Module 1

Who is the head of the Treasury?

Chancellor of Exchequer

Who decides UK interest rates in the BOE and how often?

MPC - 8 times a year

Who makes decisions for the PRA and where do they sit?

PRC within the BOE

What do the FPC do and where do they sit?

They focus on macros and systemic risk. They sit within the BOE

What are the roles of financial services in the UK?

• a means to save and invest

• allows savings to be transferred to the broader economy (banks using savings for loans)

• allows people to transfer risk through insurance

• allows firms to transfer risk through reinsurance

What are the 4 components that make up the structure UK financial services?

• Firms

• Markets

• Infrastructure

• Authorities

What do the Competition and Markets Authority do?

• investigate mergers to ensure they don’t reduce competition

• take actions on businesses/people for anti-competitive behaviour

• protect consumers from unfair practice

Who are payments overseen by and who regulates them?

Overseen by BOE and regulated by the PSR

Objectives of the PSR?

• systems are operated in the interests of all users

• promote competition

• promote innovation

Who are the 3 European Supervisory Authorities?

• EBA - European Banking Authority

• EIOPA - European Insurance and Occupational Pensions Authority

• ESMA - European Securities and Markets Authority

Who is the EU version of the PRA?

ESRB - European System Risk Board

Who is the EU version of the FCA?

ESFS - European System of Financial Supervision

What is FSAP?

Financial Services Action Plan - initially set out to create a single EU marketplace

Who is FATF and where do they operate?

Financial Actions Task Force - they operate globally - and oversee global anti-money laundering

What is Fiscal Policy

Government spending, borrowing and tax

Who issues UK gilts?

DMO

What is the most direct way for the government to stimulate the economy?

Increase Government spending

What is QE?

Quantitive Easing - when the government buys back Gilts to inject liquidity

What does the government use taxation for?

• spending on education, health and self defence

• influencing behaviour e.g. tax on alcohol

What is the welfare state?

• State benefits

• Services such as the NHS

What is a sensible order for an advisor to conduct a fact-find?

PIMPSI - Protection, Income Protection, Mortgages, Pension, Savings, Investment

What is PIMPSI?

PIMPSI - Protection, Income Protection, Mortgages, Pension, Savings, Investment

Protection in PIMPSI refers to what? And what types are there?

It refers to protection in the event of death (life insurance).

• Term Insurance

• Whole of life Insurance

In life insurance - what is Term Insurance and Whole of Life Insurance?

Term Insurance - runs for a set period and then ends - tends to be cheaper

Whole of life assurance - runs for life and pays out on death - generally used for expected costs like IHT or funeral

What types of Term life insurance are there?

• Level

• Decreasing term

• Increasing Term

• Family Income Benefit

• Convertible

• Renewable

• Gift Inter Vivos

What is Level Term life insurance?

• term, premium and amount insured all defined at outset

• policy expires at end of term

What is Decreasing Term life insurance? and what can it be used for?

• term and premiums defined at outset

• sum assured decreases yearly - can be linear or tied to a loan/mortgage

• can also be know as mortgage protection policies (repayment mortgages only)

What is Increasing Term life insurance?

• term and initial amount defined at outset

• amount insured and premium increase yearly - by a set % or inflation

• used to cover increasing needs

What is Family Income Benefit life insurance?

• a form of decreasing term assurance

• a set term (usually until retirement)

• will pay a yearly set income for the remainder of the term

What is a Convertible Term life insrance?

a level term insurance offering the option to convert to Whole Of Life or Endowment

What is a Renewable Term life insurance?

allows you to extend your policy for another fixed period at the end of its term without undergoing new medical underwriting

What is Gift Inter Vivos?

a specialist type of decreasing-term life insurance designed to cover the Inheritance Tax (IHT) liability that arises if you pass away within seven years of giving a large lifetime gift

What types of Whole Of Life assurance are there?

• Non-profit

• With-Profit

• Flexible

What is Non-Profit Whole of Life Assurance?

• premium is defined at outset

• payout on death is fixed and guaranteed

• most expensive form

What is With-Profit Whole of Life Assurance?

• a basic insured amount is defined at the outset

• “reversionary bonuses” are added by the insurer

  • these come from company profits

  • once given they cannot be taken away

  • added to the insured amount over time

• your premiums are added into a pool and invested (stock, bonds, property etc)

• on redemption there may be “terminal bonuses” based on fund performance

What is Flexible Whole of Life Assurance?

• similar to with-profit assurance

• client can adjust their premiums, sum assured and investment funds as circumstances change

• aka “unit-linked fund”

In life insurance, what is a unit-linked fund?

where your premiums contribute towards an investment fund (“with-profit insurance”)

How does an Endowment work?

An endowment policy is primarily a type of life insurance that doubles as a savings or investment vehicle.

Premiums paid are split:

• 1 portion to pay the interest-only part of the loan

• Another portion pays into an investment fund

The intention is the investment portion pays off the outstanding capital on maturiy.

What types of Endowment are there?

• Mortgage

• Savings Endowment

• Friendly Society Savings

What is the contribution limit on a Savings Endowment?

£3600 per year

What is the contribution limit on a Friendly Society Savings Endowment?

£270 per year - or £25 per month

In regards to Life Insurance - who can be covered?

• Own life

• Joint life first death

• Joint life second death

• Life of another

What is a Trust in regards to life insurance?

This is where the owner of a policy (settlor) puts the policy with a Trust (trustees). The trust then distributes the proceeds to the beneficiaries on redemption.

This is good to use for most life policies.

What are the benefits of using a trust with a life insurance policy?

On redemption:

• there will be no probate delays

• there is no IHT payable as the proceeds are not paid to your estate

What is the difference between Mortality and Morbidity?

Mortality is death

Morbidity is illness

What is an income protection policy?

• pays an ongoing INCOME

• pays if unable to work due to sickness/accident

• usually maximised to pay 60% of salary to incentivise work

• “deferred periods"‘ before payouts starts, options are: 4,8,13,26,52 weeks

• insurer cannot cancel plan

• designed to be a LONG-TERM policy

What are the deferred periods of an Income Protection Policy?

4, 8, 13, 26, 52 weeks

What is Critical Illness Cover?

• pays a LUMP SUM

• pays if diagnosed with 1 of a number of specified illnesses

• usually pays after you live through a specified period (usually 10-14 days, sometimes 28)

• different from income protection and sometimes used alongside

What are the premium types for Critical Illness cover?

• Guaranteed premiums i.e. set for life

• Reviewable - will be base on past claim. These generally start cheap and get more expensive as you get older

What is PPI / MPPI?

• will pay loan / mortgage payments for a limited term (up to 2 years)

• pays if you are ill or made redundant and cannot work

• Short-term policy

• Normally has a maximum deferred period of 60 days

What is Redundancy Protection?

• pays out monthly income (normally up to 70% of earnings)

• does not pay if voluntary redundancy

• short-term policy (usually 12-24 months)

What is Personal Accident and Sickness cover?

• pays out a lump sum OR income OR both

• pays if unable to work due to accident or illness

• designed as short-term policy, with a short deferment up to 14 days

• also pays out a lump sum in the event of specific injuries e.g. going deaf

***often used to cover the deferment period of the longer term Income Protection policy***

What policy is often used to cover income expenses whilst you are in the deferment period of activating an Income Protection Policy?

Personal Accident and Sickness Policy

What is an Accident, Sickness and Unemployment policy?

• pays income for a limited period (it is a short-term policy)

• similar to Accident and Sickness policy, but also includes involuntary unemployment

• often used to cover the deferment period of an Income Protection Policy

What are the 2 type of Long Term Care Insurance?

• Pre-funded

• Immediate needs

What is a “pre-funded” policy of Long Term Care Insurance?

• pays a regular income to cover care home / nursing fees

• pays if you cannot perform activities of daily living (ADL), such as washing, dressing, eating

What is a “immediate needs” policy of Long Term Care Insurance?

• if you already need care

• you pay a lump sum to the provider

• they provide regular income to your registered care provider - for the rest of your life

In regards to PMI - some plans undertake a full underwriting process - what do others do?

“moratorium underwriting’.

This excludes some things from cover.

e.g. if you see you doctor about your knee - even if all turns out to be fine - it could mean anything to do with your knee is excluded for a set time (e.g. 2 years)

For life insurance policies - is there a difference in premiums between men and women?

No - all should be charged on a unisex basis

What is a repayment mortgage?

• a mortgage where capital and interest are paid over the term, leaving you mortgage free at the end

What is an interest-only mortgage?

a cheaper mortgage where you only pay the interest and need to find a means to pay off the capital at the end

What insurance is sensible to have alongside a repayment mortgage to cover the event of death?

Decreasing term

What is the Mortgage Market Review?

It was an FCA regulatory overhaul of mortgages - making it only possible to get an interest-only mortgage where there is a clear plan to pay off the capital

What mortgage interest rate types are there?

• Variable

• Tracker

• Fixed

• Capped

• Cap and collar

• Discount

• Offset

• Green Foreign Currency

What is the difference between a variable and tracker mortgage?

Variable - the lender chooses the rate which is usually connected to the BOE base rate

Tracker - tracks to the base rate by a set %

What is a discount mortgage rate?

a variable rate with a discount - usually only for a certain period

What is an offset mortgage?

a mortgage that is linked to your savings account.

• Instead of earning interest on your savings - the amount saved is deducted from your mortgage debt.

• You only pay interest on the net mortgage amount

What is a green mortgage?

rewards buyers of energy efficient homes (normally new-builds), with a lower rate and/or cash-back

What is an Ijara mortgage?

• An Islamic mortgage.

• the provider buys the house

• you pay the provider rent

• at the end of the term the rent payments are used to buy the property

What is a Diminishing Musharaka mortgage?

• an Islamic mortgage

• you buys the house jointly with the provider

• slices are then sold to the buyer until full ownership

• the buyer pays a rent on the provider’s share

What is the difference between consumer buy-to-let and business buy-to-let?

business buy-to-let is not regulated, whereas consumer is

What are the 2 main types of Equity Release?

• Home Reversion

• Lifetime Mortgage

What is the minimum age for Equity Release?

55

What is Home Reversion Equity Release?

• all or part of the property is sold to a provider for a reduced value

• customer gets the right to live in the property rent-free for life

What is a Lifetime Mortgage Equity Release?

• a mortgage designed to run for life

• the loan is only repayable when the customer dies or leaves for long-term care

What are the interest options for Lifetime Mortgage Equity Release?

• Fixed

• Interest-only

• Roll-up

• Drawdown

What is Fixed interest in regards to Lifetime Mortgage Equity Release?

• customer gets income / lump sum tax-free. Any equity owed if repaid on sale of the house.

• essentially a loan against the house with a fixed rate.

• most common type

What is interest-only interest in regards to Lifetime Mortgage Equity Release?

• a loan against the house where only interest is repaid

• lump sum gets received

• interest-only repayments can be fixed or variable

• the balance is repaid on sale of the house

What is roll-up interest in regards to Lifetime Mortgage Equity Release?

• a loan against the house

• interest payments do not get paid and instead roll up

• all is paid off when house is sold

What is Drawdown interest in regards to Lifetime Mortgage Equity Release?

• can be used with fixed, roll-up or drawdown types

• no lump sum is received

• instead, you only take what you need

• benefits from less interest being due

What are important considerations with Equity Release?

• is there a no negative equity guarantee?

• receiving money could affect your eligibility to state benefits

What is Share Appreciation Mortgage?

• aka equity-linked mortgage

• you get a reduced rate or receive a lump sum

• in exchange for giving up a % of future increases in the property value

• not really used now as bad value for customers

What is sale and rent back?

• for borrowers who are in trouble

• provider buys the property at a reduced value and rents it back

• fixed-term tenancy - usually at least 5 years

What is the different between structured and unstructured debt?

• Structured debt: a fixed term loan with fixed repayments. e.g. a car loan

• Unstructured debt: payments may vary, and overpayments can be made. e.g. mortgages