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CEMAP 1, 2 & 3

Section 1: The UK Financial Services Industry

CeMAP®1 UK Financial Regulation
Unit 1 - Introduction to the financial services environment

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Section 1: The UK Financial Services Industry

Functions of the financial service industry

Money has two important factors;
A medium of exchange
A unit of account
A common denominator against which
values of all goods and services can be
measured
...
This Sector is
also known as ‘cash-rich’

DEFICIT
Those who own less liquid funds than they
currently wish to spend
...


Financial intermediaries are institutions that borrow money from SURPLUS sector at a lower
rate and lend it to the DEFICIT sector at a higher rate
...


Why individuals and companies need financial intermediaries?
o

Maturity transformation – intermediaries are able to offer a wide range of deposit
accounts to a wide range of depositors, to ensure the depositors funds aren’t all
withdrawn at the same time
...


o

Risk transformation – risk of default is minimised by the intermediary because money
is leant to a wide range of borrowers
...


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Section 1: The UK Financial Services Industry
Financial Institutions

Prior to the 1980’s the difference between types of financial organisations was more clearly
defined, but today boundaries are less clear
...
‘Bancassurance’ was originally a term used when a
bank owned an insurance company, but banks can now offer a much wider range of
services
...

Other jobs does the bank of England do?
o

Issuer of banknotes – ensures an adequate supply of note and coin is in
circulation

o

Banker to the government – provides finance for the government by automatic
loans

o

Banker to the banks – all the major banks hold accounts and the bank has
considerable control over interest rates in the money markets
...


o

Lender of last resort – makes fund available when the banking system is short
of liquidity

The bank of England was also formerly responsible for managing new issues of giltedged securities (known as gilts, these are loans to the government)

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Section 1: The UK Financial Services Industry
This function has now been transferred to the debt management office within the
Treasury, to avoid any conflicts of interest that might arise because of the bank’s
responsibility for setting UK interest rates
...




The legislation divided the responsibility for the financial stability between the
Treasury, the Bank of England and two new regulators 0 the Prudential
Regulation Authority and the financial conduct authority
...




The Financial Conduct Authority (FCA) is responsible for the regulation of
conduct across the financial services industry
...




Savings and loan facilities are provided
...




Members share a common bond, such as living in the same area,
working for the same employer or belonging to the same church
...




Savers are protected through the Financial Services Compensation
Scheme
...




A unique feature – members’ savings and loan balances are covered by
life assurance, subject to overall limits
...


Since the Building Societies Act 1986, building societies have been able to covert to
banks, with the status of a public limited company
...

The possibility of a windfall on the conversion of a mutual organisation has led to what
is known as ‘carpetbagging’ – the practice of opening an account with a society in the
hope that it will demutualise
...




Largely the province of the ‘High Street’ banks and building societies
...


Wholesale banking – Process of raising money through the wholesale money
markets
...



The rate of interest charged in the interbank market is the London Interbank
Offered Rate (LIBOR)
...


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Section 1: The UK Financial Services Industry
Independent commission on Banking

Established in June 2010 in the wake of the 2007 global financial crisis
Key recommendations were:


UK retail ring-fencing – separating retail banking from investment banking to
safeguard against risking banking activities
...




Bail-in and depositor preference – statutory power to recapitalise banks
...




Structural reform – including limits on banks link with investment and wholesale
banking
...

There still remains a large
number of people who don’t
have a current account
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(Estimated to be in excess
of 3M people)

Section 1: The UK Financial Services Industry
Clearing
Clearing, in the baking context, refers to the process each day of settling the account
between banks as a result of transfers by cheque, direct debit and debit cards
...




Payment systems in the UK are regulated by the Payment Systems Regulator
...






European laws governing financial services are most commonly in the form of
Regulations and Directives
...
A nation state can only opt out of the regulations if a specific dispensation is
granted
...
The objective of the directive must be achieved within a certain
timescale, typically two years
...


Because of the weaknesses that came to light following the recent financial crisis, the EU
established the following:
European Supervisory Authorities
Within the EU there are three European Supervisory Authorities:
The European Securities and Markets Agency



Contributes to the financial stability of the European Union
Has direct supervisory responsibility for credit reference agencies

The European Banking Agency


Provides advice to EU institutions in the areas of banking, payments and emoney regulation

The European Insurance and Occupational Pensions Authority



Core responsibilities are to support the stability of the financial system
Provides protection of policyholders, pension scheme members and beneficiaries

The Single Supervisory Mechanism
The Single Supervisory Mechanism is a new system of banking supervision for Europe
...


The European System of Financial
Supervision




Supervises individual financial
institutions
Comprises a network of
national financial supervisors
The FCA is the national
financial supervisor for the UK

The European Systemic Risk Board




Monitors and assesses risks to
the stability of the financial
system as a whole
Plays a key part in the
European System of Financial
Supervision
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Section 1: The UK Financial Services Industry
Introduced in November 2014, the SSM establishes a common approach to banking
supervision
...


Regulation in the UK

Regulation of financial services in UK is a five-tier process
...


Fifth Level

The arbitration schemes to which customers’ complaints can
be referred, for example the Financial Ombudsman Service
...

Changes in taxation affect the financial services market in two ways:


Increased general taxation reduces the amount of money available for investment, or
to fund loan repayments
...




Everyone acquires a domicile of origin at birth – this is the domicile of their
father, or of their mother if the parents are not married
...




If the individual is not UK domiciled, but has lived in the UK for at least 17 out of
the last 20 year, they are deemed to be UK- domiciled for inheritance tax
purposes
...



If a person is domiciled in
the UK, or deemed domicile,
inheritance tax is charge on
their worldwide assets



Persons who aren’t
domiciled in the UK are
liable only to inheritance tax
on their assets held In the
UK
...




Any person who spends
more than 183 days in the
UK in a given tax year, is
automatically regarded as a
UK-resident for tax
purposes
...




The Chancellor usually delivers his budget in March of each year, following which, a
Finance Bull is published for approval by Parliament
...




Any earned income in excess of this figure is subject to income tax
...


Not all income that an individual receives in taxable
...


Income not assessable to tax














Redundancy payments up to £30,000
The first £3,600 of shares given to an employee
in their employer’s company as part of a Share
Incentive Plan
Interest on NS&I Savings Certificates
The first £2,000 of shares given to an employee
in their employer’s company
Income from ISAs
Gift aid payments
Proceeds of a qualifying life assurance policy
Educational grants
War widow’s pensions
Some social security benefits
Housing grants from Local Authorities 12
Capital element of a purchased life annuity

 r

Section 1: The UK Financial Services Industry
Income tax rates for 2015/ 16
Earned Income
When all relevant deductions have been made from gross income, what remains is
taxable income, the amount to which the appropriate tax rated are applied in order
to calculate any tax liability
...
g
...


Allowances and tax rates 2015/ 16

Share Dividends







Received net of 10% tax deduction
Non-taxpayers can’t reclaim this
deduction
Lower and basic rate taxpayers
have no further liability
Higher-rate taxpayers have a
further 22
...

Additional-rate taxpayers must pay
a further 27
...

Additional-rate taxpayers must pay
a further 25% of the gross interest

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Section 1: The UK Financial Services Industry
Personal Allowance


The personal allowance represents the amount of income than can be received each year
before income tax is charged
...




For those born before 6 April 1938, the allowance is £0, 660
...
The allowance can be transferred to the spouse, even if the spouse
is not blind
...
The relief if restricted to
10% of the allowance
...




A form P60 is issued to the employee by
the employer in April each year
...


Allowance deductions against tax
Taxpayers can make certain deductions from gross income before their tax liability is calculated
...


Allowable expenses



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The costs of carrying out one’s employment
For self-employed – expenses incurred must be ‘wholly, exclusively and necessarily’ while doing
the job
...




The sum payable on death must be at least equal to 75% of the total premiums
payable
...


The total income is
the reduced by any
allowable deductions
...


The figure you are left
with is the taxable
income and the
current tax rates can
now be applied
...

In order to provide these benefits, the state collects contributions from most employees,
employers and the self-employed
...

There are four classes of National Insurance Contributions, namely:

Class 1 = Employee’s and employer’s contributions
All employees whose earnings exceed a specific figure must pay Class 1 contributions; their
employers must also pay contributions
...



Employees pay 12% on earnings between what is known as the ‘primary threshold’
(£155 per week in 2015/ 16) and the ‘upper earnings limit’ (£815 per week in 2015/
16)
...
8% on all of the employee’s earnings above what is known as the ‘
secondary threshold’ (£156 per week in 2015/ 16 – with no upper limit



Contributions are reduced if the employee is ‘contracted-out’ of the state second
pension (S2P0 via a defined-benefit pension
...
The contributions are
£2
...


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Section 1: The UK Financial Services Industry

Class 3 = Voluntary contributions


These are voluntary contributions that can be paid by those who wouldn’t otherwise
be entitled to the full Basic State Pension

Class 3A


New category of National Insurance to be introduced from October 2015
...


Class 4 = Self-employed profit-related contributions



These are contributions paid by the self-employed based on their annual profits
...

Contributions are payable to the HMRC in half-yearly instalments, along with income
tax
...


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Section 1: The UK Financial Services Industry

Capital gains tax
This tax is payable on the net gain when certain assets are sold, transferred, or given to
someone else
...
The term ‘net gain’ means the full profit on the item,
less any allowable deductions
...
It
may still be possible however, for a non-resident to claim principal residence relief if they live
in the property for at least 90 days in a tax year
...
g paintings by an art
dealer0, the gains are treated as revenue and subject to either Income Tax or Corporation
Tax
Disposals
The following is a list of some disposal that will not incur a CGT liability:



Transfer between spouses
Distribution of assets at death – they are acquired by the personal representatives at
market value
...

NS & I Savings Certificates and SAYE schemes
ISAs
Foreign current for personal expenditure
Private cars
Gains on life assurance policies which are disposed of by the original owner
...
This exemption cannot be carried forwards if it’s not used
...


Calculation of CGT
Allowable deductions
When the amount of the gain to be taxed is being calculated, the following deductions can
also be made:




The costs of purchase can be added to the purchase price and selling costs can be
deducted from the sale price
The cost of improvements (but not from the costs of maintenance and repair)
Capital gains made prior to 31 March 1982 are not taxed
...

For basic rate taxpayers, the taxable gain is subject to 18% tax – for higher and additional
rate taxpayers, the rate is 28%
Example

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Section 1: The UK Financial Services Industry

Entrepreneurs’ Relief
A lower rate of 10% applies to the first £10 million of cumulative gains arising from the
disposal of trading businesses – known as ‘entrepreneurs’ relief’
...

Most property letting businesses are exempt from this relief
Payment of CGT



Charged on gains arising from disposals in the period 6th April – 5th April the following
year
...


Inheritance Tax
This tax is levied mainly on the estates of deceased person, but can also be payable on
certain transfers made during a person’s lifetime
...
Estates up to this value are within the nil-rate band and 0%
tax applies
...


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Section 1: The UK Financial Services Industry

Potentially Exempt Transfers
The size of the estate will also include the value of transfers made during the previous
seven years prior to the date of death
...
Tax on this type of transfer is due immediately at a rate
of 20%
...

Small gifts of up to £250 per tax year to any number of different people
Donations to political parties and to the nation
...
Increased to £2, 500 from each grandparent and £5,
000 from each parent
...

An annual exemption of £3, 000 per tax year for gifts not covered by other
exemptions
...


Value Added Tax (VAT)

VAT is an indirect tax on most business transactions which take place in the UK
...
The standard rate of VAT is 20%, but 5% for
domestic heating




Some goods and services are exempt, e
...
loans and insurance, but not financial
advice
Some are zero-rated, e
...
books, children’s clothes and food
Businesses must register for VAT if their annual turnover (not profit) is above a
certain figure
...


Stamp Duty

Stamp duty is a tax payable by the purchaser on certain transactions, such as the purchase
of securities and land
...

Documents should be stamped within the permitted time period and failure to do this could
mean that the conveyance of land cannot be registered or that share transfers will not be
accepted for registration
...
5% of the market value is payable
...


This means that transactions of £1, 000 or less are exempt


1
...
An example of a bearer
instrument would be a share warrant or stock certificate which is payable to the
holder
...


Stamp Duty Land Tax (SDLT)
Stamp Duty Land Tax (SDLT) is due on the purchase or transfer of residential property or
land in the UK where the amount given is above a certain threshold
...


From 1 April 2015, corporation tax is levied at 20%
For companies with profits up to £1
...

For those companies with profits over £1
...


Withholding Tax





The aim of this tax is to make sure that income doesn’t leave the UK untaxed
Normally applies to income earned in a country by non-residents in that country
In the case of visit sportsmen/ women and entertainers from other countries for
example, a withholding tax of 20% is charged on their earnings in the UK
...
These objectives look at the ‘big picture’ issues, such as
unemployment, inflation, balance of payments and economic growth
...
Inflation ca be defined
as ‘too much money chasing too few goods’, or excess
purchasing power in the economy, resulting in rising prices
...


Low unemployment


To expand the
economy so that there
is more demand for
labour, land and
capital
...

The aim should be a balance over the
medium term
...

Standards of living improving
Growth can be measured by the Gross
Domestic Product (GDP) - the value of
goods and services produces within the
country over a period of time
...




UK government uses the Consumer Price Index (CPI) to measure inflation



The target is to keep inflation at an average annual rate of 2%, with a maximum
‘divergence’ of 1% either way



The CPI is a similar measure to that which is used within the Eurozone, which is the
Harmonised Index of Consumer Prices (HICP)
...


The main element of monetary policy which is used to control inflation in the UK is the
rate of interest, which is now manipulated by the Bank of England’s Monetary Policy
Committee

Monetary and Fiscal Policy
Two major types of policy are used by governments to achieve their long-term objectives:


Monetary Policy – which acts on interest rates and the money supply



Governments can control the growth in the supply of money by restricting the amount
of lending carried out by banks



Manipulating interest rates can influence the demand for credit by customers
...


Fiscal Policy – which acts on public sector spending, revenue, borrowing and saving


Fiscal policy (sometimes called budgetary policy) involves influencing the money
supply and the overall level of economic activity
...
g
...
There are three general outcomes:


A balanced budget – the amount raised in tax is put back in to public
spending



A budget surplus – the amount taken away is more than put back



A budget deficit – the amount being put back is more than that being taken
out
...


A deficit means the government has to borrow to finance it
...


State Benefits
Financial planning can be affected by state benefits in two main ways:
State Benefits can affect the need for protection


The amount of protection cover required by an individual relates to what income or
capital they would need and what they already have in place, which can include state
benefits
...


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Section 1: The UK Financial Services Industry
Benefits cap
A maximum amount of state benefits that can be received was introduced in April 2013

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