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 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.

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.