Serving the retail customer

Question 1

What additional elements make up the hierarchy of needs for consideration when giving advice to a client, following Budgetingand Managing Debt?

Answer 1

Borrowing, including house purchase
Protection
Retirement Planning
Saving and Investing
Estate and Tax Planning

Question 2

What are the two key pieces of information you need to determine a clients budget for spending on financial services?

Answer 2

Income and expenditure with a full breakdown of each

Question 3

Why should an adviser exercise caution in recommending debt consolidation?

Answer 3

Debt consolidation companies often charge high fees

Whilst monthly payments may be lower, the overall cost over the term of the loan could be much higher

Clients with a history of running up debts, may continue to do so and result is a more serious problem

If the client cannot service the loan, it may result in higher charges and penalties

If the loan is secured on their property, they may lose their home if they default on payments

Question 4

What is the correct term to describe a mortgage?

Answer 4

The security offered in exchange for a loan.

Question 5

How is the security for a mortgage transferred over to a lender?

Answer 5

By assignment of ownership of the property.

Question 6

What was the impact of MMR (mortgage market review) on the sale on interest only mortgages?

Answer 6

Lenders are now required to check that borrowers have a credible repayment strategy for the loan

Question 7

What are the main features of an Equity-linked mortgage (also known as a SAM - shared appreciation mortgage)?

Answer 7

The lender takes a stake in the equity of the property in exchange for charging interest on a lower proportion of the loan. It may be possible for the borrower to aquire the lenders stake over time.

Question 8

What are the two types of equity release schemes?

Answer 8

Lifetime mortgage or Home Reversion Scheme

Question 9

What are the different types of lifetime mortgages?

Answer 9

Roll-up Mortgage
Fixed repayment lifetime mortgage
Interest Only
Home income plan

Question 10

What is a home reversion plan

Answer 10

The client sells all or part of their home in return for a lump sum or regular income or both. The client continues to live in the property in exchange for a usually nominal rent.

Question 11

What are the two home purchase plans that do not involve interest payments (special interest to the Muslim community)?

Answer 11

Ijara - payments made to a firm & house bought at the end of the agreement
Diminishing Musharaka - payments made buy slices of the firms share until owned. Rent is charged on the outstanding portion and reduces until fully owned

Question 12

What are the risks associated with Mortgage Reduce/rent-back/selll to let schemes?

Answer 12

Clients likely to be paid less than full value of the home
They may have to leave the home at the end of the intial rental period
The could be evicted if they breach the tenancy terms of fall behind with rent
If the firm gets into financial difficulty, the property could be repossessed and the client would have to leave

Question 13

Why does the Government consider that some landlords require FCA protection?

Answer 13

Some are considered to be ‘accidental’ landlords - where they have let out the home due to overseas travel, inheritance, borrowers moving elsewhere, as opposed to those who rent out specifically as part or all of a business

Question 14

What are the types of existing cover a client may have?

Answer 14

Existing insurance
Lump sum benefits from private pensions
employer benefits - sick pay/death benefits
The state - bereavment payments, sick pay, employment and support allowance

Question 15

Which type of loan would you expect to be more expensive in APR terms - a mortgage to buy a house or a loan for a car and why?

Answer 15

The car loan would be a structured loan and therefore;
It is a higher risk loan, with interest rates increased with a higher risk of default
It is unsecured
Interest rates tend to be higher for a structured loan

Question 16

How does a family income benefit policy differ from a standard DTA?

Answer 16

The life office will make a series of regular payments (annually or monthly) rather than a one off lump sum

Question 17

How does a convertible term assurance policy differ from both a Increasable or renewable term assurance policy?

Answer 17

A convertible policy can be changed to an endowment or a whole of life policy depending on whether the client needs savings or longer term protection. The others remain essential term assurance policies.

Question 18

What would be the benefit of a whole of life, last survivor policy to heirs?

Answer 18

It may allow them to meet inheritance tax requirements after death of the assured without impacted on the remaining estate

Question 19

What is the impact of a longer deferral period on an Income Protection plan?

Answer 19

A lower premium

Question 20

Why do insurers restrict the level of Income Protection on offer (usually 50-60% of earnings)

Answer 20

So the claimant has an incentive to return to work, therefore avoiding the moral hazard of a claimant taking longer to return to work if they were better off being absent

Question 21

What is the difference between how a life and an income protection policy is assessed?

Answer 21

Life assurance uses ‘Mortality’ - the length of time someone will live
Income protection uses ‘Morbiidity’ - the rate of disease or medical problems

Question 22

What is the difference between income protection and personal accident and sickness insurance?

Answer 22

Personal accident and sickess insurance;
May pay a one off lump sum in addition to regular sums
Term - limited to 1,2 or 3 years with a short period of deferral
A greater range of occupations will be accepted ( limited with IPP)
Premium is likely to be a fixed rather than a % of earnings
Lower cost

Question 23

In addition to repaying a mortgage or loan, Why might a person want a Critical Illness policy?

Answer 23

Provision of private healthcare treatment
Alterations to the home
Purchase of special medical equipment
Income replacement

Question 24

What are the two types of Long Term Care Insurance?

Answer 24

Immediate Care - bought with a lump sum when the care is needed
pre-funded - bought in advance by a monthly premium

Question 25

What is the purpose for which Payment Protection Insurance is offered by Insurance Companies?

Answer 25

to protect mortgages and/or loans

Question 26

What is the benefits cap?

Answer 26

Households that do not work, should not receive more in benefits that the average wage of working households.

Question 27

Why was universal credit introduced?

Answer 27

To streamline the benefits system by bringing together a range of benefits and credits into a single system

Question 28

What is the definition of ‘Means’ tested in relation to state benefits?

Answer 28

An assessment of income and capital to ascertain whether benefits are payable

Question 29

What are the changes to the state pension age?

Answer 29

66 by October 2020
67 between 2026 and 2028
68 between 2037 and 2039

Question 30

What are the general principles of ‘priorities first’ when considering a clients circumstances?

Answer 30

Pay off expensive debts - i.e. credit cards
Protect the family
Have an emergency fund

Question 31

What is the PSA (personal savings allowance) for a basic rate tax payer and a 40% tax payer?

Answer 31

£1000 for basic rate

£500 for 40%

Question 32

What are the main benefits of a pooled investment?

Answer 32

Professional expertise
Spreads risk
Reduced dealing costs
Less admin
Choice

Question 33

Under what circumstances are each of the following policies payable?
Family Income Benefit
Personal Accident Insurance
Income Protection Insurance
Personal Pension

Answer 33

FIB - Payable on death
PAI/IPI - in the event of ill health preventing working
PP - on agreed retirement date

Question 34

What is the residence nil rate band?

Answer 34

Where a parent leaves their home to a direct descendant, a further £150,000 tax free can be taken

Question 35

What are the ways a client can reduce IHT?

Answer 35

organise estate to reduce overall liability, including lifetime gifts and writing property in trust
Providing money to cover any liability such as a whole of life, last survivor policy

Question 36

What are the four main uses for deposit based investments in investment portfolios?

Answer 36

An emergency fund
Provide liquidity
A fund for future investment opportunities
As an asset class for short, medium and long term planning to balance other classes within the portfolio

Question 37

What are the four main approaches to tax planning?

Answer 37

Make use of tax allowances
Choose the most suitable investments for the persons tax position
Choose investments that provide tax free returns
Choose investments that qualify for tax relief

Question 38

You undertake with your client, a budgeting exercise and this shows that outgoings exceed his income by a significant amount. What initially is the most suitable course of action?

Answer 38

Refer them to the CAB or National Debt helpline

Question 39

Jill and Andrew both wish to take out an income protection plan. Andrew is aged 41 and Jill is 34 but the premiums for Jill are higher than for Andrew. Why?

Answer 39

Jill has a higher morbidity risk