Financial services, regulation and ethics

11 chapters of study text including test your knowledge questions in most sections

Audiovisual presentations for many of the sections on the first 3 chapters only to help get your studies off to a flying start

Revision assessments for each chapter to help confirm your understandin...

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CPD credit

You will be credited with the CPD times listed within the revision test sections. This will be added to your CPD certificate when you complete each assessment. Your CPD certificate can be viewed and printed from the CPD certificate link on the left hand menu at any time.

By studying each chapter and then taking the end of chapter assessment this will create an entry on your CPD certificate containing:

Your personal details

Course name

Chapter name

Assessment results for each chapter

Estimated CPD time for each chapter.

After taking a chapter assessment if you go to the CPD certificate link you can produce a CPD certificate. By selecting the date filter you can choose which items to include on your certificate. You can also download this to excel which will allow you to edit the certificate as required.

The estimated CPD times allocated the first time you take the end of chapter assessments are:

R01                 

Hours

Chapter 1

3.5

Chapter 2

7

Chapter 3

5.5

Chapter 4

3.5

Chapter 5

5

Chapter 6

12

Chapter 7

5.5

Chapter 8

8

Chapter 9

2.5

Chapter 10

4.5

Chapter 11

3

Total       &nb...

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Statement of Professional Standing (SPS)

All advisers giving independent or restricted advice must hold a Statement of Professional Standing (SPS). This details evidence they subscribe to a code of ethics, are qualified and have kept their knowledge up to date.

Bodies accredited by the FCA will be responsible for issuing individuals with an SPS and for ensuring that advisers hold an appropriate QCF Level 4 qualification.

If an SPS is removed from an adviser, the FCA could levy a fine on them, suspend them or even decide to remove their approved person status, although it could also agree to an action plan being undertaken before reinstatement.

FCA monitoring

Firms are obliged to inform the FCA if any of their advisers fall below its competence or ethical standards.

The FCA collects information about individual advisers, such as the qualifications they hold and which accredited body they use. The FCA uses this database to help identify the highest risk individuals.

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Where we have created an audiovisual presentation you can view it in a new window by clicking on the image that appears at the top of the section. As detailed in the contents and information page before purchasing this module there are a selection of animated audiovisual presentations (total of 1 hour of viewing time) in the first 3 chapters only. These presentations are costly to create and maintain so are limited to cover some of the sections in the first 3 chapters only to help get your studies off to a flying start.

In a modern economy, the financial services industry performs four main functions:

To provide a medium through which savings can be channelled into capital under management

To provide a means by which short-term deposits can be matched with the needs of borrowers needing long-term funds

To allow people and companies to insure against the risks that they do not wish to take, but that others are prepared to assume in return for payment

To allow investors to diversify risks across a number of asset classes and investment products

Short-term savings

Banks and building societies provide a safe and readily accessible home for individuals to deposit their surplus funds, whilst at the same time they are benefitting from being able to use the money deposited to make a return for themselves. Banks and building societies lend the money they receive from their savers to their borrowers. The interest they charge their borrowers is higher than the interest they pay to their savers, and the difference (after operating costs) generates a profit for the bank’s shareholders or the building society’s members.

Some of the profit is distributed back to account holders in the form of better interest rates. A bank may also use ...

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Longer-term investment and capital markets

Capital markets developed for two key reasons:

Investors needed to be able to invest in assets that provided growth above the general increase in prices (i.e. to achieve a ‘real’ rate of return)

Companies needed to raise money without always having to borrow it from banks

For these reasons, two different types of investment exist.

Shares represent part-ownership of a private or public limited company. By buying shares, the investor is able to benefit from any increase in the value of the company - which is reflected in its share price - and to receive some of the company’s surplus profits in the form of dividends . Some categories of shareholder are also able to vote on some of the company’s key decisions.

Fixed interest stocks (bonds) allow investors (individuals and corporate investors) to lend money to companies in exchange for a payment of interest. The interest received by the investors will be higher than that available from a bank or building society, due to the higher risk represented by such an investment (i.e. the risk that the company could default on the interest payments, or fail altogether with the risk that borrowed money is not repaid). This is a similar principle to that which applies to loans to the government in the form of gilts (mentioned above).

Although these investments can be purchased directly, they are also available through collective investments such as unit trusts, stocks and shares ISAs and investment and pension funds.

Test your knowledge - question: How does the government use the savings of individuals to meet some of its borrowing needs?

Answer : Purchase course for answer

Within the financial services sector there are four components:

Financial infrastructure (payments, settlements, clearing, trading systems)

Financial markets (on exchange and over the counter)

Financial firms (banks, building societies, insurance companies, pension funds)

Financial sector authorities (Bank of England, FCA, PRA, HM Treasury)

Financial infrastructure

The success of the entire financial sector is heavily dependent on the payment, settlement, clearing and trading systems within it. The payment systems are important because they deal with high values and because they are widely used by customers. Their failure could impact from firm to firm, or from market to market, and this could impact on the normal economic activity of the country.

The payment systems in the UK are overseen by the Bank of England, its role being to monitor and facilitate the payments systems and Sterling money markets. The former Payments Council (which has been replaced by the Payments Systems Regulator (PSR) - see below) provided the forum for the UK’s financial institutions to develop banking systems for the future and to facilitate developments in payments. It maintained close links with the three separate clearing companies responsible for maintaining the efficiency and integrity of the payment systems: CHAPS Clearing Company, Cheque and Credit Clearing Company, Faster Payments Scheme and BACS Payment Schemes Ltd.

Pay.UK is the operator of  the UK’s retail payment systems, setting standards for payment systems providers.

The Payments Systems Regulator (PSR)

In April 2015, the Payments Council was replaced by the Payments System Regulator, which is the economic regulator for the £81 trillion payments systems industry in the UK. The purpose of the PSR is to make payments systems (that are accessible, reliable, secure and value for money) work well for those that use them. It is a new competition-focused regulator for retail payment systems, working from within the FCA, and its statutory objectives are to:

Ensure that payments systems are operated and developed in a way t...

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Life assurance companies

Life assurance companies sell their products either through intermediaries (independent or restricted - multi-tied or tied) or their own sales teams. Some companies adopt specific policies to support one element of the advice sector.

Friendly societies

These organisations were established in the 19th Century as mutual self-help groups, with all the profits after expenses being distributed to the groups’ members. Their self-help status was assisted by being granted an exemption from taxation. This allows them to offer tax-efficient savings plans to investors, although the nature and size of investments available are restricted by legislation.

Although still a part of the overall financial services industry, most societies are small and only a few actively sell tax exempt endowment-type savings plans, distributed either by independent advisers or the society’s own sales staff. They are also able to offer a small range of home service-type small industrial life policies.

The Friendly Societies Act 1992 has allowed them to apply for corporate status and extend their range of products to include unit trusts/OEICs and ISAs.

Multi-distribution organisations

Many large organisations with a well-established customer base (e.g. Marks and Spencer) have taken advantage of this in recent years by starting to offer their own limited range of financial services products, which frequently includes life assurance, unit trust/OEICs, ISAs and sometimes pensions.

Explain the difference between independent advice and restricted advice.

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The UK is an international financial centre, playing host to many overseas firms and home to financial markets which are an integral part of the global economy. London is the world’s largest and most diverse international marketplace, and this means it is closely involved with the financial bodies of many other countries.

There are a number of European Union (EU) bodies a...

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Most of the current financial services regulation originated from the EU; in fact, about 70% of the FCA’s policymaking effort has been driven by the EU. These rules continue to apply post-Brexit, unless and until they are repealed by the UK Government.

The UK voted to leave the European Union in a referendum on 23 June 2016.

On 31 December 2020 at 11pm UK insurers lost their passporting rights to write insurance business in the EEA, having to operate through their subsidiaries (and vice versa for EEA companies)

Negotiations began in March 2021 to establish a Memorandum of Understanding (MoU) between the UK and EU, but these h...

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The amount of capital firms should hold

The rules they must comply with when carrying out business with customers

The controls which must be applied to counter the risks of money laundering and terrorist financing

The tests to apply when assessing the suitability of new controllers or large shareholders

The requirements which must be imposed to counter the risk of market abuse

The disclosure which companies must make when seeking new capital

State the three objectives of the Financial Services Action Plan.

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In the UK, the Chancellor of the Exchequer has direct responsibility for financial services and introduces legislation to regulate the industry which is implemented by the Treasury.

The three pieces of legislation governing the regulation and conduct of business of the financi...

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The government regulates and participates in finance through its role in maintaining the economic stability of the country, fulfilling its electoral mandate of protecting the interests of UK citizens.

Taxation within the UK

Taxation is how the Chancellor raises money for the government to run the country. The forms of taxation which exist in the UK and the amounts charged have a major impact on the country’s economy and the financial services industry. Changes in taxation not only affect individuals’ disposable income, but also affect trade and the economic activity of the country and impact on the financial services industry. The money raised through taxation is used to provide services such as the NHS and to redistribute wealth from those most affluent to the poorest members of our society through social security benefits and payments.

An increase in taxation can lead to a reduction in disposable income for taxpayers. This will impact on people’s spending decisions and may affect their willingness to purchase financial products. However, a reduction in taxation will give people more money to spend, therefore stimulating the economy by injecting more funds into the system.

The Chancellor uses tax concessions to encourage people to invest and the following list gives examples of products offering tax concessions:

Individual Savings Accounts (ISAs) and Junior ISAs (JISAs)

Pension schemes (including personal pensions and stakeholder pensions)

Qualifying life assurance policy proceeds

Friendly society savings plans

Capital gains on gilts and corporate bond...

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The number of beds available for state funded long-term care for the elderly and infirm is also reducing, and the costs of private provision are frequently high. Although there are policies available to fund this need, there is currently no tax benefit from doing so and few people see the expense as essential, often meaning that a family home needs to be sold to meet the costs.

As the population ages alongside a declining birth rate, there are fewer working taxpayers supporting the system for those retired or claiming benefits and a continually worsening situation. Possible actions that the government could take to relieve the situation include:

Laws requiring compulsory contributions to pensions by employers and employees (partly addressed through the auto-enrolment into workplace pensions and the introduction of NEST)

Compulsory private medical insurance

Tax breaks for pensions, health insurance, medical insurance and long-term care insurance

All these could help to relieve the situation, but current arguments against them focus on the costs involved in their introduction.

What action is carried out by the Monetary Policy Committee to assist in achieving the government’s inflation target?

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NOTE - These questions are designed for revision purposes only and are therefore not written in an exam style. If you require exam style que...

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