Chapter 3 Flashcards
When is an activity regulated? (wording)
According to section 22(1) FSMA, an activity is regulated “if it is an activity of a specified kind, which is carried on by way of business and relates to an investment of a specified kind…”
According to section 22(1) FSMA, an activity is regulated “if it is an activity of a specified kind, which is carried on by way of business and relates to an investment of a specified kind…”
Who specifies the particular activities and investments?
Treasury
Where a firm of solicitors is involved in a transaction, the following three questions must be answered in relation to it. Which are these?
1) Is your firm carrying on business?
2) Does the transaction involve a specified investment, i.e., an investment that falls into one of the following three categories (securities, relevant investments or neither of these)?
3) Is the investment of the kind regulated under Part II of RAO, and if so, does any exclusion apply to it?
If the answer is “yes” to the above three questions, it’s a regulated activity.
In this case, authorization needs to be obtained, otherwise it’s a criminal offence.
Is your firm carrying on business? What two elements are relevant to assess whether an activity is carried on by way of business?
In which case can it safely be stated that one is not carrying on business?
1) The degree of continuity
2) The existence of a commercial element
3) The scale of the activity
If activities are carried out in a purely personal capacity, then no authorization is required.
The categories of securities, relevant investments, and structured deposits are defined in the Financial Services and Markets Act 2000 (FSMA). The category “none of these” is not defined in the FSMA, but is commonly used in regulatory and compliance contexts. Give a brief description of each category.
The term “securities” generally refers to tradable financial instruments such as stocks, bonds, and derivatives. These are typically regulated by the Financial Conduct Authority (FCA) as specified investments under the FSMA.
“Relevant investments” is a broader term that includes both securities and other types of financial instruments such as options, futures, and contracts for difference. This category is also regulated by the FCA as specified investments under the FSMA.
“Structured deposits” are a type of financial instrument that typically offers a combination of a deposit and a derivative component. These are regulated by the FCA as a subcategory of relevant investments.
Finally, the category “none of these” is used to refer to transactions or investments that do not fall within any of the categories mentioned above and are therefore not regulated by the FCA.
When discussing investments with friends, how can it be stated that it does not represent “carrying on business”?
Everybody should invest in that opportunity.
Does the transaction involve a ‘specified investment’? What four categories of investment exist?
Where are they defined?
1) Securities
2) Relevant Investments
3) Structured Deposits
4) None of these
The categories of securities, relevant investments, and structured deposits are defined in the Financial Services and Markets Act 2000 (FSMA). The category “none of these” is not defined in the FSMA, but is commonly used in regulatory and compliance contexts to refer to transactions or investments that do not fall within the specified categories of financial instruments and are therefore not subject to regulation by the FCA.
Specified investments - category 1: Securities. What securities are included?
1) Shares or stocks in the share capital of any company
INCLUDES: Companies incorporated outside the UK and unincorporated bodies outside the UK (e.g., company shares in overseas investment trusts)
EXCLUDES: Shares in OEICs and building society share accounts
2) Instruments creating or acknowledging indebtedness
INCLUDES: Debentures, debenture stock, loan stock, bonds and certificates of deposit
EXCLUDES: Bank notes, bank statements, checks, bankers’ drafts, letters of credit, and bills of exchange
3) Government and public securities
EXCLUDES: Loan stocks, bonds issued (e.g., to foreign governments) by (a) assemblies for England, Scotland, Wales and Northern Ireland, (b) a local authority, or (c) the government of any country or territory outside the UK (e.g., gilts - which are long-term loans to the British Government)
EXCLUDES: National savings
4) Instruments giving entitlement to investments
INCLUDES: Share warrants
5) Units in a collective investment scheme
INCLUDES: Units in a unit trust fund and shares in an OEIC
What are unincorporated bodies?
In UK law, unincorporated bodies refer to organizations or associations that are not legally recognized as separate entities from their members. These bodies are not considered to have a distinct legal personality, which means they cannot own property, enter into contracts, sue or be sued in their own name.
Examples of unincorporated bodies include clubs, societies, and associations that are formed for a specific purpose, such as a sports club or a social club. These bodies are usually run by a committee or a group of officers who are elected by the members.
While unincorporated bodies do not have the same legal status as incorporated entities such as companies, they can still have liabilities and obligations. Members of unincorporated bodies may be personally liable for any debts or legal claims against the organization.
What is an investment trust?
Are they ‘specified investments’?
An investment trust is a type of collective investment scheme that pools money from multiple investors to invest in a diversified portfolio of assets, such as shares, bonds, property, or other investments. Investment trusts are established as public limited companies (PLCs) and are traded on stock exchanges like ordinary company shares.
The investment trust is managed by a professional fund manager who is responsible for buying and selling the investments on behalf of the trust’s shareholders. Investors buy and sell shares in the investment trust, and the price of the shares is determined by supply and demand on the stock exchange.
Yes, the fall under “securities.”
What are the advantages of investment trusts over other types of collective investment schemes, such as unit trusts or open-ended investment companies (OEICs).
For example, investment trusts are able to borrow money to invest in assets, which can potentially enhance returns but also increase risks. Investment trusts also have a fixed number of shares, so they are not subject to the same liquidity issues as open-ended funds, which may have to sell assets to meet investor redemptions.
Investment trusts also have the ability to retain income and dividends earned on investments, allowing them to build up reserves for future payouts to shareholders. This is known as “revenue reserves”, and it can provide a more consistent and predictable income stream for investors.
What does “open-ended” mean versus “close-ended”?
In finance and investment terminology, “open-ended” refers to a type of investment vehicle, such as a mutual fund or an OEIC (Open-Ended Investment Company), that is not limited in the number of shares or units it can issue to investors.
This means that investors can buy and sell shares or units in the fund at any time, with the fund issuing new shares when demand is high and redeeming shares when demand is low. As a result, the size of the fund can increase or decrease based on investor demand.
The opposite of an open-ended investment is a “closed-ended” investment, such as an investment trust. A closed-ended investment has a fixed number of shares, which are traded on an exchange like other stocks. Investors can buy and sell these shares on the secondary market, but the investment trust itself does not issue new shares or redeem existing shares based on investor demand.
In summary, open-ended refers to an investment vehicle that can issue or redeem shares or units based on investor demand, while closed-ended refers to an investment vehicle with a fixed number of shares that are traded on an exchange like other stocks.
What is the difference between open-ended investment companies and investment trusts?
The main difference between an OEIC (Open-Ended Investment Company) and an investment trust is their legal structure.
1) An OEIC is structured as a company, while an investment trust is structured as a closed-ended investment company. This means that an investment trust has a fixed number of shares in issue, which are traded on the stock exchange like any other listed company.
Because investment trusts are closed-ended, they do not have to issue or redeem shares in response to investor demand, which means that their share price can be at a premium or discount to the value of their underlying assets. This is in contrast to OEICs, which issue and redeem shares based on investor demand, with the share price typically being equal to the value of the fund’s underlying assets.
2) Another difference between OEICs and investment trusts is that OEICs tend to have a wider range of investment options. For example, OEICs can invest in a wider range of assets, such as derivatives or exchange-traded funds (ETFs), which may not be available to investment trusts.
3) In terms of liquidity, OEICs are generally more liquid than investment trusts, as investors can buy and sell shares in an OEIC at any time, while shares in an investment trust may be less liquid and subject to wider bid-offer spreads.
4) In terms of regulatory requirements, both OEICs and investment trusts are subject to regulation and investor protection measures, but they may be subject to slightly different rules and requirements.
Overall, the main difference between an OEIC and an investment trust is their legal structure, with OEICs being open-ended and investment trusts being closed-ended. This can have implications for how they are traded, priced, and managed, as well as their investment options and liquidity.
What is debenture?
Is it a ‘specified investment’?
A debenture is a type of bond that is not secured by collateral or any specific asset. It is backed only by the general creditworthiness and reputation of the issuer. Debentures are typically issued by corporations or governments to raise capital, and they pay a fixed rate of interest to investors. They are considered riskier than secured bonds, but often offer higher yields to compensate for the added risk.
Yes, the fall under “securities.”
What is the difference between a debenture and a bond?
Debentures and bonds are both debt instruments that are issued by companies and governments to raise funds from investors. Although they share some similarities, there are some key differences between them.
1) Definition:
A bond is a debt security that represents a loan made by an investor to a borrower (usually a company or government) for a specified period of time, during which the borrower makes periodic interest payments to the investor and repays the principal amount at maturity.
A debenture, on the other hand, is a type of bond that is not secured by any collateral or asset, and is backed only by the general creditworthiness and reputation of the issuer.
2) Security:
Bonds are often secured by specific assets of the issuer, such as property, equipment, or inventory. This means that if the issuer defaults on the bond, the investor has a claim on the assets that secure the bond.
Debentures are not secured by any specific assets and are therefore riskier for investors. If the issuer defaults on a debenture, investors may not have any collateral to seize to recover their investment.
3) Risk and Return:
Because bonds are often secured and have a lower level of risk, they typically have a lower interest rate than debentures, which are riskier for investors.
Debentures generally offer higher interest rates than bonds, but this comes at the cost of greater risk. The interest rate on a debenture reflects the creditworthiness of the issuer and the perceived risk of default.
In summary, while both bonds and debentures are debt instruments used by companies and governments to raise funds from investors, the key differences lie in their security and risk-return profile. Bonds are often secured by specific assets and have a lower level of risk, while debentures are unsecured and offer higher returns but come with a greater level of risk.
What is a debenture stock?
Is it a “specified investment”?
Debenture stock is essentially a form of debt security that pays a fixed rate of interest over a specified period of time, similar to a debenture. However, it also has some of the characteristics of stocks, such as being transferable and potentially convertible into shares of stock.
Debenture stock was commonly used in the UK in the early 20th century as a way for companies to raise capital. However, its use has since declined, and it is not a commonly used term in modern financial markets.
Yes, the fall under “securities.”
What is a loan stock?
Are they “specified investments”?
A loan stock is a type of security that represents a loan made by an investor to a company. Like other debt securities such as bonds and debentures, loan stocks pay a fixed rate of interest to investors over a specified period of time and are considered to be less risky than equity investments.
Unlike bonds and debentures, however, loan stocks may have features that make them more similar to equity securities. For example, they may be convertible into shares of the issuing company’s stock or may have attached warrants that give the holder the right to purchase additional shares at a specified price.
Loan stocks are typically issued by larger, more established companies that have a track record of stable earnings and cash flow, and are seeking to raise capital without diluting their ownership through the issuance of additional equity.
Investors who are seeking income with lower risk than stocks or other equity securities may find loan stocks to be an attractive investment option. However, as with any investment, it’s important to carefully evaluate the creditworthiness of the issuer and the risks associated with the investment before investing.
Yes, the fall under “securities.”
What are certificates of deposit?
Are they “specified investments”?
Certificates of deposit (CDs) are a type of savings account offered by banks and other financial institutions. They are a low-risk investment option that offers a fixed rate of interest in exchange for depositing a lump sum of money for a set period of time.
When you open a CD, you agree to keep your money in the account for a predetermined term, which can range from a few months to several years. In return, the bank pays you a fixed rate of interest, which is typically higher than the interest rate on a regular savings account.
CDs are considered to be low-risk investments because they are FDIC-insured, which means that the Federal Deposit Insurance Corporation (FDIC) guarantees the safety of your deposit up to a certain amount. This means that even if the bank were to fail, you would still receive your deposit back.
However, CDs also have some drawbacks. One major drawback is that your money is tied up for the duration of the term, which means that you can’t access your funds without paying a penalty. Additionally, the interest rates on CDs may be lower than other investment options that carry more risk, such as stocks or mutual funds.
Overall, CDs can be a good option for investors who are looking for a low-risk investment with a guaranteed rate of return, but they may not be the best choice for everyone, depending on their financial goals and risk tolerance.
Yes, the fall under “securities.”
What is the difference of a certificate of deposit and a bond?
Certificates of deposit (CDs) and bonds are both investment products, but they differ in several key ways.
First, CDs are a type of savings account that is offered by banks and other financial institutions, while bonds are issued by corporations, municipalities, or governments to raise capital. CDs are typically shorter-term investments with maturities ranging from a few months to several years, while bonds usually have longer maturities ranging from several years to several decades.
Second, CDs generally offer a fixed interest rate for the duration of the investment, while bonds may have a fixed or variable interest rate that can change over time based on market conditions.
Third, CDs are FDIC-insured up to a certain amount, which means that the federal government guarantees the safety of the deposit. In contrast, bonds carry a certain level of risk, and the issuer may default on the debt, resulting in a loss for the investor.
Finally, CDs are typically more liquid than bonds, as investors can withdraw their money before maturity by paying a penalty, while bonds may have restrictions on when they can be sold or redeemed.
In summary, while both CDs and bonds are investment products that offer a fixed rate of return, CDs are typically shorter-term, FDIC-insured, and more liquid, while bonds are longer-term, carry more risk, and may have variable interest rates.
What is a bankers’ draft?
Are they “specified investments”?
A banker’s draft, also known as a bank draft or cashier’s check, is a check that is guaranteed by a bank. It is a type of check where the bank itself makes the payment on behalf of the purchaser, rather than the purchaser making the payment with their own funds. The bank verifies that the funds are available in the purchaser’s account and then issues a draft for the specified amount, which can be used to make a payment to a third party. Banker’s drafts are often used for large transactions where a personal check or electronic transfer may not be accepted.
No, they are not specified investments.
What are letters of credit?
Are they “specified investments”?
Letters of credit are a financial instrument that acts as a guarantee for payment between two parties in a transaction, typically involving international trade. Essentially, a letter of credit is a commitment by a bank on behalf of the buyer that they will pay the seller a certain amount of money, provided that the seller fulfills certain conditions.
In a typical letter of credit transaction, the buyer (importer) approaches their bank to request a letter of credit, which is then issued by the bank to the seller (exporter). The letter of credit outlines the specific terms and conditions of the transaction, including the amount of money to be paid, the timeframe for payment, and any required documentation.
Once the seller has met the conditions outlined in the letter of credit, they can present the necessary documents to their bank, who will then forward them to the buyer’s bank. If the documents are in order, the buyer’s bank will release the payment to the seller. If the documents are not in order, the buyer’s bank may refuse to make the payment, giving the seller an opportunity to correct any errors.
Overall, letters of credit provide a level of security for both the buyer and the seller, ensuring that payment is only made once the conditions of the transaction have been met.
No, they are not specified investments.
What are bills of exchange?
Are they “specified investments”?
Bills of exchange are legal documents that facilitate the exchange of goods or services between parties. They are commonly used in international trade, but can also be used in domestic transactions. Essentially, a bill of exchange is a written order from one party (the drawer) to another party (the drawee) to pay a certain sum of money to a third party (the payee) at a specific time in the future.
Bills of exchange are often used to provide credit to buyers and sellers, as they allow for deferred payment. For example, a seller might ship goods to a buyer, who agrees to pay for them in 60 days. Instead of waiting 60 days for payment, the seller can create a bill of exchange that instructs the buyer to pay the agreed-upon amount to the seller’s bank in 60 days. The seller can then sell this bill of exchange to a bank or other financial institution, which will pay the seller a discounted amount of money (based on the time value of money and the perceived creditworthiness of the buyer) and assume the risk of collecting the full amount from the buyer in 60 days.
Bills of exchange can also be used to transfer funds between parties in different countries, as they provide a mechanism for exchanging currency and settling debts. For example, a Japanese company that needs to pay a supplier in the United States might use a bill of exchange denominated in yen to pay the supplier’s bank in dollars, with the bank assuming the risk of collecting the full amount from the Japanese company.
Bills of exchange are governed by a set of international laws known as the Uniform Commercial Code (UCC), which outlines the rights and responsibilities of the parties involved in a bill of exchange transaction. They are an important tool for facilitating international trade and providing liquidity to businesses and financial institutions.
No, they are not specified investments.
What is the difference between bills of exchange and letters of credit?
Bills of exchange and letters of credit are both financial instruments used in international trade, but they serve different purposes.
A bill of exchange is a written order, similar to a check, from one party (the drawer) to another (the payee) to pay a specified amount of money on a certain date in the future. The bill of exchange is a type of negotiable instrument, meaning it can be transferred to a third party as a form of payment. Bills of exchange are typically used in international trade transactions to facilitate the payment process, as they provide a way for the parties involved to guarantee payment for goods or services.
On the other hand, a letter of credit is a financial agreement between a buyer and a seller, typically facilitated by a bank. The letter of credit is a guarantee from the bank that the buyer will pay the seller for goods or services provided, as long as the seller meets certain conditions, such as delivering the goods by a specified date and meeting quality standards. Letters of credit are often used in international trade transactions to reduce risk and ensure that both parties receive what they are owed.
In summary, bills of exchange are a form of payment that provide a guarantee of payment for a specified amount at a future date, while letters of credit are a form of financial guarantee from a bank that ensure payment for goods or services provided, provided certain conditions are met.
What are share warrants?
Are they “specified investments”?
Share warrants, also known as stock warrants, are financial instruments that give the holder the right, but not the obligation, to buy a specific number of shares of a company’s stock at a predetermined price within a certain time frame. They are similar to stock options, but there are a few key differences.
Share warrants are typically issued by the company itself, whereas stock options are often issued to employees by the company as part of their compensation packages. Share warrants are also tradeable securities that can be bought and sold on the open market, whereas stock options can only be exercised by the employee who was granted them.
Yes, the fall under “securities.”
Specified investments - category 2: Structured deposits. What are structured deposits?
A structured deposit is a type of savings account where you deposit money for a fixed period of time, and at the end of the term, you will receive your initial deposit back along with either interest or a premium payment. However, the amount of interest or premium you receive may be linked to certain market conditions or performance indicators, meaning there is some level of risk involved in the potential returns.
Structured deposits can be linked to a variety of underlying assets or indicators, such as stock market indices, interest rates, commodities, or foreign exchange rates. The return you receive on your structured deposit will be directly linked to the performance of these underlying assets or indicators. So, if the performance of the underlying asset is favorable, you may receive a higher return on your deposit, but if the performance is poor, you may receive a lower return or even risk losing some or all of your initial deposit.
What does Euro-denominated mean?
Euro-denominated refers to financial instruments that are denominated in euros, which is the official currency of the eurozone. This means that the value of the financial instrument is expressed in euros, and any transactions or payments related to it are made in euros.
What is Euribor?
Euribor stands for the Euro Interbank Offered Rate, which is the interest rate at which eurozone banks lend to one another on an unsecured basis. It is the benchmark reference rate for euro-denominated financial instruments, including loans, bonds, and derivatives. Euribor rates are calculated and published daily based on submissions from a panel of banks, and there are different maturities available, ranging from overnight to 12 months. Euribor rates are used extensively in financial markets and can have a significant impact on borrowing costs and the performance of financial instruments.
Euribor stands for the Euro Interbank Offered Rate, which is the interest rate at which eurozone banks lend to one another on an unsecured basis. - what does unsecured basis mean?
“Unsecured basis” refers to the type of lending where there is no collateral or security for the loan. In other words, the borrower is not required to provide any assets or guarantees to the lender to obtain the loan. Instead, the loan is based solely on the borrower’s creditworthiness and ability to repay the loan. So, in the case of Euribor, the interest rate is determined based on the creditworthiness of the borrowing bank and the prevailing market conditions, without any requirement for collateral or security.
What is Libor?
LIBOR stands for London Interbank Offered Rate. It is a benchmark interest rate that is used to set the rates on various financial products, such as loans, mortgages, and derivatives. LIBOR is calculated by averaging the interest rates that a panel of banks based in London would be charged if they borrowed from other banks. The rates are published daily in different currencies and for different time frames, ranging from overnight to 12 months. LIBOR is one of the most widely used benchmark rates in the world, but its use has declined in recent years due to concerns over its reliability and accuracy.
What is the difference between LIBOR and Euribor?
LIBOR (London Interbank Offered Rate) and Euribor (Euro Interbank Offered Rate) are both interest rate benchmarks that indicate the average rate at which banks can borrow from each other in the interbank market. However, there are several differences between the two:
1) Geographical location: LIBOR is based in London, while Euribor is based in the eurozone.
2) Currencies: LIBOR rates are published for five different currencies: USD, EUR, GBP, CHF, and JPY, while Euribor is published only for euro-denominated loans.
3) Contributor banks: The contributor banks for LIBOR and Euribor are different. LIBOR has 11 to 16 banks contributing to its rate setting, while Euribor has a panel of 22 banks.
4) Calculation methodology: While both benchmarks are calculated based on the submissions of contributor banks, the methodologies are slightly different. For example, Euribor is calculated as the arithmetic mean of the submitted rates, while LIBOR is calculated as the trimmed mean after removing the highest and lowest 25% of submissions.
Overall, both benchmarks are widely used in the financial industry, but the ongoing phase-out of LIBOR has led to an increased focus on Euribor as a replacement benchmark for euro-denominated loans.
Can structured deposits be linked to variable rate deposits?
No, structured deposits are typically not linked to variable rate deposits. Variable rate deposits are a type of savings account where the interest rate can change over time based on market conditions or other factors. In contrast, structured deposits are linked to specific underlying assets or indicators, such as stock market indices or commodity prices, and the return on the deposit is directly tied to the performance of these assets or indicators. The terms and conditions of a structured deposit are usually fixed at the time of the deposit and do not change over the term of the deposit. So, while variable rate deposits and structured deposits are both types of savings accounts, they are fundamentally different in terms of how they operate and what factors determine the return on your deposit.
What is the connection between variable rate deposits and LIBOR and EURIBOR?
Both LIBOR and EURIBOR are commonly used as reference rates for variable rate deposits, meaning that the interest rate paid on a variable rate deposit may be linked to one of these benchmark rates.
For example, a bank may offer a variable rate deposit that pays an interest rate equal to the 3-month LIBOR rate plus a fixed spread. In this case, the interest rate paid on the deposit would change periodically based on changes in the 3-month LIBOR rate.
Similarly, a bank may offer a variable rate deposit that pays an interest rate equal to the 6-month EURIBOR rate plus a variable spread. In this case, the interest rate paid on the deposit would change periodically based on changes in the 6-month EURIBOR rate.
Both LIBOR and EURIBOR are being phased out as reference rates for financial instruments, including variable rate deposits, due to concerns about the integrity of the benchmark rates. What does this mean? Why is the integrity of benchmark rates important?
In recent years, concerns have been raised about the integrity of some benchmark rates, such as LIBOR and EURIBOR. These concerns stem from allegations of manipulation and collusion among some banks that participate in the rate-setting process, as well as weaknesses in the underlying market data used to calculate the rates.
Manipulation and collusion can occur when banks submit false or inaccurate data to the rate-setting process in order to benefit their own trading positions or to artificially influence the benchmark rate. Weaknesses in market data can arise when there are insufficient transactions or insufficient diversity in the types of transactions used to calculate the benchmark rate.
The integrity of benchmark rates is important because inaccurate or unreliable rates can lead to mispricings of financial instruments, distortions in market outcomes, and harm to consumers and investors who rely on these rates to value and manage their financial exposures. As a result, regulators and market participants have been working to develop new, more robust benchmark rates and to strengthen the processes used to calculate and verify these rates.
Why is it important for solicitors to know about LIBOR and EURIBOR?
It is important for solicitors to be aware of LIBOR and EURIBOR because these benchmark rates are widely used as reference rates for financial instruments, including loans, derivatives, and structured deposits. As a result, they may have an impact on the terms of legal agreements and financial contracts that solicitors are involved in.
For example, solicitors who advise clients on loan agreements or other financial contracts that reference LIBOR or EURIBOR need to understand how changes in these rates can affect the terms of the agreement, including the interest rate, payment schedule, and other key provisions. They may need to advise clients on strategies for managing interest rate risk, such as hedging or renegotiating the terms of the agreement.
In addition, solicitors may need to be aware of the ongoing transition from LIBOR and EURIBOR to new benchmark rates, such as the Secured Overnight Financing Rate (SOFR) in the United States and the Euro Short-Term Rate (ESTR) in the eurozone. This transition may involve changes to legal agreements and financial contracts that reference LIBOR or EURIBOR, and solicitors may need to advise clients on how to navigate these changes.
Overall, understanding the implications of LIBOR and EURIBOR for legal agreements and financial contracts is an important part of the work of solicitors who advise clients in the financial sector.
The categories of securities, relevant investments, and structured deposits are defined in the Financial Services and Markets Act 2000 (FSMA). The category “none of these” is not defined in the FSMA, but is commonly used in regulatory and compliance contexts. Give a brief description of each category.
The term “securities” generally refers to tradable financial instruments such as stocks, bonds, and derivatives. These are typically regulated by the Financial Conduct Authority (FCA) as specified investments under the FSMA.
“Relevant investments” is a broader term that includes both securities and other types of financial instruments such as options, futures, and contracts for difference. This category is also regulated by the FCA as specified investments under the FSMA.
“Structured deposits” are a type of financial instrument that typically offers a combination of a deposit and a derivative component. These are regulated by the FCA as a subcategory of relevant investments.
Finally, the category “none of these” is used to refer to transactions or investments that do not fall within any of the categories mentioned above and are therefore not regulated by the FCA.
What is a contract for difference?
A contract for difference (CFD) is a financial derivative that allows traders to speculate on the price movements of underlying financial assets such as stocks, commodities, currencies, and indices, without actually owning the underlying assets.
With a CFD, a trader agrees to exchange the difference in price of the underlying asset between the opening and closing of the contract. If the price of the underlying asset increases during the contract period, the buyer of the CFD receives a profit from the seller equal to the difference in price. Conversely, if the price of the underlying asset decreases, the buyer of the CFD owes the seller the difference in price.
CFDs are often used for short-term trading, as they allow traders to take advantage of small price movements in the underlying asset, without committing a large amount of capital.
Are the four categories that define a ‘specified investment’ mutually exclusive?
Some financial instruments, such as stocks, can appear in more than one category. This is because the categories are not mutually exclusive and are instead designed to capture different aspects of the financial instruments or transactions they cover.
For example, a stock can be classified as a “security” because it is a tradeable financial instrument representing ownership in a company. At the same time, it can also be considered a “relevant investment” because it is a type of financial instrument that is subject to regulation under the Financial Services and Markets Act 2000 (FSMA).
Similarly, a stock can be a component of a “structured deposit” because the return on the deposit may be linked to the performance of the stock. In this case, the stock is not the primary financial instrument but is instead used as a reference point for determining the return on the structured deposit.
Therefore, the categories are not mutually exclusive, and financial instruments and transactions can fall under multiple categories depending on their specific characteristics and features.
Give 10 financial instruments that do NOT fall under ‘specified investments’
1) Physical commodities, such as gold, silver, copper, or oil, that are not traded as futures contracts or options.
2) Collectibles, such as art, antiques, stamps, or coins, that are not traded on a regulated market.
3) Currencies held for personal use or travel, as opposed to currency trading for investment purposes.
4) Money market deposits and certificates of deposit (CDs) that are not linked to other financial instruments.
5) Corporate bonds that are not traded on a regulated market and are not structured products.
6) Mortgage-backed securities and asset-backed securities that are not traded on a regulated market.
7) Real estate, including physical property, land, and real estate investment trusts (REITs).
8) Precious stones and metals, such as diamonds or platinum, that are not traded as futures contracts or options.
9) Agricultural commodities, such as wheat or corn, that are not traded as futures contracts or options.
10) Livestock and fisheries, such as cattle or salmon, that are not traded as futures contracts or options.
What are real estate investment trusts (REITs) and why are they not subject to regulation by the FCA?
A Real Estate Investment Trust (REIT) is a type of investment company that owns and manages income-producing real estate properties. REITs are often publicly traded on stock exchanges, allowing individual investors to invest in real estate without owning physical property.
In the UK, REITs are subject to specific tax rules that require them to distribute a minimum of 90% of their rental income to investors as dividends. This tax-efficient structure has made REITs an attractive investment vehicle for both individual and institutional investors.
While REITs are a type of investment, they are not typically considered to be “specified investments” under the Financial Services and Markets Act 2000 (FSMA). This is because REITs are structured as companies, rather than as collective investment schemes or investment funds, and do not offer shares or units to the public for investment.
As such, REITs are not subject to the same level of regulation as other types of investment funds or vehicles. However, they are subject to various corporate and tax regulations, as well as rules and standards set by the stock exchanges on which they are listed.
What are money market deposits and why are they not subject to regulation by the FCA?
Money market deposits are a type of bank deposit that typically offer a higher interest rate than regular savings accounts. Money market deposits are also known as money market accounts or money market savings accounts.
In the UK, money market deposits are not typically considered to be “specified investments” under the Financial Services and Markets Act 2000 (FSMA). This is because money market deposits are generally considered to be a type of bank deposit, rather than a separate investment product.
Banks that offer money market deposits are regulated by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA), which are responsible for ensuring that banks maintain adequate levels of capital, manage risk appropriately, and treat customers fairly. However, money market deposits are not subject to the same level of regulation as other investment products, such as stocks, bonds, or mutual funds.
Money market deposits are generally considered to be lower-risk investments, as they are backed by the deposit insurance schemes that protect customers in the event of a bank failure. As such, they are often used by investors who are seeking a relatively safe place to park their cash and earn a higher interest rate than they would with a traditional savings account.
What is the difference between a money market deposit and a regular savings account?
Money market deposits differ from regular savings accounts in a few key ways:
1) Interest rates: Money market deposits typically offer a higher interest rate than regular savings accounts. This is because they often require a higher minimum deposit and may limit the number of withdrawals or transfers you can make each month.
2) Minimum balance requirements: Money market deposits often require a higher minimum balance than regular savings accounts. If your balance falls below the minimum, you may be charged a fee or your interest rate may be reduced.
3) Check-writing privileges: Some money market deposits may offer check-writing privileges, allowing you to write checks against your account balance. This is not typically an option with regular savings accounts.
4) FDIC insurance limits: Like regular savings accounts, money market deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to certain limits. However, the FDIC insurance limit for money market deposits is typically higher than it is for regular savings accounts, which can make them a more attractive option for investors with larger sums of money to invest.
Overall, money market deposits are generally considered to be a more sophisticated savings option than regular savings accounts. They are often used by investors who are looking for a higher rate of return on their cash, but who want to avoid the risks associated with other types of investments, such as stocks or bonds.
Specified investments - category 3: Relevant investments. What three elements are contained as relevant investments?
1) Long-term insurance contracts
2) Options, futures, and contracts for differences
3) Future plan contracts
Long-term future insurance contracts contains 7 different types. What are they and describe each of them.
Endowment policies: These are life insurance policies that pay out a lump sum after a set period of time or upon the death of the policyholder, whichever comes first.
Whole life policies: These are life insurance policies that provide coverage for the entire life of the policyholder, as long as the premiums are paid. They typically include a savings or investment component, which can provide a cash value that can be accessed by the policyholder during their lifetime.
Annuities: These are financial products that provide a regular income stream in exchange for a lump sum payment or a series of payments. They are often used to provide a guaranteed income in retirement.
Investment bonds: These are investment products that combine an insurance policy with an investment component. They typically offer tax advantages and can provide a lump sum payment at the end of a set period of time or upon the death of the policyholder.
Pension fund management contracts: These are contracts that provide for the management of pension funds, which are retirement savings accounts that are designed to provide income during retirement.
Long-term permanent health insurance: This is insurance coverage that provides for the payment of benefits if the policyholder becomes disabled or unable to work due to illness or injury.
Term life policies: These are life insurance policies that provide coverage for a set period of time, typically 10 to 30 years. They pay out a death benefit if the policyholder dies during the term of the policy.
General insurance contracts: These are insurance policies that provide coverage for specific risks, such as property damage, theft, or liability. They are typically short-term policies that are renewed annually. - can you make a list of the elements without the descriptions
Why are funeral plan contracts regarded as specified investments? (relevant investments)
Funeral plan contracts are regarded as specified investments because they involve the prepayment of funeral expenses. These contracts allow individuals to plan and pay for their funeral in advance, typically by making regular payments to a funeral plan provider. The provider invests the payments to generate a return, which is used to cover the cost of the funeral when the time comes. Since the provider is managing investments on behalf of the consumer, funeral plan contracts fall under the definition of a specified investment and are therefore subject to regulation by the FCA.
Specified investments - category 5: None of the above. Which two elements are contained?
1) Deposits
INCLUDING: Bank and building society share accounts and all ISAs
EXCLUDING: Mini-cash ISAs
2) Regulated mortgage contracts
What are ISAs and Mini-cash ISAs? Are they specified investments?
ISAs (Individual Savings Accounts) are tax-free savings and investment accounts available to UK residents. The money saved or invested in an ISA will not be subject to income tax or capital gains tax. There are several types of ISAs available, including cash ISAs and stocks and shares ISAs.
Mini-cash ISAs, also known as cash ISAs, are a type of ISA that allows you to save up to a certain amount tax-free each year. They are similar to regular savings accounts, but with the added benefit of tax-free interest. The maximum amount you can save in a cash ISA each year is subject to change, and the amount varies depending on your age and other factors.
Cash ISAs are not specified investments, stocks and shares ISAs (and other ISA types) are, according to the book.
What is a regulated mortgage contract?
Are they specified investments?
Regulated mortgage contracts are a type of mortgage that is regulated by the Financial Conduct Authority (FCA) in the UK. They are mortgages that are secured against a borrower’s home, where the borrower is an individual or a trustee of a trust and the property is located in the UK. Regulated mortgage contracts offer a higher level of consumer protection than unregulated mortgages, as lenders are required to follow certain rules and guidelines when offering and managing these mortgages.
Yes, they fall under the category “none of these”
