA)
Proprietary & Mutual Organisations
Proprietary Organisation – limited companies owned by shareholders eg RBS, HSBC
Mutual Organisation – not limited companies, no shareholders- owned by the members

eg Nationwide and any true building society – also Friendly Societies
Building Societies Act 1986
• Allowed building societies to demutualise and convert to a bank – change from a

mutual organisation to a proprietary one
• Schedule 8 allowed societies the chance to deal in a broader range of services
• Shares were issued to current members of the society which led to ‘carpet
bagging’ – where people moved to a building society in anticipation of
demutualization
Retail & Wholesale
Retail Banking
• Provision of financial services to the public and to companies through a network

of branches
Wholesale Banking
• Money is raised wholesale by financial institutions from the wholesale money

markets
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• Banks and other financial institutions will often borrow money wholesale and
then lend it to the public retail which will give them a profit
• Building Societies are now able to raise funds from the wholesale market up to a
limit of 50% of their total liabilities
• Sub prime lenders raise their funds from the wholesale market
• Normally undertaken by finance houses and retail banks, for example, the inter-
bank market, where banks lend money to other banks
• The rate of interest charged on the inter-bank market, which is known as the
London Inter-Bank Offer Rate (LIBOR), is fixed daily and can have maturity
dates from one day upwards
Money Transmission and the Clearing Process
The original source for money sources was always the branch network with customers
visiting the bank to make their transactions. These branches obviously still exist but their
importance has been reduced since automatic teller machines (ATMs).
Clearing
Clearing refers to the process at the end of each business day of settling between banks
the transfers of money as a result of customers using cheques, direct debits and debit
cards.
Clearing services are co-ordinated through three operational clearing companies:
• Cheque and Credit Clearing Company – clearing of cheques

• Voca Ltd formerly known as BACS – direct debits
• CHAPS – same day electronic inter bank transfer system
The Role of Government & Influence of the European Union
• These are laws that are passed by the European Parliament and the Council of
Ministers. They take the form of:
Regulations
These are binding in their entirety and are directly applicable to all member states
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Directives
These are binding as to the result to be achieved upon each member state to which
they are addressed and must be achieved within a certain timescale. However, the
means by which they are to be achieved can be determined by each state. In other
words, they are not binding in their entirety.
Five Tiers of UK Regulation
• First Level – European union regulations and directives
• Second Level – Acts of Parliament eg Building Societies Act 1986
• Third Level – UK regulatory bodies such as the FSA
• Fourth Level – compliance policies of individual financial institutions
• Fifth Level – rulings from arbitration and ombudsman schemes following

customer complaints.
Economic and Monetary Policy
• Managing the economy requires a number of things:
 Price stability – keeping inflation low

 Low unemployment – ensures a demand for goods & services and reduces
the cost of state benefit
 Balance of Payments equilibrium – import/export balance relationship
 Satisfactory economic growth – economy is growing
• Very difficult to achieve all of these at the same time. Any attempt to improve one
of these could affect the other. For example if you have no unemployment, that
could lead to an increase in inflation
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• However, if there was no inflation, this would lead to high unemployment
• The government’s long term objective is to keep unemployment and inflation on

the low side. So, they are happy to accept a ‘trade off’ of a low rate of inflation
and a low rate of unemployment.
• Inflation is measured by the Consumer Price Index which differs from the Retail
Prices Index in that it excludes mortgages from the inflation calculation. The
government has set an official target of 2% inflation rate plus or minus 1%
• The main way that the authorities can influence whether this goal is to be
achieved is through the setting of interest rates by the Monetary Policy Committee
Monetarist View of Economics
• Monetarists believe that inflation is a man made phenomenon and is caused by

allowing credit and money to be easily made available – supply of money
• Therefore inflation can be controlled by the government using the setting of high
interest rates to discourage people taking on additional debt
• In UK this is now the job of the MPC to set interest rates. If they rise, most
lenders will follow suit although they do not have to.
Fiscal View of Economics
• Fiscal policy is concerned with government and public spending

• Government spending, taxation and borrowing all affect the economy
• The Government has a huge public sector responsibility in paying for health care,
education and public safety and this money is raised through taxation
• With regard to the public sector there are 3 possible outcomes:
 Balanced budget – all revenue from taxation is invested in public

spending
 Budget surplus – more is raised in taxation than is invested in public
spending. This can result in less jobs being available due to companies
being over taxed and as a result of there being more unemployment there
will be less demand for the supply of money
 Budget deficit – public spending is greater than revenue from taxation.
This could be due to government spending in job creation or companies
being under taxed. Results in less unemployment and as a result of this
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and lower taxation there is a greater demand for credit which has an
inflationary effect.
• If a budget deficit exists there will be a need for the government to meet that
shortfall. This is referred to as the Public Sector Net Cash Requirement (PSNCR)
• The government’s so called ‘golden rule’ is to borrow only to invest and not to
fund public spending although this is currently looking increasingly difficult.
• The sustainable investment rule – Over the economic cycle, public sector net debt
as a proportion of gross domestic product will be held at a stable and prudent
level
#Test - General
Taxation (10 questions)
Tax Legislation
• Following the 'Budget', a Finance Bill is published which contains the taxation
proposals that are to be debated in Parliament
• If, following debate, the Finance Bill is approved and receives Royal Assent, it
becomes the Finance Act
Domicile
• Domicile refers to the country that a person treats as their permanent home or to
which they plan to return
• Domicile of origin is determined at birth as the domicile of the father or if they

are unmarried, the mother
• Domicile of choice is when a person chooses a new domicile by showing an

intention to settle there permanently
• Deemed domicile is when a person is not UK domiciled but has lived in the UK
for 17 out of the last 20 years
• If a person is either UK domiciled or deemed domiciled their estate for

inheritance tax purposes includes all worldwide assets
• If a person is neither UK domiciled or deemed domiciled at death the estate for

inheritance tax purposes only includes assets held in the UK
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Residence
• This affects a person’s liability to pay income tax and capital gains tax
• If a person is classified as resident or ordinarily resident they are liable for income
tax and capital gains tax on income and capital gains made worldwide
• A person is classed as ‘resident’ if they:
 Spend 183 days or more in UK during a tax year
• Ordinarily resident is someone who normally lives in the UK but who has not
spent 183 or more days in the UK in the last tax year.
INCOME TAX
Income tax is based on income received throughout the whole tax year 6 April-5 April
The following examples of income are all liable for income tax
• Salary or wages, bonuses, commission, benefits in kind

• Tips
• Certain pension or retirement benefits
• Interest on bank accounts not including ISAs
• Dividends from shares
• Income from gilts
• Trust income
• Property rental income
• Income from copyright and patent
• The value of benefits in kind such as company cars if total income exceeds
£8,500. The taxable benefit is based on the car’s carbon dioxide emission rating.
If fuel is also provided, a further taxable benefit applies
Some examples of income not liable for income tax are:
• The first £30,000 of redundancy payments

• Interest from National Savings Certificates
• Income from ISAs
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• Educational grants
• Gambling proceeds
• Some social security benefits
• Benefits from Friendly Society Policies
• Covenanted or Gift Aid payments
• The proceeds from a qualifying life policy
• The capital element received from a purchased life annuity
Who is liable for Income Tax ?
• Everyone regardless of age

• Non taxpayers can complete form R85 to receive interest gross on certain things
• When a child receives income via a settlement from parents that will be treated as
the parent’s income for taxation purposes
Personal Allowances
• Everyone regardless of age has a personal allowance which is the amount you can
earn before tax becomes payable.
Income Tax Allowances 2007-2008 Amount Tax Code and letter

Personal Allowance £5,225 522L
Personal Allowance if you are aged 65 – 74 £7,550 755P
Personal Allowance if you are aged 75 and over £7,690 769Y
• Tax payers are allowed to make certain deductions from their gross income before
assessing their tax liability including pension contributions and allowable
expenses incurred wholly for business reasons
• After these deductions have been made, what is left is taxable income, which is
then applied to the tax bands below.
• Married couples have an additional allowance where at least one spouse was born
before 6 April 1935
• There is also a Blind Person’s Allowance (£1,730) in 2007-08 if a person is
registered as blind with a local authority. This allowance can be transferred to a
spouse even if they are not blind
Tax Band Rate From To

Starting Rate 10% £0 £2,230
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Basic Rate 22% £2,231 £34,600
Higher Rate 40% £34,601 Upwards
• Note: The 10% lower rate is to be abolished from April 2008 on earned income,
and at the same time the basic rate is to be reduced from 22% to 20%.
Bank and Building Society interest will have tax deducted at source at 20%.
Non taxpayer (NTP) Can reclaim the tax paid or complete R85
Lower Rate taxpayer (LRTP) Can reclaim 10% overpaid
Basic Rate taxpayer (BRTP) No further liability
Higher Rate taxpayer (HRTP) Must pay an additional 20%
• Because many depositors pay basic rate income tax, interest rates are often quoted
net or after deduction of income tax.
• The gross rate can therefore be calculated by dividing the net interest rate by 0.8
• Therefore a net interest rate of 4.0 = a gross interest rate of 5.0%

0.8
Dividend income received from shares will have tax deducted at 10%
Non taxpayer Cannot reclaim this tax

Lower Rate taxpayer Nothing further to pay
Basic Rate taxpayer Nothing further to pay
Higher Rate taxpayer Must pay an additional 22.5% of the grossed up dividend
• This time interest is deducted at source at 10% so the taxpayer receives an amount
which is the net dividend with 10% having already been taken
• This time, the gross dividend can be calculated by dividing the net dividend by
0.9
• Therefore, a net dividend of £100 = a gross dividend of £111.11

0.9
• A higher rate taxpayer would have to pay a further 22.5% of this gross dividend
making 32.5% tax paid in total.
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Taxation of proceeds from a life assurance policy
• Premiums paid into a life assurance policy such as endowments are invested into
different assets such as property, shares etc.
• All the benefits that come out of the policy are deemed to have already been taxed
at 20% within the fund.
• Policies such as these are regarded as ‘qualifying’ which means that the pay out
from these policies is tax free.
• Endowments and other life assurance policies are regarded as ‘qualifying’. An

example of a ‘non qualifying’ policy would be an investment bond (see later)
Collecting Income Tax
Employed
• If you are employed, income tax is paid by the employer under the PAYE scheme.
HMRC will provide a tax code for each employee (see earlier table)
Self Employed
• Sole traders and people in ‘partnership’ pay income tax directly to HMRC
through declaring their ‘net profit before tax ‘ eg after deducting fixed and
variable costs
• These figures can be either submitted directly to HMRC who will calculate the
tax liability or they can calculate the tax liability themselves and send it to HMRC
for approval – ‘self assessment’.
• This needs to be done by 31st January following the end of that tax year.
• Thus, for the tax year 2006/07 that ended on 5th April 2007, you can either submit
your tax return to HMRC by 30th September 2007 and they will calculate your tax
liability.
• Alternatively, you can submit your tax return by 31st January 2008 and calculate
the tax payable via self assessment.
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Classification of Income
Previously different types of income used to be classified under different

schedules(A,D,E & F).These have now been replaced by the following system.
• Income Tax (Earnings & Pensions) Act 2003
 This covers mainly income from employment, previously classified under

Schedule E.
• Income Tax (Trading and Other Income) Act 2005
 This covers all other income that previously fell under the other schedules.
Calculation of Income Tax
Step 1 – Work out the total income for that tax year
Step 2 – Subtract deductions
 Self employed business expenses must be wholly and exclusively for the
trade
 Employed business expenses must be wholly, exclusively and necessarily
for the job.
Step 3 – Deduct the personal allowance
Step 4 – Apply the taxable income to the tax bands.
Example 1
Bob(42) has total income before allowances of £ 30,000. Calculate his income tax
liability for the year 2007-08?
Deduct the personal allowance
£ 30,000
- 5,225
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24,775
£ 24,775 is the amount of taxable income that is left. As this amount is less than £ 34,600
we know that there is no higher rate tax to pay.
So
£ 24,775
- 2,230 @ 10% = £ 223.00
22,545 @ 22% = £ 4,959.90
£ 5,182.90 income tax to pay
Example 2
Tina(39) has total income of £ 40,000 before allowances. Calculate her income tax
liability for the year 2007-08?
Deduct the personal allowance
40,000
- 5,225
34,775
This is the amount of taxable income that is left. This time this amount is more than
£34,600 so you know that there will be some higher rate tax to pay. The easiest way to do
this is by working out the higher rate tax to begin with, which will be the excess of
taxable income over the higher rate threshold (HRT)
So
34,775
- 34,600 (HRT)
175 @ 40% = £ 70
There is £ 34,600 left to be taxed at the basic rate and the lower rate
34,600
- 2,230 @ 10% = £ 223
32,370 @ 22% = £ 7,121.40
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£7,414.40
Note
If it is a higher rate tax calculation, for 2007-08, the lower rate and basic rate
amounts will always be the same. Eg £223 and £7,121.40 will always be the same. It
is just the higher rate amount that will be different.
#Test Income Tax
Capital Gains Tax
• This is a tax that is payable on gains made on the disposal of certain assets.
Limited companies are not specifically liable for this tax, although any gains they
make would be dealt with via corporation tax.
Exempt assets
• Main private residence as long as it is not used for business

• Ordinary private cars
• Goods/chattels below £6000
• Gifts to the nation
• Foreign currency for personal use
• Government stocks (gilts)
• Life policies
• National Savings Certificates
• ISAs
• Gambling proceeds
• Compensation for injury
Note
Where assets are bought and sold in the course of a trade for instance an art dealer there
is no liability for CGT but the profits are dealt with via either Income tax or Corporation
tax.
A Disposal
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• A gain is made when an asset is sold at a higher price than it was bought at
• A disposal can also include a transfer of ownership of an asset
Annual CGT Allowance
• Every person regardless of age has an annual CGT personal allowance where no
tax is incurred of £9,200 in 2007-08
• If this allowance is not used in a tax year it cannot be carried forward to future
years
Reducing the effect of inflation
• Before 1982 – all assets acquired before that date will be assessed at their value
on 31st March 1982
• 1982-1998 – Indexation allowance
 The purchase price or value on 31st March 1982 can be increased in line
with the increase in RPI between the purchase date(or value on 31st
March 1982) and April 1998.
 This is because the government only wants to tax gains above and beyond
the increase in an asset’s value to inflation
 Indexation allowance is applied before the annual allowance
• 1998 onwards – Taper relief
 Taper relief reduces the amount of the gain depending on how long the
asset has been held since April 1998 up to a maximum of 10 years
WITHIN YEARS 1 & 2 0% relief or 100% of gain is charged

WITHIN YEAR 3 5% relief or 95% of gain is charged
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• Where an asset was held before 6 April 1998 but disposed of after that date:
 Apply indexation allowance for the period of ownership up to and

including 5 April 1998
 Apply taper relief for the period of ownership after 5 April 1998.
• Business assets get favourable treatment with regard to taper relief. For business
assets, after year 1 they can claim relief of 50% of the chargeable gain.
Thereafter, 75% relief is available.
• Furthermore, if the business asset disposed of is replaced by other business assets

‘roll over relief’ may be claimed on all chargeable gains realised by individuals.
This means that the CGT is deferred until a final disposal is made.
• Similarly, CGT on any gain arising from the gifting of assets or ‘sale at an under
value’ may be deferred until the recipient disposes of it. This is called ‘hold over
relief’
Other Deductions – Allowable Expenses (Buying, Improving, Selling)
• The costs of acquiring or buying an asset can be deducted from the gain made
• The costs of improving an asset can also be deducted though not repair costs
• Costs incurred on disposing or selling an asset can also be deducted
Capital Losses
• If you suffer a loss on the disposal of an asset, that loss can be offset against
capital gains achieved on other assets
• Any such losses must first be offset against gains made in that tax year
• Any losses still outstanding may then be offset against gains to be made in future
years
CGT Rates and Payment
• The total gain that is made on an asset is called the ‘chargeable gain’
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• A gain that is made after the personal allowance and after any indexation or taper
relief has been applied is called the ‘taxable gain’
• The taxable gain is added to a person’s taxable income and is taxed at the
following rates:
 Starting Rate 10%

 Basic Rate 20%
 Higher Rate 40%
• CGT is normally payable on 31 January following the end of the tax year in
which the gain is made.
Step 1 Calculate the Chargeable gain
Step 2 Apply any indexation or taper relief to the chargeable gain
Step 3 Deduct the annual exemption to give you the taxable gain
Step 4 Add the taxable gain to taxable income and apply the tax rate
Example 1
Alan bought an antique vase for £12,000 and sold it for £30,000. With no buying,
improving or selling costs and ignoring indexation and taper relief, what is the taxable
gain?
Step 1 Calculate the Chargeable Gain
Sale Price – Purchase Price = Chargeable Gain
30,000 – 12,000 = £18,000
Step 2 Adjust the Chargeable Gain with indexation/taper relief
Not Applicable here
Step 3 Deduct the annual exemption from the chargeable gain and any losses b/fw
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£ 18,000 – £ 9,200 = £ 8,800 (taxable gain)
Example 2 Losses brought forward
If in the previous example Alan had brought forward a loss of £15000 from the previous
year, what would the taxable gain be now
Taxable Gain = Chargeable Gain – Annual Allowance – Losses from previous year
£ 18,000 - £9,200 - £ 15,000 = - £ 6,200 which is a loss that can be offset against
future gains
Example 3 Calculating the tax payable
Jenny has a taxable income of £30,000 and a taxable gain of £ 6,600. How much CGT
will she pay in 2007-08?
Add the taxable gain to the taxable income
£30,000 + £ 6,600 = £ 36,600
Note: We are only interested here in taxing the gain NOT the income so we will only
be calculating the CGT to be paid on the £6,600 gain
36,600 (total income)

-34,600 (higher rate threshold)
£ 2,000 @ 40% = £ 800
Therefore we have taxed £ 2,000 of the taxable gain at 40%, therefore the remainder of
that gain needs to be taxed at the basic rate which for CGT is 20%.
£ 6,600 (original taxable gain)

- 2,000 (already taxed)
£ 4,600 @ 20% = £ 920
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£ 800 + £ 920 = £ 1,720 CGT
INHE RITANCE TAX (IHT)
• IHT is potentially payable when a ‘transfer of value’ occurs usually on death at

the rate of 40%.
• This is charged on the estate of the deceased individual at the rate of 40% on the
amount of the estate exceeds the nil rate band.
• For IHT purposes the estate includes:
• The value of all assets at death

• Value of gifts made within 7 years of death
• Some lifetime gifts – mainly to companies or clubs or societies
How Domicile Affects Inheritance Tax
• Remember that, in the UK, deemed domicile relates to people who, though not
UK domiciled, have lived in the UK for at least 17 of the last 20 years
• If a person is either UK domiciled or deemed domiciled at death, the estate on

which IHT is charged includes all assets, regardless of where they are in the
world
• If the individual is neither UK domiciled nor deemed domiciled at death, the

estate on which IHT is charged includes only assets situated in the UK
A transfer will either be exempt, potentially exempt or chargeable
Exempt Transfers
• Spouse Exemption - includes same sex couples under the Civil Partnership Act
 The whole estate no matter how large can be passed to the spouse with no
IHT liability
• Gifts not exceeding the total current nil rate band (£300,000)
 No IHT is payable until the total value of the estate exceeds £300,000
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 Couples can split their estate by becoming ‘tenants in common’ so each of
them can make use of their nil rate band.
• Small Gifts Exemption
 Gifts of up to £ 250 per annum per person are exempt
• Annual Gift Exemption
 Gifts totalling £ 3,000 in any one year which are not covered by other
exemptions. If this is not used in a particular year it can be carried
forward for one year only.
• Marriage Gifts
 £ 5000 from each parent, £ 2500 from each grandparent, £1000 from
others
• Other Exemptions
 Gifts to charities, political parties and exemptions that allow businesses

to be passed on through business property relief and agricultural property
relief.
 Gifts that are made regularly out of income which do not affect the
donor’s standard of living
 Life assurance policies that are placed in trust for the benefit of named
beneficiaries.
Potentially Exempt Transfers (PETs)
• These are lifetime transfers made between individuals that may incur IHT
• No IHT is payable at the time of the transfer
• IHT does become payable if the person making the transfer(donor) dies within 7
years of making the transfer
• The IHT rate applicable can be reduced by tapering relief.
Gift followed by death within IHT Rate payable

1 – 3 years 40%
3 - 4 years 32%
4 – 5 years 24%
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5 – 6 years 16%
6 – 7 years 8%
Example.
John, who was a widower, made a gift of £100,000 to his son just under 5 years ago.
When John died recently, his remaining estate was valued at £300,000. How much
IHT would be charged to John’s estate?
Since John’s estate is equal to the IHT threshold of £300,000, this incurs no IHT
liability. However, since John’s gift to his son took place within 7 years before John’s
death, the gift would become taxable, as follows:
IHT = Gift x IHT Rate Payable

= £100,000 x 24%
= £24,000
Chargeable Lifetime Transfers
• A chargeable lifetime transfer is one where an immediate charge to IHT is

payable by the recipient of the gift
• They are usually gifts to a club or society.
• These transfers are charged at half the normal rate immediately – 20%
• As with PETs if death occurs within 7 years the full balance of IHT becomes
payable.
Gift with Reservation of Benefit (GROB)
• It is not possible to avoid IHT by giving away property and continuing to live in it
rent free.
• This would be treated by the tax authorities as never having been given away and
therefore will remain in the donor’s estate for IHT purposes.
Other Issues
• Funeral expenses and settlement of bills can be deducted from the estate before
calculating IHT liability.
• IHT is payable to the Capital Taxes Office.
Page 28
Value Added Tax (VAT)
• VAT is an indirect tax levied on the sale of certain goods and services
• There are three rates:
 Zero rated
 Standard rate 17.5%
 Domestic fuel rate 5%
• A person or company needs to register for VAT when its annual turnover exceeds
£ 64,000 in 2007-08
Administration of VAT
• If a business exceeds the annual registration limit (£64,000), it must register for
VAT unless the goods or services are exempt.
• Businesses below that limit may decide to register
• VAT returns are completed quarterly
Exempt Supplies
• Provision of insurance policies and the charging of commission

• Services from doctors, dentists and opticians
• Provision of education
• Provision of credit services such as mortgages
• Exempt supplies would require legislation to enable them to be re-classified as

zero rated or taxable
The supply of financial advice is not exempt and advisers who charge a fee for advice
could be held liable to charge VAT for this advice as accountants or solicitors are.
Zero Rated Supplies
• Food but not restaurants or take aways
Page 29
• Books and newspapers
• Children’s clothing
• Prescriptions
• Domestic water supply
• Any zero rated category can easily be re-classified
Registration is not strictly necessary if that company is providing zero rated goods.
However, registration would be necessary if they wanted to reclaim any VAT paid for
goods coming into their business.
Advantages of Registration
• VAT paid out for your business can be reclaimed
Disadvantages of Registration
• Your product or service is now more expensive as VAT may have to be charged
• The additional administrative burden of VAT returns which are quarterly
Stamp Duty Reserve Tax and Stamp Duty Land Tax
• Payable by the purchaser according to specific ‘heads of charge’.

• Property or shares can’t be registered unless stamp duty has been paid.
Stamp Duty Reserve Tax
HEADS OF CHARGE CHARGED ON RATE

Bearer Instruments Market Value 1.5%
Purchase of shares Market Value 0.5%
Bearer instruments are securities where the name of the owner is not recorded. Possession
is the only proof of ownership and title passes by physical delivery.
Page 30
Stamp Duty Land Tax
Up to £ 125,000 NIL
£125,001 to £ 250,000 1% of the full purchase price
£ 250,001 to £ 500,000 3% of the full purchase price
£ 500,000 + 4% of the full purchase price
The Nil rate is extended to £ 150,000 in disadvantaged areas and for non residential land.
Corporation Tax
• This is a tax paid by limited companies on their profits

• Companies are taxed on their profits based on their accounting period which they
choose.
• Companies resident in the UK pay tax on their worldwide profits
The Corporation tax year is 1 April to 31 March.
20% in 2007/08
Small Companies Rate Profits up to £300,000 21% in 2008-09
22% in 2009-10
A marginal rate to ease the
Marginal rate £300,001 to £1.5 Million transition between the small
companies rate and the
main rate
Main Rate Over £1.5 Million 30% reducing to 28% in
2008-09
Withholding Tax
This phrase is normally associated to those people who are not residents of the UK but
who earn income in the UK such as non resident entertainers and sportsmen and women.
The aim is to ensure that this income does not leave the country without being taxed. This
is achieved by taxing their income at source at 22%.
The UK has a ‘double taxation’ agreement with over 100 countries to ensure that the
same income is not taxed twice.
Page 31
National Insurance
There are four categories:
Class 1 – Employees’ and employer’s contributions

Class 2 – Self employed flat rate contributions
Class 3 – Voluntary contributions
Class 4 – Self employed profit related contributions
Class 1 Employee Contributions
• Paid by employees who earn more than the primary threshold.

• Reduced rate is charged if earnings are beyond the upper earnings limit
• Do not pay Class 1 NICs if you earn less than the primary threshold
Class 1 Employers Contributions
• Paid by employers at 11% on earnings between the primary threshold (£100 per
week) and the upper earnings limit (£670 per week), with a reduced level of 1%
payable on earnings above the upper limit.
• Although employees do not pay Class 1 NICs on weekly earnings below the
primary threshold, entitlement to certain State benefits begins when earnings are
beyond the lower earnings limit which is £87 per week
Class 2 NICs
• Flat rate contributions paid by the self employed (£2.20 per week 2007-08) if their
annual profits exceed the threshold of £4,635 per annum for 2007-08
Class 3 NICs
• Voluntary contributions that are made by people who may have fallen behind on
their national insurance payments – flat rate £7.80 per week in 2007-08
• By paying these it may give them entitlement to certain state benefits such as the
basic state pension.
Page 32
Class 4 NICs
• Self employed have to pay additional NICs on profits between £5,225 and
£34,840 at the rate of 8%
• For profits above the upper limit they have to pay an additional 1%.
Page 33
Welfare and Benefits (1 question)
TYPE OF TAX ISSUE MEANS NIC KEY FEATURES

BENEFIT TESTED ISSUE
WORKING TAX WORKING 16
CREDIT TAX FREE NO NO HOURS + per week
INCOME TAX FREE CLAIM VALID IF
SUPPORT EXCEPT YES NO SAVINGS ARE £6000 OR
LESS.
UNEMP.
JOB SEEKERS CLAIMED FOR 6
ALLOWANCE TAXABLE YES NO MONTHS
STATUTORY MIN PAID FOR 39

MATERNITY PAY TAXABLE NO LEVEL WEEKS MAX
MATERNITY PAID FOR 39

ALLOWANCE TAX FREE NO NO WEEKS MAX
CHILD BENEFIT PAID UP TO16

TAX FREE NO NO 19 IF IN
EDUCATION
CHILD TAX NOT PAID UP TO 16
CREDIT TAX FREE EARN NO 20 IF IN
£ 66,000 + EDUCATION
STATUTORY SICK PAID FOR 28
PAY TAXABLE NO NO WEEKS MAX
INCAPACITY TAXABLE UP TO 28 WEEKS

BENEFIT EXCEPT 29-52 WEEKS
SHORT NO NO BEYOND 52 WEEKS
TERM RATE
ATTENDANCE LOWER & HIGHER
ALLOWANCE TAX FREE NO NO RATE
OVER 65s
DISABILITY DISABILITY HAS
LIVING TAX FREE TO OCCUR BEFORE
ALLOWANCE NO NO 65
UNDER 65s
CARERS CARER MUST BE
ALLOWANCE TAXABLE YES NO FULL TIME
BASIC STATE BASIC

PENSION TAXABLE NO YES SUBSISTENCE
LEVEL
Page 34
Working Tax Credit
• Purpose is to make work worthwhile for those on low incomes

• Have to be employed or self employed working at least 16 hours per week
• Employees receive the credit in their wage slip
• Self employed receive it by bank transfer
Income Support
• For those 16 or over with income below a certain level

• Working 16 hours a week or less
• Entitlement not dependent on an individual’s NICs
• Means Tested – savings under £ 6,000 – full benefit
• savings between £ 6,000 and £ 16,000 – reduced benefit
Jobseeker’s Allowance
• For those who are unemployed but are actively seeking work – this can be
claimed for 6 months after which they can apply for Income Support
• Must not be working or working less than 16 hours per week
• Must be aged at least 18 but less than retirement age
• Must be capable of working at least 40 hours per week
• Must have signed a Jobseeker’s agreement
• NIC credits are given for each week that the person receives JSA
• Paid gross but taxable
• Can be contribution based or income based. Contribution based depends on
having paid a certain amount of Class 1 NICs
Statutory Maternity Pay (SMP)
• Must have been with the same employer for at least 26 weeks including the
qualifying week which is 15 weeks before the due date of birth
• Her earnings must not have been less than the lower earnings limit – the level at
which NICs start to be payable
• Must have paid a minimum level of Class 1 NICs
• Payable for a maximum period of 39 weeks
• Earliest first payment is 11 weeks before the due date of birth
• Latest first payment is the due date of birth
• Weeks 1-6 - 90% of average weekly earnings paid
Page 35
• Weeks 7-39 - lower of flat rate £112.75 or 90% of average weekly earnings
• SMP is taxable and paid by the employer
Maternity Allowance
• For those who are unable to claim SMP such as the self employed or someone
who has recently changed jobs
• Payable for a maximum of 39 weeks
• Earliest payment and latest payment is the same as SMP
• Paid at a lower rate than SMP
• Paid by the Dept for Work and Pensions and tax free.
Child Benefit
• For those who have responsibility for bringing up children

• Payable for each child up to the age of 16 (19 if in full time education)
• Are two rates with a higher rate paid for the first child
• Benefit is not based on the claimant’s NIC record
• Not means tested and is tax free.
Child Tax Credit
• Available to the parent who has responsibility for the child’s care
• Available up to 1st September following the child’s 16th birthday
• Payable up to 20th birthday if the child is in full time education
• Benefit counts as income and is not available for those earning more than £66,000
Statutory Sick Pay (SSP)
• For employees who are off sick for 4 days or more

• Employers pay the employee and then reclaim from the DWP
• Paid for a maximum of 28 weeks
• Employees earnings have to be above the lower earnings threshold
• After 28 weeks have to apply for incapacity benefit or return to work
• Benefits are taxable
Page 36
Incapacity Benefit
• For those who cannot claim SSP because they are either self employed or their
SSP payment period has ended
• Not means tested
• There is an assessment test for the first 28 weeks based on their ability to do their
own job – GP will provide certificates for this
• Next 28 weeks – assessment on their ability to perform general all work tests
• Short term rate – payable for up to 28 weeks
• Short term higher rate – payable from weeks 29-52
• Long term rate – if still unable to work after 52 weeks or for the terminally ill
after week 28.
• Payments are based on NIC record and all but short term lower rate is taxable
Attendance Allowance – 65 and overs
• Short term rate – either day or night help. Long term rate – both day and night
• Not based on NIC record
• Not means tested and tax free
Disability Living Allowance – Under 65s
• Available to those whose disability started before 65, but once given it can
continue after 65
• There is a qualifying period of at least 3 months and the need must be ongoing for
at least another 6 months
• Qualifying period can be waived if they are not expected to survive 6 months
• Care component and a mobility component
• Benefits are tax free.
Carer’s Allowance
• For those caring for a severely disabled person

• Carer must be between 16 and 65 giving at least 35 hours to the task
• Person being cared for must not be receiving Attendance Allowance or Disability
Living Allowance
• Benefit not based on NIC record and are taxable
Page 37
Basic State Pension
• Available for men from 65. Women from age 60 (equalisation from 2020 - 65 for
all)
• Must have paid NICs for at least 90% of their working lives.
• Provides little more than subsistence
• The single person’s basic state pension is £87.30 per week and the married
couple’s rate is £139.60 per week
Additional State Pensions
• Graduated Pension Scheme 1961

• State Earnings Related Pension Scheme (SERPS) 1978
• State Second Pension 2002 – employees only
Pension Credit
• Introduced in October 2003 to supplement the income of many retired people by

ensuring they have a minimum level of income
• This minimum level is currently around 30% higher than the Basic State Pension
• In 2007-08 Pension Credit guarantees a minimum income £119.05 per week to a
single person and £181.70 to a couple.
Page 38
Unit 1 Section 2
Financial Assets (10 questions)
Deposits
• When a lump sum or capital is placed in a deposit account, its value is increased
through interest.
• Inflation however will reduce the real value of this amount over time
• A suitable account to have for short term, easy access savings and especially
useful for an ‘emergency fund’ to cover an unforeseen problem – rainy day
money
• This sort of account is considered to be desirable for an individual who has spare
money for the first time in his/her life.
• Interest - pays interest on a daily basis- credited monthly, quarterly, half yearly or
annually. May be a notice period for the withdrawal eg 30 or 60 days – longer the
notice period, usually the higher the rate.
• Money Market Deposit Accounts – offer a higher rate of interest. Usually for
those with large sums of money being placed for short periods – salary payroll
• Interest Bearing Current Accounts – immediate access plus interest – low rates
Taxation
The savings taxation rates apply to interest which is 20% deducted at source and then
• Non taxpayers (NTP) can reclaim 20% overpayment or complete Form R85 to
have the interest paid gross
• Lower rate taxpayers (LRTP) can reclaim the 10% overpayment.
• Basic rate taxpayers (BRTP) have nothing further to pay
• Higher rate taxpayers (HRTP) have to pay a further 20%
Page 39
‘Grossing up’ the Net Interest Rate
If an interest rate is quoted as 5% Gross we can work out the Net interest rate by:
Gross Interest Rate x 80% = Net Interest rate OR
5.0 x 80% = 4.0%
Therefore, if we are given the Net interest rate as being 4.0% we can work out the Gross
interest rate by:
Net Interest Rate / 80% = Gross Interest rate OR
4.0 / 80% = 5.0%
Offshore Deposits
• These accounts are based outside the UK in places such as the Channel Islands
• These offer the potential of a higher return but they are also higher risk. This is
because they are not protected by the Financial Services Compensation Scheme
and also due to currency movements.
Taxation of Offshore Deposits
• Interest is paid gross this time(different to normal savings taxation rules)

• UK residents required to declare the income to HMRC and pay tax at their
marginal rate, or in other words their highest rate.
Cash ISAs
• These replaced TESSAs and PEPs from 6 April 1999

• The cash ISA must be held with an approved ISA manager and can be a
standalone mini-ISA or part of a maxi-ISA
• Available to those aged 16 and over and can only be held in a single name
Page 40
• Interest is paid tax free on the current investment limit of £3,000 per annum. This
is due to be increased to £3,600 from April 2008.
• There is no fixed term and withdrawals can be made at any time
National Savings & Investments
There are a range of these different accounts which are offered on behalf of the
government. These are all low risk as the capital is not at risk. These can be summarised
below.
NS&I – Easy Access Account
• Available for individuals : aged 11 or over with the signature of a parent

• Minimum investment : £100
• Withdrawal : tiered interest rate ‘card & pin’ account
• Tax treatment : paid gross but taxable
NS&I - Investment Account
• Available for individuals : aged 7+ with the signature of a parent or guardian

• Interest : tiered depending on the investment in seven levels
NS&I - Income Bonds (regular monthly income)
• Minimum term : no term

• Interest rate : tiered to reflect deposit amount
NS&I - Pensioners' Guaranteed Income Bonds (Pensioners' Bonds)
• Available for individuals : aged 60+ male or female – monthly income

• Investment : lump sum investment
• Term : 1, 2 or 5 years – rate guaranteed
Page 41
NS&I - Capital Bonds
• Term : 5 years
• Investment : lump sum
• Withdrawal : can be withdrawn but interest rate is then reduced
NS&I - Fixed Rate Bonds
• Term : 1, 3 & 5 years

• Withdrawal : 3 months notice or 90 days interest penalty
• Interest rate : Guaranteed for the term chosen and will be reset at the
end of the term. The investor can then either withdraw it
or leave it invested for a further term.
• Tax treatment : paid net of savings tax @ 20% then
o Non-taxpayers can either reclaim the 20% overpayment or complete Form

R85 to have interest paid gross
o Lower rate taxpayers can reclaim the 10% overpayment
o Basic rate taxpayers have no further liability
o Higher rate taxpayers have to pay an additional 20%
NS&I - Savings Certificates
• Minimum investment : £100

• Maximum investment : £ 15,000
• Term : 2 or 5 years(fixed) 3 or 5 years(index linked)
• Interest rate : fixed or fixed with index-link
• Tax treatment : paid gross & TAX FREE – great for higher taxpayer
NS&I - Premium Bonds
• Potential gain to investors through a regular tax-free prize draw with prizes of up
to £1miillion per month
• Minimum investment : £100 (all purchases in multiples of £10)
• Maximum investment : £30,000
• Term : no limit
• Withdrawal : anytime but 8 days notice should be given
• Tax : winnings are TAX FREE
Page 42
NS&I - Children’s Bonus Bonds
• Available for : Anyone 16+ can buy for anyone under 16

• Minimum term : 5 years but must be cashed by child’s 21st birthday
• Interest rate : fixed for the first five years. No interest paid after 21
• Tax treatment : paid gross and TAX FREE
Page 43
NATIONAL KEY
SAVINGS & FEATURES TAX
INVESTMENTS
EASY AVAILABLE TO ANYONE PAID GROSS
ACCESS OVER THE AGE OF 11. BUT TAXABLE
SAVINGS MINIMUM BALANCE £100
OPENED FOR ANYONE
INVESTMENT OVER THE AGE OF 7. PAID GROSS
ACCOUNT BUT TAXABLE
INCOME GIVE REGULAR PAID GROSS

BONDS MONTHLY INCOME. BUT TAXABLE
INTEREST RATE
PENSIONERS’ GUARANTEED FOR 1, 2 OR PAID GROSS
BONDS 5 YEARS. BUT TAXABLE
GIVES MONTHLY INCOME
LUMP SUM INVESTMENT
CAPITAL – 5 YR TERM. PAID GROSS
BONDS INTEREST RATES BUT TAXABLE
INCREASE OVER THE
TERM
FIXED RATE OF INTEREST PAID NET OF 20% TAX
FIXED RATE OVER 1,3 OR 5 YEARS. THEN SAVINGS TAXATION
BONDS INTEREST RATE RULES APPLY
GUARANTEED
FIXED INTEREST OR
SAVINGS INDEX LINKED.
CERTIFICATES AVAILABLE FOR TAX FREE
BETWEEN £100 AND
£15,000
MINIMUM PURCHASE
PREMIUM PRICE IS £100. WINNINGS ARE TAX FREE
BONDS MAXIMUM £30,000
CHILDRENS’ FOR ANYONE UNDER 16.

BONUS MUST BE CASHED BY 21 TAX FREE
BONDS
Page 44
Fixed Interest Securities
Gilts
• Issued by the government to raise money

• Low risk investment as the government will not default on the interest or the
capital return
• Coupon – this is the rate of interest that will apply throughout the term
• Interest – paid half yearly on the par value of the gilt
• Redemption Date – this is the date the government will repay the capital
• Short Dated Gilts – from 0 to 5 years to run
• Medium Dated Gilts – from 5 to 15 years to run
• Long Dated Gilts – over 15 years to run
• Undated gilts have no redemption date and need to be sold on the open market to
recover the capital at the government’s discretion
• Gilts are issued by the UK Debt Management Office who actually define short
dated gilts as 0-7 years and medium dated as 7-15 years
• As with shares gilts can be sold for amounts above or below their par value.
Movements or anticipated movements in interest rates could affect the market
value of that gilt as will the amount of time left on that gilt, and supply and
demand.
o If for example, a gilt was quoted as Treasury Stock 2020 @ 9%, then if
interest rates at that time were low, then that guaranteed 9% rate could be
attractive to other investors and they could be prepared to pay more than
the face or par value of that gilt.
• When the redemption date is reached the government will only pay the par value
of that gilt which may be different from the market value depending on interest
rates.
• Gilts can be fixed interest or index linked
Page 45
• If it is index linked BOTH the capital value and the interest rate will move in line
with inflation.
• On sale of a gilt, they are quoted either:
 Cum dividend – new purchaser receives the next interest payment

 Ex dividend – seller receives the next interest payment
• Gains made on the sale of a gilt are exempt from CGT
• Interest is paid gross and then taxed as savings income
 NTP nothing to pay

 LRTP must pay 10%
 BRTP pay 20%
 HRTP pay 40%
Local Authority Stocks
• Similar to gilts except they are from a local authority
• Term is fixed as is the rate of interest paid half yearly
• These are not negotiable and cannot be sold on the open market
• Not quite as risk free as gilts
• Interest is paid net of 20% tax as savings income and then the normal savings
taxation rules apply. Slightly different to Gilts where interest is paid gross.
Permanent Interest Bearing Shares
• PIBS are from Building Societies to raise capital
• Interest is fixed and paid half yearly
• PIBS not covered by the Financial Services Compensation Scheme and therefore
rank behind account holders in priority of payment should the building society
become insolvent
Page 46
• Interest is paid gross and then taxable as savings income – same as gilts
Corporate Bonds
• Issued by companies to raise money
• Fixed rate of interest, a fixed redemption date and a fixed return
• Like gilts, they can be bought and sold for amounts above their ‘face value’
• A much higher risk than gilts but potentially a higher reward
Debentures and Loan Stock
• These are special types of corporate bonds issued by companies to raise capital
and usually pay a fixed rate of interest
• Debentures – these are secured against the company’s assets. Debenture holders
have priority over other creditors on liquidation
• Loan Stock – these are unsecured and are therefore more risky but could offer a
higher reward. Some loan stocks give the holder the right to convert the loan to
ordinary shares but there is no obligation to do so.
• Holders of these type of debt take priority over the shareholders on liquidation
• Interest is paid net of 20% tax then
 NTP reclaim the 20%

 LRTP no further liability
 BRTP no further liability
 HRTP pay an additional 20%
Equities and Other Company Finance
Ordinary Shares
• People who hold ordinary shares have two main rights
 To receive a share of the profits through dividends
Page 47
 To vote at shareholders’ meetings
• Investment in shares is high risk as there is a danger of losing all your capital
investment. This risk can be reduced through ‘diversification’ which involves
spreading that risk among a number of companies
The Stock Market
The Stock Exchange is the market for selling shares and there are 2 markets:
The Main Market
• A full listing is only available to very large companies able to meet certain
requirements such as having at least 25% of the share capital in public hands and
having been trading for at least 3 years.
The Alternative Investment Market
• This is for newer, smaller companies and the membership rules are less strict
• There is therefore greater growth potential in investing in these companies
• Investment in these companies is considered higher risk
• By joining the AIM the profile of these companies will be enhanced
Risk and Reward
• Shareholders have no liability for the debts of the company. The company itself is
liable for those debts as it is a separate legal entity
• The shareholder will lose what he has invested into that company if the company
goes into liquidation
• Shares are considered high risk-high reward
• Over time however, shares have out performed deposit based investments
Page 48
Financial Returns from Shares
There are 2 ways in which people are interested in investing in shares:
Income – in receiving an annual income through distribution of dividends
Capital – through seeing the growth of the share price leading to eventual encashment
for a profit.
• Companies are not obliged to distribute dividends to shareholders. They may

choose to do so in order to generate interest in that company by other prospective
investors.
• When dividends are to be paid there are ways of judging the success of that
investment:
 Earnings per share – net profit divided by the number of shares
 Dividend Cover – where a company pays 25% of its profits in dividends

that dividend is said to be covered 4 times. Where a company pays 50% of
its profits in dividends it is said to be covered 2 times. A dividend cover of
2 or more is considered acceptable. A dividend cover below 2 could be
indicating that the company is paying dividends from profits from
previous years to try and generate interest in the company.
 Price/Earnings Ratio – Share Price divided by Earnings per share. Shares

with a low P/E Ratio (less than 4) have poor growth prospects. Shares with
a P/E Ratio of 20 or more are considered growth stocks.
Taxation of Income from Shares
• Dividends are taxed as dividend income (different to savings taxation)
• The income is received net of 10% tax
 NTP - unable to reclaim that 10% ( not good)

 LRTP – no further liability
 BRTP – no further liability ( incentive for them to invest)
 HRTP – pay an additional 22.5% of the grossed up dividend making
32.5% in total ( also an incentive for them to invest)
Page 49
Grossing up the Dividend
Example
John is a higher rate taxpayer who receives a dividend of £ 250. How much additional tax
is payable on this dividend ?
Step 1 Gross Up the Dividend
We know that 10% tax has already been taken on the dividend at source, therefore the
gross dividend must be:
Net Dividend
90% = Gross Dividend
£250
90% = £ 277.78
Additional Tax
Gross Dividend x 22.5%
£277.78 x 22.5% = £ 62.50
• Gains made on the sale of shares are subject to CGT
• Shares can be sold either ‘cum dividend’ or ‘ex dividend’ as discussed earlier on
gilts.
Rights Issues and Scrip Issues
Rights Issue
• When a company issues more shares to existing shareholders at a

discount.. The existing shareholder does not have to take up the
Page 50
option. Stock Exchange rules require that when a company has shareholders
and they are looking to raise capital by issuing more shares, those shares must
be offered to existing shareholders first
Scrip Issue/Bonus Issue/Capitalisation Issue
• Issue of new shares to existing shareholders for free. No additional capital is

raised here. Effectively, the number of shares is increased and the share price
is reduced. Often awarded to employees of a company
Preference Shares
• They rank above ordinary shareholders when dividends are paid out and on
liquidation
• Dividends are generally but not always fixed
• These shares do not usually carry voting rights but they could acquire them if
dividends have been delayed
• Cumulative Preference – this means that if dividends are not paid, the entitlement
is accumulated until they are paid.
Convertibles
• These are effectively loans to a company when they want to raise capital which
carry the right to be converted at a later date to ordinary shares.
• In recent years they have been increasingly issued as convertible preference

shares.
Property
• Investment in property has become very popular for the following reasons:
 Rents and house values tend to move in line and above the rate of inflation
providing built in indexation
 An acceptable form of security when borrowing money
Page 51
• Some of the disadvantages are:
 Periods without tenants

 Recessions can make that property difficult to let
 Investment costs can be high eg Stamp Duty, legal fees
 Property may not be as easily marketable as other investments, or in other
words it may take time to sell that property.
• Income from property is subject to income tax after deducting allowable expenses
• A wear and tear allowance can be used against capital items such as furniture,
fixtures and fittings
• On disposal, any gain is subject to CGT
Buy to Let Mortgages
• Historically, lenders have viewed these as commercial loans and therefore there
has always been a higher interest rate
• Lenders have entered into this market and rates are now more competitive
• Some lenders insist that the property is professionally managed by an ARLA

member – Association of Residential Letting Agents
• Vital that an Assured Shorthold Tenancy Agreement is established which will

always guarantee that you are able to end that tenancy
• Gross rents typically need to be around 125% of the mortgage payment
Foreign Exchange
• The foreign exchange market is an international market where currencies are

exchanged
• The market itself is in effect the ‘dealing rooms’ of financial institutions all over
the world. Millions of transactions are taking place every hour and therefore the
changing price of a particular currency is determined by supply and demand
• The two main reasons why currency is exchanged are for international trade in
goods and services and for investment. Eg short term investment in a country with
high interest rates
Page 52
• Currency speculators aim to make profits by anticipating changes in exchange
rates and buying/selling at the right time. A speculator might spend £1 million on
buying US dollars at a rate of 55p which would give him $1,818,182. If the rate
moved to 57p to the dollar, he could exchange it back to sterling and make over
£36,000.
Derivatives
This is a financial product that is derived from a secondary financial product and it
usually represents a commitment to buy or sell the secondary product at a fixed price,
either on a specific date or between two specified dates.
The key factor is that they give an opportunity to buy or sell at a price different to the
market value. This gives derivatives a value which enables them in most cases to be
traded. The most common products used in this way are shares, commodities, interest
rates and exchange rates.
Options
This is a right, though not an obligation, to buy or sell a specific amount of an asset at a
specified price (the exercise price) within a specified period.
There are two types:
• Call Options – the right to buy

• Put Options – the right to sell
The buyer of the option pays an option premium to the seller of the contract
Futures
Although similar to options, these are an obligation to buy or sell at the specified price on
the specified date.
Futures are available for commodities such as coffee and currencies. Some of these deals
are contracts between two parties and are not traded in which case they are known as
‘forward contracts’
Page 53
Warrants
These are a type of call option that is generally issued by a company when giving the
holder a right to buy the company’s ordinary shares at some future date.
The warrant confers the right to buy the shares at a fixed price on or before a specified
date, i.e. while the warrant is exercisable. If the prevailing share price is higher than the
warrant price at the time of the purchase, the warrant holder can realise a profit.
Page 54
Unit 1 Section 3
Financial Products
Collective Investments (approx 3 questions)
• Collective investments allow small investors to contribute to a large investment

fund
• This has many advantages:
 A top class fund manager can be used with the cost shared by all investors
 No research is needed by the investors- fund manager is an expert
 The risk is spread through investment in a range of funds
 Fund managers can negotiate reduced dealing costs
 Wide choice of funds in which to invest
• Collective investments are categorised as having ‘medium risk profile’
Unit Trusts
• A pooled investment – large numbers of investors contribute to a large single fund
• A Trust Deed sets out the powers of the Trustees & fund manager
• Trust Deed places legal obligations on both trustees & fund manager
• The fund value is divided into units with the actual unit price being a small
fraction of the total value in the fund
Page 55
• Unit Trusts are open ended with the fund manager able to create more units in
response to demand thereby increasing the size of the fund.
Role of the Fund Manager
• Fund Manager is responsible to the trustees

• Manages the trust fund and values the assets
• Sets the price of the units
• Sells units to investors
• Buys back units from unit holders
The fund manager is obliged to buy back units from investors when the investor
wants to sell.
Role of the Trustees
• Trustees are often high street banks and have a role to ensure fund managers
comply with the Trust Deed
• Trustees also have to ensure that there is sufficient investor protection in place in
order to comply with the FSA.
• Approve marketing material and issue the certificates to investors.
Pricing of Units
• There are three important unit prices:
 Offer Price – Fund Manager sells to investors at this price
 Bid Price – Fund Manager buys back from unit holders at this price
o The difference between the two prices represents the management

charge for the fund manager – bid/offer spread
 Cancellation Price – this is the minimum permitted bid price. When there
are investors both buying and selling the bid price will generally be higher
than this. If there are more people selling than buying the cancellation price
may be used.
Page 56
Historic and Forward Pricing
• Historic – units are sold at the previous day’s valuation – rarely used
• Forward – units are sold at the next valuation (at the end of the day). This is the
most common method.
Buying and Selling Units
• Fund Managers have to buy when the unit holders want to sell.
• Units can be bought over the phone or by writing
• Purchasers receive a Contract Note from the fund manager and a Unit Certificate
from the trustee. The certificate is proof of ownership
• When selling, the unit holder signs the renunciation section on the back of the
certificate and sends it to the fund manager.
Charges
• Bid/Offer Spread
• Annual Management Charge eg 1% - may be called a monthly charge
Unit Types
• Accumulation – where the objective is capital growth – any income is reinvested
• Distribution – designed to produce income through dividends to the investor
Page 57
Taxation of Unit Trusts
• Income received from unit trusts is classed as dividend income and is

therefore received net of 10% and then:
 NTP unable to reclaim the 10%

 LRTP nothing further to pay
 BRTP nothing further to pay – an incentive
 HRTP – pay additional 22.5% of the gross dividend, making
32.5% in total – an incentive for them to invest too
• Taxation of income from a non equity unit trust will be classed as savings
income and therefore 20% is deducted at source and thereafter the normal
savings taxation rules apply
• Gains within the fund in the hands of the fund manager are exempt from CGT.
However, when the unit holder sells the unit, they are subject to CGT.
• Whilst we can’t say that unit trusts have no risk, because the investment is
spread among between 30 and 150 companies the risk element is considered
to be medium.
• Also, due to the fact that there are trustees involved and the fund manager is
authorised by the FSA, ensures that the risk is mitigated.
Investment Trusts
• These are not actually trusts at all but investment companies whose business is to
invest in stocks and shares
• Investors buy shares in the investment trust company
• The share price can sometimes be sold at a discount which gives the potential
for greater returns.
Page 58
• As with all companies, the number of shares available remains constant so an
investment trust is regarded as ‘close ended’ as opposed to unit trusts which are
open ended.
• The other advantage they have is that investment trusts are able to benefit from
‘gearing’ which is the ability to borrow to further investment aims. This gives the
ability to enhance the growth potential in a rising market. However, in a falling
market losses can be increased.
• Some investment trusts are known as split level or splits which means that some
are concentrated on income and some are concentrated on capital.
• Split level trusts or split capital trusts or ‘splits’ are where two or more different
types of share are offered. The most common are:
 Income shares – receive the whole of the income generated but no capital
growth.
 Capital shares – receive no income but receive all the capital growth
• Real Estate Investment Trusts (REITs) allow private investors to invest in

property in the form of an investment trust.
 They will pay no corporation tax provided that:
o At least 75% of income is from rent

o At least 90% of net profits go to the shareholders
o No individual shareholder to own more than 10% of the shares
Taxation of Investment Trusts
• Investment Trusts are treated in exactly the same way as Unit Trusts. So, they are
taxed as dividend income which is received net of 10% tax and then:

 HRTP – pay additional 22.5% of the gross dividend making
32.5% in total – an incentive for them to invest
Page 59
Open Ended Investment Companies (OEICs)
• This is another type of collective investment
• Have similarities with Unit Trusts in particular
• Unable to ‘gear’ – borrow to further their investment aims
• Established under company law so not a trust
• They are overseen by the depositary which could be a bank as opposed to trustees
• The authorised corporate director performs the same role as the fund manager for
a unit trust
• Can have different types of OEIC including income, capital growth, fixed interest,
overseas and specialist markets
Investing and Pricing
• Investors buy shares in an OEIC which is open ended which means that more
shares can be created to meet demand
• The OEIC can invest in a variety of funds and switches between funds are
common
• OEIC shares are single priced so no bid/offer spread
• OEIC shares tend to be priced on a ‘forward’ basis.
OEIC Charges
• Initial Charge – no bid/offer spread but a separate charge is taken between 3-6%
of the investment.
• Annual Management Charge – 0.5% to 2%
• Other administration charges may also be deducted from income that is generated.
Taxation of OEICs
• Income received from OEICs is classed as dividend income and is therefore

received net of 10% and then:
Page 60
 HRTP – pay additional 22.5% of the gross dividend, making
32.5% in total – an incentive for them to invest too
• Gains within the fund or in the hands of the OEIC are exempt from CGT
• Gains from the disposal of the shares or in the hands of the investor are
subject to CGT
• The risks associated with OEICs are similar to unit trusts.
UNIT INVESTMENT
TRUST TRUST OEIC
Trustee oversees the Investors purchase Depositary oversees

trust. shares in the the OEIC.
investment company
Trust is open ended Investors purchase
Not open ended shares
KEY FEATURES Value of the fund is
divided into units. May be available at OEIC is open ended
a discount.
Fund Manager buys No ability to gear up
and sells the units. Inv Trusts benefit
from gearing
No ability to gear up
Bid/Offer spread Diff between Initial Charge
purchase & sale
price
CHARGES
Annual Annual Annual
Management Management Management
Charge Charge Charge
Paid net of 10% Paid net of 10% Paid net of 10%
TAXATION OF NTP can’t reclaim NTP can’t reclaim NTP can’t reclaim
DIVIDENDS LRTP nothing LRTP nothing LRTP nothing
BRTP nothing BRTP nothing BRTP nothing
HRTP extra 22.5% HRTP extra 22.5% HRTP extra 22.5%
CGT LIABILITY Investor - YES Investor - YES Investor - YES
Page 61
Individual Savings Accounts (ISAs)
• This is the government’s tax efficient savings schemes

• Comprises two parts and can be arranged on a mini or maxi basis
• Contributions are limited in each tax year as follows
MINI ISA MAXI ISA

DIFFERENT MANAGERS ONE MANAGER
CASH MAXIMUM IN A
TAX YEAR £3,000 £3,000
EQUITIES (STOCKS &
SHARES) MAXIMUM IN £4,000 £7,000
A TAX YEAR
TOTAL
MAXIMUM CANNOT EXCEED £7,000 CANNOT EXCEED £7,000
• If you save in an ISA you are entitled to keep all that you earn and not pay any tax
on it.
• The maximum you can save in cash in a tax year is £3,000
• You can pay into your ISA whenever you want and you can stop making
payments at any time.
• You cannot put money into both a Mini and a Maxi ISA in the same tax year.
From 2008-09 the distinction between maxi and mini ISAs will be removed and
the overall limit will be increased to £7,200 of which £3,600 can be cash
• They can only be established in a single name- joint ISAs are not possible
• Must be 18 or over to take out an equities ISA. 16 for a cash ISA
• Since April 2004 the 10% tax credit on dividend income cannot be reclaimed by
the fund manager
Advantages
• No liability to income tax or capital gains tax

• Flexible product
Page 62
Disadvantages
• Ability to reclaim the 10% tax on dividend income was withdrawn from 2004
Taxation
• Taxation on dividends (from shares) is paid net of 10%. The ability to reclaim this
has now been abolished
• In the hands of the investor there is no liability to either income tax or CGT.
Child Trust Fund
This is a tax free savings account for children born on or after 1 September 2002. It is
an attempt to encourage savings on behalf of children.
A summary of the key features of this:
• An initial voucher of £250 is provided by the government which can be £500

if the child’s family is eligible for the full tax credit
• The parent uses the voucher to open an account for the child. The account is in
force until the child is 18 at which point, they can access the money.
• If the CTF is on a stakeholder basis, the maximum annual charge is 1.5%.

There is no limit to charges on other CTF accounts.
• Parents and others can make additional payments into the CTF up to a
maximum of £1,200 per year
• Neither the parent or the child is subject to income tax or capital gains tax
from the CTF. However, there is no tax relief on amounts invested either.
Structured Products
• The characteristic of these is that they offer an element of protection of the

capital while offering the chance to benefit from the growth in the stock
market.
Page 63
• They appeal to investors who are wary of the downside of the stock market
but who would like to share in its growth possibilities.
• An example of such a product is the Guaranteed Equity Bond which typically

has a 5 year term and offers a return of around 120% of any growth in the
FTSE but with a return of capital if the index fails.
#Test on Collective Investments
Page 64
Insurance (approx. 2 questions)
There are 2 main categories here – General Insurance and Life Assurance
Life Assurance
Whole of Life Assurance (WOL)
• Whole of Life Assurance pays out on the death of the assured whenever it occurs
so there is a guaranteed pay out.
• Premiums are payable throughout life or up to a specified age
• As there is a guaranteed pay out these policies acquire an investment or surrender
value
• Policies can be written on single or joint basis – payable on first or second death
• Mainly used to provide protection for dependents but can also be used to cover an
IHT bill following death.
Low Cost Whole of Life
• There is a sum assured which is payable whenever death occurs
• This sum assured is lower than the cover required but this is added to with the
addition of bonuses
• If there is a shortfall when the assured dies, this shortfall is met by the life
assurance company through a decreasing term assurance contract so the pay out
will be for the sum assured.
Page 65
Flexible Whole of Life
• Issued on a unit linked basis and combine life cover with investment
• It is flexible in that you can cash in units at the bid price to buy life cover
• The policyholder selects the monthly premium according to affordability and the
required level of life cover
• The higher the level of life cover, the larger the number of units that will need to
be cashed in to pay for this
• If you require lower life cover, the more units you can purchase for investment
• These policies are very flexible and the balance between life cover and investment
can be altered very easily
• Minimum Cover – low protection amount and a substantial investment element
Balanced Cover –cover maintained throughout life based on stated sum assured
Maximum Cover – level of cover guaranteed for a stated time(10 years) after
which increased premiums will be needed if cover is to continue.
• Initial level of cover is usually guaranteed for 10 years. After this the life
company has the right to increase premiums or decrease the cover.
Universal Whole of Life Policies
• This is an extension of a flexible WOL policy with a range of ‘bolt ons.’

• In addition to life cover you can add any of the following:
 Permanent Health Insurance (PHI)

 Critical Illness Cover (CIC)
 Accidental death benefit
 Total and permanent disability
 Hospital benefits
 Flexible premium levels
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 Waiver of premium (WOP)
• Any of these benefits are paid for by cashing in or cancelling units at the bid price
Investment Bonds
• These are single premium, unit linked, non qualifying whole of life policies
• A non qualifying policy is:
 No specified term or a term below 10 years

 Single premium contract ( lump sum)
 No life cover or less than 75% of premiums allocated to it
• Investment Bonds are therefore counted as non qualifying
• A single premium or lump sum purchases units in a specified fund but the holder
does not actually own the units
• This investment can be cashed in or surrendered for a value equal to the bid value
at that time.
• If you die before surrender an enhanced amount is paid out, typically 101% of the
bid value
• Switching between funds is allowed without any penalty.
Taking an income from Investment Bonds
• These are intended for capital growth, but it is possible to take an income through
‘partial surrenders ‘ of capital
• Up to 5% of the original investment may be withdrawn each year up to a total of

20 years without incurring an immediate tax liability even for HRTPs. This is
referred to as ‘tax deferred’
• This tax deferred feature is attractive to HRTPs as they can defer that liability to
retirement when they may then be a BRTP
Page 67
Taxation
Income Tax
• Basic rate income tax at 20% is deemed to have been paid from the fund itself so
there will be no further income tax liability for NTP, LRTP and BRTP on those
‘partial withdrawals’.
• If a HRTP who took 5% income per year and deferred the tax liability to a later
date, and they are still a HRTP at that point, they will have to pay a further 20%.
If they were a HRTP when they took the 5% withdrawals and they deferred the
tax to a time when they are no longer a HRTP, then there will be no further
liability.
Capital Gains Tax
• As with income tax, capital gains tax is deemed to have been settled within the
fund at 20%
• Therefore, when the bond is surrendered if the bond holder is a NTP, LRTP or
BRTP there will be no further liability.
• If however, the bond holder is a HRTP there may be a CGT charge of a further
20%.
Uses of Whole of Life Policies
• Mainly used for protection – to protect dependents following the death of a

breadwinner
• They can also be used to:
 Cover funeral expenses following death

 Provide funds to pay an IHT bill following death
• If the WOL policy is being used to cover an IHT liability it is common to set it up
to pay out on a joint life, second death basis – known as a last survivor policy
Page 68
Term Assurance
• These differ from WOL policies in that there is only a pay out when death occurs
during the term of the policy.
• If the assured survives the term there is no pay out and the policy ceases
• There is no investment element to these policies so they do not have a surrender
value
• Premiums are usually paid monthly and are fixed at the outset
• Can be taken on a single or joint life basis
Level Term Assurance
• A fixed or level sum is paid on death during the term of the policy
• The sum assured is level throughout the term
• Premiums are also fixed throughout the term
• If the insured survives the term the policy ends
• Usually used in conjunction with an interest only mortgage
Page 69
Decreasing Term Assurance
• Sometimes called a Mortgage Protection Policy
• Generally speaking, this repays the outstanding balance on a repayment mortgage
• Premiums will always be cheaper than a level term policy
• Premiums are level even though the amount of cover reduces over time
• Usually used in conjunction with a repayment mortgage
Gift Inter Vivos Cover
• This is a DTA contract to cover a potentially exempt transfer (PET). It will

provide an amount to pay the reducing IHT liability when a person dies within 7
years of making a gift. The cover will remain level for 3 years and then reduces
each year after that until the policy ends at the end of year seven.
Increasing Term Assurance
• Sum assured increases each year by either a fixed amount or a certain percentage
• This feature ensures that the pay out keeps pace with inflation
Page 70
Convertible Term Assurance
• A special type of level term assurance which includes an option to convert it to

either an endowment or whole of life plan at any stage during the term
• If a higher level of cover is required after conversion this additional sum is

subject to normal underwriting.
• Due to its convertible status this costs around 10% more than term assurance.
• At the point of conversion there is no need for further medical evidence although
the age of the assured will be taken into account at the point of conversion.
• The option can only be exercised while the convertible term assurance is in force.
• A useful policy for a couple with a young family who want the option to convert
a plan when affordability is less of an issue.
Renewable Term Assurance
• This is a policy which is renewable at the end of the term without further
medical evidence
• The sum assured is the same but the premiums will take into account the age
of the assured at the renewal stage
Renewable and Increasing Term Assurance
• A renewable contract with the option to increase the level of cover at a specified
date or when renewing it without further medical evidence
Family Income Benefit
• A form of DTA which instead of paying out a lump sum, the contract will pay out
a series of instalments starting from the date of death of the assured and ending at
the end of the policy term
• Payments can be converted to a lump sum but the total amount payable would be
reduced if this were the case.
Page 71
• FIB is not subject to income tax and policies can also be arranged with escalating
benefit to combat the effects of inflation
Pension Term Assurance (PTA)
• Life insurance taken in conjunction with a personal pension plan or a stakeholder

plan
• Applications submitted prior to December 2006 qualified for tax relief on the
premiums. This has now been withdrawn on new applications after December
2006.
• Plan holders who took this out prior to December 2006 are unaffected.
Health Insurance
Critical Illness Cover (CIC)
• Gives a tax free lump sum on diagnosis of a list of specified illnesses
• Pre existing conditions excluded
• Can be used to clear a mortgage balance
• Illnesses and conditions covered generally include:
 Heart attack
 Stroke
 Most cancers
 Kidney failure
 Multiple sclerosis
 Rheumatoid arthritis
 Major organ transplant
• Many policies will pay out in the event of total and permanent disability but the
definition varies between providers. Some providers take it as meaning the
disability prevents them from doing any job suitable by virtue of their education,
status and experience.
Page 72
• Other companies have a tighter definition that requires that the disability has to
prevent them from doing any job.
Permanent Health Insurance (Income Protection)
• Pays an income when the policy holder has suffered accident or sickness
• The amount claimed cannot generally be more than 60% to 65% of that person’s
net income less state benefit
• Policy term cannot exceed state retirement age
• The plan holder will select a deferred period – the longer the deferred period the
cheaper the premiums will be.
• The insurer cannot cancel the policy regardless of the number of claims made
• If a plan holder returns to work at a lower rate of pay due to disability

proportionate benefit can be paid
• The insurer could cancel the policy if hobbies or change in employment

significantly increase the risk of a claim
• Premiums tend to be higher for women due to their higher morbidity rate
• Premiums are higher if in a high risk occupation.

• Class 1 - lowest risk – accountants, civil servants, clerical and admin. jobs
• Class 2 - low risk - hairdressers or pharmacists
• Class 3 – moderate risk – farmers or electricians
• Class 4 – highest risk – coal miners and industrial chemists
• Benefits are tax free if taken by an individual but if an employer provides the
cover they are considered a benefit in kind and taxable
Exclusions
• Self inflicted injury, alcohol or drug abuse

• Pre existing conditions
• Injury arising from a criminal act
• Pregnancy and childbirth complications
Page 73
Mortgage Payment Protection Insurance (MPPI)
• Sometimes referred to as ASU – accident, sickness and unemployment

• Covers a borrower’s mortgage payments for a maximum of two years but can also
include mortgage related costs
• The unemployment aspect only covers involuntary redundancy
• Can exclude unemployment cover if the borrower wishes
• Payments start after a deferred period eg 28 days
• Benefits are tax free
Exclusions and Restrictions
• Any redundancy known about will not be covered

• A person may have to be employed for a minimum period before they can take
out this policy.
• For unemployment cover, no claim is considered for as long as 6 months after the
policy is accepted
• There are additional requirements for self employed claimants to be successful
Private Medical Insurance
• These policies provide cover for private medical treatment

• Benefits include:
 Avoiding NHS waiting lists

 Choice of hospital, consultant
 Can pay daily rate of income if there is an overnight stay in NHS hospital
 Choice of timing
 Better quality room
• Covers in patient charges, out patient charges and surgical and medical fees
• The premium will be influenced by age, quality of room required and the type of
hospital
• General Exclusions
 Pre existing medical conditions

 Routine eye and dental treatment
 Self inflicted problems
Page 74
 Cosmetic surgery
 Alternative therapies
• Taxation
 Premiums subject to Insurance Premium tax @ 5%

 Benefits are tax free unless you receive it as an employee from your
company in which case it is a benefit in kind if earning more than £ 8,500
 For employers it is a deductible expense
Long Term Care Policies
• Provide funds to cover the cost of long term care

• There will be an assessment on the insured’s ability to complete everyday tasks
such as washing, dressing, feeding, toileting, mobility and food preparation
• This is known as activities of daily living (ADL)
• The higher the ADL failure count, the greater the benefit available
• If benefits are paid to the insured or the organisation providing the care, they are
tax free.
General Insurance
• This includes all insurance that is not life assurance
• In general terms the principle of indemnity applies – that is, if a person has
suffered loss they should be restored to the same position they were in before that
loss – neither better off or worse off.
• Therefore, if your car has been damaged by someone else and its going to cost
£1000 to repair it, the insurance pay out should be £ 1000.
The Principle of Averaging
Page 75
• Occurs at the time of a claim when the insurer discovers that the property is under
insured. This may be deliberate in order to keep the premiums low or it could be
that inflation has increased the amount required,
• The insurer may as a penalty for this, reduce the amount they pay out to the
insured through ‘averaging’
• In the event of a complete loss, for example, a house burning down, the amount
paid out would be limited to the amount that the property is insured for.
• Many losses are only partial and in that instance ‘averaging’ can occur. In other
words, someone who was under insured should not be indemnified in full. In this
case, the claim is scaled down in the same proportion with regard to the premium
paid to the premium that should have been paid.
Example
Adam has contents insurance for £10,000 when the true insurance value should have
been £15,000.
If Adam made a claim for £300 for a damaged carpet, he would only get a pay out of
£200 as he was only insured for 2/3 of the amount that he should have been insured
for.
Policy Excess
• Helps to keep premiums low whereby the insurer deducts a certain amount from
each claim eg £ 100
Buildings Insurance
Standard Risks Covered
• Fire and smoke damage

• Lightning, earthquake and explosion
• Storm and flood
• Subsidence and heave
• Impact damage on the property
• Theft and attempted theft
• Damage caused by riot, strike or civil disturbance
Page 76
• Leakage of water due to freezing or burst pipes
• Additional premiums may cover accidental breakage of fixed glass and sanitary
fittings
• Some of the above will not be covered if the property is left unoccupied for more
than 30 days including
 Theft and attempted theft

 Burst pipes
 Riot, civil commotion or vandalism
 Damage to glass
Contents Insurance
• Covers anything that you would take with you should the property be sold
• Could include accidental damage, damage to freezer contents and extended cover
for items kept in a garden shed
All Risks Insurance
• Also known as extended contents cover

• Covers items regularly taken outside the home eg laptops
• Unspecified items – each item has a value below a specified limit
• Specified items – items above that limit must be specifically listed and valued
Private Motor Insurance
• There are three levels of cover
 Third party only

 Third party, fire and theft
 Comprehensive
Travel Insurance
Page 77
• Cover can be arranged for individual journeys or on an annual basis.
• Cover usually includes:
 Cancellation due to illness, injury

 Missed flights due to transport failure
 Delayed departures
 Medical expenses
 Personal accident
 Loss of possessions
 Personal liability
 Legal expenses
Insurance Premium Tax
• This is only applicable to general insurance and is charged on premiums at the

rate of 5%. The only exception is travel insurance which is charged at 17.5%.
• There is no insurance premium tax on long term assurance such as life and
protection insurances such as permanent health insurance, critical illness and
payment protection insurance.
#Test Insurance
Lending Products (approx. 5 questions)
Page 78
Mortgages
• There are actually only 2 mortgage repayment methods available – CAPITAL

REPAYMENT and INTEREST ONLY
• The parties involved in a mortgage are:
 The lender sometimes referred to as the mortgagee

 The borrower sometimes referred to as the mortgagor
Capital Repayment Mortgage
• Also called Capital & Interest mortgage or a repayment mortgage.
• Each monthly payment involves an element of interest and an element of capital
• Therefore, it is a reducing loan with the balance outstanding decreasing all the
time.
• In the early years, by far the biggest element of the payment is interest with this
imbalance being reversed over time.
• So the capital decreases slowly at first but towards the end of the term the
decrease is much quicker.
• If all the monthly payments are made the loan will be repaid in full at the end of
the term
Advantages
• Easy to understand
Page 79
• Easy to borrow more as the loan is reducing while the house value is probably
rising
• Good method if you have a low risk profile
• Quite flexible in that the term can be extended if the borrower suffers hardship
Disadvantages
• This method does not automatically include life insurance which must be taken
separately – known as decreasing term assurance.
• No chance of a surplus at the end of the term
Interest Only Mortgages with a Repayment Vehicle
• The borrower pays only the interest due each month, no capital is repaid at all
during the term
• The repayment of the capital is achieved at the end of the term through a capital
repayment vehicle such as an endowment (see later)
• This method not very popular these days due to poor performance particularly by
endowment policies
Advantages
• For endowment options only life insurance is included in the plan

• Some products such as ISAs, Personal Pensions have tax advantages
Disadvantages
Page 80
• With most of these there is no guarantee that the mortgage debt will be cleared at
the end of the term – dependent on stock market performance
• Not a good method for the risk averse
• The loan amount does not reduce during the term
Important Note
• It is not uncommon for people to take out a Pure Interest Only mortgage without
a capital repayment vehicle. This might appeal to first time buyers or people with
affordability problems who are planning to switch to a repayment mortgage in a
few years time.
Endowment Policies – A quick guide
• An endowment policy is in essence a ‘savings plan’ that you make regular

monthly payments into each month in addition to your monthly payments on an
interest only mortgage
• The idea is that by the end of the mortgage term, this ‘savings plan’ will be at the
very least equal to the mortgage balance – on maturity eg when the policy ends
• In addition, all endowments have built in life insurance so that if the policy holder
dies during the term, the full mortgage balance will be paid off – death benefit
Non Profit Endowment Policies
• This policy guarantees to pay the sum assured on the earlier of
 Death during the term of the policy

 On maturity
• No risks with these as you know the exact amount it will pay out.
• The policy holder does not share in any of the profits that the life company gets so
for that reason these are rare today.
Full With Profits Endowment Policies
Page 81
• This policy guarantees to pay off the mortgage debt on the earlier of
 Death during the term of the policy
 On maturity as long as the sum assured is equal to the mortgage
• No risks with these but because they are guaranteeing so much they are extremely
expensive
• Also get the chance to receive bonuses which may give a surplus
Low Cost With Profits Endowment Policies
• Designed to be a cheaper alternative to the Full Endowment

• This option does not guarantee to pay off the mortgage in full on maturity
• The main features of the Low Cost Endowment (LCE) are:
 The policy starts with a guaranteed sum assured of around half of the
mortgage balance
 It is hoped that through the addition of bonuses, by the end of the term the
fund will be large enough to fully clear the mortgage
 As the fund is in theory always growing the amount needed to clear the
mortgage on death is reducing, so in effect the life policy works on a
decreasing term basis.
Bonuses
Page 82
There are two types of bonus that can be added.
Reversionary (Annual)
• Not guaranteed to get these but once added it can’t be taken away
• Added to the plan annually if given
Terminal
• Not guaranteed to be given this bonus either

• Paid on death or maturity
• On a low cost endowment the granting and size of the terminal bonus will
determine whether there will be enough to pay off the mortgage
Unit Linked Endowment Policies
• Different to all the With Profits plans – no basic sum assured
• Carry a greater risk but also a greater reward – chance of a surplus
• Premiums are used to purchase units on the stock market
• Some units are cancelled each month to pay for life cover which is built in as are
all endowments – guaranteed death benefit
Page 83
• No guarantee of what the fund will be on maturity as it will depend on how all
these units will have performed on the stock market
• The units have two prices:
 Offer Price – you buy the units at the offer price

 Bid Price – you sell the units back to the Fund Manager at the bid price
• Charges
o the difference between the bid and the offer price – bid/offer spread
o policy fee charge – a fixed monthly deduction
o annual charge – around 0.5-1.5% of the fund value
• Most providers offer periodic reviews to see if the plan is on target usually after
10, 15, 20 years and then every year thereafter
Flexibility
• Unit linked plans have a flexible maturity date so the policyholder can repay the
mortgage early if he chooses or extend the term if necessary
• Very important note – all With Profits plans have a fixed maturity date which
cannot be reduced or extended
• Unit linked is also flexible in that you can increase your premiums if you need to.
Unitised With Profits Endowments
• A combination of the with profits and unit linked
• For those who like the guarantees provided by the with profits with the
guaranteed sum assured but who like the high reward element of the unit
linked and the ability to purchase units on the stock market
• Are entitled to bonuses as with all with profits plans and if given they are used
to purchase more units
• Unitised with profits plans have a minimum guaranteed sum assured (GSA)
Page 84
Poor Endowment Performance
• Low Cost endowment performance has been very poor in recent years due mainly
to low interest rates and poor stock market performance
• Endowment providers have been ordered by the FSA to review all endowments
that are being used for mortgage repayment
• Each plan must be reviewed at no less than two yearly interviews showing
projected growth rates of the policy at 4%, 6% and 8%
Pension Mortgage
• A PPP or a stakeholder pension(SHP) can be arranged for anyone under the age of
75 including children
• Since April 2006 the maximum annual contribution is the higher of
 Up to 100% of their UK earnings
OR
 £3,600
• There is however an overall maximum annual allowance which is currently

£225,000
• Whether the individual has retired or not benefits can be taken at any time after 50
although this will rise to 55 from 2010
• Up to 25% of the fund can be taken as tax free cash
• The balance of the fund must then be used to buy a Compulsory Purchase Annuity
or alternatively an income can be taken as draw down.
• The 25% tax free cash would normally be used to repay the mortgage. So, in
order to repay the mortgage the total pension fund needs to be at least 4 times the
mortgage balance.
Page 85
• Contributions are paid net of basic rate tax, so an actual contribution of £100 into
your pension fund would cost you £78. Higher rate taxpayers would be able to
reclaim a further 18% so for them it would only cost them £60.
• One disadvantage for the lender is that the pension cannot be assigned to them
unlike an endowment. The lender cannot therefore become entitled to the
proceeds from the pension.
Individual Savings Account Mortgage (ISA)
• It is possible to use an ISA account as a repayment vehicle for a mortgage.
• Payments into the ISA can be regular or by lump sum but they cannot exceed the
limits which are a maximum of £7,000 per tax year, £3,000 of which is the cash
maximum.
• The main benefits are that the fund is extremely tax efficient and if the growth
exceeds expectations, then it is possible to repay the mortgage early.
• The main disadvantages are that there are no guarantees of repaying your
mortgage and that there is no built in life cover so level term assurance should be
arranged
Mortgage Products
Standard Variable Rate(SVR)
Page 86
• This is the rate of interest set by each individual lender as their standard product
• It will vary from lender to lender – some will be lower than others
• It is a variable rate of interest so that when rates go up the SVR will tend to go up
and vice versa according to the wishes of the lender
Discounted Rate
• This is a discount off the SVR for a specific period – eg 1% off SVR for 2 years
• It is still a variable rate so if interest rates rise or fall, the rate that the borrower
will pay will change but it will always be a saving on the SVR for that period
• May be an arrangement fee to pay.
• Early redemption penalties are likely to apply during the discounted period.
• Lenders may attach other products to the offer such as buildings insurance.
• After the discounted rate ends the rate will revert to SVR which will always be an
increase in rate.
Fixed Rate
• Does ‘what it says on the tin’ – rate is fixed for a period of time
Page 87
• If interest rates rise or fall, your rate will always stay the same for that period
• An arrangement fee sometimes called a booking or reservation fee is usually

payable
• After the fixed rate the rate will revert to the SVR which may be higher or lower.
• Early repayment charges are usually payable during the fixed rate
Base Rate Tracker
• The interest rate is variable and it varies in line with the Bank of England Base
Rate who announce any changes in interest rates monthly – BoEBR
• A common example would be BoEBR + 0.50%. So the rate paid would be the
current BoEBR plus 0.50% for the period stated
• Whenever the BoEBR goes up or down, your rate would change accordingly, so
you are not subject to the whim of the lender.
Capped Rate & Collared Rate
• For the period stated a ceiling is set above which the interest rate cannot go above
Page 88
• A good idea for people who believe that interest rates are likely to rise in the short
term
• You can still take advantage of falls in interest rates but you are protected against
rises in interest rates above a certain level
• Some lenders whilst agreeing to a capped rate also insist on a collared rate which
is a rate set which the actual rate charged cannot go lower than.
Product Incentives
These could be available on any mortgage and include
 Free valuation
 Free legal fees
 No arrangement fees
 No early repayment charges
 Cash Back – the higher the LTV the lower the cashback. Note that when the
mortgage is redeemed early the cashback may be required to be paid back. This is
known as ‘clawback’.
 Portability – moving the product to a new property
Mortgage Schemes
Page 89
Flexible Mortgages
Can almost be anything it wants to be but the following are common:
 Overpayments, underpayments & payment holidays

 Additional borrowing facilities up to an agreed limit eg 80% LTV
 Interest calculated on a daily basis.
Current Account Mortgage
• This is a variation of the flexible mortgage which enables the borrower to carry
out all of his personal and financial transactions within the one account
• The account is able to receive salary credits and pay direct debits to the lender.
• The combination of salary credits and daily interest considerably reduces the
amount of interest payable and the term of the mortgage.
Offset Mortgage
• This requires the borrower to have a savings account with the lender and enables
the interest payable on the savings account to be offset against the mortgage
interest charged
• If a borrower has an offset interest only mortgage for £100,000 and has £25,000
in a savings account, he can opt to waive the interest on the savings account
enabling interest to be charged on a net loan of £75,000.
• This calculation is repeated on a daily basis.
The Low Start Mortgage – Deferred Capital
Page 90
• These repayment mortgage schemes assist in keeping costs low during the early
years of the mortgage, often by deferring the repayment of any capital during a
specified initial period.
• Borrowers must be made aware that at the end of the initial period, no capital has
been repaid
• Borrowers must also be made aware that payments will increase beyond the initial
period, as no capital has been repaid.
• If you had a 25 year repayment mortgage with a 5 year deferred capital period, in
effect you pay interest only for the first 5 years and then it becomes a capital
repayment mortgage for the remaining 20 years.
• May be appropriate for those currently on low earnings, but with realistic
expectations of higher earnings by the end of the initial period, for example, a
soon to be qualified professional
Low Start Mortgages – Deferred Interest
• During the early years, some of the interest is capitalised (added to the loan
balance) rather than being paid by the borrower
• This can be unattractive to both lender and borrower where the borrowing
requirement is of a high LTV, for example, 90% since the lender’s security will
be gradually erased as will the borrower’s equity. The result is an increased
danger of negative equity.
• Attractive to those who need a high LTV (low deposit) but want to keep
repayments low during the early years.
• Again, this may be appropriate for those currently on low earnings, but with
realistic expectations of higher earnings by the end of the initial period, for
example, a soon to be qualified professional
CAT Standard Mortgages
Page 91
This is a government backed initiative to show that the mortgage meets certain criteria.
Charges
• Must be daily interest
• No separate charge for a higher lending charge
• All other fees disclosed as up front cash
• Intermediaries cannot charge fees
• Arrangement fees
 No arrangement fee for a variable rate mortgage

 Maximum arrangement fee of £150 for a fixed or capped rate
• Interest rate cannot be more than 2% more than the BoEBR on a variable rate
mortgage
• Maximum redemption charge of 1% of the balance outstanding for each year

remaining on product on a fixed or capped rate. No early redemption charges on a
variable rate.
Access & Terms
• No compulsory products
• Lender’s normal lending criteria must apply
• All advertising and paperwork must be clear and in plain language
• Customer chooses the monthly repayment date
Lifetime Mortgages (formerly known as Home Income Plans)
Page 92
• Allows a person usually retired and over a certain age who own their home
outright to mortgage their property.
• No repayments are made to the lender during the lifetime of the borrower
• The interest is ‘rolled up’ and added to the capital which is repaid after the death
of the borrower when the property is sold
• The lender will place a limit on the LTV – 25% to 55%. The younger the person
applying the lower the LTV. This is because a person who takes it out at 60 will
accrue more unpaid interest than an 80 year old as they are likely to live longer.
• Due to the vulnerable nature of the people that this is aimed at, the main lenders
in this area have formed the Safe Home Income Plans(SHIP) who have agreed
that:
 any applicant be encouraged to seek independent legal advice

 any negative equity situation be funded by the lender
 the borrowers will be entitled to stay in the home for the rest of their lives
eg until the death of the second party on a joint mortgage
 the plan must be portable although part of the loan may have to be repaid
if the next property is insufficient security.
Home Reversion Schemes
• The owner sells part or all of the equity to a lender in return for a lump sum
• The lender will normally ask for a discount on the value of the property. If a
homeowner was looking to sell 100% of the property to a provider and the
property was worth £200,000, the planholder would receive less than £200,000
for selling that 100% equity stake.
• No mortgage is created here and therefore no interest is charged
• The lender will take life expectancy into consideration before deciding how much
of a lump sum to award for what proportion of equity.
Page 93
• The provider will have to wait until the death or second death before they can
recover their capital when the property is sold
Most of these schemes are covered by the SHIP Code of Practice which offers individuals
the same safeguards as for lifetime mortgages
Shared Ownership Mortgage
• This combines rental with owner occupation to help those on low incomes to
become owner-occupiers.
• Involves borrowers, the lender and the local authority or housing association
• A borrower will buy a share, 25% for example in a property and pay rent on the
remaining 75%
• The borrower also has the chance to buy further shares in the property from the
housing association until the whole property is owned – ‘stair-casing’
• When the property is sold the equity is split according to the proportion of
ownership that each party holds.
Mortgage Related Property Insurance
• The property needs to be insured with a policy that is acceptable to the lender
• Have its interest as mortgagee noted on the policy
• Secure a right over the proceeds of any claim to remedy the problem
Other Lending
Second Mortgages/Secured Loans
• Borrower uses the property again as security for a loan to a new lender
• Would have to be sufficient equity in the property to make the lender comfortable
• The first lender retains the mortgage deeds
• If the property is sold the first lender has the first claim to the proceeds, passing
any surplus onto the second lender
• As there is therefore a higher risk of the second lender not recovering their loan
higher rates of interest are charged on second and subsequent mortgages
Page 94
Unsecured/Personal Loans
• Generally for shorter terms up to 7 years

• Interest rate is fixed and remains unchanged throughout the term
• Building Societies are restricted in this area to no more than 15% of their
commercial assets
• It needs to be established whether the Consumer Credit Act 1974 applies to the
loan:
 Loans over £25,000 are not regulated by the CCA 1974

 Loans under £25,000 are regulated by the CCA 1974 unless exempt
 Loans are exempt if:
o They are for home improvements of your main dwelling AND

o The original mortgage was provided by the same lender.
• If this applies then the loan will be regulated by the FSA
Note
As of April 2008, the Consumer Credit Act 2006 becomes law which removes the
£25,000 ceiling with certain exceptions.
Overdrafts
• Interest rate charged for overdrafts will depend on whether the overdraft is
authorised or unauthorised.
Credit Cards
• Agreed credit limit with a minimum monthly payment

• No interest is charged if the full balance is repaid within a specified period
• Credit card companies charge retailers a fee for offering this payment method to
the public
Charge Cards
• This time the outstanding balance needs to be paid in full at the end of the
month
Page 95
Debit Cards
• Chip and Pin services. Present your debit card as payment for goods.
Commercial Loans
• This is a loan where the purpose of the loan has some commercial activity eg
for a business, shop, office, factory
• Usually, it will be a company who takes out a commercial loan
#Test Lending Products
Pension Products (approx. 2 questions)
Page 96
Occupational Schemes
• There are 2 main types
 Money Purchase Scheme – Defined Contribution
o Contributions invested to create a fund

o Pension dependent on investment performance
 Final Salary Scheme – Defined Benefit
o 1/60th of the final salary paid for every year of service up to a

maximum of 40 years
o Maximum pension is therefore 40/60th or 2/3 of the employees
salary just before retirement.
• Additional Voluntary Contributions (AVC)
Employers who provide occupational schemes are obliged to also provide facilities
such as AVCs to help employees increase their pensions
• Free Standing AVCs
Following the Finance Act 1987 employees can opt for FSAVCs provided by a
different pension provider than the one the company uses.
Personal Pension Plans (PPPs)
• These and stakeholder pensions are available to anyone under 75
• These are money purchase arrangements so the pension achieved is dependent on

the level of contributions and investment performance
• They cannot be arranged in joint names
• The main tax advantages are:
Page 97
 Contributions attract tax relief at the person’s highest tax rate
 Receive tax relief initially at the basic rate even for NTP & LRTP
 HRTP can claim an additional 18% through self assessment so the HRTP
gets tax relief at 40%
• On retirement the plan holder can
 Use the full fund to buy a Compulsory Purchase Annuity (CPA) which is
buying an income for life which is taxable as earned income
OR
 Take up to 25% as tax free cash and use the remainder to buy a CPA or
take income drawdown or pension fund withdrawal
• Open Market Option
Allows the individual at retirement to shop around to get the best annuity rates rather
than just accept the deal offered by the pension provider
• Income Drawdown/ Pension Fund Withdrawal
 Allows individuals the chance to defer the buying of a CPA

 Annuity rates have been extremely poor
 Within certain limits, the individual can draw down income from the fund
as an alternative to purchasing a CPA
Pension Rule Changes (A Day April 2006)
• Since April 2006 the maximum annual contribution which is the aggregate of all
pension arrangements including occupational pensions is the higher of
 Up to 100% of their UK earnings
OR
 £3,600
Page 98
• There is however an overall maximum annual allowance which is currently
£225,000. This can be exceeded but tax will be charged on the excess.
• These limits now apply to all pension arrangements whether taken together or
individually
• Whether the individual has retired or not benefits can be taken at any time after 50
although this will rise to 55 from 2010
• Up to 25% of the fund can be taken as tax free cash
• The balance of the fund must then be used to buy a Compulsory Purchase Annuity
or alternatively an income can be taken as draw down.
• If the pension fund value exceeds the pension fund lifetime allowance of £ 1.6
million there will be a tax charge on the excess at 40%
• Contributions are paid net of basic rate tax, so an actual contribution of £100 into
your pension fund would cost you £78. Higher rate taxpayers would be able to
reclaim a further 18% through self assessment.
Stakeholder Pension
• Became available from April 2001
• Designed to encourage individuals to make pension provision and to particularly

attract those on low earnings.
• Similar rules to PPPs
• They do have restrictions in terms of:
 Charges cannot exceed 1.5% of the fund value for the first 10 years and
1% thereafter
 Exit and entry charges are not allowed
• Stakeholder Pensions and Employees
 Employers with 5 or more employees must offer a stakeholder scheme if

they don’t already provide an occupational scheme
 Employees are not obliged to join
Page 99
 Employers do not have to contribute to the scheme but do have to provide
a payroll deduction
Unit 1 Section 4
Page 100
The Financial Planning & Advice Process (3 questions)
General
• It is important that the adviser hands over a terms of business letter (TOBL) at
the first meeting
• It is also important that the client understands that all issues revealed are private
and confidential
• The client must also be made aware of the rights he/she with regard to the Data
Protection Act 1998 (DPA)
• FSA through the Financial Services and Markets Act 2000 governs the questions
we ask of clients whereas the DPA governs how we deal with those answers
Typical Savings Patterns
• Short term investments – instant access deposit accounts able to get at savings in
an emergency
• Medium term investments – less flexibility in exchange for a greater return
• Long term investments – risk of capital loss – potential high reward eg shares
Financial Life Cycle
Youngsters
• Attracted by small savings schemes (NS&I) often opened by parents or

grandparents
Teenagers and Students
• Little surplus income at this stage – borrow to fund college/university
Post Education/Young Adults
Page 101
• Saving towards a deposit for a house so short term easy access savings vehicles
the most common
Young Families
• Major borrowing is now likely to have taken place with a mortgage

• One partner may have had to stop work to raise children
• Protection of the income of the main breadwinner is crucial
• Should begin to think about pension provision
Established Families
• Money perhaps less tight with a return to two incomes

• Might trade up to a larger property, maybe a bigger mortgage
• May have greater creditworthiness enabling more expensive household goods
• Could receive legacies from deceased parents/grandparents
Mature Households
• Often the period of highest earning and outgoings may decrease if children leave
the family home
• Pension provision now becomes a major priority
Retirement
• As retirement approaches people looking to convert income into lump sums for
retirement
• On retirement those lump sums are then converted back into income (CPA)
• IHT mitigation could now also be a priority
• Continued good health and long term care could be the most important issue.
Page 102
Gathering Information
• The Financial Services & Markets Act 2000 (FSMA) requires that advisers must
‘know their customer’ and the adviser must be able to identify a client’s needs
• The adviser should ensure that a questionnaire or fact find is completed which
will highlight the client’s:
 Current and future needs

 Ability to meet these needs
 Attitude to their importance
• The fact find will uncover the following:
Client’s Circumstances
These relate to three main areas
• Personal details ( hard facts)
• Financial details (hard facts)
 Occupation
 Income & expenditure
 Assets
 Liabilities
• Objectives ( soft facts – subjective)
 Hopes and desires

 Goals in the future
 Changes in circumstances possibility
 Views on alternatives
 Whether they are willing to take action
Attitude to Risk
• It is essential to ascertain a client’s attitude to risk before recommending a

solution
• The advisor always needs to explain the risks involved with a product and
ensuring that the client understands and accepts the risks involved.
Page 103
Client Preferences
• Whilst the adviser should acknowledge a client’s preferences, if those preferences

are based around an incorrect assumption about a product, the adviser has a duty
of care to correct that misunderstanding.
Identifying and Agreeing Needs and Objectives
These can be categorised within the acronym PRISM which covers every area of
financial advice.
P – Protection for dependents and yourself from the effects of illness, accident and death
R – Retirement issues eg pension provision
I – Investments – commencing or maintaining current investments
S – Savings – commencing or maintaining current savings
M- Mortgages – improving the arrangements on debts owed – mortgages and other loans
There should also be an awareness of the TAX issue which applies to each of those areas.
If there are a number of ways that a client can be helped it is best to agree with the client
an order of priority.
Recommending Solutions
The adviser needs to be aware of the following issues when recommending solutions:
• State benefits
• Affordability
• Taxation
• Risk
• Is timescale an issue
• Current arrangements
Page 104
Implementing Solutions
• Presenting recommendations
 Explain how each recommendation matches their needs

 Explain the benefits the client will get from this product
 Explain risks or limitations
 Provide a summary for why that product has been recommended such as a
features and benefits analysis – what specific benefits these features
provide
• Handle Objections
• Obtain a commitment to buy
 Application form completion is the responsibility of the client but the

adviser can complete it with the client’s permission
 The client must be made aware of the effects of non disclosure of material
information
 Advisor must formally ask the client to read and check before signing
• Documentation
 Adviser must provide a business card at the start of the meeting

 Duty to explain any cancellation notice or period eg the client’s right to
withdraw from the contract within a certain period
 Advisor must provide a Key Features Document containing an illustration
before the application form is completed
 Advisor must retain all records for three years except for:
o Life Policies & Pensions contracts – 6 years

o FSAVCs, pension transfers & opt outs - indefinitely
• After Sales Care
 Pro active servicing – the adviser instigates contact with the client to
discuss changing circumstances and needs in order to take advantage of
new opportunities
 Reactive servicing – the adviser responds to a request from a client or

from a product provider eg missed premiums
Page 105
Unit 1 Section 5
The Main Financial Services Advice Areas (3 questions)
Budgeting
• This is crucial to all areas of financial advice and advisers when recommending a
product should not put any pressure on household income.
• Although, attitude to risk is a fundamental consideration, affordability is perhaps
even more important.
Protection
• This is the concept of protecting a financial product against various risks such as
death or illness. There are different types of protection:
Family Protection
• Losses due to death
o Any loss of income usually has a huge impact on a family

o That loss of income could make loans unaffordable
o There could be a risk of losing the family home as a consequence
o Missed payments that occur could jeopardise future borrowing
These problems can be prevented by ensuring either:
 Arranging an income protection policy to cover the loan
OR
 Arranging a capital sum to be paid on death to clear the loan in full
Page 106
Losses due to Illness
• Similar problems can occur if the main breadwinner suffers a serious illness
which prevents them from working
• These needs can be solved by:
o Providing an income protection policy to replace that lost income

o Providing an income to pay for treatment or adaptations to the house
o Providing a lump sum (critical illness policy)
Losses due to Unemployment
• The same concerns exist here as for losses due to illness
Business Protection
Death of a key employee
• Could have a big impact particularly on small companies

• Can be covered by Key Person Insurance
• Level Term Assurance is the most common
• Policies are taken by the company on the life of a key person
• If the policy is taken for 5 years or less then it is classed as a business expense
• If this is the case, any proceeds would be subject to corporation tax.
Death of a Business Partner
• It is important that the surviving partners of a business insure against the death of
a business partner with a view to covering the claims of a deceased’s partner’s
beneficiaries.
• The automatic accrual method
o Deceased’s share automatically shared among surviving partners

o Proceeds of a life policy paid to deceased’s beneficiaries
Page 107
• The Buy and Sell method
o Deceased’s executors obliged to offer to sell the deceased’s share of the

business to the surviving partners
o The surviving partners have to buy
o Life policies are taken on each of the partners for the benefit of the
surviving partners.
• The Cross Option method
o This time the deceased’s estate has the option to sell the deceased’s share
to the partners within a specified time
o Surviving partner’s have the option to buy
o If either side exercises that option it is binding on the other
o As this is an option rather than an obligation Business Relief is available
Borrowing
• The purchase of a house is the biggest single transaction that most people ever
undertake in their lives
• Failure to protect that loan in the event of death or disability can ultimately lead to
the loss of that family home.
Investment and Savings
• People invest to either provide an income or a capital sum
• These choices may change over time due to considerations such as a change in
risk profile, tax considerations or accessibility of capital.
The effect of inflation
• While there is inflation the buying power of a capital sum will decrease over time.
£10,000 in 2018 will not be able to buy you as much as £10,000 will in 2008.
Page 108
• The adviser needs to be aware of this and consider products that grow in real
terms – ie at a rate greater than inflation
• Equity or shares based investments have proved to be effective in achieving this
• The real rate of return is the interest rate minus the rate of inflation.
Retirement Planning
• One of the government’s most pressing problems concerns most people’s inability
to adequately provide for their retirement
• The Basic State Pension is unlikely to be adequate for most people
• Stakeholder Pension Plans were designed to encourage people to make pension

provision as they were designed to be easy to understand with a maximum charge
of 1.5% of the fund for the first 10 years and 1% thereafter.
• This imposed maximum 1.5% charge has made stakeholder plans unattractive for
the quality pension fund manager as he can make more on other pension schemes.
This has resulted in poor take-up rates on stakeholder plans
Estate Planning
• Remember that beyond the allowed threshold IHT is payable on the deceased’s
estate at 40%
• It is possible to reduce this liability by making use of exemptions and making
Potentially Exempt Transfers (PETs)
• Other possibilities include:
o Estate equalisation – enables each person to make full use of their annual
exemption
o Another method is to place assets in trust, since trust property does not
become part of the deceased’s estate – ring fencing.
o If you give property away while continuing to live in it, this is covered by
the ‘gift with reservation of benefit’ rule with the asset being treated as
never having been given away at all and is included in the value of the
estate.
Page 109
o The importance of making a valid will is also a vital element.
o Life Assurance Policies can also be used to cover an IHT liability. Usually
this is done on a joint life, second death basis – last survivor policy. On
the first death the spouse exemption applies and on the second death, as
the policy is written in trust, it will pass direct to the beneficiaries
Tax Planning
• It is always vital to consider the tax implications of any product recommendation
• Although this is a specialist area, an adviser needs to have an overview of the tax
issues with regard to a particular product such as an awareness of the tax
implications of various products such as:
o ISAs
o CGT free investments such as gilts
o Investments where the tax paid at source cannot be reclaimed such as
endowments and investment bonds.
Page 110
Unit 1 Section 6
Basic Legal Concepts Relevant to Financial Services

(7 questions)
Personal Representatives
• These people represent deceased people in order to distribute the estate

• How it is distributed depends on whether there is a valid will
• If there is a Will they are called Executors nominated by Grant of Probate

• If there is no Will they are called Administrators nominated by Grant of
Letters of Administration
• The person who makes the Will is called the Testator
• Modifications to a Will are recorded on a codicil

• You must be 18 to make a Will in English law, 16 in Scotland.
• For a Will to be valid it must be:
o Written
o Signed by the testator
o 2 witnesses to the testator’s signature(not beneficiaries nor spouses of
beneficiaries)
o Testator must witness the witnesses signatures
• A Will is invalid if:
o It is destroyed with the intent to revoke it

o A later Will is made
o Testator marries or remarries unless it is made in contemplation of
marriage
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Deed of Variation
• Sometimes it is an advantage to the beneficiaries to vary the way the estate is

distributed. In effect you are ‘varying’ the terms of the Will
• This can only be done for family or more commonly tax reasons
• In order to do it all beneficiaries under the existing Will must be over 18 and
all must be in agreement to the variation
• It must be done within 2 years of death and HMRC must be informed within 6
months of the variation.
Intestacy
• A person has died intestate if there is no Will or no valid Will

• The person who deals with the estate is the Administrator who applies for Grant
of Letters of Administration.
• The rules of intestacy will apply which are:
o Spouse but no children
 Spouse receives the first £ 200,000 plus half of any remainder

with the other half going to the parents or the siblings if the
parents are dead
o Spouse and Children
 Spouse receives the first £ 125,000 plus an income from half the
remainder for life.
 The other half goes to the children. When the spouse dies the
children also get the capital from which the spouse was receiving
an income from.
o Children but no spouse
 Estate shared equally among the children.
o Neither spouse nor children
 Estate goes to the deceased’s parents or if dead to the siblings
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Trustees
• A Trust is created by the person who creates the trust – the settlor.
• When the trust is created the settlor has no legal interest in the trust property. It
now belongs to the trust itself
• The trustee is now the person who has legal responsibility for that trust according
to the trust deed.
• Trustees must be of sound mind and aged 18 or over
• If a trustee dies the remaining trustees can appoint a new trustee.
Trustees must:
• Act in accordance with the trust deed. If they have discretion in exercising
their powers then all trustees must agree
• Act in the best interests of all beneficiaries
• Under the Trustee Act 2000 trustees also need to:
o Obtain proper advice when reviewing investments

o Be aware of the need for suitable and diversified assets
Companies
• Limited companies are distinct legal entities – separate from the shareholders
• Therefore, the shareholders are not liable for the debts of the company
• Each company must have a Memorandum which sets out the powers of the
company and Articles of Association which sets out the powers of the directors
Partnerships
• A partnership is not a separate legal entity and therefore the partners are
responsible for the liabilities of the partnership
• The Partnership Deed is a written agreement which specifies how profits and
liabilities are allocated amongst the various partners.
• A Limited Liability Partnership is one where each partner’s liability is limited to
the amount they have invested into the partnership.
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Law of Contract
• Contracts are binding whether made orally or in writing

• To be valid the following must exist:
o All parties must have capacity – 18 or over and of sound mind

o An offer and acceptance of that offer
o Consideration – what each party exchanges – money in return for a
product or service
o Intention to create a legal relationship
o Must be legal
o Terms must be clear and unambiguous
o Contract must not have been coerced through misrepresentation, duress or
undue influence
• Most contracts are based on the assumption of caveat emptor which means buyer
beware
• However, life assurance contracts are based on the principle of ‘utmost good
faith’ which means that all material facts relevant to the application need to be
disclosed
• If one of the parties to a contract does not perform its side of the contract, that
person is then in breach of contract
• If it was to go to court damages would be sought and if proven awarded to

indemnify the claimant or to reinstate him for his loss – this will include legal
expenses.
Law of Agency
• An agent is a person who acts on behalf of another person

• The person he is acting for is known as the principal
• Agents can enter into contracts on behalf of the principal and in law the actions of
the agent are considered to be those of the principal
• An agent should only act in accordance with the power and authority that they
have been given
• If it can’t be proven that the agent has exceeded their authority then the principal
could be held liable for the actions of the agent.
• This may also be the case if the agent has acted within his ‘apparent authority’.
This occurs when the principal has done or said something which a reasonable
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person would conclude represents a granting of authority. The court would have
to decide.
• If the agent has acted outside his authority and it can be proven then t he agent
could be held liable for his actions by a third party.
• Where the agent has exceeded his authority but the principal is happy with the
outcome then this is called ‘ratification’.
• Financial advisers who operate as tied agents are acting as agents of that product
provider whereas independent advisers are acting as agents of the client.
Ownership of Property
There are 2 types of property:
• Realty – land and everything attached to land
• Personalty – any property which is not land
Joint Property
Joint Tenants
• Where two or more people jointly own an asset. Where one of them dies, the
property passes to the surviving joint owner.
• This is irrespective of any provisions made in a Will.
Tenants in Common
• This time each tenant in common owns a specific share of the property which may
or may not be 50/50.
• On death the deceased’s person’s share is passed via their estate eg Will or
intestacy.
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Power of Attorney
• These are people who act on behalf of others

• The donor grants the authority, the donee is given the authority
• A person who is a minor or of unsound mind cannot create a power of attorney
• A standard power of attorney will expire if a person becomes of unsound mind.
• A person of unsound mind can have a power of attorney granted for him by the
Court of Protection
• A person of sound mind can appoint an Enduring Power of Attorney which only
comes into force when a person becomes of unsound mind
• Enduring powers of attorney must be registered with the Public Guardianship

Office, now referred to as the Office of the Public Guardian.
• They can only be revoked by the Court of Protection
• Enduring Powers of Attorney are now referred to as Lasting Powers of Attorney

which covers personal and health issues in addition to financial matters
Insolvency and Bankruptcy
• Insolvency occurs when the value of a person’s liabilities is greater than their
assets and they are unable to meet their financial obligations
• Bankruptcy occurs when an insolvent person is subject to a bankruptcy order by

the county court
• An individual can petition for their own bankruptcy or a creditor can petition for it
if they are owed £ 750 or more
• Enterprise Act 2002 reduced the period of bankruptcy from 3 years to 1 year. In
Scotland, it is still 3 years but is about to change to 1 year.
• During that period the person is known as an undischarged bankrupt and cannot
borrow more than nominal amounts of money
• Once declared bankrupt that person is assigned to the ‘trustee in bankruptcy’

whose duty is to recoup as much as possible for the creditors. Certain assets such
as clothing, certain household items and work related items cannot be taken
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• Following discharge a person is referred to as a discharged bankrupt and must
always disclose the existence of the bankruptcy in any credit application.
• An individual voluntary arrangement (IVA) is an alternative to bankruptcy. The

debtor will arrange with the creditors to re-schedule debts over an agreed period
often 5 years.
• An IVA can only be achieved if creditors holding 75% of the aggregate debt are
in agreement.
• An individual with an IVA will not be able to obtain credit while the IVA is in
force and is likely to be impaired even after the end of the arrangement.
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UNIT TWO
UK FINANCIAL SERVICES REGULATION
Section
1. The Financial Services Authority (approx 70% of questions)
2. Money Laundering
3. Complaints & Compensation
4. Data Protection
5. Other Laws & Regulations
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Unit 2 Section 1
The Financial Services Authority (70%)
Introduction
• Most UK industries these days are regulated by an independent body. For

financial services that watchdog is the Financial Services Authority (FSA)
• In the past there had been some regulation which was reactive rather than
proactive, which largely resulted from financial scandals.
• There was also during this time deregulation in the banking and building society
markets which was introduced in the Building Societies Act 1986 and the
Banking Act 1987.
The Financial Services and Markets Act 2000
• There was a Financial Services Act 1986 where there was an attempt for the
industry to self regulate itself. This was largely unsuccessful.
• There were a number of reasons for the establishment of the FSA but the main
problem was that the existing regulatory structure was too fragmented and there
was need to have one single regulator which covered the whole industry.
• In June 1998 regulation of the banks and the Bank of England were transferred to
the FSA
• In December 2001, The Financial Services & Markets Act 2000, transferred
regulation of virtually the whole industry to the FSA
• On 31 October 2004 the regulation of mortgages was transferred from the

voluntary Mortgage Code Compliance Board (MCCB) to the FSA
• In January 2005 the regulation of general insurance was transferred to the FSA
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Statutory Objectives, Role & Activities
• The FSA is not a government department but a designated agency operating as a

limited company.
• The FSA board is appointed by the Treasury which has overall responsibility for
the financial services industry under the direction of the Chancellor of the
Exchequer.
• The FSA has certain statutory objectives:
 Promoting public understanding

 Maintaining confidence in the financial services industry
 Maintaining an appropriate level of consumer protection based on:
o Different levels of product risk
o Different levels of consumers’ experience and expertise
o Need for accurate information and advice
o The principle that consumers need to take some responsibility
 Reducing financial crime such as money laundering, insider dealing etc
• The performance of the FSA is measured against its ‘principles of good

regulation’ and must be seen to be:
 Ensuring that the costs of regulation are proportionate to benefits

 Allocating resources efficiently
 Facilitating innovation and competitiveness
 Taking account of the responsibilities of managers
 Taking account of international factors and UK’s competitiveness
 Aid competition rather than suppress it
• The FSA performs its role by:
 Setting standards
 Developing rules and regulations and supervising their implementation
 Authorising companies and individuals
 Providing guidance and training
• The FSA must report annually to the Treasury
• The FSA also provides a Handbook which gives guidance on the rules and
regulations for authorised firma and individuals.
• The rules in the Handbook are binding obligations. Guidance explains the rules
but does not have to be followed.
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• The Handbook is made up of individual Sourcebooks and divided into five
sections:
 High Level Standards (authorisation rules)
o Threshold conditions – requirements for firms to be authorised

o Fit & Proper Test for approved persons
o Senior Management Arrangements – what procedures are in place
to ensure control of the business
 Business Standards (rules on conducting business)
o Interim Prudential Sourcebook – financial soundness of firms
o Conduct of Business Sourcebook – marketing and sale of financial

services. In November 2007 a new conduct of business rules book
called NEWCOB was introduced.
o Market Conduct Sourcebook – rules concerning investment

markets including insider dealing
o Training and Competence Sourcebook
o Money Laundering Sourcebook
 Regulatory Processes
o Rules and guidance on achieving authorisation

o FSA’s enforcement powers
o Supervision manual – how compliance will be monitored
 Redress Sourcebook – about complaints and compensation
 Specialist Sourcebook – arrangements for professional firms such as

solicitors, accountants and the supervision of Lloyds of London
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Principles for Firms & Approved Persons
• The FSA has a set of 11 Principle of Business with which firms and individuals
must comply:
1. Integrity
2. Skill, care and diligence
3. Management & control of the business
4. Financial prudence
5. Market conduct – proper standards of market conduct
6. Clients’ interests
7. Client communication
8. Conflicts of interest
9. Clients’ relationship of trust
10. Clients’ assets – must arrange adequate protection
11. Regulator relations – deal with the regulator in open and co-operative way
• There are also 7 statements of principle for staff who are approved persons and
for those carrying out controlled functions.
• This covers virtually everyone in the industry. Does not cover secretarial/admin
etc
1. Must act with integrity

2. Must act with due skill, care and diligence
3. Observe proper standards of market conduct
4. Deal with the FSA in an open and co-operative way
In addition to those four, ‘approved persons’ in positions of ‘significant influence’

must:
5. Take steps to ensure the business is well organised and controlled

6. Exercise due skill, care and diligence in managing the firm
7. Take steps to ensure that the business complies with the regulatory system
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Treating Customers Fairly
• One of the potential drawbacks of having a strict regulatory system was that it
became apparent that firms and individuals could ‘hide behind’ the rules, using
loopholes or technicalities to their advantage.
• The FSA quickly became aware of this and so launched its Treating Customers
Fairly initiative (TCF). Its aim is to develop a more ethical frame of mind
leading to more ethical behaviour.
• This is an important part of the move to a ‘principles based’ form of regulation.
• The FSA has not provided a definition for TCF and has insisted that the concept
of ‘fairness’ will vary according to the circumstances.
• The FSA has said that a firm should consider a number of areas such as:
o Specific target markets when developing products

o Ensuring communications are clear and do not mislead
o Honouring promises and commitments it has made
o Identifying and eradicating causes of complaints.
• The FSA has made it clear that TCF needs to apply to the whole financial services
process from product design through to post sales.
• Responsibility for ensuring that TCF is introduced and built consistently into the
firm lies with the senior management of the firm.
In summary, TCF is designed to deliver six improved outcomes for retail financial
consumers.
• Consumers will be confident that the firm is committed to fair treatment of the
consumer.
• Products are designed to meet the needs of customer groups
• Consumers are provided with clear information at all stages
• Any advice given is suitable for that client’s circumstances
• Products perform as customers have been led to expect
• There are no unreasonable barriers to switching product or provider or making a

complaint.
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Arrangements, Systems & Controls for Senior Managers
• Senior managers have to take responsibility for a firm’s compliance and this will
involve:
o A clear chain of responsibility
 Senior managers will be held responsible for the firm’s activities.

In large firms, this can be delegated but there needs to records and
controls in place regarding this
o Systems & Controls
 Firms must have appropriate systems and controls and these must
be documented and regularly reviewed. These will include:
 Chains of responsibility – delegation & reporting
 Compliance
 Assessment & risk reporting
 Management information reporting
 Competence and honesty of staff
 Controlling business risks strategy ( recovery from fire or

computer failure)
 Readily accessible records ( secure backup systems)
 Independent audit of the systems and controls must be

made
o Whistle blowing
 Procedures need to be in place for staff to report serious activities

within the firm and such staff have a right to protection under the
Public Interest Disclosure Act 1998.
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Oversight Groups
It is important that all aspects of the institution are kept under review to ensure that
the investments of both shareholders and the customer are being handled safely and
that the laws and regulations are being observed. Examples of these are:
o Auditors
 External auditors are primarily concerned with the published financial

statements and accounts. They are independent of the institution whose
accounts are being published.
 Internal auditors have the task to review how an organisation is

managing its risks. The role of internal auditors is to identify problems
and recommend solutions to the senior management who have overall
responsibility.
o Trustees
 A trustee is a person or an organisation that has a duty to ensure that

any property held in trust is dealt with in accordance with the trust
deed.
o Compliance Officers
 Firms that are authorised by the FSA should appoint a compliance

officer to have an oversight of the firm’s compliance with all relevant
legislation and regulations.
 Responsibilities of a compliance officer will include:
 Production of a compliance manual

 Maintenance of compliance records
 Correspondence with the FSA on compliance matters
 Ensuring that staff meet FSA requirements as regards
recruitment, training, supervision and selling practices
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The Fit & Proper Test for Approved Persons
The FSA has to determine whether a person is ‘fit and proper’ to be allowed to undertake
a controlled function. This will relate to:
• Honesty and integrity judged by:
 Criminal record
 Disciplinary proceedings
 Any previous record with regard to FSA rules
 Complaints record
 Insolvency record
 Dismissal from a position of trust
• Competence and capability in meeting FSA’s training and competence

requirements
• Financial soundness based on current financial position, any previous

bankruptcies and credit rating.
Prevention of Crime
The FSA is committed to reducing financial crime which includes:
• Market abuse
o Insider dealing – taking advantage of information not yet known to the

public
o Market manipulation – where a person gives false or misleading

information with the intention of influencing the share price.
• Money laundering (see Section 2)
FSA Regulation of Firms and Individuals
All financial services firms need to be authorised by the FSA if it carries out regulated
activities with regard to regulated investments. These areas cover all the main areas of
financial services.
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Capital Adequacy
The capital adequacy of authorised firms needs to be assessed.
Capital Adequacy Regulations for Deposit Takers
• Institutions must have sufficient capital to make it unlikely that the deposit will
be at risk
• In this respect, capital means the bank’s own capital base not fund deposited by
customers
• Minimum capital adequacy is set to prevent depositors from losing their deposits
• The Basel Accord set out the minimum capital requirement for banks. This was
achieved in terms of the bank’s solvency ratio.
• Current regulations require a solvency ratio of at least 8%
• There is also an adjustment level which is used according to how risky that
product is:
 0% - cash in hand
 20% - loans to the European Bank, gilts and local authority.
 50% - loans secured by mortgages on residential property
 100%- unsecured loans
Example
A bank has assets of £ 200 million in mortgages. What is the bank’s minimum capital
adequacy assuming a minimum solvency ratio of 8% ?
Minimum Capital = Assets value x Adjustment % x Min Solvency ratio
= £200 million x 50% x 8%
= £ 8 million
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Capital Adequacy Regulations for Investment Business
Investment firms have the freedom to provide services across the EU and the Investment
Services Directive (ISD) enabled this to be so.
This has now been revised by the Markets in Financial Instruments Directive (MiFID).
This covers the same areas as the previous directive and also includes investment advice.
The Capital Adequacy Directive established minimum capital requirements for these
firms and they are split into two categories:
• Advisers/Arrangers/Brokers – these firms must have initial capital of at least

125,000 EUROS, however, this is reduced to 50,000 EUROS if they do not hold
client money.
• Investment firms who deal on their own behalf must have initial capital of at least
730,000 EUROS
Solvency Margin for Life Assurance Companies
• The Life Directive of 2002 requires that life assurance companies must maintain
an adequate solvency margin at all times.
• This is more difficult because the life assurance company has liabilities that the
company may or may not have to make at unknown dates in the future.
• The solvency margin is the excess of the assets over its mathematical provisions
or liabilities
• The basic rule where there is an investment risk such as with endowments is that
there must be a solvency margin of 4% over its liabilities. In other words, the
value of a life company’s assets needs to be 104% of the value of its liabilities.
• For policies with no investment value such as term assurance, the percentage
required is less.
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The Risk Based Approach
There are 4 types of risk faced by financial services consumers
• Prudential risk – incompetent management
• Bad faith risk – fraud, mis-selling or non disclosure
• Complexity/unsuitability risk – customer not understanding
• Performance risk – poor investment performance
• The FSA is very much concerned with the risks in the first two categories and
possibly some in the third category, but it is not responsible for protecting
customers from poor investment performance.
The FSA approach to supervision
• The FSA takes a risk based approach to supervision. This means that they will
make a continuing assessment of each firm judging the probability of any risk
and its likely impact
• Probability is concerned with the FSA’s view of :
o Business risk – looking at capital adequacy and accounts

o Control risk – looking at management structure & systems and controls
o Consumer Relationship risk – marketing and advice practices
• Impact factors relate to the effect on the economy, the industry or the client:
o How a firm’s collapse would affect the industry

o The size of its customer base
o Availability of compensation following loss
• The probability and impact assessments are then combined to give an overall risk
assessment of the firm.
• Firms with a higher risk assessment are monitored more closely. Each firm is
given a risk band ranging from (A) high risk to (D) low risk.
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Discipline and Enforcement
Where the FSA suspects regulations have been broken they can undertake a:
• General investigation – looking at the business as a whole
• Specific investigation – looking at the actions of an authorised person
The person appointed by the FSA to undertake a general investigation can require:
• The individual and connected persons to answer questions, provide information

and provide documents
• They can also require any other person to provide documents
The person appointed by the FSA to undertake a specific investigation can require:
• Anyone to answer questions, provide information and provide documents.
If the FSA has reason to believe that someone has not complied with the requirement to
provide information or documents, they can apply to court for a search warrant to enter
the property and seize documents.
Enforcement Powers
If a firm fails to comply the FSA has range of disciplinary powers including:
• Varying the firm’s permissions – removal of a permission to operate in one of the

firm’s activities
• Withdrawal of approval – the firm ceases to be approved in some or all of its

functions
• Seek an injunction – FSA freezes the assets of the firm
• Seek restitution – FSA applies for a court order to have proceeds forfeited to them
• Seek redress – same as restitution but this time the court order forces the gains to
be returned to clients
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• Disciplinary action – if a person or firm is judged to be guilty of misconduct, the
FSA can issue a private warning, publish a statement of misconduct or impose a
financial penalty.
The FSA Conduct of Business Rules
Approved Persons & Controlled Functions
Under Section 59 of the Financial Services & Markets Act 2000 individuals have to be
approved by the FSA before they can carry out certain functions in relation to regulated
activities. These functions are known as ‘controlled functions’ and are divided into 5
categories.
• Governing functions – people who run the business
o Directors, Non executive directors, Chief Executives

o Partners
o Sole trader but only if there are also employees
• Required functions – those with technical expertise
o Compliance officer
o Money laundering reporting officer
o Appointed actuary in life assurance companies
• Systems & control functions – often accountancy/finance positions
o Risk assessment
o Finance
o Internal auditing
• Significant management functions – responsible for the management of:
o Insurance underwriting
o Financial resources
o Settlements and claims
o Designated investment business
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• Customer functions – all roles where advice is given to clients.
o Fund manager
o Financial adviser
o Mortgage adviser
o Investment adviser
o Pension transfers
Advertising and Financial Promotions Rules
These cover invitations or inducements to enter into investment activity and include
advertisements in all media forms and telephone calls.
• Financial promotions must have been approved or prepared by an authorised

individual.
• There is a distinction made between ‘real time’ promotions – personal visits,

telephone conversations and ‘non real time’ – letter, newspaper, TV, website
• The rules applying to non real time promotions(advertisements) are:
o They must be clear, fair and not misleading
o A record must be kept (for one year after it was last used) of all non-real
time promotions and of their approval by an approved person. This record
must include proof of all factual claims made.
o Non real time promotions must show adequate contact details of the firm
o It is not necessary to indicate that the firm is regulated by the FSA unless
the advertisement is a direct offer such as a newspaper advert
o There must be a clear and adequate description of the product and an

explanation of the risks involved
o Information about past performance must be based on an appropriate

period of not less than 5 years or the period the product has been available
if shorter. Past performance is not necessarily a guide to future
performance”
o If an equity linked product is compared to a deposit based product, it must

be made clear that the equity product is not as secure
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• The rules applying to unsolicited real time promotions are:
o Unsolicited approaches or cold calling is allowed for packaged products

such as life assurance policies and unit trusts but not permitted for the sale
of shares or mortgages
o Unsolicited calls may not be made between 21.00 and 9.00 and all day
Sunday
o The caller must always check to confirm that the recipient is happy to
continue with the call.
Record Keeping
• Clear and accessible records must be kept in relation to advertisements, fact finds,
advice recommendations etc
• The main reason for this is to prove compliance with the regulations
• Records can be kept in any format but they must be capable of being re-produced
in English
• Firms must take adequate steps to ensure that records are protected from
destruction, unauthorised access and alteration
Training & Competence
The FSA has set out rules and guidance for all firms to ensure competence of all
individuals employed in a controlled function
There are three categories of employees with detailed competency and training rules:
• Financial advisors and those dealing in or managing investments

• Supervisors
• Supervisors who oversee certain ‘back office’ functions such as supervisors of
underwriting or claims staff in a life insurance firm
Other approved persons are not subject to these rules unless they are involved in the sales
process.
Recruitment
• There need to be checks regarding knowledge, skills and qualifications
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• If the person has no industry background, full training has to be given
• There are transitional arrangements for people recently assessed as competent by

a recent employer.
Training
• Firms must determine each employee’s training needs and arrange training
• Firms must monitor and assess the training and have systems in place for the
continuing competence of employees.
Assessing Competence
• An employee must not engage in any of these activities unless they have been
declared as competent by the employer. This means that the employer is satisfied
that they have the knowledge and skills and they have passed ALL modules of an
appropriate examination eg CeMAP
• An employee may engage in such activities BEFORE being declared competent

if they act under appropriate supervision and the employer has ensured that they
have an adequate level of knowledge and skills and they have passed the relevant
module of an appropriate exam such as module 1 of CeMAP and CeFA
Maintaining Competence
• A firm must also have arrangements to ensure staff maintain competence. This is
known as Continuing Professional Development. There is no prescribed minimum
time to be allocated to this but a figure of 50 hours per annum could be deemed
appropriate.
• Methods used to illustrate this could include training courses, private study,
conferences etc
Record Keeping
• Employers must retain records showing how an employee’s continuing

competence is being assessed
• These training records must be kept for at least three years after an employee has
left the firm but records for pension transfer staff must be kept indefinitely.
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Specific Rules for Financial Advisers
• The FSA’s Conduct of Business Sourcebook relates to standards with regard to

advising and selling covering:
o Advisor’s level of independence

o Advisor’s relationship with the client
o Information gathering
o The requirement to give suitable advice
o The requirement to clearly describe the product
o The opportunity to withdraw
o Advisor’s remuneration – how he is paid
Types of Customer
Under the regulations customers are defined within three categories:
• Market Counterparty
o This is someone who has a high degree of financial knowledge such as

someone whose job it is to sell financial products himself.
o As such, they are given the lowest level of customer protection.
• Intermediate Customer
o A customer who has some knowledge or experience of financial services.

An example of this would be a firm acting on behalf of a private customer
with some knowledge or experience of the industry
• Private Customer
o Someone with very little knowledge of financial services

o Most customers fall into this category
o These people require the highest level of customer protection
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Terms of Business Letters and Client Agreements
• All financial advisors are required to have a Terms of Business Letter(TOBL) and
this must be given to the client before any information is sought
• If a product is being requested in response to an advertisement, a TOBL must be
included in the first response
• A TOBL is not required if:
o The customer has received one in the past and it has not changed
o The customer is a professional investor
o The customer has entered into a separate client agreement ( see below)
• The TOBL typically includes:
o Advisor status – tied or independent

o What services are available
o Full name of the regulator
o Client’s rights under the Data Protection Act 1998
o Details of complaints procedure
o The basis of the advisor’s remuneration – fee or commission based
o The firm’s authorisation to handle money
o The safe keeping of client’s assets and the right to inspect
o The duty to disclose details of any connected persons
o What locum arrangements are provided
o Whether or not professional indemnity insurance is held.
Client Agreement
• This is a TOBL with some additional elements

• Required when the service to be provided includes high risk investments such as
‘futures’ and ‘options’ on the derivatives market
• The agreement reflects the fact that the client has an increased level of reliance on
the advisor’s advice, so the following is dealt with:
o A clear description of the client’s aims

o What restrictions are imposed on the advisor
o Confirmation of the amount that the client is committed to
o How the agreement can be terminated
o An explanation that the client has waived the right to cancel during any
cooling off period
o How charges will be applied
o When, how and why unsolicited calls may be made
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Discretionary Investment Management Agreement (DIMA)
• This is a client agreement with additional elements.

• A DIMA gives a Power of Attorney which gives the advisor discretion with
regard to choice of investments
• The DIMA will specify the limits to that discretion
Advisor Status and Disclosure of Status
Polarisation and Depolarisation
• Polarisation was introduced by the FSA by the Financial Services Act 1986 and it
requires all advisors, prior to giving advice, to make clear to clients their status
regarding whether they are:
o Tied
o Independent
• Advisors must explain the difference between the two, both verbally and in written
form
• By the end of the 1990s it had become clear that polarisation was no longer an ideal
way of protecting the consumer from the danger of ‘commission bias’.
• The FSA devised a new scheme which became effective from June 2005 called
‘depolarisation’. Under the new rules, advisers are permitted to operate in one of
three categories:
o Fully independent advisers – offer products from across the whole market.
Due to the size of the marketplace, independent advisers will be allowed to
use a panel of providers and still be independent as long as the panel is
representative of the spread of products across the whole market.
o Advisers who offer products from a limited range of providers – known as

multi tied. For example, one provider for pensions, one for protection and one
for mortgages.
o Advisers who are tied to one provider – offer products from that company
only.
• Advisers are obliged to specify at the outset which category they operate in before
any business is discussed.
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• Customers must also receive 2 important documents that the FSA have branded as
Key Facts documents. The first is the Initial Disclosure Document (IDD) and the
second is about the cost of the services commonly known as the Menu
The Initial Disclosure Document (IDD)
Sets out the key facts about the firm and its services including:
• Types of product offered

• Whether they are from the whole market or not
• Whether advice and recommendation is given
• Whether payment is required
• Details of the firm’s ownership and regulation
• Complaints and compensation details
The Guide to the Cost of our Services – The Menu
• Services provided by the firm

• Fee or commission
• The fact that different firms have different charging structures
• If fee based how much this is
• If commission based how much this is and how this compares with the market
average.
Advisers who are classed as independent will have to be a whole of market firm. In
practice, they are able to select from a panel provided that the panel is representative of
the whole of the market. They also have to offer but not insist a fee based option.
Adviser’s who are tied to a particular provider are still required to give advice as to the
most suitable product. If there isn’t a suitable product available from the provider to
which they are tied they are not allowed to recommend the ‘next best’.
It is not a requirement, but in the above instance the adviser is permitted to recommend
that the client seeks independent advice.
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Know Your Customer Rules
• Advisors must not give investment advice until they have discovered the client’s
personal and financial circumstances. This is sometimes referred to as the fact
find and includes:
o Personal information
o Employment details
o Assets – property, savings and investments
o Liabilities – mortgage, loans, credit cards
o Expenditure – household expenses, travel expenses, socialising
o Attitudes & objectives – attitude to risk
• These rules require advisors to take all reasonable steps to ensure that the client
understands the nature of any risks including whether any capital is at risk.
• Fact find information must be retained as follows:
o Pension transfers, opt outs & FSAVCs – indefinitely

o Life policies and pension contracts – 6 years
o Other products – 3 years
Suitability of Advice
• The advisor is required to recommend the most suitable product given the client’s
circumstances. There is no such thing as ‘best advice’
• Advisors must not take into account commission levels when determining
recommendations.
Suitability Letter
• This letter explains to the client the reasons for the recommendation
• It must be provided as soon as possible after the sale is completed and no later
than the date the cancellation notice is issued.
• These letters are required for:
o Life policies
o Pensions including pension transfers and opt outs
o Unit trusts, investment trusts and OEICs
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Execution Only
• This is where the customer directs the advisor to arrange the transaction for a
specific product from a specific provider.
• For these types of transactions the advisor does not have a duty to fully explain
the risks involved.
• However, the advisor must still effect the transaction on the best terms available
in the market.
• Advisors must also obtain the client’s signature to confirm that the transaction is
execution only.
• Only a very small proportion of cases will be execution only – no more than 5%
Charges and Commissions
The FSA requires firms to ensure that a customer is aware of the direct or indirect costs
of products.
• Charges and fees must not be excessive and the advisor should consider how
those charges compare with other advisors.
• For investment advisors the basis and amount of the charges will be disclosed in
the TOBL. If the business is execution only the firm can make the disclosure
verbally and then provide written confirmation within 5 business days.
• If the product being recommended is a ‘packaged’ product such as life and

pensions, the advisor must disclose the amount of commission received and this
will be included in the Key Facts Illustration. (KFI)
Product Disclosure
Those advising and selling ‘packaged ‘products such as endowments, pensions and unit
trusts must provide details of the key features of the product before the sale is concluded.
This is sometimes referred to as a KFI. This will include:
• The important elements of the product

• Risk factors
• Whether repayment levels are fixed or variable
• An FSA illustration of projected early cash in values
• Consequences of making the product paid up
• Information on charges and commission
• Taxation implications
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Cooling Off and Cancellation
• This concerns the customer’s right to change his mind and withdraw from a sale
within a specified period often 14 days after receiving the cancellation notice.
• If this occurs the customer will receive a full refund unless the product is a lump
sum investment where the value of that investment has fallen.
• In this case the customer will receive the investment’s reduced value, as long
as this is stated in the contract.
Stakeholder Products
To try and encourage the public to participate in the financial services market the
government asked Ron Sandler to suggest ways to stimulate interest.
The Sandler Report concluded that:
• There is too much complexity within many financial products

• The industry has failed to attract the majority of people on low incomes
• The market was more geared to companies than individuals.
The recommendation therefore was to develop a range of low cost, low risk, simple
products that would appeal to the financially unsophisticated.
• The maximum permitted annual charge for investment products was set at 1.5%
for the first 10 years and 1% thereafter.
• Controlling the risk element was deemed to be a crucial factor. This was to be
achieved by limiting the proportion of shares in unit linked and with profits funds
to 60% of the fund.
The government has announced that as a result of this a range of stakeholder products
will include:
• Child Trust Fund

• Stakeholder Pension
• Cash deposit similar to a cash ISA
• A medium term investment product similar to collective investment schemes
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A more simplified sales model has also been proposed with more limited factfinds and
sales interviews pre-scripted.
Regulation of Mortgage Advice
• Since 31 October 2004 the FSA has become responsible for most mortgages
• The FSA regulates all mortgages that meet all of the following criteria:
o Individuals or trustees
o First mortgage or charge
o Property in the UK excluding timeshare
o Borrower or immediate family occupying 40% as a residence
• Second mortgages meaning a second mortgage on the same property are not
regulated by the FSA. Also, subsequent mortgages are not regulated.
• Buy to Let Mortgages are not regulated by the FSA nor are corporate mortgages
• Mortgage suitability involves:
o Considering whether a mortgage is appropriate for that client

o Which repayment method or product is suitable
o Which provider best meets those needs
• The issuing of a suitability letter is not a requirement, but most mortgage advisors
tend to do so.
• There is no cooling off period with mortgage contracts.
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The structure of the MCOB rulebook is as follows:
MCOB Application & purpose – explains the scope of the rules

1
MCOB Explains use of correct terminology such as “higher lending charge” and
2 “early repayment charge”. Communication needs to be clear, fair and not
misleading.
MCOB Rules on financial promotions as discussed earlier
3
MCOB Advising and selling standards – the IDD
4
MCOB Pre application disclosure – the KFI
5
MCOB Disclosure at the offer stage by the lender
6
MCOB Disclosure at the start of the contract
7
MCOB Specific rules for lifetime mortgages
8
MCOB Specific rules for lifetime mortgages
9
MCOB Annual Percentage Rate
10
MCOB Responsible lending – lenders to have written responsible lending policy
11
MCOB Charges – excessive charges are not permitted
12
MCOB Arrears and repossessions – lenders must try to reach agreement with
13 borrowers in arrears and not put unreasonable pressure on the borrower.
Records must be kept and the lender must write to the borrower within 15
working days of becoming aware of the arrears.
Regulation of General Insurance
• The FSA became responsible for this area since January 2005.
• This was prompted by the need to implement an EU Directive aimed at opening

and standardising the market for insurance intermediaries throughout the EU
• The training and competence rules are exactly the same as previously described
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• Individuals and firms have to authorised through the same processes that apply to
other financial services sectors.
• Rules applicable to intermediaries who sell, administer or advise on general

insurance are contained in a new rulebook known as the Insurance Conduct of
Business (ICOB) Sourcebook. The rules are summarised below:
General Rules
• This covers rules on communications which must be clear, fair and not
misleading.
Financial Promotions
• Advertisements must be clear, fair and not misleading. Expressions of opinion

need to be fair representations and it should be made clear if quotations are
estimates only.
Advising and Selling Standards
The main elements are:
• Information on status – eg whole of market. This information can be provided in

an IDD. If both mortgage and insurance products are on offer it can be done
through a Combined Initial Disclosure Document (CIDD)
• Fees – details of fees must be disclosed
• Suitability of Advice – when a personal recommendation is made, the contract

must be suitable for that customer. This must be evidenced by a Demands and
Needs Statement which explains why a particular product was recommended.
• Excessive charges – charges must not be excessive
• Unsolicited services – automatic renewal of contracts must not be carried out

unless the customer has consented to this.
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Product Disclosure
• It is the intermediary’s responsibility to provide product information to customers.

The insurance company must provide that information for the intermediary.
Cancellation
• The cancellation rights are offered by the product provider but the intermediary
needs to be aware of them
• For general insurance contracts the cancellation period is 14 days
• For pure protection policies (eg Critical Illness) the period is 30 days
• If a customer cancels the insurance company must return any money paid to it
within 30 days of cancellation. For general insurance the company can deduct any
reasonable and genuinely incurred costs.
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Unit 2 Section 2
Money Laundering (10%)
The international body that has been formed to combat money laundering is the Financial
Action Task Force on Money Laundering (FATF). This organisation has over 30
members including all EU states.
The current law in the UK on money laundering is within the Proceeds of Crime Act
2002. This makes the laundering of money from all forms of crime illegal.
The Terrorism Act 2000 specifically mentions as an offence the retention or control of
terrorist property – in other words ‘money laundering’.
Money Laundering
• Money laundering is the process of filtering the proceeds of crime through

different accounts or financial products in order to conceal its true origins. For
example using cash to buy a financial product and then selling that product in
order to receive a legitimate authorised cheque.
• A European Union Directive defined it as any of the following:
o The conversion or transfer of property knowing that such property is

derived from criminal activity.
o The concealment or disguise of property knowing that it is derived from
criminal activity
o The acquisition, possession or use of property knowing that it is derived
from criminal activity
o The participation in any of the above
• Property – includes all assets of every kind including legal documents
• Criminal activity – any criminal activity specified in the Vienna Convention or by

a member state.
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• Money laundering within the EU will be treated under EU rules regardless of
whether the original crime took place outside the EU.
Money Laundering Offences
There are three main offences that apply when people are dealing with the proceeds of
crime.
• Concealing criminal property
• Arranging relating to criminal property
• Acquiring or using criminal property
This has serious implications for the financial services industry as persons working in the
industry must ensure they do not become involved either deliberately or by being
manipulated.
The rules require that all authorised firms must:
• Establish procedures to prevent money laundering

• Educate staff about money laundering
• Obtain satisfactory evidence of identity for transactions exceeding 15,000
EUROS – sterling equivalent around £10,000
• Report suspicious circumstances to avoid the possibility of being accused later of
‘arranging’ or ‘acquiring’
• Do not alert those suspected
• Appoint a Money Laundering Reporting Officer which is a controlled function
and must be a person of appropriate seniority.
• Give regular training to staff including warnings about the consequences to
themselves and the firm if they fail to follow the rules
• To ensure that the procedures are up to date through monitoring reports on money
laundering matters
• Request a report from the Money Laundering Reporting Officer each year and
provides details on any incidents reported by staff.
• Take action to strengthen procedures and controls and to remedy any deficiencies
highlighted in the report.
Note: Contravention of any of the rules is a criminal offence.
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Money Laundering – Failure to Disclose
All suspicions must be reported to the authorities. Whenever money laundering is

suspected or identified a report needs to be made.
Money Laundering – Tipping Off
• It is a criminal offence to disclose to a person suspected of money laundering that

they are being investigated or are about to be.
• The FSA will take into account the Joint Money Laundering Steering Group’s
guidance notes on the steps that firms should take in verifying the identity of
customers and confirming the source of deposit funds.
• They will also take into account the Financial Action Task Force’s publications
which will highlight any known developments in money laundering.
Money Laundering – Client Identification
• A key area is determining the identity of a customer and this is required:
o When opening a new account, investment or policy

o For all customers when the value of a transaction exceeds 15,000 EUROS
o For life assurance policies the limits are reduced to 1,000 EUROS per
annum for regular premium contracts and 2,500 EUROS for single
premium contracts
o In every case regardless of the amounts, where there is suspicion
• Where a client is introduced to a firm by an intermediary, it is allowed to accept

that intermediary’s written assurance that sufficient evidence of identity has been
obtained.
• Acceptable forms of identity include current passport, driving licence with photo,
entry on electoral roll, national ID card or recent utility or council tax bill
• Where people cannot produce this evidence, the FSA has guidance to ensure that
these people are not excluded from financial services. In this instance, a letter
from a person such as a Church Minister, a solicitor or doctor would be good
enough.
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Money Laundering – Record Keeping Requirements
Records must be kept and this will include:
• Evidence of ID retained until at least 5 years after the relationship has ended.
• Retention of supporting evidence of transactions until at least 5 years after the
transaction was executed
Money Laundering – Reporting
• Each firm must have a Money Laundering Reporting Officer (MLRO). Staff must
report to the MLRO if they know or suspect that a client is involved in money
laundering.
• The MLRO will then decide whether to report to the Serious Organised Crime
Agency (SOCA)
• At least annually the MLRO must report to the firm and this report will assess the
firm’s compliance and provide updates on any incidents submitted during that
year.
Money Laundering – Training Requirements
• Firms are required to provide training on a regular basis and to make employees
aware of money laundering procedures and legislation.
• Staff need to be aware of the law on money laundering, the firm’s procedures and
their own individual responsibilities and consequences for them personally
• Staff also need to know the identity of their MLRO.
Money Laundering – Enforcement
• Anyone convicted of concealing, arranging or acquiring could be sentenced up to

a maximum of 14 years in prison
• Anyone convicted of failing to disclose or tipping off could be imprisoned for up
to a maximum of 5 years.
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Unit 2 Section 3
Complaints & Compensation (5%)
Firm’s Complaints Procedure
• The key requirements under the FSMA 2000 are that firms must:
o Have appropriate and effective complaints handling procedures

o Make customers aware of these procedures
o Aim to resolve complaints within 8 weeks or pass to the Financial
Ombudsman Service (FOS)
o Inform complainants of their right to go to the FOS
o Report to the FSA on a 6 monthly basis on their handling of hard
complaints.
• Complaints may be received orally or in writing and should be acknowledged

within 5 working days.
• Complaints covered by the FSA include:
o all private individuals

o small businesses with turnover less than £1 million
o charities with income less than £1 million
o trustees with assets less than £1 million
• It is necessary to distinguish between hard complaints where there has been some
financial loss, material distress or inconvenience and soft complaints where there
has been some infringement of the sales rules. Soft complaints do not have to
reported to the FSA.
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Dealing with Complaints
• All complaints must be dealt with by a person of sufficient competence who is not
directly involved
• The firm must resolve the complaint within 8 weeks
• Where the firm’s final response cannot be given within 4 weeks of receiving the
complaint, an interim letter must be sent explaining the delay.
• The firm’s final response must be by letter and it must inform the complainant
that they have the right to go the Financial Ombudsman Service. This must be
done within 6 months of the date of this letter – The Deadlock Letter
• Records must be maintained for three years. The FSA must be sent reports every
6 months showing how many complaints were passed to the FOS and how many
were concluded.
The Financial Ombudsman Service (FOS)
• Since December 2001 the FOS has taken over from a number of different
financial services ombudsman schemes.
• The FOS has three different divisions:
o Banking and loans including mortgages

o Insurance
o Investment
• The FOS has not taken over the responsibilities of the Pensions Ombudsman who
deals with complaints about occupational pension schemes.
• The FOS is:
o Free of charge to customers

o Funded by firms authorised under the FSMA 2000
o Membership is compulsory for authorised firms
o FOS only becomes involved when the firm’s internal complaints
procedure has been exhausted.
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• Complainants must:
o Complain to the firm first

o Complain to the FOS once the internal procedures have ended
o Complaints must be made within 6 years of the event or within 3 years of
the time when the complainant should have become aware that there was
cause for complaint
• The FOS can make awards of up to £100,000 and awards by the FOS are binding
on authorised firms but not on individuals.
• The FOS can automatically dismiss silly or unnecessary complaints
• As of April 2007, the FOS also handles complaints about businesses with
consumer credit licences.
The Financial Services Compensation Scheme
There are compensation arrangements where an authorised firm has become insolvent.
Insolvency of an insurance company
• 100% of the first £2000 and 90% of the balance with no upper limit
• Increased to 100% when the insurance is compulsory by law (motor insurance)
Insolvency of a firm carrying out investment business or mortgages
• 100% of the first £30,000 of the loss
PLUS
• 90% of the next £20,000
MAXIMUM OF £48,000
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Insolvency of a bank or building society- loss of deposited funds
• 100% of the first £2000 of the loss
PLUS
• 90% of the next £33,000
MAXIMUM OF £31,700
• Claims against the FSCS cannot be made for other losses such as poor advice or
poor investment performance.
Pensions Ombudsman
• This was created by the Social Security Act 1990 to deal with certain complaints
relating to occupational and personal pension schemes
• The Pensions Ombudsman can decide about complaints in relation to the running
of pension schemes but not the sale and marketing of pensions. Nor would
they become involved in disputes with regard to state pensions
• Complaints should first be referred to the managers or trustees of the pension

scheme. If this does not result in agreement they should be referred to The Office
of the Pensions Advisory Service(OPAS) who try to resolve the matter through
mediation.
• Complaints will relate to cases of maladministration
• Disputes will relate to disagreements concerning facts or laws
• Complaints must be made in writing within 3 years of the event being complained
about.
• The Pension Ombudsman’s decision is binding on all parties.
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Unit 2 Section 4
Data Protection (5%)
The Data Protection Act 1998
• The 1998 Act is much wider in scope than the previous legislation and includes
data held in computerised systems and data held in manual filing systems
• The earlier 1984 Act only covered computerised data.
• The aim is to give individuals control over the use of any personal data held about
them by organisations.
Definitions
• Data subject – individual whose data is processed
• Personal data – information relating to a living individual
• Sensitive personal data – such data can only be processed with consent
and this includes:
o Racial origin
o Religious beliefs
o Political persuasion
o Physical health
o Mental health
o Criminal proceedings – not civil – CCJs not classed as sensitive
• Data controller – this is normally the company that controls that data and has to
ensure that they are following the requirements of the Act.
• Data processor – this is the individual who works for the company who processes
the data on behalf of the data controller.
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Data Protection Principles
There are eight data protection principles:
• Data must be processed fairly and lawfully. This includes the need to tell the
subject what information will be processed and why.
• Data must be obtained only for a specified purpose.
• Data must be adequate but not excessive and must be relevant.
• Data must be accurate and kept up to date.
• Data must not be kept for longer than necessary although FSA regulations could
affect this
• Data must be processed according to the rights of data subjects which includes:
o On payment of £10 the right to receive a copy of the information held and
this must be provided within 40 days of the request.
o The right to have the information corrected if appropriate.
• Data controllers need to take measures to ensure that data is secure from
accidental or deliberate misuse, damage or destruction.
• Data must not be transferred to a country outside the European Economic Area
(EEA) unless that country’s data protection is comparable with the EEA.
Enforcement
• The Information Commissioner oversees the application of the Data Protection

Act.
• The Commissioner can issue two types of notice to a data controller.
o An information notice – this is less serious and it requires the data

controller to specify what steps the company will take to comply with the
Act.
o An enforcement notice – requires the organisation to either take some

action or refrain from certain activities.
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• The Commissioner has the power to prosecute a data controller who fails to
comply with either notice.
• It is a criminal offence to:
o Fail to make a proper notification to the Information Commissioner. This

is the process of registering and confirming that personal data is being
held and also specifying the purpose for which that data is being held.
o Process data without authorisation from the Commissioner.
• The maximum penalty for these offences is a fine of £5,000 unless the case goes
to the Crown Court in which case there is no limit.
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Unit 2 Section 5 (10%)
Other Laws & Regulations Relevant to Advising Clients
Changes to Consumer Credit Legislation
The Consumer Credit (Advertising) Regulations Act 2004 states exactly how credit
advertisements should appear to prevent consumers being misled.
• All advertising must be in plain English.

• The name of the advertiser must be included
• Typical APR must be displayed and two thirds of those responding need to be
eligible for it
• If then loan is to be secured it must be stated what the security is.
Consumer Credit Act 1974
• This Act is regulated by the Office of Fair Trading and sets out standards for all
lenders.
• The Act affects most lending including personal loans, HP agreements and credit
card agreement.
• Any loan in excess of £25,000 is not regulated by the CCA 1974
• Loans of £25,000 or under will be regulated by the CCA unless it is exempt.
• Exempt loans are:
o Those loans for purchase of a main dwelling – 1st charges

o Further advances as long as the purpose of the loan is for home
improvements and the further advance is from the original lender.
• In the exempt instances above therefore these loans would be regulated by the
FSA.
• From April 2008 all non exempt loans will be covered as the £25,000 ceiling will
be lifted.
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Other elements of the Act are:
• Suppliers of loans and credit must be licensed by the Office of Fair Trading
• Clients must receive a copy of the agreement for their records.
• Prospective borrowers have a cooling off period when they can withdraw. This
applies to all CCA loans except loans that are signed on the lenders’ premises.
• Advertisements cannot be misleading
• Credit reference agencies must disclose all information held about individuals on
request
• An Annual Percentage Rate (APR) must be shown for all regulated loans. This
will usually be higher than the flat rate as it includes the other charges included in
setting up the loan eg arrangement fees, legal fees etc.
Unfair Contract Terms
The Supply of Goods & Services Act 1982
• This Act applies to the supply of financial services. It will be deemed that the
service will be performed with reasonable care, within a reasonable time and that
a reasonable charge will be made.
Unfair Terms in Consumer Contracts Regulations 1999
• These regulations apply to all contracts between consumers and a seller of goods
or services, where the consumer has no power to change the terms of the contract.
• In other words, the contract is deemed ‘not individually negotiated’ such as life
and pension contracts.
• A contract that has been drafted in advance does not give the consumer the chance
to individually negotiate the terms of the contract.
o A credit agreement to buy a freezer would be included under the Act

o A person selling their home would be excluded from the Act but the
legislation would include a builder selling new houses.
The person buying the freezer would be forced into accepting the terms and conditions in
that credit agreement which would be a standard document. They would have no power
to influence the drafting of that document.
A person selling a house has the power to negotiate the precise terms of that contract with
the buyer.
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• All terms within the contract must be fair, be in plain language and adhere to
the principle of good faith. For instance, clauses that are inserted purely to avoid
liability would be a breach of good faith.
• If a contract falls under this Act, the OFT is responsible for handling complaints.
Rules Regarding Occupational Pension Schemes

As discussed previously, the regulation of occupational pension schemes remains
separate from the regulation of other financial services.
The Pensions Act 1995
• This Act introduced changes to the provision and supervision of pensions, with a
view to restoring confidence with measures designed to:
o Prevent fraud
o Improve the administration of occupational schemes
The Pensions Act 2004
• The later Pensions Act 2004 was a response to the worsening pensions crisis in
the UK. Two important aspects to this Act were:
o Establishment of a Pension Protection Fund

o Transfer of responsibility from the Occupational Pensions Regulatory
Authority (OPRA) to the newly created Pensions Regulator
• The Pensions Regulator was created to have overall responsibility for the regulation
of occupational pensions
• Its mission is to improve confidence in work based pensions by protecting the

benefits of scheme members, promote good administration and reduce the risk of
claims being made to the Pension Protection Fund.
• The Pensions Regulator aims to identify and prevent potential problems by

identifying and assessing the risk. Eg inadequate funding, poor record keeping etc
• The Pensions Regulator will consider the combined effect of the likelihood of the
event occurring and the impact of the event on the scheme.
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• The Regulator has a range of powers that enable it to protect members’ benefits:
Investigating Schemes
• All schemes must make regular returns to the regulator. The Regulator must also be
informed as to any important changes by the schemes trustees.
• The regulator demands to be informed quickly if the scheme cannot meet its funding
requirement.
Putting Things Right
• Requiring specific action to be taken to improve matters within a certain time

• Recovering unpaid contributions from an employer who does not pay them to the
scheme by the 19th day of the month following the month when they were deducted
from the member’s salary.
• Disqualifying trustees who are not considered fit and proper persons
• Imposing fines or even prosecuting certain offences
Acting Against Avoidance
• This relates to preventing employers from deliberately avoiding their pension

obligations. The main actions the regulator can take are:
o Contribution notices requiring the employer to make good the amount

o Financial support directions requiring finance to be put in place for an
under funded scheme.
Note
The Pensions Act 2004 introduces requirements for trustees to have sufficient knowledge
and understanding of pension and trust law and of scheme funding and investment.
The Pension Protection Fund (PPF)
• This was established in the Pensions Act 2004 to protect members of private sector
pension schemes whose firms become insolvent
• The PPF will ensure that where a company becomes insolvent and as a result there
are insufficient funds to maintain full benefits that compensation will be provided as
follows:
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o 100% for existing pensioners
o 90% for pre retirement members subject to an overall cap
• To ensure the PPF retains its value over time, pensions in payment will be increased
in line with the retail prices index(RPI) up to maximum of 2.5% per annum
• Compensation will be funded by firstly taking over the assets of pension schemes
with insolvent employers and secondly by taking a levy on all private sector final
salary schemes. Part of that levy will go towards the PPF Ombudsman.
EU Directives
• These are issued by the European Union and they are binding upon each member
state to which they are addressed but the methods used to achieve them are up to
the member state.
EU Directives and Banking
• The Second Banking Directive gave institutions the freedom to establish and
pursue business throughout the EU.
EU Directives and Investment
• The Investment Services Directive enabled investment firms to operate

throughout the EU.
• If the investment firm is authorised in its home state it does not need any further
authorisation to operate in other EU states.
EU Directives and Insurance
• EU Directives & Life Assurance
o The Second Life Directive laid down rules relating to the freedom for life
assurance companies to provide services across the EU but not for group
pension funds.
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o If the policy is created on the applicant’s own initiative the regulations that
apply are those of the state in which that company is established eg
Norwich Union – UK
o Applicants who create a policy with an insurer established in a different
state are required to sign a declaration acknowledging that the rules of the
other state apply.
o The Third Life Directive states among other things that:
 Policyholders will have between 14 and 30 days cooling off period

from the date they were informed of the contract’s creation.
 Policyholders must also be offered clear and accurate information
about the key features of the product (KFI in UK)
• EU Directives and General Insurance
o The Second Non Life Directive laid down the principle that non life
insurance companies could operate throughout the EU.
• Insurance Intermediaries
o A directive was introduced to ensure that insurance intermediaries could

operate throughout the EU.
o Insurance intermediaries must hold professional indemnity insurance to
cover at least 1 million EUROS per case and 1.5 million EUROS in total
per annum.
o There is also a requirement to maintain a financial capacity equal to 4% of
premiums subject to an overall minimum of 15,000 EUROS.
CAT Standard Mortgages
• The government is concerned that too many financial products are too complex
and too expensive with regard to charges.
• As a result of this the CAT standard was introduced which is like a government
badge in that it gives guarantees in respect of Charges, Access and Terms.
Page 162
Charges
• Must be daily interest
• No separate charge for a higher lending charge
• All other fees disclosed as up front cash
• Intermediaries cannot charge fees
• Arrangement fees
 No arrangement fee for a variable rate mortgage

 Maximum arrangement fee of £150 for a fixed or capped rate
• Interest rate cannot be more than 2% more than the BoEBR on a variable rate
mortgage
• Maximum redemption charge of 1% of the balance outstanding for each year

remaining on product – only applies to a fixed or capped rate mortgage.
Access & Terms
• No compulsory products
• Lender’s normal lending criteria must apply
• All advertising and paperwork must be clear and in plain language
• Customer chooses the monthly repayment date
Advertising Standards
• The Advertising Standards Authority (ASA) is a voluntary, independent, self

regulatory body that administers the British Code of Advertising and Sales
Promotion.
• The ASA covers all non broadcast advertisements such as those:
o Press and magazines

o Posters and hoardings
Page 163
o Direct mail leaflets
o Cinema commercials, videos, CD ROMs and the internet
o Competitions and prize draws
• A number of sanctions are available including legal action following referral to

the Office of Fair Trading.
• Advertisements should be prepared with responsibility to consumers and should

adhere to the principles of fair competition in business.
• The code requires that all advertisements should be legal, decent, honest and
truthful.
• Advertisers are permitted to express opinions provided that it is made clear that it
is an opinion and not a statement of fact. Anything that goes beyond opinion must
be able to be objectively proven.
The Banking Code
• This is a voluntary code drawn up by the British Bankers Association.
• It relates to the banks dealings with private customers, executors and trustees but
not sole traders, companies, partnerships or clubs and societies.
• A separate Business Banking Code covers small businesses – turnover up to £1M
• The Banking Code covers:
o Current accounts
o Deposit and savings accounts
o Cash Mini ISAs
o Cash and ATM services
o Loans and overdrafts but not mortgages
o Foreign exchange
• The Banking Code has a number of key commitments:
o Act fairly and reasonably
o Help customers to understand products and services
o Quickly and sympathetically deal with problems
Page 164
o Publicise the code and make copies available.
• The main purpose of the code is that banks should:
o Check identity of new customers
o Describe terms and conditions in plain language
o Explain and publicise the basis of charges
o Establish a complaints procedure
o Keep customer information confidential.
o Provide prospective guarantors with details of their rights including

advising them to seek independent legal advice
Page 165

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CeMAP 1

Unit 1 – The Financial Services Environment & Products

The UK Financial Services Industry……………………………….. 8

Unit 2 – UK Financial Services Regulation

The Financial Services Authority……………………………………119

• CeMAP 1 is a multiple choice examination with 4 possible answers being given

• The grade boundaries are as follows:

 90% 45 – 50 correct - Pass with Distinction

The Pearson Vue Electronic Exam

• All CeMAP exams use the Pearson electronic system

• You will be allocated to a desktop computer which will usually be operated by

Introduction to the financial services environment and

Section 1 - The UK financial services industry

Section 2 - Financial assets

Section 3 - Financial Products

Section 4 - The Financial Planning Advice Process

Section 5 - Financial Services Advice areas

Section 6 - Legal Concepts relevant to financial services

The UK Financial Services Industry (4 or 5 questions)

• To be a medium of exchange money must be:

 acceptable to all parties

Within the economy there are 2 sectors:

• Sometimes there is no need for an intermediary eg share offers to the general

• Intermediaries become necessary when:

 Geographic location make it difficult to find one another

 Amount mismatch requires aggregation – match the amounts needed

 Term mismatch requires maturity transformation- match the terms

 Risk transformation – spreading the risk of default by either party

The Bank of England

• Banker to the government – BoE is a central bank because it is banker to the

Proprietary & Mutual Organisations

Proprietary Organisation – limited companies owned by shareholders eg RBS, HSBC

Mutual Organisation – not limited companies, no shareholders- owned by the members

Building Societies Act 1986

• Allowed building societies to demutualise and convert to a bank – change from a

Retail & Wholesale

• Provision of financial services to the public and to companies through a network

• Money is raised wholesale by financial institutions from the wholesale money

Money Transmission and the Clearing Process

Clearing services are co-ordinated through three operational clearing companies:

• Cheque and Credit Clearing Company – clearing of cheques

The Role of Government & Influence of the European Union

Five Tiers of UK Regulation

• First Level – European union regulations and directives

• Second Level – Acts of Parliament eg Building Societies Act 1986

• Third Level – UK regulatory bodies such as the FSA

• Fourth Level – compliance policies of individual financial institutions

• Fifth Level – rulings from arbitration and ombudsman schemes following

Economic and Monetary Policy

• Managing the economy requires a number of things:

 Price stability – keeping inflation low

• The government’s long term objective is to keep unemployment and inflation on

Monetarist View of Economics

• Monetarists believe that inflation is a man made phenomenon and is caused by

Fiscal View of Economics

• Fiscal policy is concerned with government and public spending

 Balanced budget – all revenue from taxation is invested in public

Taxation (10 questions)

• Domicile of origin is determined at birth as the domicile of the father or if they

• Domicile of choice is when a person chooses a new domicile by showing an

• If a person is either UK domiciled or deemed domiciled their estate for

• If a person is neither UK domiciled or deemed domiciled at death the estate for

• A person is classed as ‘resident’ if they:

 Spend 183 days or more in UK during a tax year