UK Financial Regulations Easily Understood Copyright© Ruksons

UK Financial
Regulations
Easily Understood
Certificate in Mortgage Advice and Practice (CeMAP): Module 1
Certificate for Financial Advisors (CeFA): Module 1
Customer Service Professional (CSP)
Certificate in Regulated Complaints Handling (CERCH)
2009/10 Financial Year

Written by

Tomi Omidiora
BA Hons, MBA, CeMAP, CeFA

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UK Financial Regulations Easily Understood Copyright© Ruksons

Published by Rucksons Ltd, UK

Financial Regulations Easily Understood
Adetomi Omidiora

Published In Great Britain 2009

Copyright © Adetomi Omidiora 2009

The Financial Regulations Easily Understood guide is to be used in addition to the main accredited Textbook and will
never replace the detail contained there.

It was written with an intention to support the reader’s understanding of the main aspects of the text, and will serve as
an appropriate revision guide to understanding investments and the risks involved.
A thorough analysis, the detailed document could also provide clarity and understanding to an individual who needs a
basic understanding of investments and risks.

The Financial Regulations Easily Understood Book published in September 2009 provides information for the
2009/10 financial year. While the author has used all her efforts in preparing this book, there are no promises or
warranties in respect of the accuracy or completeness of the content of this book with updated changes from the
appropriate financial bodies.

All rights reserved. Contents and or cover may not be reproduced in whole or in part. No part of this publication may
be reproduced, stored in a retrieval system, or transmitted in any form or by any means ---- electronic, mechanical,
including photocopying, scanning and recording worldwide, without prior permission in writing from the author and/or
publisher.

Printed in the UK.

Created and Designed By
Rucksons Ltd
www.ruksons.com
Edition 2

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Unit 1: Introduction to financial services

Environment and products

Money 1
Inflation 1
2 Types of Policies to achieve long term objectives 2
The Bank of England 4
Financial Intermediaries 4
Building Societies and Banks 5
Building Society Accounts 6
Credit Unions 6
Savings Gateway 7
Clearings 7
Offshore Deposits (Tax Havens) 8
National Savings & Investments (NS&I) 8
Individual Saving Accounts (ISAs) 10
Fixed Interest Securities 11
Money Market Instruments 13
Partnership 14
Limited Liability Company 14
Child Trust Fund (CTF) 18
Investment Bonds 18
Structured Products 19
Real Estate 19
Commodities 20
Foreign Exchange Market 20
Insurance 20
Social Security Benefits 27
Two Types of Joint Ownership 31
Mortgages 31
Endowment Table 34
ISA Mortgage 36
Mortgage Products 37
CAT Standard Mortgage 39
Equity Release for the Elderly 40
Home Reversion Schemes 41
Equity Release Table 41
Shared Ownership Plans 42
Property Insurance 42
Other Secured Lending 43
Second Mortgages 43
Unsecured Loans 43
Personal Loans 43
Overdrafts 43
Revolving Credits 43
Charge Cards 43
Debit Cards 44
Commercial Loans 44
Pension Products 44

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Occupational Pensions 44
Derivatives 46
Pooled or Collective Investments 47
Unit Trusts 47
Investment Trusts 48
Open Ended Investment Company (OEICs) 49
Collective Investments Table 50
Financial regulation 51
Taxes 52
Income Tax 52
Taxable/Non-Taxable Income 53
Investment Income Tax 55
Life Assurance Policies 56
Capital Gains Tax 57
Inheritance Tax (IHT) 59
Value Added Tax 62
Stamp Duty Reserve Tax 62
Corporation Tax 63
Withholding Tax 63
National Insurance 64
Tax Planning 64
Tax Table 65
Financial Planning and Advice 67
Pattern in which Savers/Investors hold their assets 67
Typical Financial Life Cycle – Age and Time of Life 67
The Fact Find 68
Advisor's Duty of Care 69
Financial Needs & Objectives 69
Agreeing Order of Priority 69
Recommending Solutions 70
Implementing Recommendations 70
Documentation 70
Financial Advice 71
Family Protection 71
Business Protection 72
Death of a key employee 72
Death of a Business partner 73
Death of a Small Business Shareholder 73
Insolvency 73
Bankruptcy (Insolvency Act 1986) 74
Loan Consolidation 74
Individual Voluntary Agreements (IVAs) 74
Wills 74
Trustees 76
Law of Contract 77
Law of Agency 77
Power of Attorney 77
Lasting Power of Attorney 78

Question time for Unit 1 79

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UNIT 2: UK Financial Services and Regulations

Regulation - Background 82
FSA Objectives 82
Protection Covers 83
The 5 sourcebooks make up a Handbook to explain these activities 83
Status of Provisions in FSA Handbook 84
Principals for firms and Approved Persons 84
Treating Customers fairly 85
Senior Management - Arrangement, Systems and Control 86
The "fit and proper" test for approved persons 87
The Prevention of Crime 87
Regulated Activities and Investments 87
Two categories of Regulated investments 88
Advertising and Financial Promotions 89
Advertising Requirements 89
Records 90
Training and Competence 91
Capital Adequacy 91
Basel Committee of Banking Supervision 92
Liquidity 93
Assessing Liquidity Risks 93
Liability Liquidity 94
Risks faced by Financial Services Firms 94
Risk Assessment Profile - Overall Level of Risk of Firm 95
Discipline & Enforced Powers Available to the FSA 95
Enforcement Powers 96
Approved Persons in Controlled Functions 96
The Banking Code 97
Payment Service Directive 99
Competition Commission 99
European Union Directives 100
Investment Business 100
MiFID 100
Banking Directive 101
Insurance Directives 101
Solvency Margins for Life Assurance Companies – Own Funds 104
Regulation of Mortgage Advice 104
MCOB Rulebook 105
Regulation of General Insurance 105
ICOB Rules 106
Documentation and Advice 107
Order of documentation 107
Three Types of Client 107
Polarisation 109
Retail Distribution Review 110
Suitability Requirements 110
Cooling off and Cancellation (statutory cancellation period) 111
Charges / Commission 111
Risk Disclosure 112
Product Disclosure 112
Execution-only Contracts 113
Stakeholder - Type Products (Ron Sandler) 113

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CAT Standard Mortgage 114

Money Laundering 114
Some Definitions 115
Client Identification 116
Financial Exclusion 117
Complaints and Procedures 117
Two types of Complaints 117
Financial Ombudsman Service – FSMA 2000 118
The Financial Services compensation Scheme (FSCS) 119
Pensions Ombudsman 119
Other Issues - Occupational Pension Schemes 120
Pensions Regulator 120
The Pension Protection Fund (2004) 121
Data Protection (Data protection Act 1998) 121
Rules Regarding Data 121
Other Legislation Relevant to Client Advice 122
Unfair Contract Terms 124

Question Time for Unit 2 125

Answers & Extras

Answers for Unit 1 128
Answers for Unit 2 131

Acts Table 134

European Directives Table 136

Abbreviation Table

ADL Activities for Daily Living

APACS Association for Payment and Clearing services

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APR Annual percentage Rate

ARLA Association of Rental Letting Agents
ASU Accident, Sickness, Unemployment
AVC Additional Voluntary Contributions
BACS Banking Automated Clearing Services
BOE Bank of England
BRT Basic Rate Tax Payer
CAD Capital Adequacy Directive
CAT Charges Access and Terms
CCJ County Court Judgement
CD Certificate of Deposit
CeRCC Certificate in Regulated Customer Care
CGT Capital Gains Tax
CHAPS Clearing House Automated Payment System
CIDD Combined Initial Disclosure Document
CPD Continuous Professional Development
CPI Consumer Price Index
CRD Capital Requirement Directive
CTF Child Trust Fund
EEA European Economic Area
EFTPOS Electronic Fund Transfer at the Point of Sale
EPA Enduring Power of Attorney
EPS Earnings Per Share
EU European Union
FATR Financial Services Task Force
FIS Fixed Interest Securities
FSA Financial Services Authority
FSAVC Free Standing Additional Voluntary Contributions
GDP Gross Domestic Product
GEB Guaranteed Equity Bond
Gilts Gilt Edged Securities
GSA Guaranteed Sum Assured
HRT Higher Rate Tax Payer
IDD Initial Disclosure Document
IFA Independent Financial Advisor
IFA Independent Financial Advisor
IHT Inheritance Tax
ISA Individual Savings Account
ISD Investment Services Directive
IVA Individual Voluntary Arrangement
LIBOR London Interbank Offered Rate
LPA Lasting Power of Attorney
LTC Long Term Care
LTR Lower Rate Tax Payer
LTV Loan to value Ratio
MCCB Mortgage Code Compliance Board
MCOB Mortgage Conduct of Business Rules

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MiFLD Markets in Investment Services Directive

MIG Mortgage Indemnity Guarantee
MLRO Money Laundering Reporting Officer
MPP Mortgage Protection Policy
MPPI Mortgage Payment Protection Insurance
MPPP Mortgage Payment Protection Plan (same as
above)
MVA Market Value Adjuster
NAV Net Asset Value
NIC National Insurance Contribution
NS & I National Savings and Investment
NTP Non Tax Payer
OEIC Open Ended Investment Company
OPAS Office of Pensions Advisory Scheme
PA Personal Allowance
PAYE Pay As You Earn
PE Ratio Price Earnings Ratio
PEP Personal Equity Plans
PETS Potentially Exempt Transfers
PHI Permanent Health Insurance
PIBS Permanent Interest Bearing Shares
PMI Private Medical Insurance
PPP Personal Pension Plan
PSNB Public Sector Net Borrowing
PSNCR Public Sector Net Cash Requirement
REIT Real Estate Investment Trust
RPI Retail Price Index
S2P Additional State Benefit
SDLT Stamp Duty land Tax
SHEP Second Hand Endowment policies
SHIP Safe Home Income Plans
SHP Stake holder Pension Plans
SOCA Serious Organised Crime Agency
SVR Standard Variable Rate
TCF Treating Customers fairly
TEP Traded Endowment Policies
VAT Value Added Tax

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PLEASE NOTE: THIS IS A SAMPLE FROM THE ORIGINAL

COPY. PAGES WILL BE MISSING.

UNIT 1:
FINANCIAL SERVICES ENVIRONMENT AND
PRODUCTS

Money

In earlier civilisation exchange was by Barter. However, as transactions

became bigger and complex, it became difficult for people to trade goods they
had to offer against what other people had to supply them; hence a need
arose for Money, which is a Common Denominator against which the value of
all products could be measured.
• Money is a medium of exchange – It must be sufficient in quantity,
generally acceptable to all parties in the transaction, divisible into small
parts and must be portable.
• Unit of Account – All goods and services are valued at a particular
price, this is only possible because of money. Moreover, money can also
be used as a measure of payments of debts made in the future.
• Store of value – Money serves as a store of value. For example, a
thousand pounds stored in the house today remains a thousand Pounds
next year. The purchasing power of the money could have decreased
because of inflation, but that is another matter, the money is still £1,000.

Inflation

Definitions
• Steady increase in prices
• Decrease in the purchasing power of money
• Too much money in circulation.
• Too much money chasing few goods.
• The rate of inflation is the rate at which price levels increase.
• Inflation is measured by the Consumer Price Index (CPI).

Example

If inflation were to run at 10% over an item of clothing that cost £100 at the
start of 2007, at the start of 2008 the same item of clothing would cost £110. If
the £100 were kept in a bank instead at the rate of 3% interest, the interest
over the year would be £3 (total £103).

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This means that in 2008 the funds would be insufficient to purchase that item
of clothing, indicating a decrease in the purchasing power of the money.

• The Government’s target is to keep Inflation at an annual rate of 2%

with maximum divergence either side of 1%.

Money Market Instruments

Money market instruments can be described as short- term debt instruments

issued by the Government, Banks, Building societies and several
organisations for large investors. There is no interest paid to the investor
during the term.

Treasury Bills
• They are low risk short-term securities issued by the Debt Management
Office, backed by the UK Government.
• They are highly liquid assets, easily convertible to cash at little cost.
• Bills are usually purchased in large amounts and held by large or main
corporations and financial institutions for liquidity purposes (surplus to
requirements).
• They are bought and sold on the secondary market by the financial
intermediaries (no centralised market place).
• They are issued for a 91- day period.
• Bills are issued at a discount to their par value.
• The par value (face value) is the amount payable at redemption.
• Treasury bills have Zero- Coupon; they do not pay any interest during the
term.
• The price of the bill is affected by the issue price, redemption value,
changes in interest rates and supply and demand.
• Changes in market rate must be significant enough to affect the price of
the bill, as they are usually steady, being short- term securities.
• They are similar to gilts as they are both issued by the UK Government to
raise capital, but defer because of their coupon and term.

Certificates of Deposit (CD)

• A bearer security (no name), with a fixed rate of interest, issued by
building societies and banks.
• The bearer who holds the CD at the end of the term is the owner.
• A CD can be sold on and on.
• It usually has a 3 to 6 month term with a roll over option of 3-6 months
(specific terms apply).
• A typical CD will be for £50,000 or more.

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• The bank will issue a receipt to acknowledge deposit and capital and
interest at the end of the term will be paid to the bearer.
• Banks also trade in CDs to manage their liquidity position.
• When a bank expects to have surplus funds (liquid) it will issue CDs to
coincide with that time.
• When a bank projects that it might have a shortage of funds (illiquid), it will
hold on to the CDs redeemable at the projected time.

Commercial Paper
• Represents borrowing by firms for short-term purposes (working
capital), with a term of between 5-45 days (average of 30-35 days)
• It is possible to roll over this transaction, if the firm still needs the funds.
• This roll over facility offers flexibility and the ability to re-arrange the
interest rate.
• The commercial paper is particularly favourable to the firm who has a
good credit history, as borrowing is cheap.
• A firm who has poor credit ratings can have it backed by a Letter of
Credit.
• The Letter of Credit, which is issued by the bank guarantees to make
the payment if the firm defaults.
• The bank backs this transaction in exchange for a fee.
• Commercial papers are usually purchased by large institutions e.g.
pension funds because of the huge sums involved.
• They are also referred to as unsecured promissory notes.
• Transactions can be made directly or through intermediaries.

Partnership

• In a partnership, the Partners jointly own the assets and liabilities of the
company, and are jointly responsible for the profits and losses.
• Partnerships are subject to income tax and not corporation tax.
• The Partnership Agreement (Deed) provides the detailed information
regarding the practice.
• Recently (2001) Limited Liability Partnerships (LLP) have emerged. They
are set-up and run as limited companies (and have to be registered at the
company house), but are still taxed as regular partnerships.
• In the LLP, profits and losses are still shared among the partners.

Limited Liability Company

A company is a separate legal entity, owned by shareholders whose liabilities

are limited to the amounts they have invested.

The most common way in which a company can raise money, to expand its
operations, is to float ordinary shares. These are usually bought by private
investors but more so by institutions and life pension funds.

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The nature of the company, powers to borrow and rights attaching to shares
are set out in the Memorandum and Articles of Association.
Shares are also known as asset backed investments. In the long run, growth
in these investments should generally outpace inflation.
It is important that the investor proceeds with care as shares are generally
considered to be high- risk investments.

Shares
Investment in shares can prove risky but long-term investment will usually
outpace inflation and provide higher return than deposit type investments.

Share Indices
Measure the overall performance of shares.
Financial Times 30 - Share Index (FT 30) – 30 major industrial companies – ¼ of
market value of UK equities.
FTSE100 (footsie) – 100 top companies in capitalisation terms. Weighted
according to market value.
FTSE All Share Index – About 900 shares split into sectors. Index measures
price movements, showing yields, financial ratios as well as return on share
investment.

Rights Issue
New shares must first be offered to existing shareholders to avoid dilution of
their holdings in proportion to the total shareholding. The rule is set by the
stock exchange.

Scrip Issue

• It involves increasing the number of shares to reduce the share price, at

no cost to existing shareholders. Existing share- holders are offered the
free shares in the proportion of their shareholding and the price of the
share is split accordingly (issue is also referred to as the stock split).
• It is achieved by transferring reserves (profits retained from previous
years) into a company’s share account. This is just a book entry.
• It is also called the bonus / capitalisation issue.

Buying and selling Shares

There are two markets:
Main Market – Shares can be bought and sold on the London Stock Exchange,
the main market, subject to full listing. The requirements include a 3 year
trading period, ¼th of the firm’s shares must be owned by the public and the
firm must act in accordance with the rules set by the FSA, which is the UK
listing authority.
Alternative Market – The smaller and newer firms can also be registered with
the stock exchange in an alternative market. The rules set here are less

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stringent, than those set for full listing. Benefits are that the firm can enjoy
public finance, are easily exposed to investors and investors will tend to have
a sense of confidence dealing with them. This will enhance their potential for
expansion.

Types of Equity
Ordinary Shares – Share holders receive distributed profits (dividends) and
have voting rights (participation)
Preference Shares – Dividends are payable from the company’s profits. They
rank before ordinary shares in priority of distribution but after loan stocks if a
firm were to wind up.
Preference shares are termed cumulative if unpaid dividends are accumulated
until such a time as they can be paid. Preference shares do not carry voting
rights but may acquire it if dividends have been delayed. A Convertible
Preference Share is a share that carries the right but not the obligation to be
converted into an ordinary share.
Loan Stocks – A fixed rate of interest and not dividends is payable. The
interest would be paid whether or not profits are made. The loan is not
secured on company property.
Loan stocks have no voting rights. Loan stocks can also be issued with
convertible rights, that is, a right but not an obligation to be converted to an
ordinary share.
Debentures – The same as loan stocks but secured on the company’s
property/assets.

Order of Ranking if Firm becomes Insolvent

Debentures – Loan Stocks – Preference Shares – Ordinary Shares

Company Equity Table

Debentures Loan Stocks Preference Shares Ordinary Shares

Fixed rate of Fixed rate of Dividends may be Dividends are paid,

interest paid interest paid fixed, paid out of if profits are made.
firm’s profits

Interest is paid Interest is paid Can be Cumulative, Dividends are only

whether or not the whether or not firm which means paid when the firm
firm makes a makes a profit. dividends; have to makes a profit.
profit. be accumulated till
they can be paid.

No voting rights. No voting rights. No Voting Rights, Voting Rights

except dividends Participation.
have not been paid

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in a while.

Loan is secured Loan is not secured Shares Shares

on firm’s assets or on firm’s assets or
property. property.

Taxed at 20% at Taxed at 20% at 10% at source, not 10% at source, not
source. source. reclaimable by reclaimable by
NTP can reclaim NTP can reclaim anyone, only HRT anyone, only HRT
20% 20% have an additional have an additional
HRT pay extra HRT pay extra liability of 22.5%. liability of 22.5%.
20%. 20%.

If the firm goes If the firm goes If firm goes If firm goes
insolvent they are insolvent they get insolvent they get insolvent they get
paid first. paid next. paid after loan paid last.
stocks.

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