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Certificate in Retail and Digital Banking (Cert RDB) > 20. Retail Banking Products > Flashcards

20. Retail Banking Products Flashcards

1
Q

What are the 4 types of products that customers are most likely to use?

A
  1. Current account
  2. Lending products
  3. Savings & Investments products
  4. Protection products
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2
Q

From most to least important, describe Maslow’s Hierarchy of Financial Needs. (6)

A
  1. Living today
    - allow for a reasonable lifestyle
  2. Protection
    - life/critical illness cover
  3. Income
    - protection against illness/injury
  4. Pension
  5. Savings
    - for future needs
  6. Investment
    - for future needs
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3
Q

Why might someone’s hierarchy of needs differ in order to that stated by Maslow?

A

Different life stages - e.g. retired couples may perceive protection to be less important than securing an income

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4
Q

What types of products can be considered to meet the needs of ‘Living Today’ in Maslow’s Hierarchy? (2)

A

Current accounts and lending products

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5
Q

What type of product can be described as being a safe place to store money and access various payment systems?

A

Current accounts

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6
Q

What is considered to be the main appeal of current accounts? What do banks gain from offering this?

A

They are low/no-cost.

Banks don’t mind offering this because they use current accounts as opportunities to CROSS-SELL other products

If the customer has a positive experience with their current account, they’re likely to look to their bank to take out other products in future

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7
Q

True or false - current accounts can be segmented in order for them to suit different customers.

A

True.

E.g. different costs of having the account - higher the fee, the more additional benefits such as bigger overdraft/domestic appliance extended warranties/cardholder protection/ travel insurance

Sometimes you don’t need to pay more to get more benefits, some banks offer ‘premier’ accounts with highest level of benefits which is available to only those with high incomes or savings/investment balances

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8
Q

Unsecured lending relies on what to ensure repayment?

A

A covenant = the borrower’s promise to repay

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9
Q

Which type of lending is more likely to rely heavily on credit-scoring - secured or unsecured?

A

Unsecured

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10
Q

What are the two most common types of unsecured lending?

A
  1. Revolving credit
  2. Personal loans
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11
Q

What is revolving credit?

A

The customer can continue to borrow further amounts whilst still repaying existing debt (up to a maximum)

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12
Q

What are the two main types of revolving credit? (2)

A
  1. Overdrafts
  2. Credit cards
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13
Q

What tends to be the limit on the amount of overdraft facility someone can have?

A

No more than 1 month’s salary - you are expected to pay it off as soon as you get paid

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14
Q

Overdrafts are ‘on demand’ - what does this mean?

A

The bank can demand repayment at any time

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15
Q

Are overdrafts considered to be expensive or inexpensive?

A

Relatively inexpensive but may incur fees

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16
Q

What is the minimum amount you are usually expected to pay off a credit card each month?

A

Usually around 3% of total balance

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17
Q

If you don’t want to pay any interest on your credit card balance, how should you make a repayment?

A

You should pay the balance off IN FULL and within an agreed period after the monthly statement is issued, e.g. 25 days

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18
Q

Are credit cards considered to be an expensive or inexpensive form of lending? Why?

A

Expensive unless you are paying the balance off in full every month
1. Higher rates than most other lending products
2. Overseas charges

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19
Q

What is the main advantage of using a credit card as a form of lending?

A

Under the Consumer Credit Act (1974), credit card companies are JOINTLY AND SEVERALLY LIABLE with the company accepting your payment for any BREACH OF CONTRACT/MISREPRESENTATION

You can get a refund from your credit card company if goods:
1. are faulty/damaged
2. fail to arrive
3. are not fulfilled due to the company going out of business

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20
Q

How are credit card limits decided by the lender? (2)

A
  1. Credit scoring initially
  2. Then behavioural scoring once the account is opened
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21
Q

What is a ‘connected lender’?

A

A company that lends money to customers on credit cards

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22
Q

What are charge cards? What fees do they incur?

A

Similar to credit cards but they have to be repaid in full every month

may be subject to subscription fees

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23
Q

Which two purposes would taking out a personal term loan be best suited to? (2)

What is the main advantage of using this type of loan for these purposes?

A
  1. Debt consolidation
  2. When funds are needed for a specific purpose, e.g. holiday, car, renovation, domestic appliance

Advantage = REPAYMENT STRUCTURE. Single monthly regular payments which are easier to manage

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24
Q

What are the key features of a personal term loan? (4)

A
  1. FIXED LOAN AMOUNT
  2. FIXED INTEREST RATE
  3. FIXED TERM
  4. FIXED MONTHLY REPAYMENT (made up of both interest & capital so it gets paid off)
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25
Q

What is a usual length for the term of a personal loan?

A

Usually 1-5 years but can be 10 years.

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26
Q

How are applications for personal loans usually assessed?

A

Using credit scoring/credit referencing agencies

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27
Q

What types of things are most commonly used as security with secured lending? (2)

Why?

A

Two most common are:
1. Property
2. Life Policies

Why?
1. Must be things that are readily realisable.
2. People tend to value these things, so are likely to keep up with repayments

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28
Q

What is the difference between a Mortgagor and a Mortgagee?

A

Mortgagor = borrower
Mortgagee = lender

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29
Q

Which three types of income need do mortgage lenders need to verify before lending? (3)

A
  1. COMMITTED EXPENDITURE
  2. BASIC ESSENTIAL EXPENDITURE
  3. QUALITY OF LIVING COSTS
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30
Q

What type of income need would child maintenance fall under: Committed expenditure, basic essential expenditure or quality of living costs?

A

Committed expenditure

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31
Q

What type of income need would clothing and furniture fall under: Committed expenditure, basic essential expenditure or quality of living costs?

A

Quality of living costs

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32
Q

What type of income need would child care fall under: Committed expenditure, basic essential expenditure or quality of living costs?

A

Quality of living costs

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33
Q

What type of income need would essential travel fall under: Committed expenditure, basic essential expenditure or quality of living costs?

A

Basic essential expenditure

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34
Q

What type of income need would alimonies fall under: Committed expenditure, basic essential expenditure or quality of living costs?

A

Committed expenditure

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35
Q

What type of income need would utility bills fall under: Committed expenditure, basic essential expenditure or quality of living costs?

A

Basic essential expenditure

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36
Q

How must lender assess affordability for interest only mortgages? (2)

A

Can either:

  1. Base this off MONTHLY REPAYMENTS plus COST OF CREDIBLE REPAYMENT VEHICLE

or

  1. Assess affordability as if the customer needed to may capital and interest repayments, even though it will be interest only, because these payments are higher
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37
Q

Fixed rate mortgages allow people to be able to budget their repayments well, but what are the disadvantages of this type of mortgage? (3)

A
  1. Rates may go down
  2. After the fix ends, you revert to a much higher rate
  3. Overall costs e.g. ERCs & set up fees may reduce the overall benefit
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38
Q

What is a capped rate mortgage? What are the possible disadvantages associated with this type of mortgage? (2)

A

There is a fixed upper limit but if the SVR is below this limit then your rates will change in line with the SVR.

  1. Overall costs, e.g. set-up fees and ERCs
  2. Can revert to a much higher rate at the end of the capped period

(similar to fixed rate disadvantages)

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39
Q

What is a discounted rate mortgage? What are the possible disadvantages associated with this type of mortgage? (3)

A

You receive a discount from the SVR rate during the discount period

  1. Not protected against rate rises
  2. Overall costs, e.g. set-up fees and ERCs
  3. If mortgage gets repaid within a certain period, you may have to pay back some of the discount
40
Q

What is a base rate tracker mortgage? What are the possible advantages (2) and disadvantages associated with this type of mortgage? (2)

A

Fixed percentage above the base rate

Advantages
1. Usually less than the SVR
2. Changes as soon as the base rate does, you don’t need to wait for the lender to act

Disadvantages
1. Not protected from rate increases
2. Overall costs, e.g. set up fees and ERCs

41
Q

Which is usually preferable, further advances or second charges? Why? (4)

A

Further advances are preferrable because:

  1. Lower rates
  2. Minimum admin involved - bank already knows your details and repayment history, so lower admin fees too
  3. Better for lender because they have full security
  4. Some first charge lenders don’t like approving second charges, others will only do so if there’s enough equity in the property
42
Q

What happens if a borrower defaults on a second charge mortgage but not their first charge mortgage?

A

The second charge lender can sue for possession

but they would need to fully repay the first charge lender before they can take any money

43
Q

What is the difference between an open bridging loan and a closed bridging loan?

Which usually charges the customer higher interest rates?

A

Closed = there is a CONFIRMED EXIT STRATEGY within an AGREED TIMESCALE
(e.g. there is a firm buyer for an existing property and exchange has taken place)

Open = NO FIRM BUYER/EXIT STRATEGY

Open has higher interest rates because of the higher risk involved

44
Q

What is a consumer buy to let mortgage?

Provide two examples of this (2)

A

A Buy to Let mortgage where the purpose of arranging the mortgage was NOT WHOLLY OR PREDOMINENTLY FOR BUSINESS PURPOSES - “accidental landlords”

  1. Wanting to rent out a property you have inherited
  2. The property was originally bought for you or family members to live in, but now due to unforeseen circumstances needs to be rented out, e.g. you need to move area for a job but don’t wish to sell your home.
45
Q

What is the main aim of all investment products?

A

To provide a REAL RETURN above the rate of inflation

46
Q

True or False - when recommending a product, advisors should always recommend the product with the biggest tax saving for the customer

A

False. Whilst tax planning should always be considered, it should be looked at as one of many features when weighing up product options

47
Q

True or false - banks sometimes give better rates for savings accounts with higher balances

A

True

48
Q

What is a deposit account?

A

Another name for a savings account

49
Q

What are the advantages of putting money into a savings account rather than an investment? (2) what is the main disadvantage?

A

Advantages:
1. Good for rainy day/emergency funds due to easy access
2. Low risk

Disadvantage
= worse rates/returns

50
Q

How is often is interest added to savings accounts?

A

Added daily but then paid monthly/yearly

51
Q

What does AER stand for? What is it used for?

A

Annual Equivalent Rate

Used to compare interest rates between products

52
Q

What is the Personal Savings Allowance (PSA)?

A

First £1000 of interest from savings is tax free, so long as you are a BASIC RATE TAX PAYER

53
Q

What are structured deposit accounts?

A

Fixed-term savings accounts that are linked to the performance of an underlying investment, e.g. FTSE 100

They therefore have the potential for CAPITAL GROWTH, but your investment is also 100% GUARANTEED at the end of the term (you can’t lose your money)

54
Q

When are structured deposit accounts usually considered to be attractive? (2)

A
  1. When credit interest rates are low
  2. Times of economic uncertainty
55
Q

What is usually the minimum term for an investment to see growth?

A

5 years

56
Q

What are the two types of growth that can be achieved from investments? (2)

A
  1. Interest
  2. Capital Growth

can be both

57
Q

Who within a bank is qualified to give investment advice?

A

A bank’s financial advisors who are regulated by the FCA

58
Q

What are the three main types of asset classes that you can invest money into? (3)

A
  1. CASH DEPSOITS
  2. SHARES
  3. BONDS
  4. PROPERTY
59
Q

What is a pooled investment?

What is another name for this?

A

Where your money is grouped together with other investors’ money to invest in one or more asset classes

Aka collective investment

60
Q

What are the two most common types of tax wrappers?

A
  1. ISAs
  2. Pensions
61
Q

Can tax wrappers be put around pooled investments?

A

Yes - pensions are a good example of this

62
Q

What is the most common type of shares that people invest in? Who are these issued by?

A

Ordinary shares

Issued by PLCs (Public Limited Companies)

63
Q

How are ordinary shares traded? How is the value of each share decided?

A

Traded on the stock market

Value relates to how well the company is performing - not the value of the company

64
Q

How do people make money from Ordinary Shares? (2)

A
  1. Sell them on the stock market
  2. DIVIDENDS - share of profits distributed to shareholders
65
Q

What are the advantages of investing in ordinary shares? (2) What are the disadvantages (5)

A

Advantages:
1. Potential for CAPITAL GROWTH (usually higher than deposit-based investment)
2. Potential for INCOME (through dividends)

Disadvantages
1. Potential for CAPITAL LOSS- markets are very volatile and share price can decrease quickly
2. DIVIDENDS MAY NOT BE PAID (if no profits)
3. NOT SUITED TO SHORT TERM INVESTMENT
4. NOT AS LIQUID - may not be able to sell straight away if you are in a hurry for funds
5. DIRECT INVESTMENT = RISKY, less risky to invest in collective funds

66
Q

What are NS&I Investments? What are the two main types? What is the main advantage of investing in these?

A

National Savings and Investment Scheme run by the government

  1. Income bonds
  2. Investment accounts

Advantage = 100% guaranteed by the government, you will always get the full amount of you investment back, no maximum limit

67
Q

What are Gilt-Edged Securities?

What does the wording ‘Gilt-Edged’ mean in it’s name?

A

Loan bonds issued by the government

Gilt-Edged = Very Secure

68
Q

In what way can people make money from Gilt-edged securities? (2)

A
  1. Keep the Gilt until it’s FIXED REDEMPTION DATE (usually 5-30 years)
    - get ‘COUPONS’ of interest every year
    - at the end of the term you get your money back
  2. Sell the Gilt before the end of its term on the ACTIVE GILT MARKET (like a stock market)
69
Q

Is interest made from Gilt-Edged Securities taxable?

A

Yes, you must fill in a self-assessment and include interest from GILTS

70
Q

What are the two main advantages of having property as an investment? (2) what is the main disadvantage? (1)

A

Advantage
1. Potential for capital growth - house prices increasing
2. Income from a tenant

Disadvantage
1. Funds not easily realisable/not liquid, might not be able to sell quickly

71
Q

What are some of the reasons why pooled investments tend to me more suited to most people than direct investments? (3)

A
  1. RISK IS SPREAD
    - Manager can invest in variety of assets
  2. ECONOMIES OF SCALE
    - minimum purchase amounts less of a problem with everyone’s money clubbed together
    - some costs/fees are shared
  3. PROFESSIONAL INVESTMENT MANAGERS
    - experienced in choosing assets
72
Q

What are the three most common types of collective investment? (3)

A
  1. Unit Trusts
  2. Open Ended Investment Companies (OEICs)
  3. Investment Trusts
73
Q

How is a unit value calculated within a unit trust?

A

Total trust assets, divided by the total number of assets issued

74
Q

Describe how a unit trust works.

What is the name of the person who runs unit trusts?

How are units bought and sold?

A

They are OPEN ENDED - managers create more units if they is enough demand.

Run by fund managers

People then BUY UNITS (parts/pieces of a fund)

If you want to sell your units, the fund managers are OBLIGED TO BUY BACK UNITS

75
Q

What document are units created under within a unit trust. What does this mean? What sorts of rules are included within this document? (2)

A

Created under a TRUST DEED

Means that the assets are kept separate from the company who run them

Rules:
1. Types of investment manager can make
2. The MANDATE = whether fund pays an INCOME or aims for GROWTH

76
Q

What is an Open-Ended Investment Trust?

What do investors buy when they invest in an OEIC?

What is the name of the person who is in charge of running OEICs?

How are these investments bought and sold? How is their value calculated?

A

Similar to Unit Trusts but differ in that they are set up as a LIMITED COMPANY

Instead of units, investors buy and sell SHARES

Run by an Authorised Corporate Director (ACD)

OPEN ENDED - Directors can create and sell shares whenever there is demand

If you want to sell your shares, the Director is OBLIGED TO BUY SHARES BACK

Value = total fund assets, divided by number of shares

77
Q

What is in Investment Trust?

What do investors buy when they invest in an investment trust?

How are these investments bought?

A

Similar to unit trust but instead of buying units you buy SHARES IN A COMPANY WHICH OWNS ALL OF THE SHARES

CLOSED ENDED - limited amount of shares, no more can be created

Shares can be bought either in a LUMP SUM or ON A REGULAR BASIS

78
Q

What is the main advantage of investing in a pension

A

Tax relief on all contributions up to an annual limit

79
Q

Who is most likely to take out a personal pension? (3)

A
  1. Self-employed
  2. Sole-traders
  3. Employees that don’t want to take part in their workplace scheme
80
Q

At what age can you take your pension?

A

Any age between 55 and 75

81
Q

How much of a pension fund can be withdrawn tax free? How is the rest taxed?

A

25% tax free, rest taxed at usual marginal rates of income tax

82
Q

What does SIPP stand for? What is a SIPP?

What types of investments are included in a SIPP?

What is an unique feature of SIPPs compared to other types of pension?

A

Self Invested Personal Pension

Pension which lets you choose where your money gets invested from a range of tax-free, government approved investments

Can be the usual investments eg shares, but can also be things like commercial property.

Trustees of SIPPs can actually lend up to 100% of their fund assets to an UNCONNECTED THIRD PARTY (ie not a relative of businesses owned by the SIPP), but in practice they don’t usually tend to loan out more than 50%

83
Q

What type of pay-out do you get from Life Insurance? Is this taxable?

A

A tax-free lump sum paid upon death

84
Q

What are the main types of protections offered by Life Insurance? (4)

A
  1. FAMILY PROTECTION
    - loss of income if deceased is main earner
    - if deceased is dependent spouse, increased childcare costs or loss of income if main earner cuts back hours to look after kids
  2. DEBT PROTECTION
    - Mortgage repayments, could lose house
  3. BUSINESS PROTECTION
    - death of business partners. If surviving partners are made beneficiaries, lump sum will allow them to buy the deceased’s family out and keep control of business
  4. TAX MITIGATION
    - allows those due to inherit assets to cover the inheritance tax bills without having to sell the assets (should be written into trust to ensure this)
85
Q

What type of pay-out do you get from Whole of Life Assurance? (2)

A

Either:

  1. A guaranteed lump sum upon death, regardless of when that death occurs (no fixed term)
    or
  2. you can cash in the policy early and receive a reduced sum (portion of the full value)
86
Q

What type of pay-out do you get from Term Assurance?

A

Lump sum on death if the death occurs within the fixed term only (no surrender value)

87
Q

Out of Level Term Assurance and Decreasing Term Assurance, which is more suited to protecting repayment mortgages and which is more suited to interest only mortgages?

A

Level = interest only

Decreasing = repayment

88
Q

Which is cheaper, Whole of Life or Term Assurance?

A

Term is cheaper. Whole of Life has more benefits (e.g. no term restriction & surrender value)

89
Q

Why might protection against ill health be even more important than life insurance? (2)

A
  1. The extra person is still around, so outgoings still need to include them
  2. Medical expenses
90
Q

What is income protection insurance?

How is payment usually made? Is there a maximum term?

A

Protects those who are working from loss of income if they are unable to work due to illness or a long-term disability

Payment is usually 50-60% of original income, paid monthly. This is usually only after a DEFERRED PERIOD (anything from 4 weeks to 2 years)

Maximum term = up to anticipated/actual retirement age

91
Q

True or False - Those who do not work cannot take out income protection insurance.

A

False, some companies will insure homemakers because someone else would need to be paid to carry out their tasks if they fall ill

92
Q

What is critical illness cover? What type of payout do you get?

What does critical illness cover offer as a protection? (2)

What happens if you recover from your critical illness condition after you receive payment?

A

Tax-free lump sum on diagnosis of a specified condition

  1. Debt protection
  2. Enhanced quality of life for the disabled person (one-off things like house adaptations, not an income)

Doesn’t matter if you recover after you receive payment

93
Q

True or false, for your Critical Illness Policy to pay out, you must be unable to work.

A

False, doesn’t mater, you just have to meet the policy definitions of the type of illness covered

94
Q

How do insurance covers set their criteria for critical illness cover payouts?

A

Specified conditions

Some follow the standard definitions set out by the ASSOCIATION OF BRITISH INSURERS (ABI)

some choose to cover extra conditions, including ‘TOTAL AND PERMANENT DISABILITY)

95
Q

What are two alternative names for General insurance?

A
  1. Non-life insurance
  2. Property and Casualty insurance
96
Q
A

Certificate in Retail and Digital Banking (Cert RDB) (23 decks)

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