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Personal Finance for Accountants (U13763)

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Personal Finance for Accountants (U13763) Lecture 2 The Economic and Regulatory Environment Lecture 2 The Economic and Regulatory Environment Historical context of ... – PowerPoint PPT presentation

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Title: Personal Finance for Accountants (U13763)


1
Personal Finance for Accountants (U13763)
  • Lecture 2 The Economic and Regulatory
    Environment

2
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

3
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

4
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.

5
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).

6
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.

7
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.

8
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

9
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.

10
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.

11
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.

12
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.

13
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

14
Mis-selling
  • The term mis-selling refers to the sale of a
    financial product which does not meet the FSAs
    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.

15
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.

16
Mis-selling
17
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

18
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.
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