The Advice Process Flashcards
FCA Principles for Business
Ethical Principles for Ethical Advice
Priciple 2: Skill, care and diligence promoted in all transactions
Principle 3: Management and control, all firms must organise their affairs reasonably and effectively with adequate risk controls in place
Principle 6: Treating customers fairly at every stage of the sales process
Principle 7: Communications with clients must be in the correct order, risk disclosure & cost disclosure must be communicated
Order of ethical communication priorities
Pre-sales
- Conduct risk
- Design of product, sales & marketing
Point of Sale and Post Sale
- Treating customers fairly
FTOC
Since Jan 2009 the FTOC has become part of the regulators main supervisory assessments
FCA outlined outcomes
1) Consumer confident that they are being treated fairly
2) Product is prepared adequately for the proposed client group
3) Clear info provided at all stages of the sales process
4) Advice given reflects client circumstance
5) Products perform as the customer is led to believe
6) No unreasonable barrier for the client
+ making a claim
+ switching product/provider
+ making a complaint
Complaints must be recorded and sent to the FCA every 6 months
MMR
- Distinguishes Advice/Info only
+ Advice is any verbal communication - Strict rules on affordability
- No Self-Certification
- Lenders now responsible for interest only borrower repayment vehicles
- Mortgage advisors need full qualification
Information Gathering
Commencement of loan agreement \+ application form completed Relevant Information collected at fact find \+ detailed questionnaire Fact find determines affordability \+ verifying income & expenditure Take into consideration upcoming changes \+ divorce or additional child \+ changes to interest rates or cost after discounted period
Personal Details Required
- Lenders cannot discriminate
- Basic condition is UK residency
- Can’t discriminate based on nationality
- Children 17+ not party to the mortgage
Employment & Income
- Lender looks at income over 3-5 yrs in sales with commission and bonus’
- Self-employed - Nature of the business, net profit and 3 years of self-assessment
- Lender will make sure they are not drawing more than the company net profits
Expenditure
Lender looks at
- Existing loans & name of the lender
- Credit checks for CCJ’s & Bankruptcies
+ forms a credit assessment
This is to check that their first security (the borrower) is of sufficient standing
Lender requirements
Underwriting process looks at - Size of the loan - LTV ratio - Repayment method - Insurance - Frequency of payments - Anyone over 17 residing These fields requite a declaration from the borrower, signed and dated
+ Lender implements a non-warranty disclaimer
- agrees price is reasonable but can’t give any guarantees
+ must advise that false information can result in prosecution for mortgage fraud
Borrowers Capacity
MMR requires strict affordability assessments for everyone.
Previously it was calculated by multiples of earnings usually:
3x Higher earner & 2x lower earner if joint borrowers
Since MMR affordability takes into account borrowers expenses as well
Net Disposable income / The lenders national rate x 1000 = Max loan size
The proposed mortgage shouldn’t exceed a specified portion of the net income e.g. 85%
- can be flexible with upward career paths like Dr
- additional income can be used as part of the assessment e.g. child support
- lender will check for income sustainability over the long term. includes:
+ overtime
+ bonuses
+ commission
+ certain secured pension income (annuity/final salary)
Employed people different types of income
- Car allowance
- Location allowance
- Mortgage subsidy
- Shift allowance
- Overtime
- Commission & sales related income
- Salary
These may be considered if sustainable
Income Verification - PAYE
- P60
- Payslips (last 3 for non guaranteed income)
- Self assessments
- Employers reference
Sole Trader & Partners Income Verification
Self-employed taxed on net profit (Turnover - Business expenses)
- Lender needs 3 years of self-assessment accounts
- Drawings not to exceed profit
- Net profit is used for income purposes
Set of accounts required
- Profit & loss account
- Balance sheet
Profit & Loss
Profit & Loss = income & expenditure
- Detailed breakdown of expenses is not required if the business is not VAT registered
Gross Profit = gross turnover less raw materials e.g. stock
Net Profit = gross profit less expenses e.g. office
Balance sheet
- Statement of assets & liabilities, includes capital account
- Also need business plan or sales book
- To validate a third party tax comutation, self-assessment return & on account
ON account
Income tax & NIC’s 2&4
Capital Account
- Capital used to start the business & further injections of cash
- If the capital account is reducing this looks bad
Business Borrowing
If securing a loan against the main property for business purposes
- Borrower is assessed on a personal basis unless business income is also required
- The health of the business is assessed
Company Directors
- If the director of a large LTD company they are assessed as an employee
- If they’re a director of a close company they are treated as self-employed
- Lender may seek references from employers, previous banks or other lenders
- Previous mortgage lenders may charge £50 for a reference
Now systems are more centralised references are not always necessary
Close company
5 or few owners & Director owns 20% or more
Lenders will consider business incomes (dividends, retained profits and director loans) in affordability assessment.
Directors Capital Account
This is money owed to the director
- start-up capital
- unpaid wages
- cost of personal items used for the company
- any loans paid to the director
Director Loans
Participator can get a director loan if it’s a close company
When a director borrows: debit
When a director is owed money: credit
LTD company = seperate legal entity
Business assets moved to companies are treated as a credit to the previous owner
Lenders look positively at credit and poorly at debit
Directors can draw from a credit balance as and when they need it
Loans under £10,000 is a tax free benefit in kind
Loans over £10k are taxed as benefit in kind
- tax charge is the difference between the official rate 3% and the actual rate paid on a loan if lower than the official rate.
Cash value is added to income for tax purposes
Director loans need to be paid within 9 months by the end of the accounting period
- any amount outstanding is taxed at 32.5% (25% pre-2016)
Tax charge can be reclaimed from HMRC only when repaid
- HMRC pay it back 9 months later
Bank Statements
Lenders will look at these to see how you manage your finances
- Need to check how many bank accounts they have and where their salary is paid.
Company references
Must be on company letterhead & needs to be dated with stated income and signed by authority, must be an original
- Advisor should check for fakes
Statistical Modelling
The lender uses a formula based on their average clients expenditure.
Statistical modelling uses assumed figures
e.g.
£600 - couple
£125 - per child
Calculating how much a client can borrow
Disposable income is calculated by:
Total income - committed - statistical = disposable income
Affordability is calculated:
Disposable income / notional amount (e.g £6.52) x1000 = amount that can be loaned.
Some lenders will base affordability on 80-85% of their free disposable income. This must be deducted from their disposable income before the calculation.
Income-committed-statistical
x 85% = disposable income
then
Disposable income / notional amount x 1000 = max loan
