Unit 2 : Financial Capability for the Medium and Long Term Flashcards Preview

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Flashcards in Unit 2 : Financial Capability for the Medium and Long Term Deck (350):

As people move from childhood into adulthood and then grow older, according to what do their needs and wants change?

- Their lifestyle
- The prevailing culture of the society in which they live
- The size of their family
- Their ability to afford products


What are the 5 main long-term financial products?

- Medium and longer term savings
- Investments
- Pensions
- Longer-term borrowing
- Insurance


Why do people invest?

To save for a longer term want or aspiration. It is different from a long-term savings product because it is more risky but can bring a higher return.


Give 2 examples of longer-term borrowing products.

- Mortgage: a loan secured on the value of the property being purchased
- Hire Purchase: secured consumer credit to finance items such as cars and furniture


What is a decision to buy a financial product influenced by?

Internal and external factors


What is the key internal factor that affects someone's choices?

Their own personal set of values, beliefs and attitudes - these will affect the way people manage their money


What are the 5 internal factors that influence a decision to satisfy a need or want and therefore to buy a financial product?

- Values
- Beliefs
- Attitudes
- Perceptions
- Preferences


What are values?

General feelings or beliefs about desirable behaviour and goals. They involve the concepts of 'good' and 'bad' and how people think things ought to be.


What are beliefs?

Beliefs are more specific and detailed than values, they are less about the way people think things ought to be and more about the way they think they are.


What can beliefs be?

Religious, free speech, enterprise and fairness


What are attitudes?

Attitudes refer to how, at a given time and place, people think they feel about another person, event or issue.


What are perceptions?

People's perceptions represent their understanding of the world around them. Their perceptions affect the way they feel about the financial products that they are surrounded with.


What are preferences?

People have certain preferences for particular products, and these will depend on their values, beliefs and attitudes.


What are external factors?

Those that are not within your control, but are imposed from outside


What are the 3 external factors that influence a decision to satisfy a need or want and therefore to buy a financial product?

- Marketing and advertising
- Peer pressure
- Trends, fashions and role models


What is marketing?

The activities associated with buying and selling a product or service, i.e. everything a company does to acquire customers and maintain a relationship with them


What does marketing include?

Advertising, selling and delivering products to people


What can marketing be subdivided into?

Promotion and Public Relations


What does promotion refer to?

Paid-for marketing activities, including advertising


What does promotion include?

All activities that aim to:
- Communicate with people
- Inform them of goods and services
- Persuade them to buy


What is advertising part of?

Promotion - it is used to inform and persuade


What can advertising carry?

Explicit (overt buy me now! message) and implicit messages (lifestyle and fashion message)


Who uses advertisements?

The media (television and radio - broadcast media, newspapers and magazines - print media, online - electronic and social media, cinema, hoardings, posters and billboards - other media) as well as banks, building societies and insurers


Give 7 examples of other promotional media.

- Carrying out product trials
- Offering money off
- Bogof
- Running customer competitions
- Sponsoring teams or events
- Special credit terms
- A bank may offer cash back to customers who use its credit card


Why should people be careful when choosing a financial product?

There is always a lot of 'small print' - that is terms and conditions. Sometimes a bonus or discount may be available only in certain circumstances and customers should be aware of this before choosing the product so they are not misled.


What is PR?

Public Relations - advertising that is not paid for directly but which keeps a business's product in the public eye


What is PR part of?

Promotion, where the entire message is implicit


What does product placement and sponsorship do?

These type of activities cost money buy they contribute to the general reputation of a business and are not directly related to the brands that the business sells


What do we form from our peers?

Our perception of what is the norm - the acceptable behaviour within our particular group, and often we want to fit in, to be one of the crowd


Give an example of where trends can be found.

In financial services


In what 3 ways can trends influence the choices people make regarding financial services?

- The way in which people pay for goods and services, i.e. card or cash
- People's attitudes to savings
- How people view using credit


Give an example of a trend in financial services?

People's attitude to borrowing money - many years ago it was deemed 'low class' to buy goods on credit because it showed that people could not afford to pay otherwise. The trend reversed after the invention of the credit card as it became desirable to fund a 'high class' lifestyle on credit.


What is culture about?

Norms - about behaviour and attitudes across social groups, what society thinks is acceptable and unacceptable


Why are financial services providers very interested in culture?

Because it influences financial behaviour and indicates to them what financial products will be successful


What is there a strong culture of in the UK?

Home ownership - providers make mortgage loans available to people so they can buy they homes and pay back over a long period (often 20-25 years)


Among whom are mortgages normal?

People that work, and many people aspire to buy their own home one day - so people in the UK are likely to need to save for a deposit and then take out a mortgage


What risk do people take with mortgages?

The risk that they may not be able to keep up with repayments and that their home may be repossessed


What is the situation once people have paid off their mortgage?

The property belongs to them and they do not have to make any more payments; thus nobody can ask them to leave their home, even in retirement


Since the financial crisis in 2007 what has happened with regards to mortgages?

It has become a little harder to obtain a mortgage, but the culture of home ownership remains strong


Why are more young people renting rather than buying property?

Because of high deposits on houses


Where is the culture of home ownership not present?

In Germany, for example, because the norm is to rent property - only 43% of Germans decide to buy their house. The other 57% do not need to save for a deposit, but to pay a few months' rent in advance.


What is the risk with renting?

Tenants could be asked to leave the property is they do not pay the rent or if the lease runs out and the landlord wants the property back


What is the feedback effect?

People's feelings affect how they behave. The links between thoughts, feelings and behaviour is clear, and can be traced back to attitudes and so our personal values.


What is the feedback effect linked to?

Expectations - what people expect is going to happen


What are expectations?

Self-fulfilling - in that people's attitudes mean that they affect the outcome of events


Give 3 examples of self-fulfilling expectations.

- If people expect a share price to fall, they will start to sell shares; if enough people see them the share price will fall
- If interest rates are expected to rise, people will save more money and borrow less; this means providers will have to pay out more interest on savings and gain less from lending. They may choose to increase the interest rates on lending, to maintain their income.
- If people expect increased unemployment, they may save more for the future or delay spending. Businesses will need to produce less goods and services, they then need fewer workers and so unemployment does rise.


What are the 2 influences of personal values on financial decisions?

- Ethical investing: involves someone choosing to save in a way that means money will be used for what the individual considers to be a good purpose. Ethics are a set of ideas about what people believe is right - the moral code that they aim to live by - so one person's opinion about what is ethical will differ from that of someone else.
- Religious beliefs: Islamic Law (Sharia Law) prohibits the payment of interest on a debt and so Muslims are not allowed to borrow money. All major banks now provide Sharia-compliant financial products.


When someone buys a financial product, what are they entering in to?

A relationship with the provider that has implications for a specified time period (short, medium or long-term) - so buying a financial services product is not the same as buying something that is quickly consumed


Why must the customer be aware of the implications of a relationship with the financial service provider?

They bring with them responsibilities and the customer must be able to meet their obligations


What is the affordability implication of borrowing?

In the case of short-term borrowing, a person can know with a good deal of certainty whether they can afford to pay the money back. In the case of a medium or long-term loan, they cannot be so certain as their circumstances may change (e.g. they may lose their job).


What are the affordability implications of buying an insurance policy?

- Home and Travel insurance, are not very expensive. However, Motor insurance for young people can be very costly. Since motor insurance is compulsory, there is no point buying a car and then finding out you cannot afford to insure it.
- Another issue is whether people are buying too much insurance. Policies such as payment protection insurance, pet insurance, mobile phone insurance are not essential and people have to decide if they can afford them or not.


What is the affordability implication of saving?

People have to decide if they can afford to save and which account to use.


What is the affordability implication of setting priorities?

Since nobody can afford to buy everything they need, want aspire to have, they need to choose between alternatives. This means they must decide on their priorities = OPPORTUNITY COST.


What is the affordability implication of attitudes to risk?

Some people are risk averse and others risk tolerant, but the majority of people are somewhere in between. So, they will insure the most important items they possess but are not over-insured.


What is considered as medium and long-term?

3 months to many decades


Why do people save for long periods?

Because they make a decision now to save out of their current income to finance a future medium or long term need, want or aspiration. These future needs, wants and aspirations will require a significant amount of money and so people need to save for longer to achieve them.


What is hoped for with long-term savings and investments?

People hope that their savings and investments will grow over a period to give them a good return. However, if the economy performs badly, they may not get as good a return as they had hoped, and with some types of investment they may get back less than they actually put in.


What are the 2 main ways in which people can use their savings or investment fund when it matures in the future?

- They can hope for capital growth, i.e. the market value of the investment is greater when sold than the amount they paid for it. So, when they cash it in, they can use the lump sum to finance a planned project.
- They can use their fund for income: the investment will pay out a regular amount that they can use as part of their monthly income, e.g. dividends.


What can many investments provide?

A mixture of both growth and income


What are the 9 features of savings products?

- Lower risk
- Savings accounts are held at financial providers
- Savers deposit money and earn interest
- The capital sum the deposit is NOT at risk
- The saver will get back the money that they put in
- Deposits of up to £85,000 are protected by the FSCS, should a provider fail
- Savings accounts do not pay very high interest
- Medium-term savings accounts will pay less interest than long-term savings accounts, but savers will usually need to give the provider notice before they can withdraw money, from the long-term accounts
- If notice is not given, interest is lost


What is a portfolio?

Many investors use a variety of different long-term savings and investment products when saving for a large item or for retirement - this combination is known as their portfolio


What are the 4 providers of long-term savings and investment products?

- Banks, building societies, NS&I and post office (all offer long-term savings and investment products)
- Friendly societies (mutual organisations that offer long-term savings and investments, life insurance, pensions and annuities)
- Insurance companies (provide long-term savings and investments, including life insurance, investment products and pensions)
- Investment companies (offer a wide range of product types. These products are divided into those that aim to grow money over time (capital growth), and those that provide regular income from the money invested).


What is capital growth?

An increase in the market value of an investment, over and above the amount the investor paid for it or paid into it.


Why might someone want capital growth?

People with small children may want a sum of money to be available in 15 years' time when their child goes to university, or someone else may want a sum of money for retirement. They do not want to take income from their investment now.


Why might someone want an income from an investment?

- They may be using a sum of money that they have accumulated to give them an annual return that could be regarded as part of their household income.
- They may have inherited some money, so they place the money in a fund that will give them an income. They sacrifice growth in order to take the income out and spend it.
- Another example is a retired person who wants to use their money to buy them an income in their old age. They buy an annuity, which means that they hand their sum of money over to an insurance company and, in return, they are paid an income for the rest of their lives.


What is an annuity?

A financial product that pays a regular guaranteed income, in return for a lump sum paid to the financial provider. It is used by people when they retire.


What will investment companies help people to do?

Invest their money, taking into account their attitude to risk, the amount to be invested and the length of time they can invest it


What are the 3 investment companies?

- Fund companies: offer packaged accounts that can be tailored for the private investor (unit trusts, OEIC's and investment trusts, which pool money for investors.
- Portfolio managers: look after a portfolio of investment products such as shares and bonds on behalf of customers who have a sizeable sum to invest. They make decisions on behalf of the investor in order to meet an agreed investment objective.
- Stockbrokers: carry out deals for people who want to buy and sell shares, bonds and other investments.


What are the 2 long-term savings products?

- Savings Bonds
- NS&I


What is the withdrawal policy of savings bonds?

The holder can only make a limited number of withdrawals or none at all, during the period without incurring a penalty


What is a savings bond?

A savings product held for a fixed period, e.g. 2 years (maturity period)


Give an example of a savings bond.

Fixed rate e-bond, by Virgin Money - an online account paying AER of 3% gross per annum and matures in 3 years. Minimum investment is £1 and maximum £100,000, no withdrawals and you are unable to cancel or close the account once it has been opened.


Who do savings accounts suit?

People who need to accumulate a medium-sized lump sum but need the discipline of a product that does not allow them to spend the money in the meantime.


What savings bond do NS&I currently offer?

A Children's Bond. They can be bought for a child under 16, they pay a tax free interest, which is guaranteed for a fixed period.


What are the investment minimum and maximum of a NS&I children's bond?

Minimum £25, maximum £3000


Can children's bonds be cashed in early?

Yes, but with a penalty equivalent to 90 days interest


Who are children's bonds suitable for?

A child if they don't need to access the money (so not suitable if the child might need it sooner)


Why are children's bonds by NS&I less risky?

As they are guaranteed by the government


What are the 4 investment products (assets)?

- Stocks and shares
- Stocks and shares ISA
- Corporate and Government Bonds
- Property


Why is the fact that people can invest money themselves by choosing to buy specific assets (such as shares or property) not a good option for many small investors?

As they do not have enough money to allow them to spread their risk over a well-diversified range of assets. Also they are unlikely to have the knowledge or time to select suitable shares and track their progress.


What are the features of stocks and shares?

- Known as equities
- Each share represents the part ownership in a company
- Someone who buys shares will pay the market value at the time, but this price will change subsequently and may rise/fall
- It is possible for someone to sell their shares if they need the cash back, but they take they risk that they may be selling when the share value has fallen
- In addition to capital growth, shareholders hope to receive a dividend, which is a share of the annual profits made by the company.
- Quite high risk investment give capital growth and income, but if the company does badly, there will be no dividends and the share price may fall
- The FTSE 100 (Financial Times Stock Exchange Index) shows the movements in the value of the shares in the hundred biggest companies listed on the stock exchange


What does a stocks and shares ISA allow people to do?

Put money into different types of investment on a tax-efficient basis


What was the ISA allowance in the UK for 2013/14?



If you were to split between investing in both a cash ISA and stocks and shares ISA, what is the limit for a cash ISA?

£5,760 (half the allowance), and the rest in stocks and shares


When are people advised to use a stocks and shares ISA?

Only if they are willing to tie their money up for at least 5 years, as the value of the ISA will fluctuate with changes in market values


What are stocks and shares ISAs free of?

Income tax and capital gains tax, but investors have to pay charges to their financial advisors and fund managers


What is capital gains tax?

The tax payable on profit (gain) made when you sell or give away an asset, like property or shares


What is the tax-free allowance on capital gains for 2013/14?



What is the tax rate charged on capital gains above the tax-free allowance?

18% up to £32,012


What is the tax rate charged on capital gains above the first band?



How do corporate and government bonds work?

Companies and governments need to borrow money, so they issue bonds. Investors lend their money to the issuer by buying the bonds. They are lending money to the company or government and so are creditors and not part-owners - as shareholders are.


Why are corporate and government bonds different from Savings Bonds?

Their value can fluctuate as they are traded on the financial market


For how long are corporate and government bonds normally issued for?

A specific period of time, and at the end of the period the bond matures and the issuing company repays the capital value


What do holders of corporate and government bonds receive?

Income in the form of interest, usually at a fixed rate


How can holders of corporate and governments get their money back?

There is a market for bonds and so holders can sell them


What are the best known corporate/government bonds?



Why are gilts the best-known bonds?

They are issued by the government and are regarded as very safe


Why is property seen as a good investment?

As property prices tend to move upwards in the long-term


Why is property investment quite risky?

Because prices can fall in an economic downturn and it is not easy to sell an asset in such time


What do people see property as?

Part of their long-term investment portfolio


What can people do with property investment upon retiring?

They can sell it and downsize and use the cash surplus to give them an income


How do people use a buy-to-let mortgage?

People can rent out the properties to give them an income, which they hope will cover the mortgage repayment, and benefit from any increase in the capital value of the properties - this is seen as quite risky


What can property also be?

Assets like gold and silver and works of art, antiques and fine wines. These can offer the potential for high rewards but are very risky and are only suitable for the very wealthy, who are experienced in these areas.


How can people look after investments without having to manage their own portfolios?

Using investment funds


Who offer investment fund products?

Banks, building societies, friendly societies and insurance companies


What will people who want to invest over the long-term but do not have the knowledge do?

Turn to the general financial providers and buy ready-made investment products


How can people discuss their needs for an investment fund?

With a CRM, by telephone or by visiting the website


What will investment fund providers make clear to investors?

That investments are more risky than savings and that the value of the fund can fall as well as rise


Give 2 examples of investment fund providers.

- Barclays Funds (Foundation Funds and Investors' Choice Funds)
- Nationwide Share dealing service


What are collective investments?

Money contributed by many people that is put into a common pool and investments are made out of that money


What is the pool of money from a collective investment used to invest in?

Many different investments such as a wide range of shares, bonds and other assets (like property, gold etc) - this means that each investor's risk is spread or diversified across many different holdings


What do collective investments include?

Unit trusts, investment trusts and OEICs - they offer combinations of growth and income


What does OEIC stand for?

Open Ended Investment Companies


Who are unit trusts - the most common form of collective investment for?

They appeal to investors who want to buy shares buy who are too small or inexperienced to be able to invest on their own


What are the 4 advantages to the individual investor from using collective investments?

- The risk is reduced because the fund invests in a large number of different types of company. The risk is spread; a small investor cannot take much advantage of as they do not have enough money to buy the minimum amount of stocks and shares.
- The investor takes advantage of the expertise of the investment manager
- The cost of hiring the services of a skilled fund manager is shared amongst investors
- There is wide choice of investment funds and collectives which cater for all types of investors


What are 3 insurance-linked products?

- Term assurance: Life Cover
- Endowment policy
- Annuity


What is term assurance - life cover?

This is an insurance plan that runs for a fixed period of time and pays out a lump sum if the insured person dies within the term (not an investment policy)


What is an endowment policy?

A long term savings vehicle. They are often used to provide a lump sum to pay off a mortgage or other long-term debt, or fund an event in the future. They can be surrendered before maturity but the insured person is likely to lose quite a bit of money in doing so.


What is an annuity?

A product that provides an income for people when they retire. They take a lump sum they have already saved and buy an annuity. This gives them a guaranteed income for a fixed number of years or until the holder dies. Some annuities are index linked, which means they rise with inflation - but these cost more than the ones that are not.


What is a personal pension?

A type of investment fund, a long-term savings plan that is tax-efficient and is purchased by an individual throughout their working life in order to save for their retirement


What are the 2 types of pension plans?

- Occupational pensions
- Personal pensions


What are occupational pensions?

Operated by employers, who may also pay contributions into them for their employees


What are the 2 types of occupational pension?

- Final Salary Schemes
- Money Purchase Schemes


What are Final Salary Schemes?

Employees pay throughout their working lives, the scheme is invested to make the best return and agrees to pay the employee a pension based on the amount of years they have worked and linked to the last salary they earned before retirement. They are risky for an employer and so many firms are closing them down. (More common is the Average Salary Schemes)


What are Money Purchase Schemes?

Employees pay into the pension plan over their working life - the scheme is invested and provides the employee with the resulting lump sum on retirement. The amount the employee receives depends on how the scheme performed. The employee can then take the lump sum and invest it in an annuity to provide income on their retirement.


What are personal pension plans?

Long term money-purchase products provided by banks, insurance companies and other providers to help customers to build up a pot for retirement


What is a feature of personal pension plans?

They are tax efficient because of the tax relief at the basic rate of income tax on the payments made into the plan


What was the Pensions Act 2008 brought in to ensure?

That everyone was automatically enrolled by their employer into a workplace pension scheme; then they have the option to leave if they wish


What must the pension scheme chosen by an employer be?

The National Employment Savings Trust (NEST) or equivalent


What does the NEST set out?

The minimum benefits required


Why did the government introduce auto-enrolment?

Because they believe that people are not saving enough for their retirement - and so they do not have to rely solely on the state pension


What is the state pension?

A regular payment made by the government to people when they reach state pension age


What is the coalition government planning to introduce with regard to pensions?

A flat rate state pension for new pensioners from April 2016


How many levels of payment of state pensions are there currently?



What is the current pension age?

- 65 for men born before Dec 1953
- Between 60-65 for women born after April 1950 and before 1953


What does the state pension keep pace with?

Life expectancy


What will the increases in pension age be and when?

- From 66 to 67 between 2026 and 2028
- To 68 between 2044 and 2046


What is the main reason that people borrow over a prolonged number of years?

They need to fund a large expenditure


Give 5 examples of large expenditures that people need to borrow for a prolonged period of time to pay for.

- A house
- Study at university
- A consumer durable
- A car
- An emergency life event


Why do people need to repay a borrowed amount of money over a long period?

Because their monthly repayments need to be small enough to be affordable and fit into their personal budget


Give 6 examples of providers that offer long-term borrowing products.

- Banks
- Building societies
- Friendly societies
- Credit Unions
- Finance companies
- Insurance companies


What is a mortgage?

A very long term loan to finance the purchase of property


What is a deed?

A document that the person buying a property sings to agree that if they cannot continue to make repayments on the loan, the lender can take the property back and sell it to pay off the remaining debt


By whom can a mortgage be taken out?

An individual or by 2 or more people buying together, but they must be over 18


When must a mortgage be paid off by?

Either the retirement or 70th birthday (whichever is sooner)


What are the 4 categories of mortgage borrowers?

- First time buyers
- Existing customers moving home
- Existing customers switching their mortgage
- Existing customers increasing their mortgage (usually to build an extension or pay for a life event)


When will a lender allow existing customers to increase their mortgage?

If the borrower has sufficient equity in their property


What is equity?

When talking about property, it refers to the difference between the value of a property and the amount of money still outstanding on the mortgage


What are the 5 steps of the mortgage process?

1) Buyer approaches lender
2) Lender works out how much it will lend
3) Buyer decides the period over which to repay
4) Legal processes to buy property are carried out
5) Buyer makes repayments every month
a) At the end of the period the buyer owns the property
b) If the buyer fails to keep up with the repayments the lender may repossess the property and sell it to recover the money lent to the buyer


What are the 6 costs of buying a home?

- A survey of the property
- Legal fees
- Stamp duty
- A mortgage application fee
- Insurance
- Cost of furnishing and fitting the property


What is the amount a customer can borrow through a mortgage closely connected to?

How much they can afford to repay and this is connected to their income


What are the 2 main aspects that determine how much a provider will lend to a mortgage customer?

- Loan to income (LTI)
- Loan to value (LTV)


How is loan to income (LTI) calculated?

- Basic annual salary + Any extra annual income (e.g. overtime, bonus, commission) - Monthly credit commitments (e.g. loans, credit cards, store cards).
- i.e. Discretionary income is calculated.
- This is multiplied by a figure (say 4 or 5) that reflects the customers' creditworthiness.


How is loan to value (LTV) calculated?

The ratio of the size of the loan to the value of the property:

Value of property = Mortgage value + Equity


Give 2 examples of LTV's.

- A LTV of 60% would where you apply for a mortgage of £60,000 for a house priced £100,000, so the equity is £40,000.
- A LTV of 90% would be where you apply for a mortgage of £90,000 for a house priced £100,000, so the equity is £10,000.


What does the mortgage period implicate?

The longer the mortgage period, the lower the amount of the monthly repayment. The capital sum will always be the same, but the longer you take to pay the mortgage off, the higher the amount of interest paid.


What are the 2 types of payment people have to make when they borrow money on a mortgage?

- Capital: the amount they borrowed
- Interest: the borrower must pay interest on the amount borrowed over the period of years of the mortgage

So, the borrower must pay both capital and interest and there are 2 main schemes that work in different ways.


What are the 2 main schemes of paying for a mortgage?

- Repayment mortgages
- Interest-only mortgages


What are repayment mortgages?

With repayment you pay an amount each month that pays off the interest and the capital and at the end of the loan period you will have paid everything off


What are interest-only mortgages?

With interest-only the repayments are lower, but you are not paying off the capital (you will need another method to pay off the capital)


How have some people paid for the capital on an interest-only mortgage?

They have relied on the value of the house going up so much, that once they sell they have more than enough to pay off the capital (so nowadays borrowers should have a financial plan in place to afford the capital repayment)


Why do some providers no longer provide interest-only mortgages?

Due to the problems with house prices falling and low returns on endowment policies


What are the 8 mortgage interest and charges?

- SVR (Standard Variable Rate)
- Tracker Rate
- Discounted Interest Rate
- Capped Interest Mortgage
- Fixed Rate
- Offset Mortgage
- Loyalty mortgages
- First-time buyers


What is Standard Variable Rate?

This means you pay an interest rate that varies with the base rate. Any changes in the interest are at the provider's discretion. So, sometimes it can go down and sometimes up, meaning the amount you pay each month can change. This gives more uncertainty, but you can pay off the loan at any point and pay more each month if you choose.


What is Tracker Rate?

The interest paid is equal to a set amount above the base rate. E.G. a tracker of 1% means the base rate is 2% and you pay 3%.


What is a Discounted Interest Rate?

This suits people who want a cheap start to their mortgage. So for a period of time, you pay an interest rate below the base rate, and after that it reverts back to the variable rate. So, if you think your income will improve in the future, this maybe an option.


What is a Capped Rate Mortgage?

This is where a ceiling is put on the rate you can pay for a short period of time. So you pay the SVR and have the security of knowing it won't go above a certain level.


What is a Fixed Rate Mortgage?

This means that the borrower has the security of knowing what the repayments will be for a set period of time. Also, if interest rates go up, your repayments stay the same. However, if the interest rates go down, you will not benefit. There are also substantial penalties if you pay the mortgage off early.


What is an Offset Mortgage?

Combines the current account, Savings and Mortgage, so that mortgage can be paid off quicker


What are loyalty mortgages?

A discount is offered, typically around 0.5%, for a specified number of years, e.g. 2. But, the borrower must have their current account with the provider and regularly pay in at least £800 per month.


What are Muslims forbidden to do under Sharia Law?

Make money from money; it is therefore not permitted to borrow or lend money for interest


What are the 2 main ways in which a customer can buy a property in a Sharia-compliant way?

- Ijara Mortgages
- Murababaha Mortgages


What is a Murababaha mortgage?

This involves the provider buying the property and selling to the borrower at a higher price, effectively hiding the interest component


What is loan forbearance?

When a lender does not seek to repossess the property as soon as the borrower misses a few monthly payments, instead allowing the customer to stop paying or make reduced payments for a set period


What are the 4 advantages of loan forbearance?

- Provides support to customers and helps maintain good relations between customer and provider
- It prevents people from becoming homeless
- Enhances the providers' reputation
- It may mean the provider does not have to write off the loan and absorb the loss in its accounts


What are the 2 disadvantages of loan forbearance?

- Once the customers temporary financial difficulties have been resolved, they will face higher repayments to make up for the shortfall
- The lender may eventually have to write off the loan


What are the 4 government home ownership schemes?

- Help to Buy equity loans
- Shared ownership schemes
- NewBuy schemes
- Help to Buy Mortgage Guarantees


What are Help to Buy equity loans?

These are open to first time buyers and home-movers on new build homes worth up to £600,000. The purchaser provides a deposit of 5% of the purchase price, the lender provides a mortgage of 75% and the Government pays the remaining 20% via an equity loan.


What are shared ownership schemes?

These are provided through housing associations. The borrower buys a share of their home (between 25% and 75%) for which they take out a mortgage and they pay rent on the remaining share. These are only available to people who earn less than £60,000, a FTB and be renting a council or housing association property.


What is the NewBuy Scheme?

This allows a person to buy a newly-built home with a deposit of 5%. The house builder and mortgage lender get together to provide 95% of the value. The government guarantees the mortgage.


What are Help to Buy mortgage guarantees?

This is available from Jan 14. The government will guarantee the mortgage of a FTB or home-mover who buys a newly built home or an existing property with a 5% deposit.


What is a buy-to-let mortgage?

A long term secured leans taken out by a person who is buying a property with the intention of letting it to tenants. The owner becomes the landlord. The aim is that the rent will cover the mortgage repayments.


What does anyone taking out a buy-to-let mortgage need to be aware of?

- Value of the property might fall
- Tenants may fail to pay the rent
- The owner may have difficulty renting the property out, or getting enough rent
- There are additional costs such as legal expenses, stamp duty, insurance etc.
- The owner will have to pay income tax on the rent received and capital gains tax when they sell the property
- They need a valid tenancy agreement and the landlord as a 'Duty of Care' to make sure the property is safe


What is a Hire Purchase?

A type of secured consumer credit to finance items such as cars and furniture, which involves the borrower repaying over a number of years. The borrower does not become the legal owner until all the repayments have been made.


What happens if the purchaser finds they cannot pay the repayments for a Hire Purchase?

They can terminate the agreement in writing, and will have to pay instalments up to that date. If they have paid more than 1/3 the company must obtain a court order to repossess the goods. They will then sell the goods at auction and if there is a shortfall the purchaser is liable for the difference. Most HP agreements are not with the trader or retailer, but with a finance company (e.g. buy now, pay later, say 6 months).


What is the Student Loans Company?

A non-profit government-owned organisation set up to provide loans and grants to students in universities and colleges in the UK. It pays loans and non-repayable grants to cover living costs and studying expenses and the cost of tuition fees - this is paid directly to the student.


What are the 2 main types of student loans?

- Tuition fee loans
- Maintenance loans


How are tuition fee loans paid?

25% at the beginning of Term 1 and 2 and 50% at the beginning of Term 3 (plus interest is charged on this loan)


How are maintenance fee loans paid?

This is paid for living expenses and is usually paid in 3 instalments. If your parents earn below a certain amount e.g. £40,000, you will get a grant for a percentage which you do not have to pay back.


When will students not repay under the repayment plan until 2016?

For course that begin after September 2012


What is the earnings threshold of repaying student loans?

£21,000 and will rise with inflation


After how long are student loans cancelled?

30 years


Give 2 examples of risk that accompanies borrowing.

- The borrower cannot keep up the repayments, maybe through the loss of a job or an illness
- The property may lose value (negative equity)


What are the 2 ways that risks through borrowing can be minimised?

- Life Insurance: if the insured person dies during the mortgage term, the life policy pays out a lump sum that covers the outstanding debt. The family of the decreased are then free of the debt and own the property outright.

- Payment Protection Insurance: PPI can apply to a mortgage, personal loan or Hire Purchase. It covers loss of earnings due to accident, sickness or involuntary unemployment. These policies are not cheap and the borrower must weigh up the advantages/disadvantages.


Why do people take financial decisions?

Because they believe it will bring some type of reward, but with some risk


What is risk associated with?

Uncertainty because the future cannot be predicted


Where is there a 'trade-off' in making financial decisions?

Between risk and reward


Give 3 examples of how there is a trade-off between risk and reward.

- Someone who wants a high rewards must accept a higher risk of loss
- Someone who is keen to avoid risk must accept that they will earn a lower return
- The saver or investor pays for accepting less risk by agreeing to receive a lower reward


Explain the risk pyramid, starting with the highest risk first.

- Shares in newly quoted firm
- Shares in established firm
- Unit trusts
- Bank Savings Account
- Premium Bonds


What have low interest rates since 2009 meant?

Savers earn very little interest on their savings and this is an incentive for some savers to choose a riskier product in order to earn a higher return


What is a good way to manage risk?

To transfer it, although this does have a cost


What is the best example of transferring risk?

Insurance - the person facing the risk decides to spend money on passing the risk to someone else, who will accept financial responsibility. People pay a premium and pass the risk of loss or damage on to the insurance company.


Why must an insurance company calculate premiums carefully?

So they they are high enough to cover the losses that do happen and to make a profit on top of this


Give an example of a compulsory insurance.

Car insurance


Give an example of an insurance that people are reluctant to pay premiums for as an event may never happen.

Travel insurance, pet insurance


What are the 2 main dimensions of risk?

- Impact of the risk: the effect on their life, of the loss or damage. Need to consider the amount of money involved, effect on their lifestyle, the timing of the event and the frequency of the event.

- Probability of the risk occurring: how likely it is that it will happen. This is difficult for an insurance company to calculate.


How is the degree of risk calculated?

Probability x Impact = Degree of Risk

(High number = high risk)


What term is usually used for products designed to pay out when someone dies?



What are the 2 types of assurance?

- Whole of life assurance: the sum assured is payable on the death of the life assured, whenever the death occurs. There is no fixed time limit and remains in force until the policyholder dies or surrenders it.
- Term assurance: the sum assured is only paid out if the person dies before the end of the specified period.


Why is whole of life assurance much more expensive?

It is guaranteed that the sum will be paid out


What happens if the person assured survives the term assurance?

The cover ceases and no payment or refund of premiums is made


What is the most common example of term assurance?

Mortgage protection


What is critical illness insurance?

This cover pays out a guaranteed cash lump sum if the insured person dies or is diagnosed with a critical illness - it usually covers illnesses like cancer, heart attack and stroke


What does income protection do?

Inability to work and the subsequent loss of income is a long term risk that everyone faces. Income protection pays out a monthly income to insured people who have suffered an accidental injury or a long term illness and who are unable to work.


What is income insurance?

This is usually paid out when someone becomes involuntarily unemployed


For how long does an income insurance policy pay out a replacement income?

12 months


What protection does the FSCS offer? (4 points)

- Deposits in banks: covers the first £85,000
- Long-term insurance (pensions and life assurance): covers 90% of the claim
- Compulsory insurance, e.g. 3rd party motor insurance
- Non-compulsory insurance, e.g Home and general: 90% claim


What are the 3 man ways of dealing with the risk of providing for family members after death?

- Making a will
- Providing for inheritance tax
- Trusts


What is the term used if someone dies without making a will?



What 4 things does the will decide?

- The person who will get their money, property and possessions
- They can provide for a partner where there is no marriage or civil partnership (without a will, such a partner cannot inherit)
- They can make arrangements for their children
- They can minimise the amount of inheritance tax they pay


Who is it advisable to seek help from to draw up a will?

A solicitor


How is a will valid? (2 points)

- It must be made by a person who is 18 years of age or over, who is of sound mind and aware of what it contains and who is making it voluntarily - without the pressure from anyone else.
- It must be in writing and signed by the person making the will in the presence of 2 witnesses (who sign it also), who cannot benefit from the will.


What amount must an estate exceed to be pay inheritance tax on?



What is the inheritance tax rate on estates exceeding the minimum amount?



When does the minimum estate amount for paying inheritance tax increase to £650,000

On the death of the second partner in marriage or civil partnership


How can inheritance tax be avoided?

Some people like to make provision for this inheritance tax, so the beneficiaries can inherit the full estate without having its value reduced by tax (especially if the spouse or partner wants to live in the property). This is because the beneficiary may have to hell the house in order to pay the inheritance tax.


What is a trust?

A financial relationship whereby property is held by 1 property (the trustee) for the benefit of another (the beneficiary). The trustee has the legal title to the property held by the trust and has the power to buy and sell assets on behalf of the beneficiary, but the trustee has the duty of care to the beneficiary and must act in their interests.


What does putting savings into a trust mean?

That money is safe and cannot be accessed by anyone except for the children when they reach a certain age


What is the ability to achieve long term objectives determined to some extent by?

What happens in the short term


Why is medium and long term financial planning done?

Because people want to achieve their aspirations and to finance life events


Give 3 examples of planned events that people want to make provision for.

- Life events (e.g. going to university, buying car or house, going on a world cruise, having a big wedding, starting family)
- Retirement: People will need to save in a pension fund or have long term investments over a period of years, in order to generate sufficient income when they stop work
- Death: Someone who has a partner, children or other dependents need to consider how death might affect others financially and they should make plans accordingly


Give 5 examples of factors that events that people plan for depend on.

- Their family situation
- Their financial situation
- Their lifestyle and how this may change
- Their personality
- Their attitude to risk


Why are expectations and risk attitude very important?

As they are connected with people's aspirations


What are the 2 unexpected events?

- Positive unplanned events (e.g. a wedding or having children), these still have an impact on a budget
- Negative unplanned events (e.g. a car breakdown, redundancy, divorce, illness), these can drain finances


Why will people need to build some flexibility into their medium and long term plans to fulfil their aspirations?

Because not all events are predictable


What is anticipating future events a part of?

The skill of risk assessment


What are the 5 features of effective financial planning?

- Realistic: within the context of their income and expenditure
- Clear: be clear as to how much something will cost
- Timely: timescales need to be applied, the longer the timescale the more planning is needed
- Flexible: a personal should be able to make changes to the plan if necessary
- Documented: a written plan is more likely to be kept to


What are the 2 main financial planning tools?

- Budgets
- Cash flow forecasts


What is a monthly budget?

A personal financial plan that someone draws up every month to show their expected income, expenditure and end of month balance


What do the results of the individual monthly budgets accumulate over time to give?

A medium and long term financial plan, known as a cash flow forecast


How can you know in advance what your balance is likely to be at the end of a cash flow forecast?

By monitoring the amounts going in and out of a bank account - this way you will know when your are spending more than you anticipated, earning less and then you can find out why this is happening


How can getting behind in saving or repaying debt for 1 or 2 months be corrected?

Either increasing income or decreasing expenditure over a few months in order to restore the savings balance or to make up the debt arrears


What are the 7 stages to the financial planning process?

1) Decide on realistic aspirations

2) Establish a timescale (e.g. 5 years to sabe for a house deposit, 40 years to retire to a warm climate)

3) Establish a starting position: the person needs to audit their current resources, like the balance on their current account, current income and expenditure, the assets they own, the liabilities they owe like overdraft or outstanding balance on their credit card, and any current provision for the future like pension

4) Establish priorities: one has to make choices between various options. Loan payments have to be made.

5) Document the plan

6) Implement the plan: keep an eye on when desired savings are proving unachievable, or loan payments. Missing payments means that the following payments will be double, interest owing will accumulate, and the lender may add penalty charges so the borrower may get an adverse credit rating.

7) Review the plan: financial planning is an ongoing process rather than a single activity. A person needs to review their financial plan regularly, as their wants and aspirations may change and their priorities will change to reflect this.


What 3 financial products can be used to meet financial goals?

- Savings: it may take longer than anticipated to save up, and depending on what product you choose a balance between risk and reward needs to be considered

- Borrowing: this involves getting into debt to achieve the aspiration now but a certain amount of future income has been earmarked to make the repayments, which might mean giving up other expenditure. The total amount repaid will be greater than the cost of the item, since interest and perhaps fees may have to be paid.

- Insurance: life assurance and pension funds are ways that many people save to achieve their long term aspirations


Why can failing to repay borrowing as scheduled cause a problem in the future?

Because of the financial footprint, which is a person's financial reputation and creditworthiness


What could happen if someone gets a bad financial reputation?

They could be refused credit in the future, when they desperately need it. Their behaviour at an earlier stage of their life can have a negative impact on later stages or on life events.


Why can failing to make a financial plan have very serious consequences when people become old?

- Failing to provide for a pension, they will be dependent on the state pension and on any other benefits they may be entitled to
- Their standard of living will probably not be very high
- They might be forced to continue working for longer but this will depend on their being fit enough and on their finding a job


What are the 4 ways to make an informed choice about a financial product?

1) Look carefully at your wants and aspirations
2) Look carefully at your position on the risk/reward spectrum
3) Look carefully at the risk/reward spectrum of the product:
a. Saving and Investment
b. Borrowing
c. Insurance
4) If necessary, you should take professional financial advice before proceeding


What does where a person stands on the risk reward spectrum depend on?

Their personality, the amount of money they have at their disposal and the stage of the life cycle they are in


What is self-insurance?

Some people do not ignore the risk completely, nor do they pay for insurance. Instead they save some money to fall back on in case the risk event does arise.


What 4 things does the extent to which people practise self-insurance depend on?

- Whether there is any legal obligation
- The cost of the insurance
- The perception of the degree of risk
- The ability to access insurance


Why is saving not risky?

As it helps someone to reduce their future risk by ensuring that they have a lump sum to use in an emergency


What is the risk associated with saving?

That a saver has to hand their money over to a provider. If the provider fails, they may lose uninsured deposits (FSCS only covers the first £85,000)


What does the return on savings and investment need to be at least equal to?

The rate of inflation, otherwise the value of saved/invested money will fall


Why is borrowing always risky?

As the borrower has to commit to repaying out their future income, but they cannot be sure that they will have enough income over the repayment term to be able to settle the debt in full


What does variable rate borrowing carry?

A higher risk


What is the risk with insurance?

The insurance company may fail and not be able to pay compensation (but the FSCS covers 90% of a failed insurer)


What are the 4 stages of making an informed choice of financial product and provider?

1) Consider the strength of your wants and aspirations, and the benefit you will derive from fulfilling it
2) Look at your own risk profile according to your financial circumstances
3) Find out the charges and any penalties, how flexible it is and the terms and conditions
4) Consider the extent to which it fits in with your own values


What is the most important factor when someone is choosing a financial product?

To match the product to its intended purpose and to the characteristics of the person buying it - this means that the product should fit well into the person's financial plan and is suitable


In what 5 terms should a financial product be suitable?

- The intended purpose, e.g. achieving an aspiration or paying for a life event
- The timescale: medium or long term
- Affordability: taking into account the person's income and other expenses
- Attitude to risk and the risk profile of the product/brand
- How the product fits into the overall product mix


What are the 2 types of demand for financial products?

- Joint Demand
- Competitive Demand


What is Joint Demand?

Means that 2 products are bought together because they are complementary, i.e. the purchase of one product necessitates the purchase of another


Give 4 examples of products that are bought in joint demand.

- Personal loan to buy a car and motor insurance
- A long term savings bond and an instant access savings account. These 2 products fulfil different wants and needs and cover different time periods.
- An interest only mortgage and an investment product to cover the payment of the capital
- A mortgage to buy a home and a personal loan to buy furniture to put in the home


What is Competitive Demand?

A situation in which 2 or more products fulfil the same need or want and therefore are in competition with each other for the customer's money


Give 5 examples of products that are in competitive demand.

- Different savings products
- Different insurance providers
- Different credit card providers
- Different loan providers
- Different mortgage providers


What do external factors affect?

People's wants and aspirations, their plans and ability to succeed in those plans. They make a difference to financial planning but people do not have control over them.


What are the 5 most common external factors that can affect a financial plan?

- Inflation
- Interest Rates
- Unemployment
- House Prices
- Changes in stock market


What is the impact of inflation on a financial plan?

- Inflation affects savers and borrowers differently, depending on the difference between the inflation rate and the interest rate being received or paid
- Savers often lose out as their purchasing power falls.
- Borrowers often benefit as money borrowed also loses value. This is corrected by paying interest, that is almost certainly higher than the inflation rate.
- Inflation may affect a decision on whether to finance a purchase by saving up the item or borrowing the money. Someone who decides to save for it faces the risk that the price of the item will increase by the time they are able to afford it, even taking interest into account. It may be better to borrow the money and to buy it at today's price. The final decision will spend on the interest rate of each product.


What is the impact of inflation on a financial plan? (4 points)

- Inflation affects savers and borrowers differently, depending on the difference between the inflation rate and the interest rate being received or paid
- Savers often lose out as their purchasing power falls.
- Borrowers often benefit as money borrowed also loses value. This is corrected by paying interest, that is almost certainly higher than the inflation rate.
- Inflation may affect a decision on whether to finance a purchase by saving up the item or borrowing the money. Someone who decides to save for it faces the risk that the price of the item will increase by the time they are able to afford it, even taking interest into account. It may be better to borrow the money and to buy it at today's price. The final decision will spend on the interest rate of each product.


What is the impact of interest rates on a financial plan? (2 points)

- The Bank of England makes changes to the Bank Rate, according to whether they want to slow down or speed up the economy - so whether they want to encourage saving or borrowing.
- The Bank Rate affects other interest rates, the rates that providers pay on savings and charge on loans and also how people expect interest rates to change in the future.


What is the impact of unemployment on a financial plan? (5 points)

- Individuals who have lost their job will now have to rely on benefits, which would be significantly less than the income they would have been earning.
- Unemployment is a particular problem for anyone who already owes money because they will have no income from which to meet loan repayments.
- People who have purchased PPI will be in a better position as their loan payments will be covered at least.
- Unemployed people may have to use their savings to pay for current expenses and their debts and they will have to postpone any life events they were planning.
- There is also an impact on long term plans such as pensions and especially if they are paying into an occupational scheme with their employer. Anyone who pays into a flexible personal pension is in a better position as they can put the scheme on hold until they find another job.


What is the impact of house prices on a financial plan? (5 points)

- House prices are a key indicator of the state of the economy. In a growing economy, there is a lot of demand and house prices will be buoyant but if the economy slows down and there is more economic uncertainty about the future, house prices may fall.
- If house prices fall this is good for first time buyers, as it makes it easier to get on the property ladder. On the other hand there is a greater risk of them losing their jobs and mortgages may become harder to obtain.
- Falling house prices are certainly not good for people who have already bought their own home as its value will fall and may even become less than the amount they owe on their mortgage.
- This negative equity is a problem for someone who wants to move but knows that the proceeds of the sale of the house will not cover the debt outstanding. They will either have to buy a cheaper property or ask the bank to finance any difference or they will have to wait until the market improves.
- A fall in property prices also affects people who look on their property as an asset in their pension portfolio and it reduces their retirement savings.


What is the impact of changes in the stock market on a financial plan?

A fall in the stock market mean that people sell shares, they will get for their shares than they paid for them. If companies are not doing very well, they will earn fewer profits and shareholders will receive fewer dividends. If someone is relying on their shareholdings to finance a future expenditure, they will have to adjust their plan.


What must financial plans have built in so that they can deal with unforeseen events and changes in personal circumstances?



What does being flexible mean?

Being willing and able to change priorities


What are 2 ways of allowing for some flexibility?

- Savings: Reducing the stress of worrying about how to manage an unfavourable unexpected event, and if it doesn't happen, they will still have the money
- Anticipate events: this is part of risk assessment


What is 'what if'?

A function of a spreadsheet whereby the user can set out a table of calculations and then change one of the variables to see 'what' the effect will be on the final results 'if' certain changes happen. Changes in interest rates and other economic variables impact on borrowing repayments and savings goals.


When is considering the effects of interest rising especially important?

If someone has taken out a mortgage when interest rates were very low, which they are currently


When is inflation a more significant problem?

For people on fixed incomes, such as retired people living off an annuity that pays them the same nominal amount of money each month. Some annuities are inflation-linked and people with this type of annuity are less badly affected.


How should people factor inflation into their financial plans?

They should assume an average rate of inflation (say 2/3%) and increase their income and expenditure by this amount each year


Give 3 examples of state benefits that some people rely on for their income.

- Jobseekers Allowance (JSA)
- Universal Credit
- Personal Independence Payments (POP); previously called Disability Living Allowance


What might a change in government mean>

Changes in people's social security policy. When changes happen, they create great uncertainty for people who are in receipt of benefits or who think they may have to claim them in the future. It is difficult for them to factor these changes into their financial plans


What are the 3 forms of debt in the UK?

- Equity withdrawal: this is additional borrowing based on the difference between the value of a house and the outstanding mortgage. This additional borrowing was very common prior to the FC, and was often used to finance holidays, new cars and extensions, pay off credit cards. When house prices were rising, people relied on an increase in the value of their house to pay for the extra mortgage.

- Other types of debt (Hire Purchase, unsecured loans, credit cards and overdrafts).

- Student debt: the amount an average student will owe when they graduate is set to rise.


What does the average student expect to owe?



When do students start paying back their loan?

When their income reaches £21,000


What does 'over-indebted' mean?

People owe more than they can afford to repay and may never pay it back


Who can someone who is indebted seek advice from?

Organisations such as MAS, CA and StepChange


What 6 things can prospective lenders see about someones' financial footprint?

- How much the person has borrowed in the past, when and how often
- Whether their borrowing has increased overtime and by how much
- How many loan applications they have made and what the results of these were
- How, to what extent and when they have been paid off their debts
- Whether they have missed payments
- Whether they have ever defaulted on a debt


Give 3 examples of things that can be negatively affected if somebody has a poor financial footprint.

- Not being able to gain a mortgage to buy a house
- Not being able to access hire purchase
- Not being able to set up a mobile phone contract


What will happen if somebody is not able to borrow?

- The only option is to save up, which is not feasible in the case of buying a house
- Being refused credit also means that it will not be possible to borrow money in an emergency
- If they are desperate to borrow, they may be forced to go to a moneylender or payday loan company that will charge extremely high interest rates and may use aggressive money recovery techniques


What are other options to gain income after being made redundant?

- Sell assets, e.g. downsize property to receive a lump sum and so reduce mortgage
- Cut down discretionary expenditure
- Contact lender to secure a payment holiday for a few months, or extend mortgage
- If you have PPI you will be able to get some income for a period of time, 6 months to a year


What are the 5 key features of information and advice that people need in order to make financial decisions and draw up plans?

- Accurate: the description must be correct (e.g. the cost of an insurance policy and the level of cover in the event of a claim)
- Up to date: (e.g. correct interest rates)
- Transparent: must be clear and not hide anything from customers (e.g. any penalties for early repayment or withdrawal)
- Timely: info must be available when customer needs it
- Sufficient: so the customer has a clear idea of what a product will do for them, but not too technical


What are the 6 factors that influence financial choices?

- The original want or aspiration (e.g. strong desire for house = strong desire for mortgage)
- Feasibility of access
- Information sources
- Personality
- Price and product features
- Reputation of provider


What is the definition of ethics?

The moral principles that govern a person's behaviour


What are people looking for increasingly in a financial provider?

A degree of moral behaviour


How can a provider behave ethically?

A provider must go beyond simple compliance and have an ethical culture


What is culture defined as?

Shared values - the beliefs and norms that determine how people are expected to behave


What is an initiative of the FCA regarding ethical behaviour?

'Treating customers fairly (TCF)' under which providers are expected to put the well-being of customers at the heart of their business


Give 3 examples of how providers have not developed an ethical culture.

- An advisor sells a product that is clearly unsuited to their circumstances, e.g. mis-selling PPI; either because they could not afford them or they would not qualify to benefit from them
- A bank makes charges that are out of proportion to the cost of providing a product
- A bank makes exaggerated and unrealistic claims for its products when compared with products of its competitors (E.G. the unrealistic claims about endowment policies, which people bought as repayment vehicles for interest-only mortgages in the 80s and 90s). Customers were told that the endowment polcicies would grow fast and by the end of the mortgage period, would be worth enough to pay off the mortgage and have a surplus left over. The mis-selling lay in the fact that the advisors made false assurances and promised customers something they could not deliver).


Give 3 examples of how providers have not developed an ethical culture.

- An advisor sells a product that is clearly unsuited to their circumstances, e.g. mis-selling PPI; either because they could not afford them or they would not qualify to benefit from them
- A bank makes charges that are out of proportion to the cost of providing a product
- A bank makes exaggerated and unrealistic claims for its products when compared with products of its competitors (E.G. the unrealistic claims about endowment policies, which people bought as repayment vehicles for interest-only mortgages in the 80s and 90s). Customers were told that the endowment policies would grow fast and by the end of the mortgage period, would be worth enough to pay off the mortgage and have a surplus left over. The mis-selling lay in the fact that the advisors made false assurances and promised customers something they could not deliver).


What is executive remuneration?

An ethical response to the issue would be for a provider to limit the salaries and bonuses it pays to its top staff, while maintaining a reasonable difference for the pay of people at lower levels in the business


Where is there increasingly pressure on financial providers?

To take more general responsibility for their actions in the world in which they operate. Therefore, they need to consider the effects of their business and of their decisions on stakeholder groups other than shareholders and top directors.


Give 5 examples of stakeholders.

- Customers
- Employees
- Communities
- Disadvantaged groups in other countries
- The environment


What does corporate social responsibility (CSR) refer to?

Any action or project in which a company goes beyond the interests of shareholders and top management in order to benefit other stakeholder groups, a self-imposed ethical policy


What do some critics say about CSR?

That it is simply window dressing an overall market campaign and aims to create a good image in order to cover up less ethical policies


What do some critics say about CSR? (2 points)

- That it is simply window dressing an overall market campaign and aims to create a good image in order to cover up less ethical policies
- Others comment that financial providers should concentrate on its main services, and maybe it could lower interest rates if it didn't have to pay money on CSR projects


Give 3 examples of CSR in action.

- Barclays 2015 Citizenship Plan
- HSBC environmental work in China
- Coop; a social banking unit, socially finance


What is ethical investment?

When someone chooses to save in a way that means the money will be used for what that individual considers to be good purposes. Also, the company they invest in takes into account the wider impacts of its activities on society and the environment.


Give an example of an ethical investment dilemma.

Whether you save money with a financial provider and they lend to a cosmetics company that tests its products on animals


What is the Ethical Investment Association (EIA)?

An organisation that brings together and offers support to financial advisors who want to promote green and ethical investment


Give an example of a financial advisor promoting green and ethical investment.

Offering investment into hydrogen-powered cars, which are more energy efficient compared with diesel or petrol engines


What is the Principles for Responsible Investment (PRI)?

An initiative set up by the United Nations Environmental Programme, a set of voluntary guidelines for investment firms that want to address social and environmental issues (e.g. human rights, climate change)


What is sustainable development?

Development that meets the needs of the present without compromising the ability of future generations to meet their own needs


What are the 3 aspects of sustainability in relation to financial services?

- Sustainability of an individual financial services provider, in other words they will not fail. Can they maintain their level of service, meet its obligations, are its products sustainable; do they meet the long term needs of its customers?
- Sustainability of the customers of financial service provider; are they managing their finances so they can afford to live well and not become indebted/face bankruptcy, can they achieve a good balance between consumption and saving during their working lives for themselves and their children and secure a comfortable old age?
- Sustainability of the overall financial markets


What are 3 ethical and sustainable considerations in choosing financial products?

- Refer to the EIA (Ethical Investment Association). EIA members can search the website for a financial advisor who is also a member and who will give them advice to suit them.
- Search for an affinity savings account, these are linked to a particular charity or good cause. The provider makes a cash payment from its own funds to this charity based on the average balances held in the affinity group accounts
- People who are very keen on buying ethical and green products might consider becoming customers of a building society or mutual


What will some Muslims buy?

Only financial products that comply with Sharia Law


What does Sharia law also state?

That a person or an institution must place their money only in investments that are ethical, must be permissible or halal


What does investments according to Sharia law that are halal mean? (3 points)

- Free of interest, speculation and gambling as these are considered to be forms of exploitation
- Made in permissible activities. (E.G. not industries such as alcohol, tobacco, gaming, adult entertainment and weapons). The permissible financial products are ones offered at an Islamic banks or a conventional bank, which offers Sharia-compliant products.
- Separately approved by an Independent Sharia supervisory board to ensure that the principles have been adhered to. Anyone who does not comply with this rule must pay money t charity.


What does investments according to Sharia law that are halal mean? (3 points)

- Free of interest, speculation and gambling as these are considered to be forms of exploitation
- Made in permissible activities. (E.G. not industries such as alcohol, tobacco, gaming, adult entertainment and weapons). The permissible financial products are ones offered at an Islamic banks or a conventional bank, which offers Sharia-compliant products.
- Separately approved by an Independent Sharia supervisory board to ensure that the principles have been adhered to. Anyone who does not comply with this rule must pay money to charity.


When do people need financial advice? (2 points)

- When buying a financial product, to help them make an informed choice
- Also during the period they are using the product


Give an example of how an informed customer will make better decisions.

Interest rates may change, personal circumstances or the economic conditions within the country may change. So, people should seek updated advice every year to make sure their financial plan is on track and that their needs have not changed without them realising it.


When does making a bad choice have more significant unfortunate consequences?

- With short term products (e.g. current accounts/savings accounts) it is easier to switch to a different one.
- However with long term products (e.g. mortgages) they are more inflexible and people need to know the facts before committing themselves. They can experience financial problems if they do not understand the agreement they are making.


What are the 10 sources of financial advice?

- Information from providers
- Marketing brochures and leaflets
- Provider websites
- TV and Radio Adverts
- Provider staff
- Information from the media
- Public sources of information
- Information from charities
- Financial advisors
- Family and peers


What are the features of the information that is from providers? (5 points)

- They will only provide information on their products, not any other providers.
- Much of the information is quite general and aimed at a large audience.
- The T&Cs can be hard for people to understand and they may need help interpreting them.
- FCA requires information given by financial providers to be fair and most misleading, and in plain English.
- The provider should point out the cost, penalties and other obligations (E.G. someone should be aware of the consequences of becoming overdrawn).


How can consumers use marketing brochures and leaflets?

Consumers can 'shop around' and collect leaflets, the marketing material will give some detail. These leaflets can be collected in branch or received through the post, or through cold calling.


Why are TV and Radio Adverts sources of advice?

They do not give a lot of information and are intended to publicise the provider's name as widely as possible. They seek to build brand awareness.


Give an example of information from the media as a source of advice.

Money Box on Radio 4, that gives the latest news on personal finance plus advice to those trying to make the most of their money. It gives information but does not aim to market products. They identify problems that consumers are having and try to identify scams. There is also a weekly interactive programme that answers listeners' questions on financial issues. Plus there is a website.


Give 3 examples of sources of information from the media.

- TV and Radio
- Newspapers
- Price comparison websites


Give 4 advantages of price comparison websites.

- Consumers can access at a glance a list of products from different providers, which helps them make a choice.
- Consumers can get information on a number of providers without contacting them separately, which saves time.
- Consumers can find the 'best buy' tables.
- Consumers can enter their own specifications and find products to suit their needs.


Give 4 disadvantages of price comparison websites.

- Not everyone has access to a computer and some are not computer literate
- Not all price comparison sites are reliable
- The price comparison websites gives the headline details, consumers should always read the small print and T&Cs
- Some price comparison websites are sponsored by specific providers who may push their own products and not give impartial advice


What are public sources of information?

- Money Advice Service
- Financial Conduct Authority (FCA)
- Office of Fair Trading


What is the Money Advice Service?

It gives free and unbiased money advice to everyone in the UK via its website, over the phone and face to face. It provides a number of services.


Give 3 examples of services provided by the Money Advice Service.

- Money Health Check: This looks at a person's overall financial position in relation to their circumstances and aims to anticipate future events. The MAS offers an online money health check. When they have answered the questions, a person gets feedback in the form of an action plan. Although the MAS does not recommend a particular brand.
- Financial education and information: the website gives information on life events, managing your money, money topics and tools/resources
- Debt advice


What does the FCA provide?

It has a website which contains a lot of information on the main groups of financial products and how consumers can protect themselves against bad products, mis-selling any scams, making complaints and receiving compensation


What does the Office of Fair Trading provide?

Its website contains advice about consumer alerts, problems with customer service


What 3 charities are providers of financial information?

- Citizens Advice
- StepChange Debt Charity
- National Debtline


What does National Debtline provide?

It is a free service and its debt advice includes a self-help pack, fact sheets, guides and review packs, personal budget sheets, debt options and sample letters


What are the 2 types of financial advisors?

- Independent financial advisors (IFA)
- Restricted advisors


Who are independent financial advisors (IFA)?

They offer independent advice and are able to consider all types of retail investment product that might meet a client's needs and objectives. It must be unbiased and unrestricted advice based on the comprehensive and fair analysis of the relevant market. They must tell consumers that they are independent.


Who are restricted advisors?

These can only recommend certain products from one or a limited number of providers. (E.G. they offer advice on Pensions or ethical investment). They are not allowed to use the word 'independent' to describe their advice.


What is the Retail Distribution Review?

It prevents financial advisors and sales staff from being paid commissions by the firms whose products they are selling. It applies to pension annuities and unit trusts but not to some mortgages and insurance policies.


What is the aim of the Retail Distribution Review?

To stop sales people from pushing the sale of products that pay them the biggest commission


What does the Retail Distribution Review mean that clients have to do?

Professional advisors charge their clients for their services and so the client needs to ask beforehand how much they are going to be asked to pay


What must financial advisors inform customers?

- That they will be charged a fee for the advice they are given and provide details of the charges
- Make it clear whether they are independent or restricted, so that the customers are given advice that is specific to their needs


What must financial advisors inform customers? (2 points)

- That they will be charged a fee for the advice they are given and provide details of the charges
- Make it clear whether they are independent or restricted, so that the customers are given advice that is specific to their needs


What has the new approach to financial advice charging done? (2 points)

- Made things transparent, as before customers often did not know the advisor received a commission from the provider when the customer bought a product or indeed how much the commission was
- Also it is hoped that the approach will restore consumer trust and avoid mis-selling scandals in the future


What is the disadvantage of the new charges from financial advice?

That it makes getting financial advice expensive and many people may not be prepared to pay for the consultation


What is the advantage of asking family and friends for financial advice?

That someone who is close to you has your interests at heart and would have a good knowledge of their personal circumstances, their personality and their wants and aspirations (however their knowledge of financial products will most likely be poor)


What is the disadvantage of asking family or friends for financial advice?

The relative or friend does not necessarily have a good (or any) knowledge of financial products. Even if they have used the product before, they do not know whether it suits the person they are advising and key aspects of the product might have changed since they bought it.


What is a situation where a person would need to consult a relative or friend regarding financial decisions?

If they are buying a financial product jointly. Each would listen to each other's point of view, take a joint decision that suits them both and be fully aware of the responsibility that each has to the other.