Week 2 Flashcards
APR
APR - annual percentage rate; defined under the Consumer Credit Act 1974 to illustrate the “true cost” of borrowing money. Takes into account the falling balance of repayment based advances
EAR
equivalent annual rate; used for calculating the true rate of interest when comparing overdrafts and takes into account that the account can also be in credit
Flat Rate
– the rate with no adjustments for falling capital etc. For example £1,000 at 10%pa would cost you £400pa
Savings- AER
annual equivalent rate; similar to APR but on savings products; takes into account frequency of payment
Savings- Nominal Rate
the “flat rate” rate as above
Saving Account features
Interest rates – introductory rates, stepped rates
Notice period – the longer the notice, the better the rate
Minimum deposits
Restricted access – such as internet based accounts
Interest period – monthly, annually
Covered by the Financial Services Compensation Scheme (see later)
Deposit Accounts
Access – branch or internet? If access is restricted customer expect a higher rate;
Minimum deposit – from £1 to £10,000. Higher the minimum deposit, higher the rate;
Tiered interest rates – more you deposit, higher the rate;
Notice period – longer the higher;
Interest receiving account – deposit or current?
Regularity of interest payments – see Santander
Saving Account Benefits
Can build up small or large lump sums for use as:-
Contingency fund (rainy day money),
Purchase a desire/want,
Deposit for an even larger purchase (house?)
Repayment of debt,
Peace of mind
FSCS Deposits
£85,000 per person per firm (for claims against firms declared in default from 31 December 2010).100% of £85,000. This figure is due to change in December 2015 to £75,000 (100,000 Euro)
FSCS Investments
£50,000 per person per firm (for claims against firms declared in default from 1 January 2010).100% of the first £50,000.
FSCS Home Finance
(e.g. mortgage advice and arranging): £50,000 per person per firm (for claims against firms declared in default from 1 January 2010).100% of the first £50,000.
FSCS Insurance Business; Unlimited
90% of the claim with no upper limit. Compulsory insurance is protected in full
FSCS: General insurance advice and arranging: unlimited
(for business conducted on or after 14 January 2005). 90% of the claim with no upper limit. Compulsory insurance is protected in full.
ISA General
Completely tax free from all forms of tax including Capital Gains, Inheritance and Income tax
Since April 2016 all ISAs are flexible, meanings funds drawn can be replaced with no impact on the ISA limit
ISA
Annual allowance £20,000 from April 17
Can be any combination of savings/stocks and shares ISAs
ISA- Help to Buy
Funds used towards purchase of first residential property
Maximum £1,000 initial deposit and £200pm afterwards
Bonus of 25% of funds maximum £3,000 on property purchase
Lifetime ISA
Ages 18-40, can be used to purchase first home or pension
Bonus of 25% of total pot on purchase of first home or if drawn when >60 yoa.
Current Account Features
Deposit interest Direct credits Easy access – debit card, ATM, internet, direct debit, standing order (what is the difference?) Debit interest Overdrafts Excess charges Return item charges Added Value Accounts.
Traditional Money Transmission Services; Standing Order
A push transaction
Payer in control
Informal, easy to set up
Traditional Money Transmission Services; Direct Debit
Pull transaction
Beneficiary in control
Beneficiary must be licenced – can be withdrawn
Must notify payer if payment changes, if not a variable mandate
Traditional Money Transmission Services: Cheques
Expensive to run
Cheque books issued
Cheque guarantee cards withdrawn 2010
Banks tried to withdraw cheques, but over ruled by government
Traditional Money transmission services: Direct Credit
Useful for wages etc
Bulk payments
Payment Systems
- Cheque and credit clearing (BACS)
Run by and owned by UK banks
Number of cheques in circulation falling dramatically
Banks have abolished the cheque guarantee card system
Also, uses bank giro credits for credit transaction
Amounts for each bank netted at end of each day and settled via the Bank of England.
Payment Systems: Standing Orders, Direct Debit & Direct Credit
Standing orders are known as push transactions, the power is with the payer to amend amount, date etc.
Direct debits are pull transactions, the originator is the beneficiary. All originators must issue an indemnity (UDDIS) protecting users from fraud and misuse. Any amendments to payments, dates etc. must be notified to payer in advance of amendment
Direct Credits – used for payment of wages, salaries, pensions, benefits etc.
Payment Systems: Debit Cards
Now the primary source of payment of consumer/personal transactions;
Card issued at discretion of the bank and cards can be withdrawn if abused;
Each transaction is authorised by the bank and can be declined;
Move from signature based claim process system to chip and pin, electronic system.
Trader/beneficiary credited automatically, on line. System known as EFTPoS – Electronic Funds Transfer at Point of Sale
Contactless, Apple Pay etc.
Payment Systems Chaps
Clearing House Automated Payment System Used for large amounts Based in UK (but can be in Euros) Guaranteed payment Same day Practical uses include transfer of house payments by solicitors.
Payment Systems: SWIFT
Society for Worldwide Interbank Financial Telecommunication
Equivalent of CHAPS but for international transactions
Used by brokers, dealers security exchanges.
Faster Payments
Individual to individual
Typically small amounts
Beneficiary must disclose banking details
Life insurance or Death Insurance? Products available: Term Assurance
Level term Decreasing term Family income Increasable term Convertible (to endowment) Renewable (without further medical evidence)
Life insurance or Death Insurance? Products available: Endowment Policies
With profits NB reversionary bonus
Unit linked
Life insurance or Death Insurance? Products available: Whole of Life
Non profit
With profit
Flexible (unit linked)
Sickness (health) insurance: Income Protection (PHI)
Deferred periods
Paid until return to work
Predetermined % of income (typically 50% - 60%).
Sickness (health) insurance: Personal accident and sickness policy
Similar to income protection, except:-
Lump sum if loss of limb/eye
Shorter deferred period
Defined term
Sickness (health) insurance: Private Medical Insurance/ Critical Illness Cover
Private Medical Insurance
Access to private health facilities, appointment on demand, shorter waiting times, etc
NB does not cover per-existing conditions.
Critical Illness Cover Lump sum payable on diagnosis of specified diseases Such as? Heart attack Stroke cancer.
Payment Protection Insurance
Offer cover for one or more of:-
Accident
Sickness
Unemployment
Known as ASU policies.
Connected to debts such as loans, credit cards or mortgages.
Deferred periods
Maximum payout term
Self employed and fixed term employees offered limited cover.
Morbidity
The likeliehood of contracting a serious illness during the term of the policy.
Statistically women are more likely to contract such diseases so the cost of such policies are more expensive to women.
Mortality
The likeliehood of dying during the term of the policy.
Statistically men die younger than women so life insurance is more expensive for men than women.
Insurance Bonds
Insurance companies can look to reduce their potential exposure by taking out morbidity or mortality bonds.
Contract Uberrimae Fidei
Means of the utmost good faith
If one party to a contract does not disclose ALL material facts at the outset the contract is voidable at the option of the injured party
Unsecured Lending Products
Overdraft
Credit card
Term loan
Secured lending
Basically, when impact of default is high (NB not when risk is high as these loans should be declined)– such as:
loan is large
used to buy a specific asset – such as a house
repayment is from a specific asset
Typically a secured loan will be offered at a lower rate than unsecured lending (as the risk is seen as low), but there may be additional costs involved, which could be added to the loan.
Secured facilities
Loans
Overdrafts
Mortgages- Buy to let/self build
Sundry Lending Services
Probate loans
Bridging loans
student overdrafts
Investment services- Gilts
Gilts – government securities, loans to the government. ’Perceived as having no risk of default’
Investment services- Bonds
loans to companies, paid annual interest and return of capital. Often secured against company’s assets
Other factors in investment decision
Payment (lump sum/monthly) Access to money Cost and charges Tax efficiency Reputation of provider.
Types of bank fraud
Internal fraud
Staff Fraud (outside of this unit).
Customer Fraud
External fraud
Non- customer fraud
Customer Fraud
Largely around the application process – application to open an account (identity theft) or application for facilities, typically lending facilities
Historically have been largely dominated by card fraud, cloning, unauthorised usage etc.
Bank protected by robust procedures, some automated, some manual. See risk unit, three lines of defence etc.
Non-customer originated fraud- APPS
Where the customer actually withdraws/transfers the funds completely within the mandate conditions. Increased by 71% in H1 2021.
Banks attempts to prevent APPS
Staff training to recognise possible APPs in branch or over the phone;
On-line automated warnings when new beneficiaries created by customer;
Delayed processing of unusual, initial or large transactions until customer confirmation received.
Ending the Banker/customer relationship - Reason for account closure
Death Mental Incapacity Bank discretion (credit account) Default Bankruptcy
