Financial Services Regulation & Ethics Flashcards
Income Tax Rates
0% on saving income up to 5K
Basic 20% 0-37,500
Higher 40% 37,501-150,000
Additional 45% 150,001
Dividend Allowance Tax Rates
Dividend Allowance 2K
Basic 7.5%
Higher 32.5%
Additional Rate 38.1%
Trust - standard rate band 1K
Rate applicable trusts?
Dividends 38.1%
Other income 45%
Dividend
Share of a companies profits paid to the shareholders, any not distributed must be re-invented
Main Personal Allowances & Reliefs
(reduce allowance of £1 for every £2 of net income above 100K
Income Limit for PA = 100K
PA Basic = 12.5K
Marriage Allowance 1,250K
Rent a room scheme = 7.5K
National Insurance Earnings
lower earnings limit £120 per week
primary threshold £183 per week
upper earnings limit £962 per week
Capital Gains Tax
individuals basic rate limit 10% above basic rate limit 20% surcharge for residential property 8% trustees and personal rep 20% business asset disposal relieve 10% lifetime limie 1 mill
Pensions
lifetime allowance 1,073,100
annual allowance 40K
Money purchase annual allowance 4K
Inheritance Tax
transfers made on detail up to 325K
excess over 325K - 40%
reduced rate for charitable contributions 36%
chargeable lifetime transfers to trusts 20%
Refer to transfers and gifts etc for reduced tax charge within 7 years of death
Corporation Tax
standard 19%
Value added tax
standard 20%
annual registration threshold 85K
Deregistration threshold 83K
Stamp Duty on Land Tax
125K = 0% 125-250K = 2% 250-925 = 5% 925-1500K = 10%
Social Security Benefits
Child first 21.05 subsequent 13.95 guardian allowance 17.90 Basic state pensions single 134.25 married 268.50 single tier state pension pension credit bereavement support payment
Role of financial services in the UK
Means for people to save and invest their wealth
Allows for savings to be transferred to broader economy through lending and investment
Allows people to transfer risk
Allow organisation to transfer risk
Shares or Bonds
attracting a return through dividends and or growth or bonds which are loads to companies and attracting return through interest and capital gain
Diversify
investor spread investment between different asset classes which do not go up or down at the sam time
Syndicates
specialist risks accepted by syndicates of wealthy investors who put up own wealth against risk
Structure of UK financial service industry (4 elements)
FIRMS Banks & Building societies Life Insurance Companies Financial Intermediaries Multi-distribution organisations MARKETS REGULATORS INFRASTRUCTURE
Core Service
offering of current accounts, instant access deposit accounts offering better interest with limited access.
Loans and mortgages
wills & executorship
Indirect Service
stockbroking, portfolio management, insurance and pension
Markets
2 primary forms of market apply - over the counter or
exchanged traded
Regulators
Financial policy committee (FPC) of the bank of england
The financial conduct authority (FCA) - the sales and marketing financial products
The prudential regulatory authority (PRA) - division of the bank Eng which covers the prudential regulation of banks and insurers
The pensions regulator (TPR) - workplace pensions
Infrastructure
CHAPS & BACS - members of association of payment clearing systems (APACS) and controlled by payment systems regulator (PSR)
European Union - European Central bank (ECB) & 3 regulatory bodies known as European supervisory authorises (ESA)
european banking authority (eba)
european securities and markets authority (esma)
european insurance & occupational pensions authority (EIOPA)
EU Regulators
European systemic risk board (ESRB) = PRA
European systems of financial supervision (ESFS) = FCA
consistent protection of consumers
Gobal Money Laundering organisation
Financial Action Task Force (FAT)
Role of UK Government
Fiscal policy - spending / borrowing and taxation
Monetary policy - control of interest rates and exchange rates (interest rates in uk set out of gov control - set by monetary policy committee (mpc))
exchange rates set by supply and demand
What UK Gov Can control - 5 factors
Spending - stimulate economy
Borrowing - national savings and investments and gilts
taxation - how raises funds for services and control
The welfare state - NHS
Regulation and law making - created the financial services and markets act (fsma) 2000 and financial services act 2021
Consumer needs
Wants - Gots = Needs
Fact Finding
hard facts - just are
soft facts - subjective, how you feel, attitude to risk
Suitability letter generated for the customer setting out exactly why product is appropriate.
Life Stages
Vulnerable / larger years - high mortgage, low savings, children = protection & emergency funds
Relaxed / AGA years - more disposable income, ill health = protection my start overtake life insurance, saving for retirement
Anxious / Saga years = long term care take over life and health insurance, pass assets to next get. IHT planning
Gaga years = long terms care takes priority
Annual Review
ensure plan remains appropriate to their needs and circumstances not changed for example
- marriage or divorce
- birth child / adoption
- change job change in legislation
- other major event (brexit)
PIMPSI model
Protection - life insurance in the main income
Income Protection - looking at protecting income against the effect of long term illness
Mortgages - ensure best deal obtained
Pensions - savings for retirement
Savings and investments - finally considering broader range of savings and investments
Protection
protecting who would be financially impacted by death of customer - dependants, spouse, creditors, funeral exp, inheritance tax provision (life insurance)
Protection life insurance solutions
Temporary insurance (may happen) or Whole of life assurance (will happen) - runs for life of insured person pay out on death
Forms of temporary insurance
level term - set and remain, if no claim made policy end with no value
decreasing term - sum assured decreases each year, either linear or tied into mortgage (mortgage protection policies)
increasing term - cover increasing needs
Family income benefit - set income over period and dependant when die in that period it will pay
Convertible term - level with option to convert to WOL or endowment (savings plan) with no need for further medical evidence
Renewable term - right to renew at end of term
Gift inter vivos - cover the IHT liability on a gift (larger gifts as taper relief)
3 forms of WOL
non profit (most expensive)
with profit
unit linked - linked to unit fund rather than profit fund (min cover - savings plan / balanced cover - middle growth estimate / maximum cover - normally renewed after 10 years)
Endowments - bad publicity since inadequate to repay outstanding mortgage
form of saving plan usually associated with mortgage - used to provide life cover and repay mortgage on death
Basis of life cover
Own life
joint life first death
joint life second death / joint life last survivor
life of another
Use of trust
owner of policy (settlor) puts policy in hands of people trust (trustees) look after proceeds for benefit of others (beneficiaries)
Income Protection - several solutions
likelihood of morbidity (illness without death)
Income Protection
Critical Illness Cover
Payment Protection Insurance / Mortgage Payment Protection Insurance
Accident Sickness & Unemployment cover
Long term care insurance
Income Protection
unable to work due to sickness or accident - limited to % pre-incapacity earnings (60%) - deferred period - shorter deferred makes more expensive - known as permanent health insurance
Critical Illness Cover
lump sum when diagnosed usually provided they live for a period after diagnosis - often used alongside IP - could cover outstanding mortgage balance - guaranteed or renewable (cheaper) premiums
Payment Protection Insurance PPI / Mortgage Payment Protection Insurance MPPI
Short term - loan repayments or mortgage payments for limited term (2 years) in illness or redundant
Accident sickness & unemployment cover
pays out an ongoing income stream for limited time in sickness or unemployment
Long term care insurance
either pre-funded or immediate needs - pay out sum assured to cover care costs = exchange of lump sum for an income for life
Could also have private medical insurance PMI - best to have full underwriting process rather than moratorium underwriting which excludes any condition where seen a practitioner
Mortgages - borrow money from provider and assign property to lender as security
2 most basic forms
Capital and interest repayment - pay back capital over length of term (early years more made up of interest)
Interest only - pay interest and repay full capital at the end of the term - popular with use of endowment however failed thus only possible where clearly defined plan for repayment
Interest rate options
Variable - changed by lender in connection with BOE base rate
Fixed - set for a fixed period, fee upfront & penalties for repaying during fixed
Capped - variable but not above pre-fixed level
Tracker - variable and tracked the BOE (usually set % above base rate)
Discount - variable with discount for fixed no. years
Offset - linked to deposit account with interest only charged on net debt
Foreign currency - loan not in sterling
Sharia Compliant Vehicles - as borrowing against value of property not permitted in islamic faith - plans in line with sharia law
Diminishing masharaka - buy house and sell back in slices
Ijara - payment put to one side and then used to buy the house
usually escape stamp duty and land tax
Buy to let
second property - measures introduced to make less attractive higher stamp duty and CGT
BTL mortgages not currently regulated by FCA
Equity Release - all wealth tied up so ability to take equity out of property for own use
Home reversion - all or part of property sold to provider for reduced value (rent free for life)
Lifetime mortgage - loan not repayable until dies, until money drawn not interest due - pre approved only
Shared appreciation mortgage - legacy plan, money lent in return for % of any future increase in property, effectively scrapped as house prices increased
Sale & rent back
buy at reduced value, unlike home reversions there is no lifetime tenancy
Structured vs Unstructured debt
structured - fixed term and payments for length of term (car loan)
Unstructured - payment vary during term and overpayments may be made (mortgages)
Pensions - retirement planning (deferred gratification) - considerations
Age - when?
Income - current (and expenditure thus revealing affordability) and future income
Family situation - dependants?
Lump sum needs - capital needed in retirement?
Current arrangements - workplace pension over and above state pension?
Pension Solutions
State Employer Auto-enrolment workplace pension Personal Pension Group personal pensions / group stakeholder pension
State pension
changes in april 2016 with intro of single tier pension - NI to be paid for 35 years to recieve £175.20 per week in 2020/21
- reduced pension avail for 10 years contribution
- prior old system
- age equalised at 65 for men and women in 2018 and now rising to 66 oct 2020
Employer pension
subdivided - defined benefit or final salary pension and defined contribution or money purchase schemes
- defined benefit places risk on employer to make up additional
- risk of poor investments
Auto-enrolment workplace pension
gov legislation all employers have to offer workplace pension to staff
- enrol 22 and up earning more than 10K per annum
- employer pay 3%of band earnings
- employee pay 4%
- HMRC 1%
- 3 large providers Nest, Now:pensions and people’s pension
Personal pensions
individual defined contributions
- receive tax relief at basic rate (additional claimed by HMRC)
- retirement, fund used to buy annuity (an income for life) or income taken directly
- another form stakeholder pension scheme (personal pensions regulated charges access and terms)
Group pension
collection of personal pensions / stakeholders nationally grouped to create look of employee pension without administrative hassle
Savings (regular small sums) & Investments (lump sum)
Term crucial - short (1-5) medium (5-15)
Deposit based saving products
Cash ISA - up to 20K per person in TY
Fixed term deposits longer & better return
High interest accounts - promotional high interest accounts
National Savings and investments - range of cash products offered by gov, lower rates, some tax free (premium bonds, ISA, certificates PIC), short term for emergency funds 3-6 and form diversified portfolio, do not keep pace with inflation so offer poor value long term
Direct Investments
Directly investing into real assets - superior returns over and above cash
Suit diff needs with income production, capital gain or both
Equities
part ownership of the capital of company can entitle owner to share of company know as dividend and capital growth through increase in value of share price
Fixed Interest
known as bonds - loans made by investor to government, comp or local authority
Borrowing pays fixed rate of interest known as coupon based on issuing or nominal price of the bond
once issues the bond can be traded for more or less the normal price
Also fixed interest security issued by building societies known as PIBS - permanent interest bearing shares
Property
Residential and commercial
Indirect Investments and wrappers
pooling funds of many investors = possible to access fund managers expertise that would otherwise be too expensive and benefit of diversification
Pooling achieved -
OEICS / UNIT TRUSTS - collective invest funds in range of assets (some passive track an index with no fund manager stock selection / others active with)
INVESTMENT TRUSTS - can borrow money for investments - higher risk
LIFE & PENSION FUNDS - tax wrappers around collective funds so investor benefit from tax treatment
ISAs - up to 20K, cash or equities, just a wrapper around invest
JUNIOR ISAs / CHILD TRUST FUNDS - same tax breaks as standard ISA lower investment limits
IHT & TAX PLANNING
IHT paid on value of estate on death or certain lifetime transfers
- each person has nil rate band of £325K - pass on no IHT
- no tax due on transfer assets between spouses
- if all left to spouse and they die, nil rate unused = 2 nil rate bands to offset
Additional nil rate band April 2017 where part estate made up of property
2020/21 = £175k
though drawn at rate if £1 for each £2 of net estate over 2M
- qualify prop must be left to direct decendants
- if estate exceeds nil rate band IHT due at 40%
- if 10% net estate gifted to charity, gift exempt and balance estate taxed at reduced rate of 36%
Options mitigating IHT
-Making exempt gifts
- annual gift allowance 3K
- small gift allowance £250 - many people you like
- gifts from surplus post tax income (made as regular pattern of giving)
- gifts in respect to marriage 5K from parent, 2.5K from grandparent, gg, 1k from anyone else
- gifts to charities, political parties or national benefit, museums
- Making potentially exempt transfers (PET)
gift one person to the other provided donor survives 7 years from point of gift - if die then gift fails and comes back to impact nil rate band
Chargeable Lifetime Transfers
Gift to a trust where value of one person estate falls but there is no corresponding increase in value of someone else’s estate.
- if cumulative total over 7 year window exceeds nil rate band = taxed at 20%
insuring the liability
right money in right hands to pay IHT bill via whole of life assurance WOL
- broader tax planning gen involves use of all personal tax allowances = pensions, ISA, CGT allowance
Debt management & budget planning - expenditure broken into 3
EXPENDITURE Essential - rent, mortgage, utilities Regular - internet Discretionary - luxuries DEBT care when looking to release equity from home - look at remortgage lower interest or extend term of loan
State Benefits - such as state pension
Paid by Department for work and pensions (DWP)
Grouped in to 3 headings:
- means tested (income based) those have least
- contribution tested (NIC)
- needs tested - level of need
Universal Credit - means tested but not taxed
A cap has also been introduces for overall level of all benefits (16-64)
replaces several legacy benefits - new system see single payment of £342.72 (under 25) and £409.89 (over 25) - childcare, unable to work, paid like a salary
State Sickness Benefits
- Contribution based ESA (taxable)
- income based - replaced by universal credit
- 13 week assessment, receive level equiv to JSA
personal independence payments pip & disability living allowance dla
tax free - help with personal care
attendance allowance aa
based on need - not taxed
state benefits & income protections
personal independence payments, disability living allowance and attendance allowance are not means tested nor NIC tested - not impacted by income protection
State bereavement benefits
initial lump sum of 3.5K & ongoing income 18 months
- tax free
- widowed parent allowance - claimant have children
- bereavement allowance paid to spouse or civil partner over 45
Housing Costs - will fall under universal credit
- housing benefit
- support for mortgage interest SMI
Other benefits
- child benefit (below 50K)
- working tax credit and child tax credit
- jobseekers allowance
- pension credit (saving credit and guarantee credit
Fact Finding
- Wants - Gots = Needs (fact finding)
- Soft Facts - Subjective (thoughts and attitudes)
- Hard facts - true and accurate data
- Risk - attitude (soft fact) and capacity for loss (hard fact)
- Life stages
- Reviews - Change of situation
