Extra cue cards

Question 1

Explain the workings of a current account

Operation, payment methods and features of a current account

Answer 1

A current account is a flexible bank account allowing both saving and borrowing.

Payment methods are cash withdrawals, debit cards, regular payments to third parties, online and mobile payments and cheques. Current accounts may:
* give the flexibility to pay into the account or withdraw at any time
* place a limit on withdrawals (notice accounts)
* have an overdraft facility.

Question 2

Describe the operation of an asset-based security.

Answer 2

An ABS is a bond backed by a ring-fenced pool of assets, normally loans (eg mortgages, car loans). The payments due from customers on these loans are repackaged into the form of a bond, which is then sold to investors.
Investors are repaid through interest and capital payments from the pool of assets.
ABSs are normally issued in tranches (often called A, B and C) with different yields and different levels of risk. Tranche A is the most secure and attractive to institutional investors.
* ring-fenced means independent of the issuer’s other assets and thus protected from other financial risk.

Question 3

Outline how the following types of customer needs can be identified, giving examples of each:
* logical
* emotional

Answer 3

Logical needs are determined after (PEBA) a careful analysis and prioritisation, followed by fitting products to those needs. The needs may be identified as:
* maintaining a current lifestyle
* protection, eg against death, loss, illness, accident
* accumulation for a known purpose, eg retirement income, mortgage repayment
* accumulation for a purpose as yet unknown, from remaining disposable income or capital.
This may involve taking advantage of tax-efficient arrangements.

Emotional needs are identified by considering an individual’s feelings. This
may result in an individual getting what they want rather than what they truly need. Examples of emotional needs are:
* to generate more income in retirement than is actually needed
* to avoid the guilt of not protecting dependants

Question 4

Outline how the following types of customer needs can be identified, giving examples of each:
* logical
* emotional

Answer 4

Logical needs are determined after (PEBA) a careful analysis and prioritisation, followed by fitting products to those needs. The needs may be identified as:
* maintaining a current lifestyle
* protection, eg against death, loss, illness, accident
* accumulation for a known purpose, eg retirement income, mortgage repayment
* accumulation for a purpose as yet unknown, from remaining disposable income or capital.
This may involve taking advantage of tax-efficient arrangements.

Emotional needs are identified by considering an individual’s feelings. This
may result in an individual getting what they want rather than what they truly need. Examples of emotional needs are:
* to generate more income in retirement than is actually needed
* to avoid the guilt of not protecting dependants