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R01: Financial Services, Regulation and Ethics > 3. Laws and Legal Concepts Relevant to Financial Advice > Flashcards

3. Laws and Legal Concepts Relevant to Financial Advice Flashcards

1
Q

Define Sole Traders

A

A sole proprietorship also referred to as a sole trader or a proprietorship, is an unincorporated business that has just one owner who pays personal income tax on profits earned from the business.

N.B. The debts of the sole proprietorship are also the debts of the owner

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2
Q

Define a Partnership

A

A partnership is a formal arrangement by two or more parties to manage and operate a business and share its profits.

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3
Q

Define Limited Liability Partnerships (LLPs)

A

Limited liability partnerships (LLPs) are an extension on a Partnership. They allow for a partnership structure where each partner’s liabilities is limited to the amount they put into the business.

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4
Q

Define Limited Companies (Ltd)

A

Limited companies, in direct comparison to sole traders and partnerships, have a legally separate identity from the owners of the business (who, for limited companies, will be the shareholders of the business).

The company is responsible for its own debts to the limits of its own assets.

N.B Shareholders’ personal assets are not at risk from creditors.

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5
Q

Define a Publicly Listed Company (PLC)

A

A company which has shares listed on the London Stock Exchange

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6
Q

Explain the Powers of Attorney Act 1971

A

Under the act, a person can give power to another individual to act on their behalf

N.B. Usually given by elderly people, expats etc.

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7
Q

Mental Capacity Act 2005

A

Came into force 1st October 2005. Revised the law on mental capacity and enduring powers of attorney (EPA).

It introduced the Lasting Power of Attorney (LPA) which allows the attorney to make decisions about their:

  • Personal health and welfare
  • Property and affairs
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8
Q

What conditions must be met for a binding contract to exist?

A
  • There must be an offer and an acceptance (terms must be clear)
  • There must be intention to create a legally binding contract, and both powers must have the power to contract
  • There must be consideration - both parties must pay or stand to pay something to the other
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9
Q

What additions to a binding contract exist for life assurance contracts?

A
  • Good Faith

- Insurable Interest

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10
Q

Define Good Faith

A

A positive duty voluntarily to disclose, accurately and fully, all facts material to the risk being proposed, whether requested or not.

The principle applies equally both to the propose and the insurer.

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11
Q

What is the Consumer Insurace (Disclosure and Representations) Act 2012 (CIDRA)?

A

It governs the disclosure requirements for consumers. Under this act, consumers have a duty to take reasonable care not to make a misrepresentation.

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12
Q

What is the Insurance Act 2015 (IA2015)?

A

The IA 2015 sets out the duty of a non-consumer (commercial customer). Their obligation is to make fair presentation of the risk in a way that is reasonably clear and accessible to a prudent insurer.

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13
Q

Define Insurable Interest

A

Insurable Interest requires the proposer of a life contract (party receiving benefits) to have some financial interest in the life assured.

N.B The interest must arise through a legal or equitable obligation.

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14
Q

Which individuals experience Contractual Capacity Restrictions?

A
  • Minors
  • Those suffering from mental health issues
  • People under the influence of alcohol or drugs at the time the contract was agreed
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15
Q

What is the Financial Services and Markets Act 2000 (FSMA)?

A

The FSMA allows a PH a cooling-off period in which to change their mind under the cancellation notice procedure (typically 14 or 30 days)

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16
Q

What is the Law of Agency?

A

An agency is a contract whereby one party (agent) agrees to do certain acts on behalf of another party (principal).

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17
Q

How does the Law of Agency affect an IFA?

A
  • The IFA is the agent of the client and owes a duty of care
  • The IFA owes no duty to the insurer, but must comply with the relevant FCA rules
  • The client is responsible for acts of the IFA
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18
Q

Define Freehold (Property)

A

Both the building and the land it stands on is owned until such time as the owner decides to sell it or dies, in which case it becomes property of their estate.

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19
Q

Define Leasehold (Propety)

A

The land on which a building stands is not owned outright by the buyer. Instead it is leased from the person who owns the freehold rights at a ‘rent’.

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20
Q

Define Commonhold (Property)

A

Allows you to own the freehold of individual flats, houses and non-residential units in a building or on an estate. Unlike leasehold, there is no limit on how long you can own the property for.

N.B. Commonhold was introduced in the Commonhold and Leasehold Reform Act 2002

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21
Q

Define Joint Tennancy

A

Neither individual can sell without the other’s agreement. Each has an equal share of the property and when one dies, the survivor inherits the other’s share of the property without probate being needed and regardless of the provisions of any will.

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22
Q

Define Tenancy in Common

A

Each owner holds their share separately. They can dispose of their share as they wish and when they die their share goes to their estate, not to the other joint owner(s), and is disposed of according to their will or the laws of intestacy.

N.B. TICs need not involve equal shares (unlike JTs)

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23
Q

Define Shared Ownership

A

Schemes operated by housing associations at a local level. Purchases buy a share of the property, with the remaining share being owned by the housing association. The purchaser pays rent to the housing association on their share. The share can of the property owned can be increased via Staircasing.

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24
Q

Define Housing Association

A

Housing associations are not-for-profit organisations set up to provide affordable homes and support local communities. They don’t make profits for shareholders. Instead, they invest all the income they make into delivering on their social purpose.

25
Q

Define staircasing

A

Staircasing is a process where an owner of a Shared Ownership property purchases further shares of the property from the housing association who owns the remaining part. An owner can usually purchase in blocks (tranches) of 10% or more.

26
Q

Define a help to buy equity loan

A

The government lends the borrower up to 20% (40% within Greater London) if the cost of their new-build property, so the borrower only needs a 5% cash deposit and a 75% mortgage to make up the rest.

N.B. The borrower will not be charged loan fees on the 20% (40% GL) for the first 5 years.

27
Q

Define Individual Voluntary Arrangement

A

A legal agreement made between a person unable to pay their debts and their creditors, which allows the debts to be paid off over a stated period of time.

28
Q

Define Bankruptcy

A
  • Bankruptcy is a legal proceeding carried out to allow individuals or businesses freedom from their debts, while simultaneously providing creditors an opportunity for repayment.
  • Bankruptcy is handled in federal courts, and rules are outlined in the U.S. Bankruptcy Code.
  • There are various types of bankruptcy, commonly referred to by their chapter within the U.S. Bankruptcy Code.
  • Bankruptcy can allow you a fresh start, but it will stay on your credit reports for a number of years and make it difficult to borrow in the future.
29
Q

Define liquidation

A

The process of bringing a business to an end and distributing its assets to claimants. It is an event that usually occurs when a company is insolvent, meaning it cannot pay its obligations when they are due. As company operations end, the remaining assets are used to pay creditors and shareholders, based on the priority of their claims. General partners are subject to liquidation.

30
Q

What are some alternatives to Liquidation?

A
  • Administration - An administrator is appointed to run the company’s affairs and aims and attempts to rescue the company as a going concern
  • Voluntary Arrangements, whereby insolvency proceedings are avoided by substituting a satisfactory settlement of financial difficulties between the company and its creditors.
31
Q

What are the Laws of Succession?

A

The laws relating to wills and intestacy

32
Q

What are the 3 major formalities required in the making of a valid will?

A
  • Writing
  • Signature
  • Attestation
33
Q

Define Intestacy

A

Intestacy refers to the condition of an estate of a person who dies without a will, and owns property with a total value greater than that of their outstanding debts. In addition, a will that covers only part of an estate sometimes is intestate.

34
Q

What happens if the intestate dies leaving a spouse but no issue (no children/grandchildren)?

A

The surviving spouse is the sole beneficiary

35
Q

What happens if the intestate dies leaving a spouse and issue?

A

Spouse takes personal chattels (tangible movable property) plus a statutory legacy of £270,000 plus half of the balance outright.The issue will take the remaining half on reaching 18 or marrying below that age.

N.B. Statutory Legacy amount is reviewed every five years and generally increases by the Consumer Price Index (CPI)

36
Q

What happens if the intestate dies without no spouse?

A

Everything is left to the issue (children then grandchildren), then successively: parents, siblings, grandparents; uncles and aunts.

37
Q

What happens if the intestate dies with no relatives?

A

Everything goes to the Crown, the Duchy of Lancaster or the Duchy of Cornwall (depending on residency).

38
Q

Define Legal Personal Representatives (LPRs)

A

Executors or Administrators:

They are personally liable for the payment of all debts and taxes from the estate.

N.B. It is essential that there are sufficient funds available before making any distribution of the estate’s assets and they should take the action as soon as possible to identify the estate’s assets and liabilities at the time of death

39
Q

Define a Trust

A

A trust is a means by which someone (the settlor) gives away an asset for the eventual benefit of others (the beneficiaries).

The actual control over that asset in the meantime is in the hands of someone else (the trustees) who look after the property in the interest of the beneficiaries.

N.B. Division of ownership: Trustees possess legal interest, beneficiaries posses the beneficial or equitable interest.

40
Q

What are the different types of trust that can come into existence?

A
  • Express Trust
  • Implied Trust
  • Presumptive Trust
  • Successive Trust
  • Constructive Trust
  • Resulting Trust
41
Q

How does an Express Trust come into existence?

A

Intentionally and expressly created, usually by some written method such as a deed or a will.

N.B. Called ‘express’ as expressly set out

42
Q

How does an Implied Trust come into existence?

A

Not created expressly but implied from the actions or circumstances of parties

43
Q

How does a Presumptive Trust come into existence?

A

One person purchases a property in the name of another. Similar to an implied trust.

44
Q

How does a Successive Trust come into existence?

A

Property is held in trust for a succession of interests, taking effect one after the other.

45
Q

How does a Constructive Trust come into existence?

A

Imposed by law, regardless of the intentions or presumed intentions of those involved.

46
Q

How does a Resulting Trust come into existence?

A

Arises where there is a failure of the trust on which the property is held. As the purpose of the trust can no longer be fulfilled, there is said to be a resulting trust for the settlor of the trust, and ownership of the property reverts to that person.

47
Q

What are the different types of trust?

A
  • Bare or absolute trusts
  • Power of appointment trusts
  • Interest in possession trust
  • Discretionary trusts
  • Will trusts
  • Statutory trusts
  • Pension scheme trusts
48
Q

Give details for Bare or Absolute Trusts

A

The trustee’s sole duty is to transfer the trust property to the appropriate beneficiary

49
Q

Give details for Power of Appointment Trusts

A

A power exists to vary or appoint beneficiaries.

This type of trust is very flexible, as it gives the trustees power to vary the beneficiaries according to family circumstances.

50
Q

Give details for Interest in Possession Trusts

A

A beneficiary has a present right to income from (or enjoyment of) the trust property.

The beneficiary may also be entitled to the capital.

51
Q

Give details for Discretionary Trusts

A

A power of appointment trust where there is no-one with current interest in possession

52
Q

Give details for Will Trusts

A

Created by a will, as opposed to one created during the settlor’s lifetime. Like anything else in a will, it only becomes effective when the testator dies. Once the testator dies the trust starts and normally the executors of the will are the trustees.

N.B. Any asset left in a will in trust is still in the testator’s ownership, is disposable by them and is subject to IHT as part of the estate.

53
Q

Give details for Statutory Trusts

A

Specifically created by the statute or law

54
Q

Give details for Pension Scheme Trusts

A

Occupational pension schemes must b set up under an irrevocable trust. Personal pension schemes can also be set up under trust.

55
Q

An irrevocable trust can be created in three ways:

A
  1. Trust Deed
  2. Declaration of Trust
  3. Deed poll or board resolution made to establish a trust
56
Q

What is the main use of trusts?

A

If suitably written, they keep policy benefits outside a life assured’s pension scheme or member’s estate so that inheritance tax is not payable on them.

57
Q

What three certainties must be present if the trust is to be valid (Knight v. Knight (1840))?

A
  • The words must be on the whole imperative, that is, they must unmistakably show that a trust is intended
  • The subject matter must be certain. The property to be subject to the trust must be specified
  • The objects of the trust, the beneficiaries, must be certain. This certainty is not required if a trust is exclusively for charitable purposes
58
Q

When is a trustee removed from trusteeship?

A

When the trustee:

  • resigns or dies
  • is removed or automatically retired under the provisions of the trust deed
  • is removed by the other trustees (if allowed by the trust deed)
  • is removed in accordance with the Trustee Act 1925
  • is removed by a relevant court

R01: Financial Services, Regulation and Ethics (9 decks)

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