FSRE 2024: Full Module 1 Summary (DipFA)

Topic 1: The Purpose and Structure of UK Financial Services

Core Purpose: Facilitate the flow of capital between surplus and deficit sectors, ensuring efficiency in the allocation of resources across the economy.

Main Participants: Retail banks, investment firms, insurance companies, building societies, asset management firms, and credit unions.

Three Key Market Sectors:

1. Money Markets: Focus on short-term borrowing and lending, usually for periods of one year or less. Instruments include Treasury bills and commercial paper.
2. Capital Markets: Involve long-term funding through debt (bonds) and equity (stocks). Capital markets are crucial for companies seeking to grow and expand.
3. Foreign Exchange Markets: Platforms for trading currencies, essential for international trade and investment. They influence exchange rates and provide liquidity in currencies.

Types of Financial Institutions: Include retail banks that offer consumer services, commercial banks that serve businesses, investment banks that engage in underwriting and advisory, insurers that manage risk, and pension funds that provide retirement benefits.

Consumer Needs: Individuals and businesses have diverse financial needs including managing income, protecting against unexpected risks, saving for specific goals, investing for future growth, retirement planning, and estate planning to manage wealth distribution after death.

Topic 2: The Role of Government and Economic Policy

Macroeconomics vs. Microeconomics:

• Macro: Focused on national economic factors, aggregate demand and supply, and overall economic health.
• Micro: Concentrates on individual consumers and businesses, studying their behavior and decision-making processes.

Economic Objectives: Governments aim for price stability (controlling inflation), low unemployment, maintaining a balance of payments (inflow and outflow of money), and promoting economic growth.

Fiscal Policy: Involves government decisions about taxation and spending to influence the economy. It aims to stimulate growth or cool down an overheated economy.

Monetary Policy: Managed by the Bank of England, it includes measures to control money supply, interest rates, and inflation, with a target inflation rate of 2% as measured by the Consumer Price Index (CPI).

Types of Taxes: Diverse taxation system including personal income tax, National Insurance contributions (NICs), Capital Gains Tax (CGT), Inheritance Tax (IHT), and Corporation Tax paid by businesses.

Topic 3: Meeting Customer Needs and Priorities

Customer Types: Differentiated into personal clients, businesses, and trustees who manage assets for third parties.

Financial Lifecycle Stages: Different financial needs occur at various stages such as childhood, student life, young adulthood, family formation, and retirement.

Hierarchy of Financial Needs: Typically, protection against risks prioritizes over debt management, followed by savings, investment opportunities, and finally, retirement preparation.

Adviser's Role: Financial advisers play a crucial role by understanding clients' financial situations, assessing their risk appetite, matching suitable financial products, and ensuring they fit clients’ needs and objectives.

Topic 4: Legal Concepts

Legal Persons: Classification includes natural persons (individuals), companies, partnerships, and trustees who manage assets on behalf of others.

Powers of Attorney: Individuals can appoint others to make decisions on their behalf through Ordinary Powers of Attorney, Enduring Power of Attorney (EPA), or Lasting Power of Attorney (LPA).

Law of Contract: Fundamental principles include offer, acceptance, consideration, capacity to contract, legality of object, and intention to create legal relations.

Trust Elements: Key components involve the settlor (who creates the trust), trustee (who manages the trust), beneficiary (who benefits from the trust), and trust deed (document outlining the trust's terms).

Topic 5: Wills, Intestacy, and Trusts

Will Requirements: For a will to be valid, it must be in writing, signed by the testator, and witnessed by at least two individuals who are not beneficiaries.

Types of Wills: Include mirror wills made by couples to reflect identical wishes, mutual wills binding each party, and codicils that amend existing wills.

Intestacy Rules: Govern the distribution of an estate when an individual dies without a valid will, typically following a statutory order of heirs.

Trust Uses: Trusts are utilized for Inheritance Tax (IHT) planning, asset protection from creditors, and to support vulnerable beneficiaries who may not be able to manage large sums of money.

Topic 6: Development of UK Regulation

Key Regulators: The Financial Conduct Authority (FCA) oversees the conduct of firms, the Prudential Regulation Authority (PRA) ensures financial institutions are stable, and HM Treasury along with the Bank of England play critical roles in economic management and policy.

Major Legislation: Significant regulations include the Financial Services and Markets Act (FSMA) 2000, Financial Services (Banking Reform) Act 2013, Financial Services Act 2021, and the latest FSMA 2023 which reforms regulatory frameworks.

Twin Peaks Regulation: Introduced post-2008 financial crisis, consisting of a dual regulatory approach with dedicated conduct and prudential regulators to safeguard systemic and consumer aspects of finance.

Topic 7: FCA and PRA Responsibilities

FCA Strategic Objective: To ensure that markets function effectively for consumers, businesses, and the entire economy.

FCA Operational Objectives: Focus on consumer protection, maintaining market integrity, and promoting effective competition between financial service providers.

PRA Objectives: Ensure safety and soundness of financial institutions, protect policyholders, promote competition, and support economic growth.

Supervision Approach: Prioritizes a risk-based, proactive, and forward-looking approach to regulation, assessing future risks and stability.

Topic 8: Principles and Fair Outcomes

FCA 12 Principles for Businesses: Core principles include acting with integrity, ensuring appropriate care, suitability for clients, safeguarding client assets, and promoting fair treatment of consumers.

Consumer Duty (2023): This new principle mandates firms to act in the best interest of consumers, establishing expectations for delivering good outcomes.

TCF Outcomes: Treating Customers Fairly outcomes encompass suitability, fairness, transparency, and providing support post-sale, ensuring clients understand products bought.

AML Rules: Grounded in the Proceeds of Crime Act (POCA) 2002 and the Terrorism Act 2000, these rules aim to prevent money laundering and terrorist financing.

Topic 9: Advice Process and Adviser Skills

Four Stages: The client advice process consists of fact-finding, rigorous analysis of financial data, making tailored recommendations, and effectively presenting these to the client.

Suitability Report: Required documentation for certain products like pensions, life insurance, and unit trusts, demonstrating that recommended products match clients’ needs and risk profiles.

Know Your Customer: Requirements under the Conduct of Business Sourcebook (COBS) 9.2, focusing on understanding risk attitude and capacity for loss of clients.

Regulatory Disclosures: Mandated disclosures as per COBS 2 (general principles) and COBS 6 (advetising and communications), ensuring transparency and compliance.

Topic 10: Regulatory Advice Framework

Client Categories: Financial service clients fall into categories including retail, professional, and eligible counterparty clients, each with different levels of regulatory protection.

Types of Advice: Different financial advice types include independent, restricted, simplified, focused, basic, and robo-advice, catering to varying client needs and circumstances.

Fiduciary Duties: Financial advisers have critical fiduciary duties to uphold, such as the duty of care, maintaining confidentiality, and prioritizing the interests of clients above their own.

Vulnerable Clients: Acknowledgement of clients who may be vulnerable due to health issues, life events, lack of resilience, or capability, necessitating tailored advice and support.