Download Personal Finance for Accountants (U13763)

Personal Finance for Accountants
(U13763)
Lecture 2 The Economic and
Regulatory Environment
Lecture 2 The Economic and Regulatory Environment
• Historical context of personal finance
• Current Regulation Regime
• The financial ombudsman service (FOS)
• The financial services compensation scheme (FSCS)
• Mis-selling
Historical context of personal finance
• One of the major milestones regarding the
subject of personal finance in the UK was the
introduction of the welfare state in 1942
under the Beveridge system.
• It was proposed that people of working age
should pay a weekly contribution. In return,
benefits would be paid to people who were
sick, unemployed, retired or widowed
Historical context of personal finance
• The cost of the welfare system in the UK has
become burdensome and more recently
governments have attempted to reduce the
role of the state in the welfare system. Where
possible they have driven the provision (in
part) into the private sector.
Historical context of personal finance
• Some schemes have also been watered down
to save money. The State earnings related
pension (SERPS) was closed in April 2002. This
had enabled claimants to receive an earnings
related top-up on the basic state pension. This
was replaced by a less valuable State second
pension (S2P).
Current Regulation Regime
• The financial services authority (FSA) is an
independent non-governmental body that was
granted statutory power by the Financial
Services and Markets Act 2000. When the Act
came into force in December 2001 the FSA
became the single regulator for the financial
services in the UK.
Current Regulation Regime
• The FSA regulates the companies and
individuals involved in such activities as
investment banking, stock broking and
financial advice. They also regulate
professional firms such as Lawyers and
Accountants that offer investment business.
• The FSA is also responsible for regulating
exchanges such as the London Stock Exchange
and Lloyds Insurance Market.
Current Regulation Regime
• ‘The FSA's aim is to promote efficient, orderly
and fair financial markets and help retail
financial service consumers get a fair deal’
• http://www.fsa.gov.uk
Current Regulation Regime
• Financial Advisors
• Before depolarisation (June 2005) the
regulation specified that advisors were either
tied in that they would only sell their products
from one company or independent where
they would be in a position to choose
products across the whole market.
Current Regulation Regime
• Under depolarisation advisers are able to
become multi-tied and offer products from a
range of providers.
• Advisors that want to call themselves
independent must be able to advise across
the whole market and allow clients to pay for
advice through fees.
The financial ombudsman service (FOS)
• The financial ombudsman service (FOS) is the body
that resolves disputes between consumers and
regulated companies.
• This service is free to consumers.
• FOS covers :
Banking services; Credit cards; Financial and investment
advice;
Insurance policies; Life assurance; Mortgages; Personal
pensions;
Savings; Stocks and shares; and Unit trusts.
The financial services compensation scheme
(FSCS)
• The FSA requires advisers to have Professional
Indemnity Insurance (PI) this covers
compensation claims against the firm. If the
firm has gone into liquidation or is in financial
difficulties and it cannot meet the claim then
the financial services compensation scheme
(FSCS) will investigate the claim and pay
compensation where appropriate.
The financial services compensation
scheme (FSCS)
• In the light of the recent banking crises the compensation scheme limits
for deposits were revised effective from 7th October, 2008.
• The current limits for compensation are:
• 1. Deposit takers (Banks, Building Societies etc.): £50,000
• 2. Investment firms: 100% of first £30,000 and 90% of the next £20,000 =
£48,000 per person.
• 3. Insurance firms: The first £2,000 of the insurance claim is covered in full
after that the scheme will pay 90% of the balance.
• 4. Home finance advice (arranging mortgages) 100% of first £30,000 and
90% of the next £20,000 = £48,000 per person
Mis-selling
• The term mis-selling refers to the sale of a
financial product which does not meet the FSA’s
standards. This is a regulatory offence and the
FSA has the statutory powers to investigate and
impose fines.
• The most common problem is where the product
involved has a much higher level of risk than the
consumer realised or where the product was sold
with assurances or guarantees that the product
was not designed to meet.
Mis-selling
• The most widely publicised example is the
mis-selling of endowment mortgages. The
endowment is an insurance policy that where
the premium are invested in order to pay off
the capital sum at the end of the mortgage
period. The borrower pays interest only to the
bank or building society over the life of the
loan.
Mis-selling
Mis-selling
• Many of these products sold in the 1980s also
offered bonuses at the end of the term. These
products are now coming to full term and are
failing to pay off even the capital sum.
• In 2002 Which? research brought evidence to
light that up to five million people may have
been mis-sold an endowment mortgage policy
Seminar Work
• Review Qs pp 35 & MCQs as given.
• Required Reading
• Core Text - Personal Finance and Planning
Theory and Practice by Debbie Harrison
Chapter 2.