Financial

markets and Institutions

Types of Investments
Debt i.e. tradable bond, issued by a company or govt or non-tradable bank loan, bank
deposit
Equity/share tradable securities giving an ownership stake in a company
Other include commodities, property, derivatives, foreign exchange
Savers can invest in the above directly or indirectly (through an intermediary) through
insurance companies, pooled investment vehicles, or pensions schemes. The indirect
method gives:

Diversification
Reduction in transaction costs
Access to expertise
Access to assets that would otherwise not be available

UK banking system uses the universal bank model involves providing financial services of
various kinds, including advisory services, in addition to deposit and lending services.

Types of Assets
Tangible assets such as land and buildings (property, or real estate), machinery, oil, sugar
and gold, are all real assets. The utility of such an asset gives it an intrinsic value.
In a monetary economy, there are claims that may represent the right to a return, such as
interest and the eventual repayment of principal (on a loan), or dividends payable out of a
companys profits (for shares in a company). Such claims are financial assets.

Shares
The ordinary shareholders of a company are the owners of the company. However, it is
normal for ordinary shares to possess a vote.
Companies legally do not have to declare a dividend on ordinary shares, many of them do
in order to maintain shareholder loyalty.
For public companies, this will not be paid until the shareholders have agreed it at the
AGM.
Companies may only pay dividends out of post-tax profits that is, from their distributable
reserves.
In any single year, the dividend paid could exceed the profit for that year, because there
may be distributable reserves brought forward from earlier years.

Bonds (fixed income securities)

A bond may be defined as a negotiable debt instrument for a fixed principal amount issued
by a borrower for a specific period of time, making a regular payment of interest/coupon to
the holder until it is redeemed at maturity, when the principal amount is repaid.

Derivatives
Derivative contracts is a term encompassing contracts such as futures, options and swaps
which derive their value from the movement, up or down, in the price of an underlying
asset.

Derivatives contract enable investors to take a position in the price of an asset without
actually taking delivery of the underlying asset. For example, a position can be taken on the
price of oil, without participants in the related derivative contract taking physical delivery of
oil at any point
Derivatives can be divided into exchange-traded and over-the-counter (OTC) types.
Exchange-traded derivatives are more standardised and offer greater liquidity
OTC contracts are tailor-made to meet the needs of buyers and sellers.

Currency transaction
Currency or foreign exchange trading (or FOREX as it is commonly known) is the dealing of
the currencies of various countries.

No formal market place for FOREX trades: in London, trading is over-the-counter (OTC).
Prices are advertised on screens and deals are conducted over telephones. The major
players are investment banks and specialist currency brokers

FOREX transactions are described either as spot or forward.
Spot means the trade is to meet immediate currency needs and will settle in two
business days after the trade day (known as T + 2).
Forward is when an exchange rate is agreed today for settlement at some future
date

Pooled Funds
In order to minimise the risk involved in investment, it is often a good idea for the investor
to spread invested money over a range of instruments, thereby diversifying risk.
Individual investors investments to be grouped together and form a collective investment
vehicle. Here they pool their money in a large fund, which is managed and invested for
them by a fund manager.

There are different types of pooled/collective investment vehicle:
Unit trusts
Open-ended investment companies (OEICs)
Investment trusts.

There are also exchange traded funds (ETFs), which are typically designed to track an index.

Authorised unit trusts and OEICs are Authorised Investment Funds (AIFs) and are often
referred to simply as funds.

Differences
A unit trust differs from investment trusts and OEICs in the way it is set up, as a unit trust
is not a company with shares.

Pricing
For unit trusts and OEICs, there is a direct relationship between the value of the underlying
investments and the value of units. Units are priced according to Net Asset Value (NAV).

Investment trust shares and also ETFs, however, are priced according to supply and
demand in the stock market.

Unit trusts are, like OEICs, called open-ended funds as there is no limit to the amount of
money which can be invested. If no second-hand units are available, the fund is permitted
to create more units and expand the fund.

Investment trusts, on the other hand, are closed-ended: except when new shares are
issued eg, on launch of the trust the buyer of investment trust shares is buying them
from existing holders of the shares.

The function of securities market

Raising of capital
Transfer of risk
Price discovery
Creation of liquidity

By short-term capital, we mean capital that is lent or borrowed for a period which might range from
as short as overnight up to about one year, and sometimes longer.
By long-term capital, we mean capital invested or lent and borrowed for a period of about five years
or more, but sometimes shorter.

Price transparency, liquidity, transaction costs
Price discovery

The process through which an equilibrium price for a financial instrument is revealed
continuously through bid and offer prices, and trading

Market establish equilibrium price

Markets disseminate the price to investors/the public

Price Transparency

Important that the investor knows the price before, during and after a deal in order to
be satisfied that he has a good deal

Pre-trade transparent (data on quotes and orders) vs post trade transparency
(publication of sizes and prices of trades)
Organised markets are transparent than OTC
Liquidity

Liquidity measured by bid ask spread in quote driven market or by difference

between the best sell and buy prices in order driven markets
Liquid markets are those where large quantities are traded or where order need to
be very large to have an impact on price

Factors contributing to liquidity are:

Effective and efficient IT
Settlement systems
Stock availability
Stock lending facilities
Diverse membership

Must calculate round trip transaction costs incorporating bid-ask spreads, dealing commission and
transaction taxes, both in percentages and in absolute amounts

Transaction costs
Broker commissions (pay fee to broker because investor cant invest directly), bid ask
spreads and market impact
Costs of a share transaction for a UK investor can be broken down as follows:
Purchase cost.
The purchase cost includes a spread which is the difference between the bid and
offer price of the share.
Broker's commission
Brokers incur various costs for the resources they employ to fill orders, including
costs for market data and order routing systems, exchange memberships and fees,
regulatory fees, clearing fees, accounting systems, office space, and staff to manage
the trading process.
A typical charge could be, say, 1.5% on a deal up to 7,000 and 1.0% above that, with
a minimum charge of 25
Stamp Duty and SDRT
Stamp Duty Reserve Tax (SDRT) is payable at 0.5% on the value of purchases of UK
equities settled through CREST (ie most transactions), rounded up to the nearest 1p
and on equities not settled through CREST, at 0.5%, rounded up to the nearest 5.
(There is no Stamp Duty if the charge so calculated would be 5 or less.)
Panel on Takeovers and Mergers Levy

The PTM levy is a flat 1 on transactions (sales and purchases) that are in excess of
10,000

Market Impact
Buyers putting through large buy orders may need to push up the price of the
security up in order to make the trade.
Sellers who want to put through a large sell order quickly may need to accept a
lower price than is immediately available to a seller with a small order.
The cost effect of this tendency for fluctuating order sizes to move prices is called
the market impact or price impact, and is a significant component of transaction
costs for large financial institutions.

Limit orders, which will be filled only if the price is better than the stated limit, provide
a way of limiting transaction costs,
Market orders are filled at whatever prices are available when the order is placed.

LSE trading platforms
Three domestic trading platforms at the LSE
Characteristics of these platforms can be summarized as whether or not they are:

Order driven v quote driven

This is decided by:

Depends on liquidity of share

The trading platforms for domestic securities are:

SETS
SETSqx
SEAQ

LSE Settlement period T +2- when all paper work and legal details are in place/money also
moved between relevant bank accounts
Stock Exchange Electronic Trading Service (SETS)

Automatic matching for trades in most liquid listed shares

Only LSE members can place orders
Only standard settlement permitted
o T+2
Orders ranked by price then time of input
Change in order -> new input time
All trades anonymous due to LCH Clearnet acting as central counterparty service
(CCP) process known as novation

SETS Quote and crosses (SETSqx)

Hybrid System for less liquid stocks

Combines quote driven platform with periodic (orders) electronic auctions
(uncrossings)
Auctions at opening (8:00am), 11:00am, 3:00pm and closing (4:35pm)
If want to trade at other times of the day, Market makers must quote bid and offer
prices for transactions of at least 1* NMS (Normal market size) per person or on a
whole basis?

NMS is a minimum volume set by LSE

Stock Exchange Automated Quotation System
Price dissemination system
Pure quote driven
System used by the LSE to display market maker prices on AIM stocks (not traded through
SETS or SETSqx)

Minimum of two market makers input bid-ask spread into SEAQ

SEAQ displays two way prices to Public (brokers/dealers/investors)
Brokers Dealers deal by phone with market makers

Only market makers are able to quote prices on SEAQ

Gilt Market
The gilt-edged market is a further major capital market in the UK. The government borrows over the
medium and longer term by issuing government stocks (called 'gilt-edged stock' or gilts).
Trade in second-hand gilts will continue until the debt eventually matures and the government
redeems the stock.

Gilts settle T+1 via Euroclear UK & Ireland (using the CREST system)
Less liquid than shares, so will need quote driven system with market makers (investment
banks)
Gilt Edged Market Makers (GEMMs):

Required to make 2 way prices to customers

Must provide information on closing prices, market conditions and their turnover
and positions
Are expected to participate in Debt Management Offices gilt issuance program
Must always participate when DMO issues further debt

Main holders: UK pension funds, insurance companies overseas investor + less extent
wealthy private individuals

Quoted excluding interest (clean pricing), however settlement price includes accrued
interest (dirty pricing)
Actual bond transaction prices reflect accrued interest based on actual/actual basis
Holders of gilts can now receive coupon payments gross

New Issues of gilts
Issued by Debt Management Office (DMO) to fund the public debt/Public Sector Net Cash
requirement (PSNCR) or to refinance maturing debt
DMO typically issues gilts by auction (preferred method)

All bidder in market bid what prepared to pay for certain volume of gilts

Alternative arrangement is tap method issue announced, investors invited to tender.

Smaller volume of gilts.

If a part not take up at the required price that part is withdrawn and released into
the market later

Alternative trading venues

Set up outside of LSE
Dark Pools

Price transparency does not need to be as high

Electronic trading platforms where neither price nor identity of trading firm is
revealed
Dont know prices someone else is willing to buy or sell at
Post trade transparency is possible but not pre-trade

Multilateral trading facility

Electronic trading platforms arranged in a similar manner to SETs but designed to be

cheaper than SETs trading
Lots of investment banks, get together cause LSE charges hefty fee to trade: BATS,
CHIX, less than half blue-chip now trade on LSE

Systematic internalises

Investment banks who execute client orders by trading for their own account rather
than with an exchange or MTF
Trade their own stock

Should know description to match to right platform for exam


Algorithmic trading
Algorithmic trading
A broad term describing all scenarios where electronic platforms:

initiate orders or
decide on/ recommend aspects of orders (timing, price, quantity) generated by
humans

High frequency trading

A subset of algorithmic trading where computers make decisions or initiate orders

based on electronically received information before (human) traders get change to
process what they observe.

Role of LSE member firms

Main market is London Stock Exchange whose members are:
Broker/Dealers
May act in dual capacity (Big bang in the 1980s made this possible)

Broke a customers business (agent)

Deal directly or buy securities for own business (principal)

Equity market makers/Gilt Edged market makers

Must quote two way prices

Make market

Interdealer brokers (IDB)

Arrange matched anonymous principal to principal trades between market makers

Safety valve, esp. for gilt edg3d market makers who are obliged to follow through on
deal up to certain size, could find themselves loaded up with securities. If large stock
cant shift on market directly as other members will lower price. To help them
unwind large positions the IDB act as brokers to market makers to allow them to
trade large positions anonymously.

The Stock Borrowing and Lending Intermediaries

If market makers wish to take a short position in a stock, ie sell more than they currently
have on their books, they will need to have stock in order to settle the trade.
The Stock Borrowing and Lending Intermediaries (SBLIs) provide access to large pools of
unused stock.
The institutional investors in the UK buy large blocks of securities and often hold these
blocks for a number of years. The SBLIs borrow stock on behalf of market makers from these

dormant positions. The stock is passed to the market maker who uses it to settle the trade,
and in effect, to go short.

Central counterparty (Novation)
Clearing house (LCH:Clearnet)
Central counterparty stands between buyers and sellers

Short seller to every buyer

Log buyer to every seller

Purpose: eliminates counter party-risk

When dealing directly with someone else there is risk that they wont deliver on their
promise (wont pay before delivering security)

LCH.Clearnet Margining
Initial Margin

Returnable good faith deposit paid on opening positions

Based on maximum probable one day loss (amount security can fall in value in one
day)

Variation Margin

Cash Settlement of daily profits or losses based on closing price each day
Paid to or received from LCH Clearnet the following morning.
If one side decides to default whole contract is void

UKLA and LSE
Companies have limited liability and can be private (cannot offer shares to public) or public
Public PLC can offer shares to public (majority do not)
If offer shares to public:
May choose to trade shares on exchange as will struggle to sell shares without secondary
market for buyer to sell shares and realise profit.
To trade on exchange most commonly you have shares listed on full list of LSE, must satisfy
req of UKLA (FCA) referred to as competent authority

Listing: must satisfy UKLA listing requirements

Onerous requirement led to junior markets

AIM: not regulated directly by FCA, is reg by LSE requirements

ISDX: UKLA requirements

UKLA listing Rules

Main conditions for full listing:
There are two tiers of listing:

Premium listing (required for FTSE UK Index membership), involving the UKLAs
super-equivalent requirements, which go beyond EU standards
Standard listing, with less stringent requirements that are broadly similar to AIM
requirements

Requirements:

Minimum market capitalisation:

o 700,000 shares
o 200,000 debt if want debt to be traded
Freely transferable - cant restrict
25% in public hands free float/in public hands (excludes shares held by founders,
or huge blocks of shares)

Premium listing extras:

Must have 3 years continuous trading record/

3 years of audited accounts (waived for innovative high growth companies and
investment companies.
Company must show that it has sufficient working capital to cover the next 12
months at least,
Must be a sponsor for the admission

Prospectus (prospects of company before they offer shares to public) has to be published
unless the offer is made to:

Qualified investor
Fewer than 150 persons (private placement)
Minimum amount you can invest per investor is high - 100,000
Total consideration of the offer less than 100,000
Shares representing less than 10% of the shares already admitted for trading

UKLA Continuing obligations
Must allow market to have full understanding of companys position

Disclose

Price sensitive information

Significant transactions plans to sell large chunk of buswiness
Changes in directors
Changes in registers key shareholders
Dividend distributions when they decide to distribute

Listed company discloses to ->

Primary Information providers (PIP)/Regulatory Information Service (RIS part of LSE)
(these entities are signed off by the FCA) tells ->
Quote vendors (Bloomberg and reuters etc.)

AIM/ICAP ISDX markets rules
AIM

Appoint NOMAD (nominated advisor) expert financial services firm that ensure
they fulfil obligation to aim rules
Produce admission document
Securities must be freely transferable
Should have broker to support trading of the company shares
On-going obligations to publish price sensitive information immediately and
disclose significant transactions.
Lock in companies with less than 2 years track record must agree to lock-in where
directors, significant shareholders and employees with 0.5% or more of the capital
agree not to sell their shares for 1 year following admission.
No minimum market capitalisation
NO minimum proportion of shares held by public

ICAP Securities and derivatives exchange (ISDX)

Applicants must:

Appoint ISDX corporate advisor specialists financial services firm

Demonstrate appropriate corp governance how comp managed and directed
Have published audited accounts no more than 9months prior to date of admission
to trading
Adequate working capital short term finance for business to run for next 12
months
Free transferability of shares cant restrict ownership
No minimum market capitalization

Dual listed companies

Structure where two corporations function as single operating entity (e.g. Royal Dutch shell
(UK & Netherlands))

Separate legal entities and stock exchange listings with supervisory board
Equalisation agreement legal contract describes how ownership is shared
Single board of directors, single management structure
May have tax advantaged
Arbitrage opportunities may arise- risk free profit where two things should be the
same but are priced differently

Cross-Listing

A company may list its shares on more than one exchange for example, a UK company
may list in on the LSE in London while also making its shares available through American
Depository Receipts (ADRs) (discussed further later in this Chapter) in New York. This is
termed a cross listing.

Note characteristics for exam

Disclosure and Transparency Rules - UK
Companies keep registers for all shareholders but sometimes shareholders could be
hidden
Nominee broker deals on behalf.
Holders (including connected parties) of 3% and go up or down through a % point

If holdings reach (3%),

falls below 3%
or moves through any percentage point above 3%
Notify company by T+2

Persons discharging managerial responsibilities (PDMR) (and their connected persons

(family)) must inform company of any transactions in own company shares/derivatives

Notify company by T+4

Company tells market via regulatory information service (RIS)/Primary information
provider (PIP) by next business day. T+1

Not just shares but also any derivatives

Legal owner is anyone connected whether directly or indirectly

Settlement period

From 6 October 2014, standard settlement in the UK is T + 2 for equities.

The ex-dividend date will always be a Thursday
These changes comes ahead of a proposed January 2015 start date for T + 2
settlement across the European Union.
Settlement of UK Government stocks (gilts) is normally T + 1, or on the same day
Settlement in sterling or euros is made on a Delivery versus Payment (DVP) basis,
where both parties are ready to settle with each other at the same time, known as
real time gross settlement.

Connected parties
Includes:

Family stockholding
If you own a third or more of any company, that companies stockholdings are
included
Concert party = two or more persons who agree (formally to informally) to act in
agreement(e.g. investment club)

Each persons must notify that they are party to the agreement

Meetings
Annual general meetings (AGM)

Must be held every calendar year (max gap 15 months)

Must be within 6 months of financial year end
21 days notice required

Members attend/send proxy

Standard tasks undertaken
o Approve accounts
o Approve dividends
o Approve (annual) reports of the directors and auditors
o (Re)appoint directed
o (Re)appoint auditors

All of these will be voted on.

Can be done via show of hands

If more than 10% or at least 5 shareholders present request paper vote, company
must do so

Proxy
Proxy power normally lasts for given meeting and any adjournments that may be created

General proxy flexibility in decision making, vote as they feel is appropriate

Special (two way proxy) told how to vote

General Meetings
General meeting (any meeting other than AGM)
Can be requested by holders of > 5% in private company or 10% in public of paid up capital
share.
If this happens:

Directors must call general meeting within 21 days

Notice Period ( 14 days) - notice to allow shareholders to come
Meeting must be held within 28 days of the notice calling to a meeting being sent
out.

Ordinary resolutions require > 50% votes cast

Special resolutions require >75% of votes cast

Corporate governance regulations (1)

UK Code on Corporate Governance
Main principles of the Code:

Leadership - Board is collectively responsible, lead by chairman

Effectiveness board to have balance of skill, experience, knowledge
Accountability board should present a balance assessment of firm position
Remuneration - remuneration levels to be able to attract retain and motivate (NB
All Medium and late companies, irrespective of listed status are require to public
remuneration report)
Relations with stakeholders dialogue and mutual understanding

Code applies to listed firms only, compliance non-mandatory, disclosure required or if they
dont they must explain in AGM why they did not

Stewardship Code
Financial reporting council also crated the stewardship code (2010) directed at (big
shareholders) institutional investors, consisting of 7 principles:

1.
2.
3.
4.

Publicly disclose their policy on how discharge stewardship responsibilities

Have a robust policy on managing conflicts of interest
Monitor investee companies
Guidelines on when and how activities escalate to protect or enhance shareholder
value
5. Be wiling to act collectively with other investors
6. Clear policy on voting (and periodic disclosure of voting activity)
7. Report periodically on stewardship activities to underlying clients using them as
investment manager

The Principal agent problem

Small firms

Owners = managers

Large firms

Owners (principal)
Managers (agents)

This is Separation of ownership and control

The agency problem arises when large firms often owned by many shareholders appoint
managers to run the firm.
The interests of the shareholders may be significantly different to the interests of the
managers.
Possible solutions:

Align the incentives shares and stock options

Board of directors monitoring managers
External pressure (on managers) if not being run well, it becomes a takeover target
Shareholder activism turning up at AGM, grouping with other shareholders to
remove poor directors by voting them out

Functions of financial services industry
4 Function of financial services industry
Financial intermediation

Linking those with capital to lend with those who need capital

Pooling and managing risk

Pooled investment funds insurance or derivative products

Payment and settlement services

Mechanisms for the transfer of money or assets

Portfolio management

Allows investors to manage their wealth through advice and management services

The role of the government

Production of services that the private sector is unwilling or unable to deliver

Regulation of firms (to ensure consumer protection)
Intervene in the distribution of income and wealth
Stabilization of the economy (reduce fluctuations of income employment and prices)

EU and UK

The European Union is an example of an international economic association.

It has a common market combining different aspects, including a free trade area and a
customs union.

A free trade area exists when there is no restriction on the movement of goods
and services between countries.
This may be extended into a customs union when there is a free trade area
between all member countries of the union, and in addition, there are common
external tariffs applying to imports from non-member countries into any part of
the union.

A common market encompasses the idea of a customs union but has a number of
additional features.
Free markets in each of the factors of production.
o E.g. A British citizen has the freedom to work in any other country of the
European Union.
Also aims to achieve stronger links between member countries
o e.g. by harmonising government economic policies and by establishing a
closer political confederation

UK membership of the EU has restricted the previously unfettered power of
Parliament. There is an obligation, imposed by the Treaty of Rome on which the EU is
founded, to bring UK law into line with the Treaty itself and with EU Directives.
Regulations, having the force of law in every member state, may be made under
provisions of the Treaty of Rome

Monetary Policy

The Monetary Policy Committee (MPC) of the Bank of England was charged with the
responsibility of setting interest rates with the aim of meeting the governments current
inflation target
- 2% measured by CPI, plus or minus 1%

The MPC decides the short-term benchmark repo rate at which the Bank of England
deals in the money markets.

International securities markets
Why would investors want to invest in overseas securities?
Maybe Diversification, more return.
European Equity

Typically done on electronic order matching systems (like SETS)

Operate under European directives from EU to make sure rules are broadly similar

US equities

NYSE uses floor based specialist system trading floor, individual trading directly on
floor
Presence of designated market makers each stock that trades is run from central
trading post- more than one stock attached to trading post. Each trading post will
have designated MMs assigned
A lot trade by universal trading system (like SETS)

Emerging markets equity

Unique challenges due to often poor:

corporate governance
Transparency
Regulation
Liquidity
Political risk=>volatility

Eurobonds
Eurobonds markets (international bond issue use by governments, corporations and banks)
Debt instrument issued by borrower normally outside of the country in whose currency it is
denominated.
Companies issuing debt in the Eurobond market have their securities traded all around the
world.

Since its Unsecured debt, the market only accepts highly rated companies.

Pay coupons gross and annually/issued in bullet form

Bearer (form) instruments issuer does not retain a formal register of ownership,
however to make sure settlement go through CCP will hold register (not open to
government or tax authorities)
Does not attract withholding tax for this reason (bearer form)
There is no formal market place
Market is telephone driven
Market Regulated by ICMA (international capital market association)
Gilts settle T +1
Corporate bonds: confirm T+1, settle T+2 requirement of ICMA

2 independent clearing houses do settlement: Euroclear or clearstream

These clearing houses immobilise the stocks in their vaults and then operate
electronic registers of ownership

Eurobond Process

The most common form of issue used in the Eurobond market is a placing.
Issuer appoints a lead manager and award them the mandate.
Mandate gives lead manager power and responsibility to issue the bond on the
issuer's behalf.
Lead manager then creates management group of other Eurobond houses.
Each house then receives a portion of the deal and places it with its client base.
The lead manager may elect to run the entire book alone, and miss out the other
members of the management group.

Fixed price re-offer

Lead manager can amend the terms of the issue as market conditions dictate.
Under fixed price reoffer, members of management group are prohibited from
selling bonds in secondary market at below the issue price until the syndicate is
broken
Syndicate breaks when lead manager believes the bulk of issue has been placed

Central Securities Depositories

Central Securities Depositories (CSD) hold securities. The fundamental objectives for the
establishment of a CSD are for gains in efficiencies and for reduction in risk.

Efficiency gained through:
the elimination of manual errors

 lower costs
increased speed of processing through automation
Which all translate into lower risks.

Almost all countries have some form of central depository where the securities are
either immobilised or dematerialised

In a 'dematerialised' system, there is no document, which physically embodies
the claim.
o The system relies on a collection of securities accounts
o instructions to financial institutions which maintain those accounts, and
o confirmations of account entries
Immobilisation is common in markets that previously relied on physical share
certificates, but the certificates are now immobilised in a depository, which is the
holder of record in the register. Access by investors to the depository is typically
through financial institutions which are members of the depository

ICSD and CSD
International centrals securities Depositories (ICSDs) have established linkages with
several domestic CSDs and have created a sub-network.
E.gs. Euroclear & Clearstream
ICSD
International Client Base
Cross-border activities
All securities
Settlement
Custody
Collateral management
Securities lending
Other Services

CSD
Domestic client base
Domestic activity only
Local securities only
Settlement
Custody

Regulatory Environment
Eu Directives is an obligation for member states to ring their law in line with the
directive.

Member states (UK)
UK government writes the laws in UK
HM Treasure
Acts

Public interest disclosure act

Trustee Act 2000
Data Protection Act 98
Pensions Act 2004
Financial Services & Markets Act (2000) - most relevant for exam
Financial Services ACT -1021

Regulatory bodies
FCA
Bank of England
o FPC
o PRA
Take Over Panel
Competition Markets Authority

Legislative Structure
Financial Services & Markets Act
Primary law tend to deal with top level stuff, guidelines and principles
Enables secondary legislation

(Regulated activities order, financial promotions order)

Enables the power of regulator to write detailed rules for industry and enforce those rules
Historically there was single regulator FSA
Disbanded in 2000 and his power was handed to two regulators (FCA and PRA)

Prior to 2013
Single regulator FSA covered botha spwcts of regulation which has two starnds
Conduct - dsy day operations of company
Prudential financial safety and soundness of cpmany make sure company isnt ging bust
ensuring that if nees to payback debt can do without falling into default.

Problem with this was that it ws hard to keep eye on both aspects at once.

Analysts felt UK felt credit crunch so badly because regulator took eye of the whole.
Northern rock was looked into and made sure customers were being treated fairly,
but didnt see that it was about to go bust

Financial Services Act split FSA into:

Conduct was taken on by FCA

Prudential take on by PRA

FCA - accountable to government (Her majesty treasury)

Regulates provision of financial services to consumers

Will aim to protect and enhance confidence in UK financial system
Deal with conduct of around >26,000 firms/every firm across the industry

PRA division of the bank of England (Micro picture, individual firms and spotting if issues
at the individual firm level)

Objective to promote safety and soundness of regulated firms

Designed to minimise the adverse effects of firms failure
Only do checks on 3000 firms, those that are systemically important (firms that
would be too damaging to fail:

Includes:

all banks
Insurers
And large firms

Leaves prudential bit for other 23,000 to FCA.

FPC division of bank of England, looks at Macro across industry as a whole

Responsible for macro prudential regulation

Aim to ensure the stability of financial system as a whole

FCA
FCA took legal structure of FSA in April 2013
Responsible for conduct supervision of all firms and for prudential supervision of non-pra
firms
Supervises trading and market infrastructure
Competent authority for listing and prospectuses and is referred o as the UK listing
Authority. UKLA and FCA two separate roles, but conducted by same body.
UKLA responsible for approving companies seeking a listing and for writing and enforcing
the listing rules (part of FCA handbook)
Responsibility for client assets oversight and countering financial crime

FCA has: 1 strategic, 3 operational objectives
Legal high level strategic objective to ensure relevant markets are functioning well
Operational objectives: PIC, protection, integrity, competition

Secure and appropriate degree of protection for consumers

o Keeping bad companies and products out of the industry
o Compensation and redress in event of things going wrong
Protect and enhance the integrity of the financial system
Promotion of effective competition in the interests of consumers

PRA
General objective: promotion the safety and soundness of regulated firms

Uses resolution planning (companies version of living will preparation for in case
they go bust) to ensure that firms that fail do so in an orderly way
The PRAs approach to supervision emphasises the importance of judgements made
by supervisors. is company at risk of going bust in the future, judging the firms to
find at risk firms

FPC

Responsible for identifying monitoring systematic risks, and taking action to address
them
Makes recommendations and gives directions to PRA and FCA

FPC is required to take economic growth into account

FPC will publish two financial stability reports every 6 months.

Authorisation Requirement
Firms are required to be authorised licensing program imposed by regulators on companies
Section 19 of FSMA 2000 The general prohibition

Company cannot conduct a regulated activity in the UK by way of a business (financial

service main part of business) unless they are authorised or exempt.

If breached, then company taken to court

Civil court or criminal court difference relies on evidence of guilt

Dual regulation
Banks and Insurers

Systematically important so they are monitored by PRA for financial safety and soundness
They are also supervised by FCA who will be monitoring their day to day conduct.

All other firms FCA is responsible for financial safe and soundness as well as conduct.

FCA/PRA Permission
Dual regulated firms will apply to the PRA for authorisation. However, the FCA will be consulted and
will give or refuse consent to the PRA based on conduct implications. PRA will be bound by the
decision.
What are regulators looking at when looking to authorise a firm:
Authorization is given by obtaining part 4a permission and fulfilling the relevant threshold conditions
which depend on whether dual or FCA only regulated.

Threshold conditions depend on whether regulated by FCA or FCA and PRA
Threshold Conditions
Application
Location of Office (head office FCA & dual reg
needs to be in UK so you can be
sued by UK law if problems)
Effective supervision (is
FCA and Dual Reg
business transparent enough
for regulators to check your
meeting requirements, FCA
business activities, (how/what
selling) PRA finances)

Suitability (fitness and

properness, are you going to be
run well y good directors who
will benefit customers)
Business Model (what you have
planned/is it sustainable)
Appropriate resources
(financial and non-fin) Need to
see whether your human
resources are good, people of
right calibre. Financials are
needed as FCA will be looking
at soundness of these
companies
Business conducted in prudent
manner (Reason for being of
PRA, company must be prudent
in how dealing are
handled/ensure not about to
go bust)
Appropriate non-financial
resources (PRA interested in
whether you have right people
around to run the business)
Claims reps (insurers only)
claims reps
Legal status (insurers only)

FCA and Dual Reg

FCA and Dual Reg

FCA firms only

Dual regulated firms only

Dual regulated firms only

Dual regulated firms only

Dual regulated firms only

Need to know all 9 of these

Legislative structure
Does the firm need authorisation? very examinable
1. Is it doing a regulated activity? If Yes,
2. Is it regarding a specified Investment? If Yes,
3. Is it an exempt person? If No
You would need Authorisation!

Regulated Activities
Regulated activities or (specified activities under the Regulated Activities Order) there are 16
Can be divided into:
Wholesale financial services activities big financial (investment banks -buyside) service firms (7)

Dealing in investments (buying and selling assets)

Dealing as an agent (executing orders/trading/broker for others (3td parties))

Operating a MTF Multilateral trading Facility (alternative trading platform outside of
conventional stock exchange institutions trade between themselves and allow some
others to trade on their exchange too)

(Investment Management Community (sell side))

Managing investments (managing money for clients)

Advising clients

(Back Office functions)

Safeguarding of investments - (custody, making sure legal title has ben correctly
transferred, making assets have been bought legally and are safely kept and all legal title in
clear)
Sending de materialised instructions - (Clearing houses perform this - no longer have bits of
paper floating about, information sent electronically via various dedicated systems (SWIFT)
to make sure custodians know what has been dealt)

Insurance

Offering/effecting insurance selling or running insurance contracts to clients

Assisting in insurance certain activities that may be carried out by legal 3rd party for
insurer (underwriting risk, claims handler may not offer or handle insurance but are vital if
you want to claim on insurance)
Lloyds (of London) specialised insurance market (original home of insurance) specific
insurance market for insuring big ticket risks ships sinking or office being attacked) on Lloyds
trading floor these big things are insured then the risk is traded between the various Lloyd
companies or members

Retail

Deposits takers
Offering electronic money services (paypal)
Regulated Mortgage (on primary residence) mortgages on second homes or buy to let are
not necessarily regulated
collective investment schemes (CIS) a fund
o Authorised unit trust
o Open ended investment company (investment company with variable capital)
Funeral plans - really a form of collective investment scheme

Agreeing to provide regulated activities process of becoming regulated is quite long, what firms
do is while going through service they start legally committing to provide services by agreeing
contracts with parties for the future.

MADAM LEASES ACAFE

Multilateral trading ability

Advising on investments regulated mortgage/home finance contracts/stakeholder products

Dealing in investments as principal or agent

Arranging regulated mortgages/deals in investments
Managing investments

Lloyds insurance market related activities

Entering into/administering a regulated mortgage or home finance contract
Accepting deposits
Safeguarding/administering investments
Establishing/operating winding up a CIS or pensions scheme
Sending dematerialised instructions

Agreeing to provide regulated activities

Carrying out or effecting contracts of insurance
Assisting in the administration and performance of a contract of insurance
Funeral plan contracts
Electronic money

Whats an Investment?

Specified investment:
Securities:

Shares - in any company

All tradable debt
o gilts
o bonds
o treasury bills (short term tradable debt issued by British government)
o commercial papers (short term tradable debt issued by companies),
o certificate of deposits (bank account thats tradable),
o FRNs (floating rate note- bond with variable rate of interest.
o Private loans are not tradable unless they are securitised.
o Premium bonds are not tradable they are like private loans between individual
and companies
Hybrids
Depositor Receipts dont actually take ownership of share, share remains in hand of
depositary investment banks, but you get any benefits of share like price appreciation or
dividend s and votes allows people who dont want to trade directly to trade
Global depositary receipt
American depository receipt
Warrant
o Options right to buy shares are specified price
Rights to or interest in investments

Repos sale and repossession agreement investment bank sells bond cause it
needs some short term money and when it sells bond it includes agreements to
repurchase bond.

Derivatives very examinable

Options on investments (anything in securities) and on currencies, gold, silver, platinum and
palladium (precious metals)
o Options on commodities are not specified investments (neither are commodities
themselves)
Futures for investment purposes - obligation to buy or sell some underlying asset in the
future (regardless of underlying asset, it is a specified investment)
Contracts for difference, e.g. swaps, forward rate agreements, spread betting in general

Insurance

Contracts of insurance life and general

Lloyds investments

Retail

Deposits
Rights under a regulated mortgage (primary residence)
Rights under a funeral plan
Units in CIS unit trusts & OEICs
Personal and stakeholder pensions (private personally made decision to take out which
differs form occupational investment) - subset of above

Exempt persons from formal regulation process
Reason recognised institutions are exempt is because they are recognised, recognition process is far
more demanding
5 different classes of exempt people - APRIL
Appointed representatives (Tied agent)

Independent legal entity e.g. self-employed insurance salesman

If tied agent breaks any rule, the parent company will be punished

Professional People (regulated by designated professional body)

Lawyers, accountants and actuaries

Recognised Institutions

Recognised investment exchanges (LSE)

Recognised overseas investment exchanges (NASDAQ)
o Overseas exchange that can trade on form the UK with approporate terminal
Recognised Clearinghouses
o e.g. Euroclear (crest)

Intuitions (that are specifically exempt)

e.g. IMF or Bank of England,

Lloyds members

Made up for firms or syndicates/members that trade insurance on Lloyds of London trading
floor.
To do this trade you must be a formal Lloyds member
Lloyds itself is regulated but its member firms are not
If any firms breach FCA rules, Lloyds will punish (like appointed representatives)

Principles for Businesses (firms)

1. Integrity acting without dishonesty, or intentionally misleading customer (1=I)
2. Skill care and diligence you dont mislead customer through lack of research (2=Due-
diligence)
3. Managements and control CEO has sub managers and they have team managers reporting
to them, a clear tree of management control (3=tree)
4. Financial prudence businesses does not overstretch itself (4=door=often see chancellor
standing outside door who should be most prudent person)
5. Market conduct standards of conduct differ across markets (5=hive full of honey and
money sells on market)
6. Customer interests TCF- always act in customers best interest (6-fixed (rate of
return/interest)
7. Communications with clients clear fair and not misleading (7=heaven, clients are gods)
8. Conflicts of interest recognises and manage these conflicts (8=hate of conflict)
9. Customer relationships of trust - (9- wine, trusting relationship have a dinner and rink with
customers)
10. Clients assets keep client assets safe and warm until mature into cash (10-hen (nurtures
eggs)
11. Relations with regulators (Open and honest with regulators (11-RR)

Individuals can sue firm if they are hurt because firms breached a rule
Hurt Individual cannot sue firm for breach of principle

Regulation of investment exchanged
FCA has recognised number of investment exchanges such as:

LSE
NYSE Liffe
London metals exchange

Recognised exchanged are required to deliver a high standard of investor protection and market
integrity

Exchanges have to undergo higher level of checking out to become recognised


Recognised clearing houses that used to be recongised yb the FCAs predecessor the FSA, but are
now regulated by the Bank of England

Off exchange derivatives (OTC)

largely unregulated
but settlement and clearing now subject to new requirements* such as clearing through
central counterparty risk management procedures and reporting.

Regulation of derivatives
MiFID applies to firms carrying out activities in relation to any derivative instrument
UK market regulated by the FCA (only in relation to those derivatives covered under specified
investments)
International accounting standards states that (non-hedge) derivatives must be rescored in the
balance sheet at fair value.

If fair value changes over companies accounting year, then that should be recognised as a
gain or loss in income statement
Except derivatives used a hedge where gains and losses are recognised in reserves

Approved Persons (individual)

Within an authorised firm, people carrying out controlled functions must be approved
Must satisfy the FCA as to fitness and propriety
1. Honest, integrity and reputation (going to jail may exclude someone from this)
2. Competency and capability (including the need to pass approved exams and an internal
assessment)
3. Financial soundness (if ever been declared personally bankrupt you probably cannot look
after other peoples money)
Key issue is disclosure, of when apply you do not disclose any relevant details, this immediately
makes you dishonest.

Approved persons must comply with FCAs Statements of Principle

Controlled functions
(SIF)
Significant influence functions - run whole departments, have influence on companies direction,
policies and how the business is run

Governing functions

Directors, partners if partnership

Required Functions

Compliance oversight (head of compliance) officer

Money laundering officer

Systems and controls - To have necessary control in business that regulator says you must have

Finance officer (head of finance)

Head of audit
Head of risk

Significant management

Trading company - Heads of settlement

Bonds- Head of bond trading

Majority of people performing controlled function:
Customer function - Anyone who has influence on customers wealth

Investment advisor
Trader indirectly by trading with market

Who undertakes approval:
If only FCA regulated (majority of firms) not considered systematic risk FCA signs of any individuals
If working for dual regulated firms, PRA approves however PRA needs consent from FCA before
grants approval

PRA checks individuals will handle businesses finance in right way

FCA will check persons follows correct conduct rules on day to day basis

Statements of principle (approved persons) distinguish from principle of

business
Apply to all approved persons first 4
1.
2.
3.
4.

Integrity
Skill, care, diligence
Proper standard of market conduct
Deal with regulator in open way

Apply only to significant influence functions -

5. Proper organisation of business must run area of business responsible, clear

organisational structure, clear job descriptions communicated clearly
6. Skill care diligence in management - delegating is not abdication of responsibility, must
understand what you are delegating to understand if person delegating to is doing good job
and not rogue trading
7. Comply with regulatory requirements must be proactive, ensure that areas of business
you are responsible for respond to changes in regulatory environment,
The code of practice for approved persons sets out descriptions of conduct that does not comply
with the above principles.

FCA Handbook
5 Main books
High level standards

Principle for business

Statements of principles
Threshold conditions
Fit and proper test
Training and competence
Senior manage arrangements
System and controls

Business standards

Conduct of business
Client assets
Market conduct

Regulatory processes

Supervision
Decision procedure and penalties manual

Redress

Complaints handling
Compensation not very examinable

Regulatory guides

Enforcement guides

Knowledge of other books not required just know they exist should be enough
(prudential standards, specialist sourcebooks and listing, prospectus and disclosure)

Senior manage arrangements system and controls (SYSC)

Purpose:

System and controls are appropriate to the nature, scale and complexity of the firm
o Outcomes based so different companies require different types of systems
Effective compliance systems (especially countering financial crime)
Create common platform of requirements for firms subject to CRD and/or MiFID
o To achieve consistency across Europe Common platform

Apportionment of senior management responsibilities

CEO responsible for apportionment

Knowing and recording who does what (recorded kept for at least 5 years from
organisational structure changes MiFID)

Training competence and professionalism

All staff (everyone) employed in authorised firms must be competent
If dealing with retail clients:

Employee must be assessed as competent

Employee must be supervised

Retail distribution review new requirements from Jan 2013 when giving retail investment sector:

Retail investment advisor must hold statement of Professional standing issued by an

accredited body such as the CISI
The SPS confirms that the advisors hold an appropriate level 4 qualification and has
completed a minimum of 35 hours CPD per year / 21hours must be structured

In addition to the above advisors must subscribe to a code of ethics

Takeover Code
Regulated by the Takeover Panel
Takeover panel Funded by a 1 levy on LSE share transactions (buyer and sellers) above 10k
Regulates offers for shares in all UK public limited companies (plcs) that are listed on exchanges
Key points

Promote fairness (note: the code does not consider competition issues or public interest)
o Equal treatment for all shareholders of a particular class
o Allow a reasonable period for the bid to be considered
Reduce occurrence of defensive measures take by target co. Discourage financial structure
that make it difficult for someone to launch a takeover bid, so they can be launched so the
investors can then decide whether or not they wish to go forward

Mandatory bid is required if shareholder acquires > 30% of the voting rights of a company.
They must make a cash offer to all other shareholders at the highest price paid in 12 months
before the offer was announced.
o Below 30% considered minority shareholder.
Offer must remain open for >21 days
If achieve >90% acceptance can compulsorily purchase remaining 10%
Directors of target company should not deny shareholders the opportunity to consider the
bid.

The competition and Markets Authority (CMA)

The CMA was established under the Enterprise and Regulatory reform Act 2013.
Will investigate all mergers if :

Proposed merger where turnover of company is at least >70 m in UK

Or when combined market share is at least 25% of total

If either of two tests are breached they will launch a Phase 1 Study (takes up to 40 days)

To determine If the merger results in substantial lessening of competition

Phase 2 Investigations
Merger may be approved, prohibited or remedies/conditions imposed

Statuary time of 12 weeks following phase 2 for remedies to be implemented.

Fines
CMA is empowered to impose fines up to 5% of the combined worldwide turnover of
merging companies for breach of an order.
They can also impose fines for failure to provide requested information.

Data Protection Act 1998
Data protection act applies when processing personal data
Data controllers must register with the Information Commissions officer (ICO)
If in contravention of data protection, commissioner can serve enforcement notice. Failure to
comply with enforcement notice could lead to a 500,000 fine
Eight principles to ensure personal information is:

Fairly and lawfully processed

Processed for limited purposes
Adequate, relevant and not excessive
o Required to keep data on customers to satisfy rules (anti money laundering). Data
protection act would say that if you asks for information that is not required for
regulatory purposes then they are in breach

Accurate and up to date

Not kept for longer than necessary
Processed in line with an individuals rights
Secure
Not transferred to other countries without adequate protection
o If data moved must be confident that data protection rules in that country are
adequate enough
Person whose data is held is entitled to ask for access to that information (subject access
request) and has the right to correct where appropriate.
o They can be charged a maximum fee of 10 for access (max fee of 2 for credit
reference agency records)
o The person entitles to be told the source, purpose and recipients of data.
o DPA 1998 requires that subject access requests take place within 40 days of the
request (including fees) being received.

Breach is a criminal act resulting in fines but not jail

Whistleblowing procedure

Whistle-blower interests stem from Public interest disclosure Act 1998 - Law
Law is detailed in SYSC part of FCA handbook - regulation
Process whereby a worker seeks to make a disclosure to a regulator or law enforcement
agency relating to criminal offence or breach of rules (e.g. FCA rules)
No contractual restrictions for whistleblowing
Should be no discrimination for whistleblowing

Trustee Act 2000

When set up a trust, should be legal trust deed behind it which gives clear advice of how any money
should be invested
If no trust deed, trust act 2000 would be default
Trustees are in power to invest in any appropriate asset and must review investments and obtain
and consider advice.

Pension Act 2004

Introduced new regulatory authority the pensions regulator

For occupational pensions

Defined benefit Pensions only promise certain % of your salary when you retire

New Pensions protection fund for where an employer who runs a scheme becomes insolvent and
unable to pay liability

PPF provides compensation up to 100% of benefits to existing pensions and 90% to those not yet
retired (funded by charges on companies that run these pensions on other defined benefit pension
schemes)
Minimum funding requirement replaced by scheme specific objectives:

Required trustees of defined benefit schemes to prepare a statement of funding principles

which will clearly outline how necessary funding will be achieved outlines what future
liabilities will be and how much companies needs to put in to attain that target
This must be reviewed every 3 years.

Conducts of Business Sourcebook (COBS)
Who?
Applies to Authorised firms
What?
Day to day activity rules in relation to:

Client categorisation
Financial promotions
Investment research
Suitability and appropriateness
Dealing and managing
Client assets and client money

Rules on Client Assets are covered by a separate sourcebook (CASS)

Client Categorisation
Anyone you would be offering financial services to are potential clients
Look at the level of knowledge of financial services that clients have
High level

Eligible counterparty (other authorised firms)

Level of protection will be low

Eligible Counterparty must want following services:

Receipt and transmission of orders

Execution of orders
Dealing on own account

Per se eligible counterparties

Authorised firms

National, central banks, international/supranational intuitions

Low level

Retail client
Level of protection will be high

Retail

Individuals and persons

Small businesses

Medium Level

Professional Client
Medium level of protection

Professional

Authorised firms when business they seek when business they is not in eligible
counterparties risk
Large undertakings in non finance

Per se Professional client

Authorised firms who are not eligible counter party
National, central banks, international/supranational institutors and regional government
Institutional investor whose main activity is to invest in financial instruments - SPV
A large undertaking which meets two of the following :
If subject to MiFID
20m balance sheet total
40m net turnover
2m own funds

Non-MiFID
12.5m balance sheet total
25m turnover
250 average employees in year

or (single test trumps all others:

5m share capital/net assets

Clients can elect to opt up, subject to certain criteria

Protection costs money, so may end up with cheaper fees

Retail clients may be deemed unable to handle risk of certain products so may have
greater access to products

General notification
Firms must notify clients of their categorisation
Prior to the provision of services firms must inform the client

Any right to request a different categorisation and

Any limitations to the level of client protection that such a different categorisation would
entail

Elective professional Clients

3 letters in this process
A firm can treat a retail client as an elective professional client if:

Firm carries out a Qualitative test and for MiFID business also a and Quantitative tests
Clients requests this in writing and
Forms gives clear written warning of the protections and investor compensation rights lost
clients states in writing in a separate document that they are aware of the consequences.

Qualitative and Quantitative tests

Qualitative test
Firm undertakes adequate assessment of KNEES

Knowledge and
Expertise
Experience of the clients

This assessment hives firms reasonable assurance that client is capable of making their own
investment decision and understands the risks involved
Quantitative test only if MiFID business (3 Rs: Regular, Rich, Resume)
At least two of three of following:

Client has traded in significant size on the relevant market (that they are seeking business
with you in) at an average frequency of 10 per quarter over previous 4 quarters
Financial instrument portfolio > 500,000
Client works/has worked in financial sector for at least 1 year in professional position which
requires knowledge of transactions/services

Financial Promotions
Must follow rules appropriate to type of client
Financial Promotions - Invitation or inducement to engage in investment activity
Written promotions (non-real time)

Adverts
Letter
Mailshots
Websites
Emails

Non-written (real time promotions) potentially more aggressive

Meetings
Telephone Calls

FSMA 2000
Financial promotion can only be issues by an authorised financial services firm, if not authorised
would need approval by authorised financial firm

e.g. Overseas financial firm not authorised would may seek to enter UK market

COBS Financial Promotion

Communication and financial promotions must be fair, clear and not

misleading
Guidance:
A firm should ensure:

It is clear if a clients capital is at risk

Any yield figure quotes gives a balanced impression of short/long term prospects
o If 1st year of investment gives bonus high rate, but drops in subsequent year must
give balanced view of this
Complex charging structures are explained
The FCA is named as regulator
A clear impression is given of any 3rd party packaged/stakeholders product provider

Exceptions

Those communicated only to investment professionals (dragons den types) or eligible

counterparties
Excluded communications if there are another set of rules that apply to communications.
E.g. takeover rules take precedence over financial promotions rules

A one-off promotions (that is not a cold call) communicated to a specific client or to one
group of recipients - could be a rich individual or family and promotion is tailored to their
needs.

Communications with retail clients

Requirements for communications with retail clients

Must be likely to be understood by an average member of the target group

Fair and prominent indication of relevant risks
Important items are not disguised, diminished or obscured
Must include the name of the firm

Comparisons of investments/businesses must be fair

Specify information sources, key facts and assumptions

o Comparisons must be fair e.g. cant compare returns on bank deposit to equity

Past performance data

Past performance data should:

Not be the most prominent feature of the communication

Contain a warning that pas performance is not a reliable indicator of future results
Cover at least 5 years immediately preceding consecutive 12 months
Include reference period and source
Contain a currency risk warning
Disclose the effect of charges if based on gross performance

Cold calls/unsolicited calls

Investment firms must not make a cold call unless:

Existing relationship where recipient envisages the call

It relates to generally marketable packaged product
o We are allowed to sell to retail public, investment itself should be authorised and
regulated by the FCA. Not just firms that are regulated, products must also be
regulated
It relates to a controlled activity/service carried out by an authorised firm/ or exempt person
o involving readily realisable securities (other than warrants)
o these are liquid and readily tradable

Definition of packaged product (CLIPS)

Collective investment schemes (regulated)

Life policies

Investment trust savings scheme not collective investment because it is closed ended,
finite number of shares. Like a company with shares trading on the market although all it
does is own shares or stakes in other products.
o ITSS (savings scheme) You invest a regular sum of money with provider each month
who n turn puts money into investment trust
o Investment directly into Investment trust is not a packaged product
Personal pensions
Stakeholder pensions
o Personal and stakeholder are private pensions. Stakeholder pensions have lower
costs

Non-written financial promotions

A firm must not initiate a non-written financial promotion unless the persons communicating it:

Does so at an appropriate time of day (for recipient) (must justify appropriate for specific
person
Identifies himself and the firm at the outset and makes the purpose of the communication
clear
Terminates the communication at any time if requested to do so
If signed up for communication; A contact point must be given, so that a future meeting if
arranged can be cancelled.

Investment adviser charging/remuneration

New rules since Jan. 2013 prevents firms making personal recommendations from earning
commission set by product provider
Applies to retail investment products (broader than packaged product)

Firms offering such service now charge for the advice they provide
Charges must be disclosed in writing in good time before advice given using clear and plain
language
Clients have the option of paying the charge upfront or may have it deducted from their
investment
Advisors can no longer receive commission from fund managers

Issues:

Transparency
Conflict of Interest

Independent advice and restricted investment advice

Independent advice you must cover all suitable retail investment products, relevant to the client
base from relevant providers

The RDR introduced a new definition of independent advice which consider all suitable
retail investment products

Restricted advice

Advice which is not independent is described as restricted

Firms must disclose the nature of the restrictions (e.g. limited number of product providers
or specific types of product) to the client

Advising on packaged product

Advisers can choose to:

Advise on the whole of the market (independent financial advisor)

Advise on limited product range (restricted)
Advise on a single providers products - Appointed representative (exempt from
authorisation)

Key Feature Document must be given to a retail client when providing a recommendation on a
packaged product including:

Details on nature and complexity of the product

Complaints handling procedure
Compensations schemes (if provider goes bust)
Cancellation rights (if client invests but changes their mind)

Suitability and suitability reports

For all Retail and professional clients:

Applies to personal recommendations and firms managing investments
Reasonable steps must be taken to ensure suitability
In order to do this firms must obtain necessary information regarding the clients:
o Relevant knowledge and experience
o Financial situation
o Investment objectives
Retail clients must be sent a suitability report if recommendation related to an investment in
a packaged product.

Appropriateness obligations
For all Retail and professional clients:
For investment services other than managing investments and personal recommendations
(essentially execution only) no advised service

No need to assess appropriateness in relation to noncomplex financial instruments

Firms to assess appropriateness based on the clients relevant knowledge/experience

If the product/service is not considered appropriate you must warn client

Where there is insufficient information to assess appropriateness the firm must notify the
client that we cannot do appropriateness check. Its a firms discretion whether or not they
execute order.

Best Execution
Applies to retail and professional clients

When executing order a firm must take all reasonable steps to obtain the best possible
results for its clients taking into account the execution factors
A firm will satisfy this rule by executing a client order in accordance with the specific
instructions of the client.

Churning and switching

Dealing with unjustified frequency/overtrading
Maybe due to racking up commissions
Firm should be acting in firms best interest

Churning relates to investments in general (switching between securities/assets)

Switching if managing portfolio of packaged products (switching between funds)

Order Execution Policy

Clients must have prior consent to execution policy
For each class of financial instrument policy should include

Information on different execution venues and

Factors affecting the choice of venue

For retail clients, the following information must be given in advance

The relative importance of the execution factors

A list of execution venues
Warning that specific instructions may prevent firm form following its policy to obtain the
best possible results

Clients Order Handling

Retail and professional clients

Firms must implement procedures and arrangement which provide for the prompt fair
execution of client orders

Comparable orders to be executed in accordance with the time of receipt by the firm

Aggregation and Allocation of Orders

Could potentially aggregate orders as long as you believe it will not disadvantage either or
clients and you disclose to clients that you will do this and that you have proper allocation
policy (our systems and 3rd party systems clearly know about the allocations)

Inducements
A firm must act honestly, fairly and in best interest of their clients
Any fee commission or non monetary benefit paid to or provided by a 3rd party must be designed to
enhance the quality of service to the client
A firm must disclose too the client any fees commissions or nonmonetary benefits in summary form.

Use of Dealing commission (Unbundling)

Fund manager passes business to broker who they pay commission to execute the order
In return the broker executes and provides research + other goodies (subscription to
Bloomberg, invite analysts to training and education conference)
Problem is that fund managers customer is paying the commissions. Anything that
commission buys should give a benefit to the customer.
Rules now say that in return for payment of commission, no other goodies are acceptable.
Commission can only pay for execution of trades and research
Unbundle packages of returns form commission to make more transparent what customer is
paying for.

An investment manager must not execute customer orders through a broker and pass on charges to
client unless the manage has reasonable ground to be satisfies that the goods services purchased
with commission:

Relate to the execution of trades

Comprise the provision of research
Will assist the manager in providing services to its customers
Do not impair compliance with the duty to act in clients best interest

Conflicts of Interest
Firms must identify conflicts of interest between

The firms and its clients

One client and another

Maintain effective arrangements to manage conflicts

If the arrangements are not sufficient, and cannot manage conflict must disclose the nature of
conflicts to firms and clients
Provide retail clients with a copy or summary of policy
Keep record of any conflicts

Conflicts of Interest Policy

The conflicts of interests policy must:
Set out the circumstances which gives rise to a conflict
State the procedure for managing conflicts, which could include:

Information barriers such as Chinese walls - prevents informations from following from
the private (M+A advisory) to the public (advisors, analysts).
o Must prevent information from flowing between these two groups
Remuneration structures - Avoid pay structures that create conflicts if advisors paid by
commission they may not be working in best interest of clients
Independence - analysts are independent to the private side. Stop one side from influencing
decision or research of the other (pressuring)
Segregation of duties having a senior manager in charge of both public and private would
be bad. Need to segregate those duties

Investment research
Apply to investment research which is intended to be disseminated to clients/public
Covers written or oral material
Firms arrangements must manage conflicts of interest and cover

No personal or firm transactions in unpublished research until clients have had reasonable
opportunity to act.
No personal transactions contrary to their current recommendation
No promises of favourable research to firm subject of research or will always have a conflict
No editorial control for the subject of the research

If significant shareholder of company we wirte share on, then we cannot get around conflict. In such
cases:

Disclose all relationships and circumstances which may impair objectivity of

recommendation

Personal Account Dealing requirements

Firms must establish implement and maintain adequate arrangements to:

Prevent employees engaging in market abuse (insider dealings and related offenses)
Ensure all relevant persons are aware of restrictions

Ensure any deals are notified promptly to the firm: post trade notification
Ensure adequate transactions record are kept:

Exceptions: discretionary fund management and nits in collective investment schemes (one
information in one security held in fund (which generally has minimum of 16 securities)

Cancellation Rights
Life policies and pensions (stakeholder or personal) you have 30 days to cancel without being
charged any fees or commissions
Other products - 14 days

Consumer must be informed of a right to cancel

Cancellation date is the date of dispatch

Record Keeping
General rule

MiFID 5 years
Non-MiFID- 3 Years

Records relating to pensions and life policies must be kept for 5 years.
Those relating to pension transfers, pension opt-outs or a free standing AVC must be kept
indefinitely.
Record keeping re. financial promotions relating to life policies and pension must be kept for 6 years.

Reporting requirements
Occasional - If executing order for client we must provide (occasional) reporting
Retail and professional clients
Retail clients to be sent an order confirmation by T+1

Except when managing investments

Periodic applies to investment managers

Must provide periodic statements that gives information on content, value and performance
of fund at regular periodic individual
Default is every 6 months for normal securities (shares, bonds)
3 months on request
If provide clients with order confirmations, the you only need to send report eervy 12
months
If portfolio is leveraged (or through derivatives) can create a lot of volatility in value of fund.
Because of this extreme volatility must report back to client on monthly basis

Holding of Client assets and client money

Make adequate arrangement to safeguard clients ownership rights in event of:

Insolvency of a firm make sure that clients assets and money is separate from firms assets
and money
Unauthorised use by the firm i.e. client must give prior consent to their use in security
transactions such as stock lending. if hedge fund want to take short position (sell
something they dont won) they borrow. Clients may not like their stocks lent out to hedge
funds

Have an adequate organisation arrangements to minimise risk of loss or reduction of financial

instruments, misuse, fraud, poor administration, inadequate record keeping negligence.

Custody Reconciliations
A firm must reconcile internal records with those of 3rd parties (such as custodian who
would have definitive record of firms assets)

As regularly as necessary
As soon as reasonably practicable after the reconciliation date

Correct any discrepancies promptly

Notify the FCA of any breaches without delay

Client money

Money which firm is looking after which is not its own

Client money must be held on trust
Client bank account should be separately identifiable form the firms own account
Main purpose of rules is to ensure money is protected in the event of insolvency.

Pollution of trust if moneys of firms and clients account become mixed. Clients accounts
are susceptible to be taken by creditors in event of insolvency.

A firm must reconcile its internal record with those of 3rd parties (banks)
As regularly as necessary
As soon as reasonable practical after the reconciliation date

Correct discrepancies promptly

If shortfall in client account top up account not pollution

If excess, remove immediately this is pollution of account

Notify FCA of any breaches without delay

Offences under FSMA 2000

FSMA makes it an offence to do the following:

Describe oneself as authorised or exempt if one is not authorised or exempt

Contravene section 21 financial Promotion
Make false or misleading statements
Knowingly or recklessly creating a false impression (for the purpose of personal gain
or loss to another person)
o Might conduct phantom transactions between themselves and another
counterparty (washing) to make market for a security look more liquid
Contravene section 91 (FSA 2012) in relation to benchmarks, specifically to make to
another person a false or misleading statement or to an act or engage in any course
of conduct that creates false or misleading impression
o Offense to deliberately use bench mark that does not give fair comparison
(picking one thats easy to beat).

Approaches to supervision: FCA

The FCAs supervision model is based on three pillars:

Firm systematic framework (FSF)

o preventative work through regular structured assessment of firm conduct
Event-driven work
o dealing with emerging issues and those that arise outside of the regular cycle
of firm assessment
Issues and products
o fast intensive campaigns on particular products or market sectors

Discipline and enforcement

Discipline
For disciplining firms or approved individuals

Private warning
Public censure Published on website of regulator and picked up by financial press
(reputational damange)
Unlimited fines

Varying or cancelling permission cancel authority to conduct in one or all areas

Withdrawal of approval individuals who are approved

A firm/individual can appeal to the Upper Tribunal (not part of the FCA)

Part of Tax and Chancery chamber, witihin of justice system

FCA has power to invoke temporary product intervention rules (TPIR) allowing a product to
be restricted or banned without following the normal disciplinary process.

Complaints procedure
Complaint- any expression of dissatisfaction in any form

Appropriate and effective complaints handling procedures

Publish summary of procedures and refer eligible customers to it at point of sale
Within 8 weeks of receiving complaint firm must either have sent
o A final response; or
If unable to resolve issue in 8 weeks:
A letter explaining why the complaint has not been resolved and notification that
complaint can be referred to the financial ombudsman service
Summary report to the FCA every 6 months.

Financial ombudsman service (FOS)

Independent archer between complaining client and firm
Easy cheap and quick route, low publicity to resolution rather talking complaint to court
FOS has two Jurisdiction

Compulsory Jurisdiction FCA regulated firms

Voluntary Jurisdiction VJ participants

The firm must cooperate with the FOS investigation:

Must complain to FOS:

Within 6 years of event happening or

3 years of customers knowing of the problem or
If raised complaint with firm, then you have 6 months of the firms final response

Maximum award 150,000 + expenses

Financial Service Compensation Scheme

Final safety net for eligible claimants of failed UK authorised firm:

Claim must be made within 6 years of the date when the loss occurred
Maximum pay-out is 50,000 for investment business for funds or securities
Maximum pay-out is 85,000 on any deposits

Insider dealing Criminal Justice Act 1993

Inside Info

Unpublished
Price sensitive
Specific/precise

Inside Source

Director
Employee
Shareholder
Virtue of work or employment elsewhere (in investment bank)
Direct/indirect source is one of above

Insider

Dealing via market/professional intermediary

o If done privately OTC, probably not subject to insider dealing
Encouraging others to deal
Disclosing - Inside information (unless proper)

Note that Insider dealing covers shares, bonds, warrants, depositary receipts and
derivatives (including contracts for differences)
Did not expect it to lead to a profit
General Defences
Dealing

Did not think it would lead to profit

Believed it to be already widely known
Would have done it anyway

Encouraging

Did not think it would lead to profit

Believe it to be already widely known
Would have done it anyway

Disclosing

Did not think it would lead to profit

Did not expect it to lead to dealing

Special Defences (for certain circumstances/actors)

Market Maker or those complying with stabilisation rules

o Stabilisation rules carried out during IPOs, prices can be volatile so

stabilisation broker can buy shares to stabilise prices
Market information
o Dawn raids if company thinking about takeover and buys shares in the
target company to build up ownership prior to formal bid

Penalties and enforcement

Penalties

Summary Conviction (Magistrates Court)

o Max: 6 months prison and 5,000 fine
(More serious) Indictment (crown court)
o Max: 7 years prison and unlimited fines

Enforcement
Her Majesties Treasury legislation write laws on insider trading
LSE investigate as usually occurs on exchange
FCA prosecutes but cannot send to jail, can only take to court

Market abuse

Covers all persons

Seven types of behaviour that can constitute market abuse
It is a civil offense (so no jail)
Sanctions
o Unlimited fines
o Public censure

Overview of Market abuse
Behaviour occurring in relation to qualifying investments traded on prescribed market.
any European economic market or investment traded on such market.
Focused on effect not intent.
Insider Dealing:

Insider dealing
Improper disclosure
Misuse of information much more general

Market Manipulation misleading people to try and make a profit

Manipulating transactions
Manipulating devices
Dissemination of false or misleading information
Misleading behaviour and distortion

Money Laundering
Definition: Process by which criminals seek to hide the true origins of money derived from
activities (whatever they may occur) considered by the UK to be criminal conducts e.g.
drugs, terrorism, tax evasion, minor theft.
Legislation

EU Money Laundering Directive

Proceeds of Crime Act 2002 focuses on individual liability
UK Money laundering Regulations 2007 focuses on company liability
Senior Management Arrangements Systems and Controls (SYSC)

The 3 stages
Placements -> laying -> Integration

The placement stage will involve retail financial entities: banks and building
societies as cash related.
The layering and integration stages more likely to involve investment management
business.

Proceeds of Crime Act 2002

Individual liability

Assistance
o 14 years in jail and/or unlimited fine
Failure to report knowledge/suspicion or reasonable grounds
o 5 years in jail and/or unlimited fine
Tipping Off
o 2 years in jail and/or unlimited fine

UK Money Laundering Regulations 2007

Institutional liability applying to financial institutions and other relevant business e.g.
casinos and estate agents
Main requirements:

Appoint Money Laundering Reporting Officers (must be a senior employee)

Identification and KYC- (know normal pattern of transactions)

Records of evidence of identity and all customer transactions (5 years from when
customer ceases to do business with firm)
Training on recognising suspicions
Internal procedures for reporting suspicions
Various levels of due diligence CDD, SDD, or EDD for PEPs)
Failure to comply penalty 2 years in jail (senior directors) and/or unlimited fine

Financial Crime Systems and Controls (SYSC)

Part of FCA Handbook applies to authorised firms

Requires firms to have systems and controls to manage money laundering risk
Firm should maintain effective and proportionate systems in order to manage the
money laundering risk
Allocate to a senior manager responsibility for the establishment and maintenance
of AML systems and controls
Appoint MLRO and ensure MLRO provides a report at least annually to the
governing body/senior management
Provide appropriate training for employees

JMLSG Guidance Note 2007

The guidance notes interpret relevant money laundering/terrorist financing

legislation and indicate good industry practice for implementing these requirements
When considering whether an offence or breach has occurred the courts/FCA will
take into account compliance with guidance notes

UK Bribery Act 2010

There are 4 offences under the UK Bribery Act 2010:

Paying bribes
Receiving bribes
Bribery of foreign officials
Failure to prevent bribery (commercial organisations):
o The company must put in place controls to prevent bribery being committed
by its employees, agents and external 3rd parties.

Penalties
Individuals: maximum jail sentence = 10 years
Institutions: Unlimited fines

Financial services action plan (FSAP)

EU Issues directives, regulations and decisions

FSAP was launched in 1999,
It consists of 42 measures, including 24 EU directives to be adapted into law of each
member state. Main ones pertain to:

Market abuse directive

Prospectus Directive
Transparency Directive
MiFID

The FSAP has 3 specific objectives

To create a single EU wholesale market

To achieve open and secure retail markets allow operators throughout Europe to
sell throughout Europe
To create state-of-the-art prudential rules and structures of supervision

Direct effect
Principle of direct effect (or immediate applicability) enables individuals or firms to
immediately invoke a EU provision before a national or European court. E.g. if directive
not fully implemented in home country
Vertical direct Directive takes precedence over national law in matters between member
state and firm/individual
Horizontal direct - between firms and/or individuals this does not apply. However courts
should interpret law so as to achieve the result required by the directive.

European Securities and Markets Authority (ESMA)
ESMA (much like FCA) aims to ensure integrity transparency efficiency proper functions of
securities markets in Europe
Contributed to safeguarding the stability of the European Unions financial system by:

Ensuring Integrity, Transparency, Efficiency, orderly function of securities markets,

and
Enhancing investor protection

Developed a single rule book in Europe with 2 purposes:

Ensure consistent treatment of investors across the EU, enabling an adequate level
of protection of investors through regulation and supervision
Promote equal conditions of competition for financial service providers.

It has a range of powers to meet its objectives:

consumer protections can prohibit financial products that threaten stability

monitoring systematic risk of cross border financial institutions
emergency powers
on-site inspections
Enter into administrative arrangements with supervisory bodies, international
organisations..
Resolution of disagreements between national authoirties,

MIFID
MiFID was set up adopted by the European council in 2004 and is part of the Financial
services action plan.

Passporting
Passporting already existed under the old (investment services directive) but MiFid
expanded the scope by including more activities.

Allows European firms to open branches and cross border sell through out the EEA
without the need for licensing in each separate jurisdictions
Tied agents established in the EEA will be able to act on behalf of a firm instead of
the firm needing to set up a branch (tied agent, similar to appointed representative
and so does not require authorization)

MiFIDs all about how firms set up and operate across boarders.
(Undertaking for collective investments in transferable securities directives) UCITS - All
about funds and how they can be sold across borders.

MiFID investment services and activities

Investment Services and Activities (wholesale FCA activities)

Operating an MTF
Dealing on own account
Execution on behalf of clients
Receipt and transmission of orders
Investment advice
Managing portfolios
Underwriting/placing financial instruments (process when shares issued for first
time) (not on UK wholesale list)

These are the activities you may passport throughout EEA using MiFID


Ancillary Services (non-core)

Safekeeping and administration (custodianship; collateral and cash, management)

Granting credit/loans
Corporate finance advice
Foreign exchange services
Investment research and financial analysis

May not passport these under MiFID

Home and host state responsibilities
Home is the one that your authorised in.
Host is the non-home you are operating in.
Home state (deal with big picture of overall parent organisation) = organisational matters
including:

Compliance arrangements
Internal systems and controls
Management of conflicts of interest
Certain conflict of business rules (personal account dealing and investment
research)
Client assets (clients protected by home state client assets rules)

Host state = operational matters including

Most COBs rules

UCTITS Directives
Undertaking for collective investment in transferrable securities
Facilitate cross border sales of open-ended funds throughout the EEA

UCITS III Product Directive

Expanded the range of permitted investments that UCITS funds can invest in.
As a result UTICs schemes can now invest in:
o Transferable securities
o Money Market instruments
o Forward contracts and financial derivatives
o Deposits
o Units in other collective investment schemes
o Commodity derivatives are excluded

UCITS III management Directives increased the range of services that can be
passported under the UCITS including safekeeping and fund administrations

UCITS IV Directive introduced:
o a passport for management companies
o a procedure for fund mergers (cross border)
o Key investor information document (replaced simplified prospectus)
o Master feeder structure to permit asset pooling (different fund in different
EU countries that all feed into one overall fund)

European Market Infrastructure Regulation (EMIR)

EMIR comprises standards of regulation of OTC derivatives, central counterparties and
trade repositories*
Implemented through FSMA 2000 in UK.
Aims for all standardised OTC derivatives to be cleared through a central counterparty.
Tries to clear up infrastructure behind derivatives when they are traded privately.
Structure around OTC derivatives (typically traded between big banks): when done privately
there is no clearing house and all the settlement and paperwork is not pushed through
formal process so some of the paperwork is not necessarily been processed correctly. This
creates problems with risk management.
If derivative that is trade with bank, it may have been traded several times between other
banks and so may not know who created the derivate. It might turn out to be a bank that
went bust and no longer exists.
EMIR imposes the following 3 new requirements:

To clear OTC derivatives through CCP

Put in place a risk management procedure for OTC derivative transactions that are
not cleared
Report derivatives to a trade repository.
o Trade repositories is an entity (an electronic platform) that centrally collects
and maintains the records of OTC derivatives. So transparency of who owns
what in OTC derivative market.

Legal Concepts
Legal Persons
2 forms:
Natural person = Individual human beings
Artificial persons = Corporations, cooperatives and countries

Corporation can be limited liability.

An unincorporated association (for example, a partnership) is not a separate legal entity; it does not
have a legal identity separate from that of its members.

Legal Persons can:

Pay Tax
Sue and be sued
Enter into contracts
Incur debt
Own property

Power of Attorney
Power to make decisions on behalf of another

A power of attorney is a legal document made by a person (the donor) which appoints
another person (the attorney or the donee) or persons, to act for the donor in legal
matters
The power of attorney may be a general power, to allow the donee to act for the donor in all
matters, or restricted to a specific act

Enduring power of Attorney
Pre 2007, It is not possible to make any changes to an existing EPA or make a new one (still
valid if created prior to 2007)
Does not need to be registered, can be a contract but no formal registration
Deals with looking after someones affairs usually the elderly
Not about personal health
Lasting power of Attorney
Post 2007
Must be registered with the Office of the Public Guardian (OPG)
2 types of LPA
o Property and Affairs LPA right to make decisions about business affairs and
property
o Personal Welfare LPA decisions about care of an individual

Contracts

A contract is a legally binding agreement between mutually consenting two parties who intend to
enter into a legal relationship

 Can be written or verbal. Verbal contracts are valid in most situations except in relation to
property and tenancy agreements.
(First 3) Required elements of a contract
Offer and Acceptance - To determine whether or not an agreement has been reached, the
courts will consider whether one party has made a firm offer which the other party has
accepted

Consideration must be some form of payment in relation to service being done

Intention the parties intend to create legal relations. What matters is not what the

parties have in their minds, but the inferences that reasonable people would draw from
their words or conduct.
Other requirements
Legality
Capacity to contract is the legal ability to enter into a contract. Cannot enter contract if
insane or under 18

Contract discharge - ways in which a contract could come to the end of its life
Breach 1 or more [parties has not fulfilled requirements set out in the contract]
Performance If standard of service is not completed in accordance with
agreements, so obligations not met
Agreement both parties happy to end contract
Frustration events have made completion of contract impossible, whereby
obligations cannot be met (e.g. painter cannot paint house if house blows away)

Utmost good faith

Requirement to disclose all relevant information is fundamental to an insurance contract. If
the rule is not observed the policy can be treated by the insurer as voidable. The
requirement is termed utmost good faith 'or uberrimae fidei.

Agency relationship
Agents' are engaged by 'principals' generally in order to perform tasks which the principals
cannot or do not wish to perform themselves,
Agency is a relationship which exists between two legal persons (the principal and the
agent) in which the function of the agent is to form a contract between his principal and a
third party

Obligations of Agents
Performance and obedience - The agent must perform his obligations, following his
principal's instructions with obedience, unless to do so would involve an illegal act
Skill and accountability
No conflict of interest
Confidentiality
Any benefit must be handed over to the principal unless he agrees that the agent may retain
it.

Forms of co-ownership of land
If land (and the property built on it) is purchased or transferred to two or more persons, these
persons become either joint tenants or tenants in common
Joint tenancy is where two or more people acquire land but no words of 'severance' are
used.

o
o
o
o

This means that the transfer does not state what share in the land each person has.
The land is merely 'held by X and Y'. e.g. husband and wife
The importance of the distinction is that if a joint tenant dies his interest lapses and
the land is owned wholly by the survivor(s). He may not pass his interest on by will.
The advantage is that only a limited number of interests can exist.
The disadvantage is the fact that survival decides ownership.

Tenants in common have shares in the land.

o A conveyance may state that the land should go to 'P, Q and R equally' each then
owns one-third part of the interest. It is equitable ownership. If P subsequently dies,
his or her one-third share goes into Ps estate: Q and R still own a one-third share
each
o Each tenant can bequeath his interest which means that a house owned by tenants
in common (A, B and C equally) will, if C dies and leaves his interest to D, E, F and G,
be owned by A, B, (one-third part each) D, E, F and G (one-twelfth part each).
o While perhaps being fairer, this can be cumbersome!

Other legal terminology

Insolvency
State of being
When ones liabilities and obligations/debt exceed ones assets + cash flow.
The company will need to take action to generate cash and/or re-negotiate terms with its
creditors
If prolonged the company declared insolvent and trading is suspended

The purpose of insolvency law is to govern what should happen to the property of a company that is
insolvent.
The basic aims of company insolvency law are to:
Protect the creditors of the company
Balance the interests of competing groups
Control or punish directors responsible for the company's financial collapse
Encourage 'rescue' operations

There are three types of corporate insolvency 'officials', depending on whether a company goes into
administration, receivership or liquidation

Bankruptcy legal matter

Bankruptcy occurs when an individual's financial affairs are taken over by a court. The individuals
assets are transferred into a trust which is used to repay as much debt as possible.

If insolvency persists leads to bankruptcy

Official Receiver takes control of the debtor's assets, as receiver and manager, selling
assets as appropriate

One is protected against further creditors, who can no longer chase you
Technically, if unable to pay 750 you can be taken to court and declared bankrupt
Lasts for period of 1 year

Will and intestacy

A will appoints the persons who will have the responsibility for dealing with the estate (the
executors, also called personal representatives) and gives instructions as to how the estate
should be distributed.

Conditions for a will to be valid

The will must be in writing

The will must be signed and witnessed by two people
The person making the will must be at least 18 years of age
The person must have the mental capacity to understand the effect of making a will
The will must not have been made as a result of pressure from another person.

A witness or the spouse of a witness cannot benefit from a will. If a witness or the spouse of a
witness is named as a beneficiary, the will is not made invalid, but that person will not be able to
inherit under the will.

Probate
Scenarios following death of individual
Executers of estate must establish financial position/ownership of deceased estate.
The workout what tax (inheritance is owed to government only after this can any
money be given to heirs.
The executors need to obtain a Grant of Probate from the Probate Registry to show they are
entitled to administer the estate.
Then they can collect the assets of the estate. The executors are responsible for settling all
liabilities of the estate before paying out the money to the beneficiaries.

Intestate
Testate
Those with legal will determining where money goes after they die
Intestate
No will, no one person can determine where the money goes.
There is a strict hierarchy of where money goes determined by government

Types of Trust

A trust is an equitable obligation in which certain persons (the trustees) are bound to deal with
property over which they have control (the trust property) for the benefit of certain individuals (the
beneficiaries)
The trustees may also be beneficiaries of the trust.
An individual who transfers assets into a trust during his lifetime is known as a settlor and
such trusts are known as settlements.
A settlor may also be a trustee and/or a beneficiary.
A trust may also be set up in a will and is then usually called a will trust. Where the trust is
set down in writing, this document is called the 'trust instrument'.

Settlor persons who sets up trust and whose money goes into trust
Trustees manage the trust and take responsibility for entire trust
Beneficiaries receives money from the trust
Life trust and Remainder man associated with interest in possession trust


Bare Trust (simple trust)
Assets of trust belong to named sole beneficiary before managed by trustees. Typical
example is child trust
The beneficiary of the trust can instruct the trustee how to manage the trust property, and
has the right to take actual possession of the trust property at any time.

Interest in Possession Trust

Beneficiary, known as an 'income beneficiary' or a 'life interest', has a legal right to the
income or other benefit derived from the trust property as it arises.
o For example, the life interest may have the right to occupy a house during his or her
lifetime, or an income beneficiary the right to receive income from the trust
property for a specified period or until death.
On the death of the life interest/income beneficiary, the assets of the trust will be held for
the benefit of the second class of beneficiary, known as the remainder man or the
reversionary interest.

Stops trust from falling into hands of beneficiary named by original beneficiary of
trust.
Life tenant is primary beneficiary, Remainder man gets whats left and can be given
remainder in will by life tenant.

Discretionary Trust
Setup when trustees hold assets for beneficiaries.

Trustees exercise their discretion as to which beneficiaries will be entitled to receive income
or capital from the trust.
The exact rights of each beneficiary are not determined in advance.

Original settlors may not know who benefits are going to

E.g. university trust with old alum settlor, where university decides beneficiaries or
Grandpa for kids not yet born

Inheritance tax (IHT)

For inheritance tax (IHT) purposes, there is a chargeable lifetime transfer (CLT) when a
discretionary trust or an interest in possession trust is set up.
The trust suffers an IHT principal charge once every ten years and;
An exit charge when property leaves the trust

Charitable Trust

Set up to provide for a charitable activities of charity in question.

Charity must be registered with charity commission and trust would provide making sure
that it carried out work as specified in the charitable trust.
Charitable trusts enable the settlor to give some degree of individuality to a gift, specifying
how it may be used and, as charities, are basically free from tax.

Client Advice
Investors can broadly be categorised into two types:
Individuals or retail investors
o classified by firms according to their wealth
Retail
High net worth
Very high net worth
institutional invest
o Such as pension funds and mutual funds (a term used in the US for collective
investment funds), hedge funds, charitable and philanthropic trusts employ
professional fund managers who manage funds on a large scale.

Explain the obligations of a firm towards retail clients.

Authorised firms have an obligation to abide by the regulators Principles for Businesses and detailed
rules, as set out in the relevant regulatory Handbook (FCA or PRA), in their dealings with consumers.
Over-arching principles include:
Requirement to treat customers fairly
Disclosures to be made to customers.

Fiduciary Responsibility
An adviser's fiduciary responsibility implies that the adviser ought not to take advantage of a
client's trust in him or her. The adviser (or firm) agrees to act in the sole interests of the client, to the
exclusion of his or her own interests.

The adviser's fiduciary duty implies:
Avoidance of Conflict of interest
To always act in client's best interests
Full and fair disclosure of material facts, particularly where there may be a conflict of
interest.

Principle for Businesses 6 states that a firm must pay due regard to its customers and treat them
fairly
It is on the actual consequences of what firms do.

By adopting a 'principles-based approach' to TCF through Principle 6, the regulator puts the
onus on firms to determine what is fair in each particular set of circumstances.

The emphasis of the Authority's philosophy is not so much on the principles themselves. It
is on the actual consequences of what firms do. Increasingly, the term used for the
regulators recent approach has been outcomes-focused regulation.

With regard to TCF, the FCA specifically expects firms to focus on delivering the following six
consumer outcomes

Corporate Culture
o consumers can be confident that they are dealing with firms where the fair
treatments of customers is central to the corporate culture

Marketing
o products and services marketed and sold in the retail market are designed to meet
the needs of identified consumer groups and are targeted accordingly
Clear information:
o consumers are provided with clear information and are kept appropriately informed
before, during and after the point of sale ability of advice
Suitability of advice:
o where consumers receive advice, the advice is suitable and takes account of their
circumstance product expectations
Fair product explanations:
o consumers are provided with products that perform as firms have led them to
expect, and the associated service is both of an acceptable standard and also as they
have been led to expect.
Absence of post-sale barriers:
o consumers do not face unreasonable post-sale barriers imposed by firms to change
product, switch provider, submit a claim or make a complaint

Investment management process

1) Plan
a. Identify and prioritise clients needs and objectives
b. Establish the clients circumstances (via Data collection): suitability/needs
c. Analyse different options to meet identified shortcoming/needs
d. Meet with the client to agree strategic asset allocation
2) Implement
a. Actually invest in funds and products
3) Review
a. Check allocation is in line with objectives
b. Circle around and go through plan stage again to make sure nothing has changed
and everything is in line

Investor needs and objectives

Identify 3 key factors
Time horizon- how long investing for
Return to match expectations
Risk tolerance

Return
Broadly speaking, the requirements of clients fall into one of two categories:

To maximise returns, eg for positive net worth individuals looking for a portfolio to match
their Risk/return preferences
To match liabilities, eg in the case of pension funds, where the aim is to match assets and
liabilities or minimise any mismatch.

Explain the importance of establishing and quantifying a clients objectives.

The first stage is to determine all of the objectives that the client is looking to meet and to prioritise
those objectives and to quantify them in financial terms

From a quantification viewpoint, the requirements of a client portfolio may include such factors as
school/college fees, loans, dependent pensions, and a primary consideration here will be whether
those liabilities are nominal or real.

A nominal liability is one that is fixed in monetary terms irrespective of future inflation.
In contrast, a real liability is one which changes in monetary terms as we experience
inflation.

Whatever the liability, assessment can involve a present value analysis of the anticipated future
liabilities that the portfolio is aiming to meet.
For example, to pay a pension of 20,000 pa for a period of 20 years when real returns
(asset returns in excess of inflation) are 3% will require a fund value at retirement of almost
300,000, and so we would be looking to achieve this fund value at the retirement date.

Objectives
Save for retirement
Provide financial protection
Repay mortgage
Insurance against disasters
Future liabilities to meet (school fees)
Other specific needs
Liquidity time horizon may need funds in short term / which may cause short term losses if
SR depreciation in asset
Liabilities
Tax considerations different people, different tax needs
Regulatory requirements
Religious and ethical considerations socially responsible investing

Risks

Capital risk chance of asset depreciating, but if focus solely on this may lead to bother

Inflation risk- risk that investment appreciation does not keep up with inflation
Interest rate risk the risk of changes in bank base rates and the knock-on effect that this

risks

may have on asset returns

o To avoid capital risk may invest in low risk, low interest investments. But if IR
increase you may be locked into relatively low yielding asset.
Shortfall risk failure to meet investment objectives. If dont want to risk capital then you
may fail to meet objectives

Diversification
Consider an Investment in shares (equities). Two sorts of risk can be distinguished:

The general market risk (or systematic risk) of investing in shares or bonds
The specific risk (or non-systematic risk) of any individual investment.

Through this process of diversification, investors are able to rid themselves of the specific risk of a
stock. It is, however, impossible to remove the market risk.

Different types of diversification

Diversification by asset class.

This is achieved by holding a combination of different kinds of asset within a portfolio,
possibly spread across: cash, fixed interest securities, equity investments, property-based
investments, and other assets

Diversification within asset classes.
An investor can diversify a portfolio by holding a variety of investments within the particular
asset types that he holds. This may be achieved by holding various fixed interest securities,
by holding equities in a number of different companies, by spreading investments across
different industry sectors and geographical markets, and by holding a number of different
properties or property-based investments.


Diversification by manager.
Diversifying risk across different funds with different managers reduces the risks from a
manager performing poorly. This is one of the attractions of 'manager of manager' and 'fund
of fund' structures.


Timescales
A clients attitude to risk may be influenced by investment timescales.
If the fund is a young scheme with 30 or 40 years to client retirement, then it can afford to
take a reasonably aggressive attitude to capital risk and invest in what may be regarded as
the riskier assets. May experience some poor years but we are also likely to experience
some very good years. The effect is that risk averages out.
If, on the other hand, the scheme is very mature and retirement is imminent, then there is
insufficient time for this averaging effect to take place

Risk Tolerance
Two approaches to gauging risk tolerance:

The process will probably start with a review of the clients current investments and risks,
which will clearly illustrate the clients historical attitude to risk. As we noted above,
however, risk tolerance changes over time, so this historical information, whilst a very useful
insight, is not of itself sufficient
To augment this, the investment adviser will also undertake the fact-find soft facts review.
They will ask the client to select a mix of, say, equities and bonds, to give an idea of the
normal mix (and hence risk) that the client wishes to face. As part of the fact find process
the investment adviser will illustrate various possible asset allocations and discuss in detail
the potential returns and risks of each. Such targeted discussions should enable the
manager to get an understanding of the clients general risk tolerance.

Investment and product selection

Approach adopted depends on the investment management style adopted, ie active or passive

Active investment manager

An active investment manager is one who intervenes with the portfolio on a regular basis,
attempting to use individual expertise in order to enhance the overall return of the fund.
There are costs involved with all transactions, and hence limits on the number of active
interventions taking place are likely to be to the advantage of the fund holder.

AIMs do not believe that the securities markets are always efficient. They believe that
securities can be misvalued. They attempt to time their purchase or sale on the basis of
specific stock information, market information, economic factors etc.
May obtain research from external sources such as investment banks, these are 'sell-side'
analysts. They may establish an in-house research department, made up of buy-side
analysts. The benefit of generating unbiased internal research needs weighed against the
costs of setting up the department.

Passive investment manager
Passive investment management establishes a strategy which, once established, should guarantee
the appropriate level of return for the fund.
The simplest strategy is to 'buy and hold'. However, perhaps the most common form of
passive management is indexation.

Indexation Indexor tracker fund
Fund manager selects an appropriate index quoted in the market place. Having established the
index, the fund manager builds a portfolio which mimics the index, hoping that this portfolio will
then perform in line with the index numbers. Likelihood is that the fund will underperform the index
for a number of reasons.
Firstly, there is the initial cost of creating the portfolio.
Secondly, and perhaps more importantly, all index funds tend to be based on a sampling
approach and consequently exhibit a degree of tracking error


Hybrid
Seeking to out-perform indexes requires a less than fully passive, and more interventionist,
approach possibly with an indexed core fund, and a Peripheral or satellite fund which is more
actively managed and could involve the use of derivatives in order to establish larger trading
positions than the fund itself can obtain

Tilting - Alternatively, the fund manager may combine both active and passive fund management
methods by Tilting the fund. Tilting involves holding all (or a representative sample) of the
constituents of an index (like a passive tracker fund), but with larger proportions in areas that the
manager favours.

Review

Portfolio performance should be reviewed no less than once a year, or more regularly for short term
funds, and will look to achieve a number of objectives.

Client circumstances we should look to determine whether any client circumstances have
altered as this may result in an alteration of the clients objectives. Any significant changes
may require a modification to the investment strategy.
Performance review we need to monitor the performance of the portfolio against the
selected benchmark to ensure that it is achieving its objectives
Portfolio rebalancing following on from the performance review we should consider
whether there is any need to update the agreed asset allocations. Care needs to be taken
here in respect of the tax liabilities that may arise from the effects of any rebalancing.


Establish clients circumstances
Data Collection/ Fact find
Hard facts:
Definite answer
Close ended questions
Soft facts:
Subjective
Open ended questions

Letter of Authority

Should factor clients other investments into making investment decisions. This may require
information on their other investments, so may need letter of Authority which would allow
advisor to talk to other product provider to find relevant information.

Advice and recommendations

Having established clients financial objectives and established their circumstances the advisor
would:
Analyse a range of options (of investments)
Prepare a report explains options when giving recommendation
Implement the Plans
o Strategic Asset Allocation
Asset classes (shares/bonds) based on objectives of the fund and client
Important decision is asset class
80-90% of differences in performance between investors
performance
Currencies based on objectives of the fund and client
Asset allocation is the key driver of investment performance, not security
selection
Key to long term performance
Review the plan, review changing circumstances and objectives and changed market
conditions

Benchmarks
When measuring performance of a portfolio, it is important to establish whether the performance
was relatively good, or bad, and so a performance measure is required.

Three main forms of comparable analysis of performance.

Comparison to relevant stock/index,

o eg a published market index
Comparison to similar funds,
o ie performance of other managers with similar objectives and constraints. PPM
consultants maintain extensive databases on statistical performance.
Comparison with a customised benchmark for funds
o that have a unique objective or constraint, eg ethical funds that cannot invest in
arms/tobacco (although the standardised FTSE4Good indices meeting ethical criteria
are available).

Benchmark indices
To be useful in this context, however, the index must be comparable over the period being
considered, and great efforts must be made to ensure that any index is both relevant and
comparable. If an index is to be used as a performance yardstick against which the performance of a
portfolio is to be assessed, it must provide a reasonable comparison.
Indices may be used for a variety of reasons. Historically, their main purpose was to give an
indication of the mood of the market. More frequently now, they are used as a benchmark for
performance assessment.

To be appropriate for benchmarking purposes, an index must be indicative of the performance that
could realistically have been achieved.

The characteristics that are required to render an index suitable as a benchmark are therefore that it
is:
specified and unambiguous
Appropriate to the nature of the fund (eg, a UK blue chip fund may utilise the FTSE 100
Index)
Appropriate to the currency of the fund
Investable, ie composed of investments that could conceivably be held in the fund
Measurable, ie the return can be calculated on a frequent basis as required
Representative of achievable performance, ie it has an arithmetic weighted composition
(remember that the return of a portfolio is an arithmetic weighted average of the individual
stock returns)
Measures the relevant component of performance, ie total return indices for total return
performance and capital value indices for capital growth

Source of wealth
Investors may have acquired their wealth actively or passively.
Passive wealth
People who have acquired their wealth passively, for example, through inheritance, or those
who have acquired savings gradually from their salaries
These people are frequently less experienced with risk and do not believe that they could
rebuild their wealth were they to lose it.
They have a greater need for security and a lower tolerance for risk.

Active wealth
People who have earned their own wealth, often by risking their own capital in the process
These types of people are assumed to be more confident and familiar with risk.
They have a higher tolerance for risk.
They dislike losing control over anything, including their investments

Recommending funds
Factors in fund selection process

Past performance no guide to the future

Charges
o Initial charges vs annual management charges
Financial stability of the provider
Stability, independence and standing of trustees, auditors and fund custodians

Compare investment performance relative to the unbiased benchmark (ideally and unbiased
benchmark such as market index comprising similar investment styles)

Where a portfolio is too small to be efficiently managed or the clients objectives are too
specialised to be handled in-house, the fund management may be outsourced. The decision to
outsource will be determined when the overall strategy and policy are developed, towards the end
of the initial investment management process.

Charges

Fund charges tend to come in one of two forms

Entry and exit charges charges made when funds are invested or when funds are
withdrawn
Annual charges generally charged as a percentage of the value of funds under
management, though they may include a performance related element

Financial stability
For many funds this is of little relevance, however it is key to 'with profits' funds run by life
assurance companies whose performance accumulates over many years.
'With profits' funds aim to smooth the fund returns across the years through the
application of bonuses.
In very good years part of the fund return will be retained rather than being allocated as an
annual bonus. In poorer years these retained funds can be called on to continue to provide
the annual bonus.
For this process to function requires a good degree of financial stability within the
provider.

Stability, independence and standing of trustee, fund custodians and auditors
One individual, the fund manager, has control of potentially quite substantial funds owned by
others, the investors. As a result, there needs to be controls and checks in place to ensure that
neither the fund manager nor anyone else involved in the process is either tempted or able to abuse
their position.
Typically, within a fund where a trustee is involved:
The fund manager controls how and where the assets are invested but never personally has
access to them
Any trades are transacted by a broker
The funds are held in the name of the trustee who is charged with the task of ensuring that
the fund manager operates in accordance with his remit
Periodically, the fund accounts are checked by the fund auditor.

Any action taken by any one of these parties is immediately transparent to the others, so this
segregation of duties should ensure the safety and security of the investors funds (except in the
case of collusion between all of the parties involved)

Written reports to clients

Providing a written report to clients is an important part of the process of giving financial advice
The parts of a financial planning report to a client are typically as follows
A statement of the client's objectives
A summary of the client's income and assets and other relevant circumstances or problems

Recommendations, including any proposals for immediate action as well as longer-term

suggestions for the client to consider in the future
Appendices, including any data that is best presented separately, if appropriate

Asset and liability matching

Young persons
pension fund
(40 years from
retirement)

Time
Liability
Liquidity
Risk Tolerance
Tax

Long term
Real
Low
High
Gross fund
No tax
(may include
index linked
gilts to protect
against
inflation)
Equity

Mature pension
fund
(Close to
retirement
=close to pay-
out)
Short tem
Real
High
Low
Gross fund
No tax
(may include
index linked
gilts to protect
against
inflation)
more bonds

Life assurance
fund (pay out
on death of
policy holder)

General
insurance fund
(never know
when may have
to cash in)

Long term
Nominal
Low
High
Tax on income
and gains

Short tem
Nominal
Very high
Very Low
Tax on income
and gains

Equity Bond/cash/treasury
bills
Real = inflation linked. Liabilities goes up with inflation if real this means that investment
must grow with inflation


Pension funds

A pension fund is an example of a liability matching fund or a return maximising fund. It represents a
pool of money to be invested now, to achieve either:
A specific return based on the employee's salary and number of years' service with the
company a defined benefit (DB)/final salary scheme,

o DB pension fund must ensure that the present value of liabilities equals the
present value of assets. Future pension liabilities is predictable by actuaries. This
suggests that it is desirable to ensure the future cash flows from assets required to
meet those pension payments are also reasonably predictable. This suggests that
bonds should play a significant role in the portfolios of pension funds.
o DB pension funds need to consider longevity risk the risk that liabilities to pay
pensions will increase as pensioners live longer. It could be difficult to meet this risk
through investment in bonds.

A general increase in value of the contributions paid on behalf of the employee a defined
contribution (DC)/money purchase scheme

Personal pension plans, set up by an individual who is, perhaps, self-employed or is

not a member of an occupational scheme, are DC pensions.

Generally speaking, pension funds have fairly long-term horizons and, therefore, are
prepared to take on board a higher degree of risk, since any shortfall in the fund can be
made up in future investment performance.
This investment policy depends on the maturity of the fund.
If the fund beneficiaries are close to retirement, then it would be more appropriate to select
relatively short-term safe investments.

Pensions - Inflations

Pension funds also have to keep control over the real rate of return that they earn since their
liabilities, potential pension payments, expand with inflation. So, pension funds tend to invest in
more speculative assets referred to as real assets (e.g. equities, property) as these offer protection
against inflation.

They keep small proportion of fund in fixed interest instruments, particularly index-linked stocks,
partly because these guarantee real returns over a period of time, but also because the bonds tend
to have fairly high durations and are therefore sensitive to movement in real interest rates.

Equally, the pension fund will keep some assets in liquid form. Government bond markets are highly
liquid market place in which to invest money gaining a moderate, risk-free return.

Discretionary and non-discretionary portfolio management

Discretionary portfolio management

o the investment manager makes and implements decisions to buy and sell
investments in the portfolio without asking the client each time.
Non-discretionary portfolio manager
o provides advice to the client to assist the client in making their own investment
decisions.

Execution-only customers

Execution-only customers are those who are not given any advice by the firm when they
make investment decisions. The only responsibility of the firm to such customers is one of
'best execution': to implement the customer's investment decisions at the best price
available.

Taxation

Income tax
Capital gains tax
Inheritance
Stamp duty
Corporation
VAT
Investor tax

Income Tax
UK income Tax system

PAYE
Most of us are taxed by the (PAYE) pay as you earn system
Most tax deducted at source
Each month company deducts from salary the relevant amount of tax

If you have extra income you must fill out the Self Assessment form; to pay additional tax

Payment on Account (if self employed or <80% of last years tax paid at source)

National insurance is extra charge on earnings
Payment contribute towards future benefits such as pensions


Income tax fiscal years

Fiscal years refers to personal income tax year 2014/15 tax years runs from 6th April 2014
to 5th April 2015the following year.

Resident and domicile

Resident
Statutory residence introduced in 2013
Status determined each year

Residence is determined by where you live in tax year
Possible to be resident in more than one place

Automatically non-resident
Resident in the UK for 1 or more of previous 3 years. Visit UK for fewer than 16 days
Non-resident in previous 3 tax years & spends fewer than 46 days during the year
Work fulltime overseas and visit UK fewer than 91 days during the tax year

 Non-residents liable to income tax only on income arising in the UK

Automatically UK resident

If non-residency does not apply:
In UK for more than half the year (183 days)
Have their only home in the UK (dont need to know conditions)
Carry out full time work in the UK
o There is a 365 day period when the taxpayer works an average of 35 hours a
week in the UK.
o Within that 365 day period, no significant breaks of more than 30 days when
he does not work in the UK (excluding annual leave and sick leave)
o Within that 365 day period, the taxpayer works in the UK on at least 75% of
his working days.
o At least one day in the tax year when he does at least three hours work in the
UK
Residents liable to UK income tax on UK and overseas

Sufficient ties test
If you dont pass either of the other two another series of tests related to
circumstances
Determining if you fall into residency or on residency
Dont need to know this for exam

Domicile

Domicile refers to the country you call home. A person can only have one domicile.

Domicile: If UK domiciled you pay tax on UK and any income earned overseas
Non-domiciled: If non-dom you wont be taxed on what earned overseas if you dont
bring it back to UK

If long term resident then may have to pay annual remittance basis charged to avoid income
tax on overseas earnings not brought back to the UK:

30,000 if resident for at least 7 years of the last 9 years
or
50,000 if resident for at least 12 of last 14 years

Income tax computation

Gross taxable income- income from all sources

Some income gets paid net of tax, so you must back out what actual gross amount is:
May have to do this for exam using formula:

 Gross amount = net / 100-% tax rate

Less: allowable deduction from gross income

Deductions
First 10,000 is deducted
Any money paid into pension up to 40,000 is deducted
Deeds of covenant to charity (not adhoc)

Charity

Payroll giving scheme

Under the payroll giving scheme, employees can authorise their employer to
deduct charitable donations from their gross salary before calculating tax via
the PAYE system.
Gift of certain shares and securities

If an individual makes a gift of certain shares and securities to a charity, he

can deduct the market value of the shares or securities at the date of the
charitable gift, again giving the employee automatic tax relief at his marginal
rate of tax.

Gift Aid
All cash donations are treated as being paid net, ie after deduction of income
tax at the basic rate (20%). So, a net donation of 800 is worth 1,000 (800
100/80) as the charity can claim 200 (20% 1,000) from Her Majestys
Revenue & Customs (HMRC)

Income Tax computation

Rate
Taxable income
Salary and interest
Dividend
Basic
0 to 31,865
20%
10%
Higher
31,866 to 150,000 40%
32.5%
Additional
>150,000
45%
37.5%

Must work out in correct order:
Earnings (Salary) and property (Non-savings)
Interest
Dividend

There is a starting rate of 10% for the first 2,880 of interest Income (2014/15).
This only applies where savings income falls below the starting rate limit of 10,000

Dividends falling in the basic rate tax band are taxed at 10%. As they come with a
10% deemed or notional tax credit, no further tax is payable on dividends for basic
rate taxpayers.

Dividends falling into the higher rate tax band are taxed at 32.5%, and for additional
rate taxpayers at 37.5%

If you earn over 100,000 for every 2 pounds you earn you lose 1 pound of your personal
allowance. Up to 120,000


Allowances
Certain loan interest payments can be deducted from total income.
An individual who pays interest in a tax year is entitled to relief in that year if the loan is for
one of the following purposes.

Loan to buy plant or machinery for partnership use (interest allowed for three
years)
Loan to buy plant or machinery for employment use (interest allowed for three
years)
Loan to buy interest in unquoted employee controlled company
Loan to invest in a partnership
Loan to invest in a cooperative

Tax relief is given by deducting the interest from total income for the tax year in
which the interest is paid.

It is deducted from non-savings income first, then from savings income and lastly
from dividend income


National insurance contributions

National insurance contributions (NICs)are payable by employees and their
employers and also by self-employed individual

Class
Description
1
Payable by employees on their earnings
above the primary threshold. The amount
payable depends on an individuals income

Both employees and employers pay
Class 1 NICs, in amounts that are
related to the employee's earnings.
Primary Class 1 NICs are paid by
employees under the State Pension
Age, on part of their earnings
through a deduction from their pay.
The employer adds their own
contribution (secondary Class 1 NICs)
and remits the total to HMRC

1A
1B
2

3
4

Payable by employers on certain types of

non-monetary benefits (company cars,
health benefit schemes)
Payable by employers on an employees
earnings if they have entered into a PAYE
settlement agreements (PSA)
Payable by self employed. If earnings are
below small earnings exception then no NIC
is payable

Contributions are payable at a flat
rate by self-employed persons,
unless annual profits are below the
small earnings exception limit
Voluntary usually to fill gaps in
contributions
Payable by self employed, if profits exceed a
threshold (based on the level of their
taxable business profits).

Taxation of trusts and beneficiaries
Tax Band
Non-dividend type income
Dividend type
(rent, savings, business
income)
st
1 1000 of income (standard 20% basic rate
10% dividend ordinary rate
rate band)
Income over 1000
45% trust rate
37.5% (dividend trust rate)

If settlor has more than one trust the standard band is split between them down to a
minimum of 200
A beneficiary may be able to reclaim tax charged on income received from a trust

Capital gains tax

Capital gains tax (CGT) is payable by:
o UK - Domiciled residents
o on the chargeable disposal
o of a chargeable asset

What you pay when you make a gain on selling asset
You must be chargeable person
A person resident or with sufficient ties to the UK

Overseas aspects

Individuals with UK domicile are liable to CGT on the disposal of assets situated
anywhere in the world if, for any part of the tax year in which the disposal occurs,
they are resident in the UK


Chargeable disposal
Sale of asset
Gift of asset
Received proceeds for asset
o e.g. insurance claim

Chargeable asset
Everything except:
Gilts
Qualifying Corporate bonds
Principal private resident
Wasting assets (cars)
NISA
NS&I products
Gambling, lottery and premium bond pay-outs


Calculation of CGT


Scenario A (000)
Scenario B
1st: Total capital gains in
37
8
fiscal year
Total capital losses in fiscal
(16)
(12)
year
=net gain or loss in current
21
(4)
fiscal year
2nd: losses brought forward (5)

from previous years (net loss
from previous year)
3rd: annual exceptions
(11*)

th
4 : chargeable gain or loss
5
(4) could bring forward to
offset subsequent gains in
following year


Pay CGT at flat rate Salary and interest of 18% (28% for higher rate tax payers)

Tax Planning

Ways to mitigate the extent of CGT liabilities:

Spread ownership of assets amongst family members (although gifting you could
trigger CGT)
Phased encashment only sell 11,000 each year to take advantage of allowance
Realise paper loss offset against gain to reduce liability
Sell shares and repurchase similar different shares
Use ISA

IHT rates
Chargeable estate
o On death value of all assets added together thats whats determined your
charitable estate
o Theres no exception
o The first 325,000 at 0% = nil banding
o Everything above 325,000 taxed at 40%

Death bed bequeathal

Potentially exempt (PET)

o any gift made by individual in lifetime is potentially exempt IHT provided not
made in last 7 years.
o any gifts in those 7 years will have inheritance tax imposed on them
Gifts to trusts
o Assets can be parked in a trust if trust isnt legal property it isnt charged to
your estate.
o a transfer to a discretionary trust will attract an IHT rate of 20% immediately
Gifts with reservation of benefit (GWR)
o i.e. gift with strings attached. Still considered part of an individual estate for
IHT purposes
o Can gift your house to children on condition that you get to live their rent
free, which means that its not a true gift. Must be paying rent for it to be
seen as true gift.

Charity reduction of 10% in IHT rate (to 36%) if deceased leaves more than 10% of their
estate to charity

Transfer of unused nil rate band
An individual has a nil rate of 325,000
If on death their chargeable estate is les than this nil rate band the excess can be
transferred t their spouse to be used on their death


Property can move between spouses with no tax
Nil rate bands can be transferred
Spouse can receive 100% of nil rate band at time of latter spouses death and add it
to her own nil rate band. Transfer is on percentage basis not a cash basis
[This calculation will come up]

Stamp Duty
Stamp Duty land tax paid by acquirer of land and property in UK

As property value rises, the stamp duty land tax increases.

Should know bandings

Non-residential property
Residential
Rate
0-150,000
0- 125,000
0
150,001 250,000
125,001 250,000
1
250,001 500,000
250,001 500,000
3
Over 500,000
500,000 1,000,000
4
N/A
1,000,001 2,000,000
5
N/A
Over 2,000,000
7




For non-residential property or land with a value up to 250,000 the SDLT rate is 1% rising to
3% for the 250,00-500,000 range and 4% for values grater than 500,000

Stamp duty reserve tax - on purchase on assets, not property but on shares in the UK (LSE
main market)

% rate of tax ( of value of transaction)

Payable in a paperless transaction by purchaser of :
Shares in a UK company
Shares in foreign co with a share register in the UK
An option to buy shares
Rights arising fro shares already owned
An interest in shares
Interest in shares - interest in money made from selling shares


Payments are made through crest (electronic settlement and registration system
administered by Euroclear)
For funds - Unit Trusts and OEIC the fund manager pays SDRT when each individual
investors units are sold

Corporation tax

Corporation tax is payable buy companies resident in the UK on their worldwide profits
(overseas companies on their UK derived profits) - dont need to know how to calculate

Main rate companies pay tax in 4 quarterly instalments based on an estimate of

their corporate tax liability
Other companies pay whole amount nine months and one day after end of
accounting period (financial year end)

Applies to cos with profits

From April 2014
of:
Main rate
>1.5m
21%
Small companies
<300k
20%
Companies that lie between pay a sliding rate somewhere between 20% and 21%

Losses can be offset against:
This years income and gains
Last years income and gains
Future years profits from the same trade

VAT
Chargeable on the supply of goods and services in the course of business
Tax rates
0% Children books and clothes (not exempt)
5% energy services and products
20% most other goods

Investment services
Commissions exempt (not same as 0%)
Nominee services exempt
Advisory services standard rate, if invoiced separately (otherwise exempt)
Portfolio management stand rate (20%)


Taxation of Investments
Direct investments
Taxed based on relevant income or capital gains tax rate
Examples include interest income form banks gilts corporate bonds, income part of
purchased life annuity, dividend income rental income
Most income is paid net of 20% (basic rate) tax.
Those paid gross include gilt interest (UK gov bonds) interest on NS&I accounts
interest paid to individual investors by listed UK comps

Indirect investments
Pension funds
ISA
REIT
CIS
VCT
EIC

 Life insurance funds

Pensions

Limit of how much can be contributed each year (40,000)
Tax relief at marginal rate : if under 75
Tax free lump sum (up to 25% of accumulate funds ) can be taken at retirement. Remainder
used to produce an income subject to income tax

Lifetime limit of 1.25m (2014/15)
Amounts above this subject to tax at 25% if the excess take as income or 55% if excess taken
as lump sum

ISA
Not an investment but rather a wrapper
Two types of ISA: Cash and Stocks and shares
Annual limit of how much can be invested in ISA (15000 for 14/15) can split as
desired between two types
Investments within ISA not subject to income or capital gains tax
Tax paid at source is not recoverable (10% on dividends and 20% on interest income
on stocks and shares only (Basic rate))

Junior ISA

Up to 4000 can be invested each year
Can be split between stocks shares and cash

REIT
Real estate investment trust
Company that primary business is to invest and rent out property
If company turns itself into reit, rental income and capital against exempt within the fund,
but requirement to distribute most rental income (90%) as dividend. ,which is taxed.
Investors subject to income tax on distributions (20% basic rate tax withheld from dividend)
Investors also subject to capital gains tax

Taxation of investment vehicle

Authorised UT/OEIC
Investment Trst co
Income (non-dividend)
>Corporation tax of 20
Corporation tax (rate
depends on profitability of
trust
Capital gains (gains within
NL
NIL
the fund)


Distributions form a collective investment fund treated as dividend distribution for income
tax purposes

But, if fund holds >60 interest bearing securities, distribution is treated as interest income
for income tax purposed (20%)
On sale (including switching between sub-funds) investor subject to CGT

Taxation of investment vehicle
Offshore fund classification (no run in UK)
Reporting status how reports income to tax man , income taxed by income tax, gains
taxed from CGT
Non-reporting status roll up funds retains most of its money to make more investments
(buy more shares increase value of fund) - gains in value isnt about capital gains its about
reinvestment they pay income tax on any capital gains. not great for investors as they
miss out on large CG allowance

Life assurance funds
Fund insures lfie and promises investment return at end of period
Process form qualifying life assurance policy free of income and capital gains tax so long as:
Premium paid for at least 10 years
Premiums paid at least annually

20% would be paid by higher rate taxpayers (25% for additional rate tax payers) on the
surplus of process over premiums paid if the above is not satisfied

One off or regular payments from a single premium UK life assurance policy usually leads to
no income tax
Max withdrawal of 5% of the original premium can be withdrawn without incurring
additional income tax liability.

Tax relief of venture capital trust

Investor tax liability is rescued by 30% of the invested amount (max investment that attracts
relief is 200,000)
If shares not held for 5 years the relief is clawed back
Dividend income is tax free
No CGT (both within the VCT and for investor, irrespective of the holding period)

Enterprise investment scheme- tax reducer
Offers tax incentives to individuals to invest in new and growing businesses
Certain unquoted shares and AIM shares
Income tax relief given at30% of investment (maximum investment is 1m) must hold
shares for 3 years
Gains on disposal are not taxed (so long as held for 3 years)
If shares sold at a loss the loss can be set against the investors income.