FSRE Unit 1 Vocabulary

FSRE Topic 1: The UK Financial Services Industry

This topic introduces the structure and functions of the UK financial services industry within the global and European context. It focuses on understanding the roles of various markets and participants, as well as the functions of money.

Asset Classes:

There are four core asset classes commonly used by investors:

• Cash: Low-risk, highly liquid, ideal for short-term needs. Includes current and savings accounts.
• Fixed-interest securities (bonds/gilts): Debt instruments with set interest payments and maturity dates. Sensitive to interest rate changes.
• Equities: Shares in companies offering variable returns via dividends and capital growth. Higher risk but long-term growth potential.
• Property: Investments in physical real estate or indirect holdings (e.g., REITs). Generally illiquid but useful for diversification.

Financial Markets:

• Money markets: Facilitate short-term borrowing/lending (under 12 months). Instruments include Treasury Bills and Certificates of Deposit.
• Capital markets: Medium to long-term investment through bonds and shares. Divided into primary (new issues) and secondary (trading of existing securities) markets.

The Role of Financial Services:

Financial services support economic activity by:

• Helping individuals and businesses manage money, save, and invest.
• Facilitating efficient allocation of resources and risk.
• Providing credit, insurance, and long-term financial planning.

UK and Global Importance:

• The UK is a global financial center, especially London, with leading positions in FX, asset management, and insurance.
• Post-Brexit, UK regulation remains robust and must align with international standards to remain competitive.

Key Market Participants:

• Consumers: Individuals and institutions seeking financial products.
• Providers: Banks, insurers, investment firms.
• Intermediaries: Financial advisers, brokers.
• Regulators and Government: HM Treasury, FCA, PRA, and BoE.

Importance to the Economy:

• Significant contributor to GDP and employment.
• Source of tax revenue and exports (especially services).
• Financial services underpin monetary policy and fiscal operations.

Regulatory Context:

Due to past crises and the complexity of financial products, the industry is regulated by a framework rooted in FSMA 2000, with enhancements from the Financial Services Act 2012 and post-Brexit reforms. This topic sets the scene for understanding how financial services enable the flow of capital, risk management, and consumer protection in both national and international settings.

Topic 2: Financial Institutions and Banking

This topic explains the range and function of financial institutions in the UK market and their roles in the financial system.

Key Institutions:

• Retail banks: Offer current accounts, savings, personal loans, credit cards, and mortgages. Support businesses with accounts, loans, and payment systems.
• Building societies: Mutual organizations owned by members, primarily focused on mortgage lending and savings products. Operate for the benefit of members, often offering better rates than banks.
• Investment banks: Support companies and governments with raising capital, facilitating mergers and acquisitions, and proprietary trading. Do not typically deal directly with consumers.
• Insurance companies: Offer protection products, including life insurers (whole-of-life cover and pensions) and general insurers (motor, home, and travel).
• Credit unions: Community-based, not-for-profit financial co-operatives offering basic savings and loans. Owned and controlled by their members and focus on ethical lending.
• National Savings and Investments (NS&I;): Backed by the government and offers secure savings products.
• Friendly societies: Mutual organizations providing savings and protection plans, often targeted at lower-income members or niche communities.
• Challenger banks: Operate without branches, offering app-based banking with innovative features (e.g., Monzo, Starling).
• Fintechs: Use technology to improve the delivery and accessibility of services like investing or budgeting.
• Wholesale markets are supported by institutions like investment banks and custodians that manage large-scale transactions, including settlement and clearing processes.
• Firms designated as systemically important face stricter oversight due to their potential impact on the financial system.
• Financial groups/conglomerates offer a mix of banking, investment, and insurance services and are supervised as a group to manage risks.

Topic 3: Financial Products and Services

This topic explores the various financial products and services available in the UK financial market and how they meet consumer needs at different life stages and support financial planning objectives.

1. Deposits and Savings:

• Available from banks, building societies, and credit unions.
  • Instant access accounts: offer flexibility but pay lower interest.
  • Notice accounts: offer slightly higher interest if notice is given to withdraw funds.
  • Fixed-term savings: offer fixed interest over a set term but penalize early withdrawal.
  • Cash ISAs: offer tax-free interest up to the annual limit (£20,000 in 2024/25).

2. Credit Products:

• Include overdrafts, personal loans, credit cards, and secured lending like mortgages.
• Key concepts include Annual Percentage Rate (APR), affordability checks, and credit scoring.
• Consumer Credit Act and FCA rules govern affordability and fairness.

3. Protection Products:

• Life insurance:
  • Term assurance: fixed time coverage.
  • Whole-of-life: pays out whenever the insured dies.
• Critical illness cover: pays a lump sum on diagnosis of specified serious illnesses.
• Income protection: provides income if unable to work due to illness or injury.
• Payment Protection Insurance (PPI): once widely mis-sold, is now heavily regulated.

4. Investment Products:

• Collective investments: OEICs (Open-Ended Investment Companies), unit trusts, investment trusts.
• Bonds and gilts: fixed-income securities from corporates or government.
• Structured products: pre-packaged investments with specific outcomes based on underlying assets.
• Tax wrappers include Stocks and Shares ISAs, which offer tax-free capital growth and income.

5. Pensions:

• Workplace pensions: auto-enrolment applies to eligible employees.
• Personal pensions: individual arrangements, often managed via platforms.
• Self-Invested Personal Pensions (SIPPs): allow broader investment choices.
• Annuities: convert pension pots into guaranteed retirement income.

6. Mortgages:

• Types include repayment and interest-only.
• Product types include fixed-rate, variable-rate, and tracker mortgages.
• Mortgage Market Review (MMR) introduced tougher affordability checks.
• Loan-to-value (LTV) ratio and affordability are key considerations.

7. Banking and Payment Services:

• Current accounts, debit cards, and online banking are core services.
• Faster Payments and BACS enable fund transfers.
• Open Banking now allows third-party apps to access customer data securely (with consent).

8. Wrap Platforms:

• Online platforms that consolidate investments, pensions, and ISAs in one place.
• Useful for financial advisers managing multiple products for clients.

9. Financial Planning Objectives:

• Products are chosen based on needs like income, growth, protection, or liquidity.
• The suitability of a product depends on customer risk tolerance, affordability, tax status, and time horizon.

Topic 4: Financial Advice and Distribution

This topic focuses on how financial products and services are distributed in the UK, particularly the distinction between advice, guidance, and execution-only models, and the channels used to deliver them.

1. Advice Models:

• Independent advice: Advisers must consider a wide range of products across the whole market and offer unbiased, unrestricted recommendations.
• Restricted advice: Advisers only consider a limited product range or single provider. Must clearly disclose their restricted status to clients.

2. Types of Sale:

• Advised sales: A regulated adviser makes a personal recommendation based on the client’s circumstances. Subject to full FCA rules under COBS (Conduct of Business Sourcebook).
• Non-advised sales: Also called “execution-only” or “information-only” sales. The firm provides general product info but no personal recommendation. The customer decides what to buy.

3. Guidance vs Advice:

• Guidance includes generic, factual information about products. It doesn’t take into account the individual’s personal circumstances and does not constitute a recommendation.
• Advice requires authorization and includes a personal recommendation tailored to the client. It is a regulated activity under the Regulated Activities Order (RAO).

4. Guidance Providers:

• MoneyHelper (run by the Money and Pensions Service): Offers general guidance on pensions, budgeting, and savings.
• Pension Wise: Free service for people over 50 with defined contribution pensions.
• Citizens Advice: Offers support on a wide range of financial and legal matters.

5. Distribution Channels:

• Face-to-face: Traditional adviser-client meetings. Still widely used for complex needs.
• Telephone: Common in call centres and for general queries.
• Online/Remote: Digital platforms allow customers to research, compare, and buy financial products. Often used by robo-advice firms or execution-only brokers.
• Hybrid models: Combine technology with adviser support (e.g., advice over video call).

6. Trends in Distribution:

• The use of digital advice tools and automated advice (robo-advisers) has increased.
• Regulatory focus has shifted to ensuring vulnerable customers are still properly supported in non-face-to-face channels.
• Platforms and apps are increasingly used for investing and managing pensions.

7. Suitability:

When advice is given, the adviser must assess:

• The client’s needs, priorities, and goals.
• Risk appetite and capacity for loss.
• Existing arrangements.
• Affordability.
• Suitability must be documented, especially when the recommendation involves pensions, investments, or life insurance.

Topic 5: Legal Concepts Relevant to Financial Advice

This topic provides essential legal foundations that underpin financial advice, including contracts, powers of attorney, trusts, and wills. Advisers must understand these to act appropriately and protect client interests.

1. Legal Persons:

• A ‘legal person’ can be:
  • A natural person (an individual).
  • A legal entity (like a company or trust) that has rights and obligations.
• Contracts and legal duties apply differently to individuals and legal entities.

2. Contract Law:

• Financial advice often results in contracts between the provider and the customer.
• For a contract to be valid, five key elements must be present:
  1. Offer – A clear proposal made by one party.
  2. Acceptance – Unqualified agreement to the offer.
  3. Consideration – Value exchanged by both parties.
  4. Intention to create legal relations – Both parties must intend to be legally bound.
  5. Capacity – Parties must be legally competent (e.g., not minors or mentally incapacitated).
• A contract must also be legal in content.

3. Power of Attorney:

• Legal document allowing one person to act on behalf of another.
• Ordinary power of attorney: Used for a specific time/purpose (e.g. temporary illness). Ceases if donor loses mental capacity.
• Lasting Power of Attorney (LPA): Remains in force after mental capacity is lost. Two types:
  • Property and Financial Affairs
  • Health and Welfare
• LPAs must be registered with the Office of the Public Guardian to be valid.

4. Trusts:

• A legal arrangement where assets are held by one party (trustees) for the benefit of others (beneficiaries).
• Types of trusts include:
  • Bare trust: Beneficiary has absolute right to assets.
  • Discretionary trust: Trustees decide how and when to distribute.
• Used in estate planning, tax planning, and protecting vulnerable beneficiaries.
• Trustees have legal duties, including managing the trust prudently and acting in beneficiaries’ best interests.

5. Wills and Intestacy:

• A will sets out how a person’s estate is to be distributed after death.
• Must be in writing, signed, and witnessed by two people (not beneficiaries).
• If no will exists, the estate is distributed under intestacy rules.
• These rules often do not align with the deceased’s likely wishes (e.g. unmarried partners receive nothing unless in will).
• Advisers should ensure clients have valid wills and recommend reviewing them regularly.

6. Legal Risks in Advice:

• Advisers must be careful when acting on behalf of clients (e.g., with vulnerable customers or those using attorneys).
• They must document authority and always act in line with their firm’s compliance framework and legal requirements.

Topic 6: Regulation of Financial Services

This topic explores the UK regulatory framework, its structure, objectives, and how regulators supervise financial services firms to maintain market integrity and protect consumers.

1. The Purpose of Regulation:

• Regulation is necessary due to the complexity of financial services, information asymmetry, and history of scandals (e.g. PPI mis-selling).
• It provides consumer protection, market confidence, and financial stability.

2. Legal Framework:

• FSMA 2000 (Financial Services and Markets Act) is the core legislation.
• Updated by the Financial Services Act 2012 following the 2008 financial crisis.
• Created a “twin peaks” model: one regulator for prudential (PRA) and one for conduct (FCA).

3. Key Regulatory Bodies:

• HM Treasury: Oversees financial regulation policy and legislative changes.
• Bank of England (BoE):
  • Ensures financial stability.
  • Oversees monetary policy and interest rates.
  • Hosts the Financial Policy Committee (FPC).
• Prudential Regulation Authority (PRA):
  • Part of the BoE.
  • Regulates banks, insurers, and major investment firms.
  • Focuses on solvency and risk to the financial system.
• Financial Conduct Authority (FCA):
  • Independent regulator.
  • Supervises ~50,000 firms for conduct.

4. FCA Powers and Responsibilities:

• Rule-making: The FCA Handbook includes sourcebooks like COBS, MCOB, ICOBS.
• Supervision: Day-to-day oversight of firms based on risk assessments.
• Enforcement: Includes fines, suspensions, and criminal prosecutions.
• Can ban misleading adverts, withdraw permissions, and issue public warnings.

5. Authorisation:

• Firms must be authorised to carry out regulated activities.
• Must meet threshold conditions, such as:
  • Suitable business model.
  • Adequate financial resources.
  • Appropriate systems and controls.
  • Fit and proper senior managers.

6. Approved Persons and SM&CR;:

• SM&CR; (Senior Managers and Certification Regime) replaced the Approved Persons Regime.
• Firms must identify key individuals (Senior Management Functions) and ensure they are fit and proper.
• Certification staff are employees in significant roles who must be assessed annually.

7. Supervisory Approaches:

• FCA uses a risk-based approach:
  • Proactive: Regular supervision of high-risk firms.
  • Reactive: Responding to events or complaints.
  • Thematic: Sector-wide reviews (e.g., advice standards).
• Firms are classified into categories based on potential harm.

8. Enforcement Actions:

• Penalties include fines, public censures, bans, criminal prosecution.
• The FCA has powers under both civil and criminal law.

Topic 7: Regulatory Framework and Compliance

This topic explains the UK regulatory structure in more depth, particularly the FCA’s rulebooks, principles-based regulation, and how firms implement internal compliance systems.

1. FCA Handbook Structure:

• The Handbook provides the rules and guidance for firms. Key sections include:
  • PRIN: Principles for Businesses (11 high-level standards).
  • COBS: Conduct of Business Sourcebook (advice and investment rules).
  • MCOB: Mortgages.
  • ICOBS: Insurance conduct of business.
  • SYSC: Senior management systems and controls.

2. The 11 FCA Principles for Businesses:

• Examples include:
  • Principle 1: Integrity.
  • Principle 2: Skill, care, and diligence.
  • Principle 6: Treating customers fairly.
  • Principle 7: Clear, fair, and not misleading communication.
• These are broad, high-level expectations applied flexibly across all firms.

3. Principles-Based Regulation:

• Focuses on outcomes rather than prescriptive rules.
• Encourages firms to think about the spirit of regulation and ensure fair treatment.
• Firms are expected to exercise judgment in applying the rules.

4. Treating Customers Fairly (TCF):

• 6 consumer outcomes, e.g.:
  • Outcome 1: Products meet customer needs.
  • Outcome 5: Clients receive suitable advice.
• TCF is embedded in firm culture, training, and compliance.

5. The SM&CR; Regime:

• Replaces the Approved Persons Regime.
• Components:
  • Senior Managers: Hold final responsibility for key areas; require regulatory approval.
  • Certification Regime: Covers significant roles like advisers or compliance staff; firms certify fitness annually.
  • Conduct Rules: Apply to all staff. Include acting with integrity, treating customers fairly, and observing proper standards of market conduct.

6. Threshold Conditions:

• Minimum standards firms must meet to be authorised and remain so:
  • Legal status.
  • Suitable location of offices.
  • Effective supervision.
  • Sound business model.
  • Appropriate resources.

7. Compliance Function:

• Larger firms must have a dedicated compliance officer and systems.
• Responsibilities include:
  • Monitoring regulatory developments.
  • Conducting risk assessments.
  • Training staff.
  • Reporting breaches.

8. Whistleblowing:

• Firms must have systems to allow staff to report concerns confidentially.
• FCA encourages open culture and transparency.

9. Approved Persons History:

• Approved Persons Regime used to require FCA authorisation for individuals in significant roles.
• Now replaced by SM&CR;, but historical breaches may still be relevant.

Topic 8: Consumer Protection, Financial Crime, and Redress

This topic covers the FCA’s Consumer Duty, how firms manage financial crime risks, and the systems in place to protect consumers through redress, compensation, and ombudsman schemes.

1. The 12 FCA Principles for Businesses (Updated):

• Principle 12: Consumer Duty – Firms must act to deliver good outcomes for retail customers.
• Consumer Duty replaces Principles 6 and 7 for retail business, emphasizing:
  • Products and services must meet the needs of target customers.
  • Communications must support consumer understanding.
  • Customer support must be effective and accessible.
  • Pricing must offer fair value.

2. Treating Customers Fairly (TCF) vs Consumer Duty:

• TCF focused on fairness and culture.
• Consumer Duty takes it further with enforceable outcomes-based expectations and puts more pressure on senior management accountability.

3. FCA Conduct Rules (SM&CR;):

• Individuals must act with integrity, due care, and professionalism.
• Firms must train staff on their duties, including fair treatment of customers and compliance with regulatory expectations.

4. Money Laundering and Financial Crime:

• Money laundering stages:
  1. Placement: Introducing illicit money into the system.
  2. Layering: Complex transactions to disguise the origin.
  3. Integration: Money re-enters the economy as “clean”.
• Key legislation:
  • Proceeds of Crime Act 2002 (POCA).
  • Money Laundering Regulations 2017.
  • Terrorism Act 2000.
• Firms must appoint a Money Laundering Reporting Officer (MLRO) and conduct Customer Due Diligence (CDD).

5. Market Abuse and Insider Trading:

• Market abuse includes manipulation (e.g. spreading false info).
• Insider dealing is a criminal offence: trading based on non-public, price-sensitive information.

6. Whistleblowing:

• Encouraged by FCA as part of a culture of openness.
• Firms must provide systems for staff to report misconduct confidentially.

7. Redress Systems:

• Customers can complain to firms, which must respond within 8 weeks.
• If unresolved, the customer can go to:
  • Financial Ombudsman Service (FOS): Independent arbiter of disputes.
  • Maximum compensation limit: £375,000 for complaints after April 2023.
• Firms must not charge for complaints handling.

8. Compensation Schemes:

• Financial Services Compensation Scheme (FSCS):
  • Protects consumers if a firm fails.
• Limits:
  • Deposits: £85,000 per person per firm.
  • Investments: £85,000.
  • Insurance: 90% or 100% depending on product.
• FSCS is funded by levies from regulated firms.

9. Vulnerable Consumers and Inclusion:

• Firms must consider needs of vulnerable clients (expanded in Topic 10).
• Equality, access to services, and clear communication are part of protection.

Topic 9: The Advice Process and Adviser Skills

This topic outlines the complete financial advice process and the interpersonal, ethical, and technical skills advisers need to ensure they deliver compliant and valuable advice.

1. Overview of the Advice Process:

A structured process ensures advice is suitable, consistent, and in the client’s best interest. The six core stages are:

1. Establish the relationship – Includes disclosures, setting expectations, and understanding client objectives.
2. Gather client information – Comprehensive fact-find including income, expenditure, assets, liabilities, risk tolerance, goals.
3. Analyse the information – Identify gaps, risks, and shortfalls.
4. Develop solutions – Research product options, strategies, and planning recommendations.
5. Present recommendations – Explain advice clearly and ensure client understanding.
6. Implement and review – Arrange products, complete paperwork, and agree review schedule.

2. Fact-Finding:

• Must be detailed and cover personal, financial, and risk profile information.
• Regulatory expectation: Adequate information must be gathered to assess suitability.
• Factfinds also help demonstrate the advice was sound if reviewed or challenged.

3. Suitability:

• Advice must be suitable, not just compliant.
• Includes consideration of:
  • Customer needs and objectives.
  • Risk tolerance and capacity for loss.
  • Time horizon, tax status, existing arrangements.
• Advisers must document and justify the rationale.

4. Soft Skills and Communication:

• Strong listening and questioning skills are essential.
• Advisers must:
  • Build rapport and trust.
  • Handle difficult conversations (e.g. affordability or risk).
  • Translate jargon into understandable language.
• Tailoring communication to the client’s knowledge and preferences is vital.

5. Client Risk Profiling:

• Must assess:
  • Attitude to risk: How much risk a client is psychologically comfortable with.
  • Capacity for loss: How much financial risk they can afford.
• Use of risk profiling tools (e.g. questionnaires), but adviser judgment is also critical.

6. Cash Flow Modelling:

• Helps illustrate how income, expenditure, and investments interact over time.
• Often used in retirement planning or long-term investment strategies.

7. Reviewing Advice:

• Regular reviews are part of ongoing suitability obligations.
• Especially critical for pensions and investment clients.
• Must check if goals, risk profile, or external circumstances have changed.

8. Ethical Behaviour and Professionalism:

• Advisers must act with integrity and in the client’s best interest.
• Bound by the FCA’s Principles and Conduct Rules.
• Conflicts of interest must be disclosed and managed.

Topic 10: Regulatory Advice Framework and COBS Rules

This topic focuses on the FCA’s Conduct of Business Sourcebook (COBS), client categories, different types of advice, and how advisers deliver suitable, compliant service across various client needs.

1. Principles-Based Regulation and Responsibilities:

• The FCA encourages firms to deliver good consumer outcomes using judgment rather than rigid rules.
• Adviser responsibilities include:
  • Acting in clients’ best interests.
  • Offering suitable products.
  • Ensuring clear and accurate communication.
  • Dealing sympathetically with client issues.
  • Providing products that meet the needs of the target market and represent fair value.

2. FCA Client Categories (COBS 3):

• Clients are classified into three groups based on their sophistication and need for protection:
  1. Eligible Counterparty: Financial institutions like banks and fund managers. Lowest protection.
  2. Professional Client: Experienced investors and large institutions. Some protection.
  3. Retail Client: Typical consumer. Highest level of protection under FCA rules.

3. Vulnerable Customers:

• Defined as those “especially susceptible to harm” due to personal circumstances.
• FCA identifies four vulnerability drivers:
  • Health (physical/mental conditions).
  • Life events (bereavement, divorce, job loss).
  • Resilience (low ability to cope with shocks).
  • Capability (low financial knowledge or confidence).
• Vulnerability can be actual or potential, temporary or permanent.
• Firms must:
  • Design products and services to avoid harm.
  • Train staff to recognise and support vulnerable clients.
  • Record relevant data.
  • Provide accessible communication and additional support channels.

4. Fiduciary Duties:

• Firms owe a duty of care, confidentiality, and primacy of client interest.
• Based on FCA Principles:
  • Principle 2: Skill, care, and diligence.
  • Principle 6: Customers' interests.
  • Principle 12: Consumer Duty.
  • Principle 10: Safeguarding client assets.
• Firms must act honestly, fairly, and professionally in clients’ best interests.

5. Types of Advice:

• Regulated advice involves personal recommendations and requires FCA authorisation.
• It must be:
  • Made to a specific person.
  • Relate to a specific regulated investment.
  • Presented as suitable based on individual circumstances.
• Guidance is generic, factual info without recommendations.
• Can be delivered by regulated or unregulated firms.
• Cannot cross the “advice boundary.”

6. Streamlined Advice Types:

• Focused Advice: Personal recommendation limited to one need or product.
• Simplified Advice: Firm sets a narrow scope of service; excludes broader review.
• Basic Advice: Used for stakeholder products; based on scripted Q&A;.
• Robo-Advice: Automated online advice based on algorithms. Must meet the same regulatory standards as human advisers. May be “hybrid” with human support.

7. Disclosure Requirements:

• Firms must disclose the scope of advice (independent or restricted) before providing advice.
• Clients must be aware of:
  • Adviser’s status.
  • Service limitations.
  • Costs and charges.

8. Support for Decision Making:

• Tools like decision trees help guide customers toward appropriate products.
• These must not cross into advice unless a personal recommendation is made.