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unit 4 - cemap 2 > The Advice Process > Flashcards

The Advice Process Flashcards

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1
Q

FCA Principles for Business

A

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

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2
Q

Order of ethical communication priorities

A

Pre-sales

  • Conduct risk
  • Design of product, sales & marketing

Point of Sale and Post Sale
- Treating customers fairly

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3
Q

FTOC

A

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

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4
Q

MMR

A
  • 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
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5
Q

Information Gathering

A 
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
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6
Q

Personal Details Required

A
  • Lenders cannot discriminate
  • Basic condition is UK residency
  • Can’t discriminate based on nationality
  • Children 17+ not party to the mortgage
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7
Q

Employment & Income

A
  • 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
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8
Q

Expenditure

A

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

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9
Q

Lender requirements

A 
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

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10
Q

Borrowers Capacity

A

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)

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11
Q

Employed people different types of income

A
  • Car allowance
  • Location allowance
  • Mortgage subsidy
  • Shift allowance
  • Overtime
  • Commission & sales related income
  • Salary
    These may be considered if sustainable
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12
Q

Income Verification - PAYE

A
  • P60
  • Payslips (last 3 for non guaranteed income)
  • Self assessments
  • Employers reference
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13
Q

Sole Trader & Partners Income Verification

A

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
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14
Q

Profit & Loss

A

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

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15
Q

Balance sheet

A
  • 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
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16
Q

ON account

A

Income tax & NIC’s 2&4

17
Q

Capital Account

A
  • Capital used to start the business & further injections of cash
  • If the capital account is reducing this looks bad
18
Q

Business Borrowing

A

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
19
Q

Company Directors

A
  • 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
20
Q

Close company

A

5 or few owners & Director owns 20% or more

Lenders will consider business incomes (dividends, retained profits and director loans) in affordability assessment.

21
Q

Directors Capital Account

A

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
22
Q

Director Loans

A

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

23
Q

Bank Statements

A

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.

24
Q

Company references

A

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

25
Q

Statistical Modelling

A

The lender uses a formula based on their average clients expenditure.
Statistical modelling uses assumed figures
e.g.
£600 - couple
£125 - per child

26
Q

Calculating how much a client can borrow

A

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

unit 4 - cemap 2 (3 decks)

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