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

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

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Occupational Pensions
Derivatives
Pooled or Collective Investments
Unit Trusts
Investment Trusts
Open Ended Investment Company (OEICs)
Collective Investments Table
Financial regulation
Taxes
Income Tax
Taxable/Non-Taxable Income
Investment Income Tax
Life Assurance Policies
Capital Gains Tax
Inheritance Tax (IHT)
Value Added Tax
Stamp Duty Reserve Tax
Corporation Tax
Withholding Tax
National Insurance
Tax Planning
Tax Table
Financial Planning and Advice
Pattern in which Savers/Investors hold their assets
Typical Financial Life Cycle Age and Time of Life
The Fact Find
Advisor's Duty of Care
Financial Needs & Objectives
Agreeing Order of Priority
Recommending Solutions
Implementing Recommendations
Documentation
Financial Advice
Family Protection
Business Protection
Death of a key employee
Death of a Business partner
Death of a Small Business Shareholder
Insolvency
Bankruptcy (Insolvency Act 1986)
Loan Consolidation
Individual Voluntary Agreements (IVAs)
Wills
Trustees
Law of Contract
Law of Agency
Power of Attorney
Lasting Power of Attorney

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Question time for Unit 1

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UNIT 2: UK Financial Services and Regulations

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

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CAT Standard Mortgage

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

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Question Time for Unit 2

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Answers & Extras

Answers for Unit 1
Answers for Unit 2

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Acts Table
European Directives Table

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Abbreviation Table
ADL
APACS

Activities for Daily Living

Association for Payment and Clearing services

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APR
ARLA

Annual percentage Rate

Association of Rental Letting Agents

ASU

Accident, Sickness, Unemployment

AVC

Additional Voluntary Contributions

BACS

Banking Automated Clearing Services

BOE
BRT
CAD
CAT
CCJ
CD
CeRCC

Bank of England
Basic Rate Tax Payer
Capital Adequacy Directive
Charges Access and Terms
County Court Judgement
Certificate of Deposit
Certificate in Regulated Customer Care

CGT
CHAPS

Capital Gains Tax

Clearing House Automated Payment System

CIDD

Combined Initial Disclosure Document

CPD

Continuous Professional Development

CPI
CRD
CTF
EEA
EFTPOS

Consumer Price Index

Capital Requirement Directive
Child Trust Fund
European Economic Area
Electronic Fund Transfer at the Point of Sale

EPA
EPS
EU
FATR

Enduring Power of Attorney

Earnings Per Share
European Union
Financial Services Task Force

FIS
FSA
FSAVC

Fixed Interest Securities

Financial Services Authority
Free Standing Additional Voluntary Contributions

GDP
GEB
Gilts
GSA
HRT
IDD
IFA

Gross Domestic Product

Guaranteed Equity Bond
Gilt Edged Securities
Guaranteed Sum Assured
Higher Rate Tax Payer
Initial Disclosure Document
Independent Financial Advisor

IFA

Independent Financial Advisor

IHT
ISA
ISD
IVA

Inheritance Tax
Individual Savings Account
Investment Services Directive
Individual Voluntary Arrangement

LIBOR

London Interbank Offered Rate

LPA
LTC
LTR
LTV
MCCB

Lasting Power of Attorney

Long Term Care
Lower Rate Tax Payer
Loan to value Ratio
Mortgage Code Compliance Board

MCOB

Mortgage Conduct of Business Rules

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MiFLD

Markets in Investment Services Directive

MIG

Mortgage Indemnity Guarantee

MLRO

Money Laundering Reporting Officer

MPP
MPPI

Mortgage Protection Policy

Mortgage Payment Protection Insurance

MPPP

Copyright Ruksons

Mortgage Payment Protection Plan (same as

above)

MVA
NAV
NIC

Market Value Adjuster

Net Asset Value
National Insurance Contribution

NS & I

National Savings and Investment

NTP
OEIC

Non Tax Payer

Open Ended Investment Company

OPAS

Office of Pensions Advisory Scheme

PA
PAYE
PE Ratio
PEP
PETS
PHI
PIBS

Personal Allowance
Pay As You Earn
Price Earnings Ratio
Personal Equity Plans
Potentially Exempt Transfers
Permanent Health Insurance
Permanent Interest Bearing Shares

PMI
PPP
PSNB
PSNCR

Private Medical Insurance

Personal Pension Plan
Public Sector Net Borrowing
Public Sector Net Cash Requirement

REIT
RPI
S2P
SDLT
SHEP

Real Estate Investment Trust

Retail Price Index
Additional State Benefit
Stamp Duty land Tax
Second Hand Endowment policies

SHIP
SHP
SOCA

Safe Home Income Plans

Stake holder Pension Plans
Serious Organised Crime Agency

SVR
TCF
TEP
VAT

Standard Variable Rate

Treating Customers fairly
Traded Endowment Policies
Value Added Tax

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PLEASE NOTE: THIS IS A SAMPLE FROM THE ORIGINAL

COPY. PAGES WILL BE MISSING.

UNIT 1:
FINANCIAL SERVICES ENVIRONMENT AND
PRODUCTS
Money
In earlier civilisation exchange was by Barter. However, as transactions
became bigger and complex, it became difficult for people to trade goods they
had to offer against what other people had to supply them; hence a need
arose for Money, which is a Common Denominator against which the value of
all products could be measured.
Money is a medium of exchange It must be sufficient in quantity,
generally acceptable to all parties in the transaction, divisible into small
parts and must be portable.
Unit of 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 Governments 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 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 companys 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, th of the firms 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 companys 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 companys

property/assets.
Order of Ranking if Firm becomes Insolvent
Debentures Loan Stocks Preference Shares Ordinary Shares
Company Equity Table
Debentures

Loan Stocks

Preference Shares Ordinary Shares

Fixed rate of
interest paid

Fixed rate of
interest paid

Dividends may be
fixed, paid out of
firms profits

Interest is paid
whether or not the
firm makes a
profit.

Interest is paid
whether or not firm
makes a profit.

Can be Cumulative, Dividends are only

which means
paid when the firm
dividends; have to
makes a profit.
be accumulated till
they can be paid.

No voting rights.

No voting rights.

No Voting Rights,
except dividends
have not been paid

Dividends are paid,

if profits are made.

Voting Rights
Participation.

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in a while.
Loan is secured
on firms assets or
property.

Loan is not secured

on firms assets or
property.

Shares

Shares

Taxed at 20% at
source.
NTP can reclaim
20%
HRT pay extra
20%.

Taxed at 20% at
source.
NTP can reclaim
20%
HRT pay extra
20%.

10% at source, not

reclaimable by
anyone, only HRT
have an additional
liability of 22.5%.

10% at source, not

reclaimable by
anyone, only HRT
have an additional
liability of 22.5%.

If the firm goes

insolvent they are
paid first.

If the firm goes

insolvent they get
paid next.

If firm goes
insolvent they get
paid after loan
stocks.

If firm goes
insolvent they get
paid last.

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