Financial Services Training

Transcription

1 Financial Services Training Unit of Competency Apply principles of professional practice to work in the financial services industry FNSINC401A Unit Descriptor This unit describes the performance outcomes, skills and knowledge required to identify industry professional approaches to procedures, guidelines, policies and standards, including ethical requirements and model and meet expectations of these in all aspects of work. This unit has application to a variety of financial services sectors and is applicable to individuals working within enterprises and job roles subject to licensing, legislative, regulatory or certification requirements so the varying Commonwealth, State or Territory requirements should be confirmed with the relevant body. Employability Skills This unit contains employability skills. Prerequisite Units Nil Application of the Unit This unit covers skills required to work in senior roles in the financial services industry and underpins other specialist units used in all sectors of the industry. Unit Sector Industry capability

2 Apply principles of professional practice to work in the financial services industry This book supports FNSINC401A Apply principles of professional practice to work in the financial services industry in the Financial Services Training Package. Copyright Peter Bull, 2011 ISBN rd edition Disclaimer All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, scanning, recording, or any information storage and retrieval system, without permission in writing from Millbank Investments Ltd, NZ or from the publisher Software Publications Pty Ltd. No patent liability is assumed with respect to the use of the information contained herein. While every precaution has been taken in the preparation of this book, the publisher and authors assume no responsibility for errors or omissions. Neither is any liability assumed for damages resulting from the use of the information contained herein. Software Publications Pty Ltd (ABN ) Head Office - Sydney Unit Gibbes Street Chatswood NSW 2067 Phone: (02) Fax: (02) Australia Toll Free Numbers: Phone: Fax: Web address: Published and printed in Australia

3 Chapter 1 Overview The financial services sector is very important in the Australian economy and encompasses a wide range of professions and industries. According to figures released by the Australian Bureau of Statistics the finance and insurance sector ranks third in terms of its value to the Australian economy Property and business services Manufacturing Mining Finance and insurance Construction Retail trade Agriculture, forestry & fishing The main sectors of the financial services industry include the following: * Accounting * Bookkeeping * Insurance * Lending Services * Credit Management and Mercantile Management * Superannuation * Banking * Credit Unions * Financial Planning * Managed Investments * Credit Checking * Finance, Mortgage and Insurance Broking * Conveyancing * Risk Management * Loss Adjusting * Workers Compensation * Financial Markets Accounting Most people think of accountants as the people who do the annual tax return. But many accountants never deal with taxation. Accountants are employed in private businesses, charities and government organisations. Their job is to record the monies going into and out of the organisation and to analyse financial reports to improve the profit, correct problems in the business or make informed decisions about a proposal affecting the financial position. FNSINC401A Apply principles of professional practice to work in the financial services industry 1

4 For example, a business may be thinking of opening another shop or office, and the accountant and management would examine the potential costs and sales to decide whether it is sensible to do this. In smaller businesses the accountant may be involved in preparing payroll and generally running the office as well as looking after the paperwork and finances. To become an accountant requires studying for a diploma or degree in accounting and many accountants join one of the professional associations who provide on-going professional development. Bookkeeping A bookkeeper is more concerned with the day-to-day operations of a business, and would: prepare invoices and receipts bank money received and pay bills perhaps prepare the payroll produce reports for the owner reconcile the bank accounts file documents in a logical manner. From March 1, 2010 bookkeepers (other than employees) who prepare a Business Activity Statement (BAS) are required to be registered with the Tax Practitioners Board. Insurance Insurance as we know it today can be traced to the Great Fire of London, which in 1666 destroyed 13,200 houses. In the aftermath of this disaster, Nicholas Barbon opened an office to insure buildings. In 1680, he established England's first fire insurance company, The Fire Office, to insure brick and frame homes. Insurance is simply protection against unforeseen events. Drivers insure their cars so that if the car is stolen or damaged in a crash the insurance company pays for repairs or replacement. Businesses, houses and possessions can also be insured against theft, fire, flood, accidental damage, etc. Life insurance means that when someone dies, people named in their will receive money from the insurance company to cover their cost of living either as a lump sum or a fixed amount each week. Typically, life insurance is used to provide an income for the family after the death of the breadwinner. E X A M P L E Alan is married with three children and works as a mechanic. His wife is a full-time mum and they are paying off an expensive house. If Alan were to die suddenly from an accident or illness, the house would have to be sold because the payments could not be met, causing serious disruption to the family. So Alan takes out life insurance, and in the event of his death his wife will receive one million dollars. This will allow her to pay off the loan on the house, and have an income by investing the remainder so that his family will not have any money worries. Income insurance is used by some self-employed people - remember they do not get sick pay - to provide them with an income if they become sick or injured and unable to work. 2 FNSINC401A Apply principles of professional practice to work in the financial services industry

5 People wanting insurance take out a policy which spells out the terms and conditions of the cover provided, and they pay a premium which is simply the fee charged by the insurer. Insurance is a form of risk management. 1. EXERCISE Use the internet to get two quotes for insuring a Toyota Camry sedan and a Porsche Boxster 987. Record the quote below. Is the premium any different for drivers under 25? Why do they want to know your postcode? Celebrities can even take out insurance to cover their assets which if damaged or injured could affect their earning power. According to the UK newspaper The Independent, singer Maria Carey had her legs insured for $1 billion in 2010, cricket legend Merv Hughes has an $800,000 policy on his famous moustache, and Rolling Stones guitarist Keith Richards has his hands insured for $2 million. 2 Lending Services There are times when people need more money than they currently have. Buying a new car, for instance, could require $20,000 or more and if you do not have that sitting in the bank, lending services can provide it. There are two parts to a loan: principal and interest. Principal and Interest The amount of the loan is called the principal and the bank, finance company or credit union lending the money charge interest to earn their income. The interest rate is based on the amount borrowed, the credit rating of the borrower, the purpose of the loan and the time taken to pay it back. There may also be other fees charged by the lender. Usually, the repayments of the loan pay the interest and some of the principal. In some cases though, the borrower may choose an interest only loan. This means that the payments made only pay the interest. At the end of the term of the loan, the borrower has to pay back the entire principal in one amount, or get another loan. Interest only loans are often used for short term purposes. E X A M P L E Pamela runs a successful company making uniforms for businesses. She has just won a big contract to supply corporate uniforms to a major grocery retailer, but has to buy a lot of material to make them. She negotiates a special deal on the fabric and borrows $20,000 to pay for it. The loan is interest only charged at 9% per annum payable at the end of each month, because as soon as her client pays her she can pay back the full amount. If money is borrowed to earn an income, then the interest and any other fees charged for the loan are tax deductible. So in Pamela s case, the interest on the $20,000 and the $200 application fee are business expenses. 2. EXERCISE How much interest will Pamela pay in the example above? How much in total will she pay for the loan? She pays back the $20,000 after three months. FNSINC401A Apply principles of professional practice to work in the financial services industry 3

6 Security For larger amounts, the lender may want security or collateral. That is, the lender wants to have control over some of the borrower s assets that can be sold off if the loan is not repaid. A common form of security is a mortgage over a house or land. This a legal instrument, and is noted on the title deeds of the property. What it means is that any debt on the property must be paid out before the property can be sold. The lender holds the title deeds until the loan is paid off. If borrowers default or cannot make the repayments on a loan the lender can take their house and sell it to recover what they are owed. The type of security also affects the interest rate charged. E X A M P L E Tina and Tony bought a house in Newcastle three years ago with a loan of $200,000, and the bank recorded a mortgage on the title of their new home. They have decided to move to Adelaide because of Tony s work and they sell their house for $500,000. They still owe $120,000 to the bank, and the mortgage means that the bank gets their money before the title can be transferred to the new owners. Tina and Tony receive the balance of $380,000 and move to South Australia. Other assets can be used as security. If you borrow money to buy a car the written loan contract may specify that the car is encumbered, meaning that it can be seized by the lender and sold to recover the debt if payments are not made. Other forms of security include machinery, shares, gold and valuable antiques or paintings. Naturally, reliable valuations of these assets are very important. Arranging a Loan Applying for a loan requires a meeting with the lender, some of whom will come to your home to arrange it, or it can be done online. You will need to provide personal information whichever method you choose. Lenders will want to know your: name, address and date of birth telephone numbers driver s licence details employment history income and assets (this requires pay slips or group certificates) credit and other references. You will also need to provide proof of your identity and meet in person with the lender to sign the legal documents. Depending on the purpose of the loan the money will be transferred into your bank account, or paid directly or by bank cheque to another party such as the seller of a car. Your payments on the loan can either done by paying a cheque to the lender as required, or as is more common and convenient, by direct transfer into the lender s account. 3. EXERCISE What is the definition of a title deed? Use the internet to find a sample title deed. 4 FNSINC401A Apply principles of professional practice to work in the financial services industry

7 4. EXERCISE Real estate is regarded as very good security on a loan. Why do you think this is the case? 5. EXERCISE Using the internet, get two quotes for borrowing $30,000 to buy a car. What are the terms of the loan? How much are the repayments and how often are they made? 6. EXERCISE Write a definition for the term credit rating. 7. EXERCISE What is a bank cheque and why it is specifically required in some cases? Describe any risks involved in accepting a personal cheque as payment. Credit Management and Mercantile Management Credit management firms are involved in commercial or consumer debt recovery. One of the risks that lenders take is that the borrower cannot or will not pay back what they have borrowed. This may be due to unemployment, illness or injury, fraud or bad money management. The word mercantile means related to commerce, business and trading. So a mercantile agency provides credit reports on other businesses rather than on individuals. A lender would engage a mercantile agency to report on the financial position of a business that had applied for a loan from the lender. The lender wants to know whether the borrower is financially sound, able to repay the loan and what risks there are in providing the loan. Let s say someone borrowed money to buy a car and for some reason fell behind in making the monthly payments. The lender may meet with the borrower and find out why they are not paying and possibly alter the amount payable each month or extend the term of the loan. If that was not feasible they may use the services of a credit management firm to present legal documents (process serving) to the borrower requiring them to appear in court. Credit managers may also carry out repossessions, where the car would be seized and sold to pay back the original debt. If the car did not sell for the amount owing the debtor is liable for any shortfall. Credit management companies also provide credit reporting on people who apply to borrow money. 8. EXERCISE Do a search for credit management on the internet or visit the site for Mercantile Credit Management What does skip tracing mean? Why would a lender want a credit report on someone who applied to borrow money? FNSINC401A Apply principles of professional practice to work in the financial services industry 5

8 Superannuation Superannuation is a way of saving for retirement. Under the Superannuation Guarantee Contribution (SGC) employers are required by law to pay a contribution into an approved super fund for each employee. The contribution is equal to 9% of the employee s wages, but note that it is paid by the employer, not the workers. The idea behind this SGC super is to reduce the number of people requiring the Aged Pension. At least every three months the contributions are paid by the employer to a suitable super fund. Employees may be able to pick the fund they want the SGC paid into. This money is then invested by the super fund in commercial property (offices, warehouses and shopping centres), the stock market or in banks. Over time the investment earns an income from rents on the properties, dividends from shares and interest from banks. Also, the investments become worth more with the natural increases in value, or appreciation, that usually occurs in real estate and shares. While the stock market can vary from day-to-day, the overall trend is for it to increase in value. Property and real estate also increase over time. Asset Value in 2003 Value in 2011 BHP Billiton shares less than $10 each $46.88 Commonwealth Bank shares around $27 each $52.44 Telstra about $4.60 $ Note that the price of Telstra shares fell over the five-year period. While the price of many shares increased over the period, some did not perform as well. This cold, hard fact about the market has led to the use of diversification in investing. Diversification means not putting all your eggs in one basket. Rather than investing $10,000 in Telstra shares, a shrewd investor might invest $2,000 in each of five companies. The risk is then spread, and losses in one shareholding can be balanced by gains in another. Further diversification can be achieved by investing in different industry sectors. An investor might buy shares in mining companies, retailers, wineries and banks. Therefore, a downturn in the wine industry would hopefully be offset by a strong gain in the value of mining shares and a modest gain in bank shares. A prudent super company will research various investments looking for stable and solid growth. They will sell shares or property when they feel the price is at its peak and buy other assets at what they feel are a reasonable value. They may hold assets which produce a good return for years or they may buy and sell others for a quick profit. When a worker retires from the workforce they can access the money that has accumulated in their super fund and receive it as a lump sum or a monthly payment. The laws surrounding super and taxation are complex and expert advice should be sought. Anyone, including employees, can make their own payments into a super fund which can be accessed at retirement. 6 FNSINC401A Apply principles of professional practice to work in the financial services industry

9 Retail, Industry and Self-Managed Funds Retail funds have a high profile due to their marketing efforts. Household names like AMP and MLC offer super facilities to employers along with insurance, banking and investment services. Industry funds are owned and operated by industry groups or unions. They do not pay commissions to sales people or advisors and their fees (how they earn their income) are generally lower than the retail funds. Self-managed super funds (SMSF) are becoming popular. It means that an individual can set up a do it yourself super fund and avoid the management charges and overhead expenses of the retail and industry funds. That is, you make all the investment decisions instead of paying a super fund to do it. It is not for everyone; it is suggested that you need $100,000 to invest to get your SMSF started and the cost and effort required to comply with the laws can be significant. 9. EXERCISE Use the Google search engine to perform a search for insurance companies in Australia. Select one company and list the services and products provided by that company. 10. EXERCISE Go to the ATO website and find out what a complying super fund is. Write a definition. Compare one of the super funds provided by AMP to one provided by the industry funds HESTA, CBUS or HostPlus. You should compare returns over a period of time (how much the funds earned), and how much the management fees are. Which fund would you invest in, and why? Banking One of the biggest providers of financial services is the banking sector. Banks will look after your money and pay you interest on that money. They will also lend that money to borrowers. The main operations of banks include: keeping money safe while also allowing withdrawals when needed providing cheque books so that bills can be paid and payments can be delivered by post providing internet banking facilities, allowing bills to be paid and money to be transferred providing personal, commercial and mortgage loans (typically loans to purchase a home, property or business) issuing credit cards and processing credit card transactions and billing issuing debit cards for use as a substitute for cheques allowing financial transactions at branches or by using automatic teller machines (ATMs) provide wire transfers of funds overseas and electronic fund transfers services like standing orders and direct debits, so payments for bills can be made automatically FNSINC401A Apply principles of professional practice to work in the financial services industry 7

10 Assessment Task 2 (element 1) Complete Parts 1, 2 and 3 of this task. The following is a list of financial sectors which you may be required to interact with in your professional dealings. Accounting Insurance Credit Management Banking Financial Planning Credit Checking Conveyancing Loss Adjusting Financial Markets Bookkeeping Lending Services Mercantile Management Superannuation Credit Unions Managed Investments Finance, Mortgage and Insurance Broking Risk Management Workers Compensation Important note: you may select the same financial sectors for Parts 1, 2 and 3 of this task, or you may use different sectors for each question. Part 1 From the list above, choose four financial sectors. For each of the selected financial sectors: Part 2 write a brief description of the role they play in the financial industry list the responsibilities each of the selected sectors has. Each of the sectors listed above will at some time interact with other sectors as part of their financial dealings. From the list above choose two sectors which will interact with each other. Part 3 Describe the interaction which takes place between them. List at least two benefits that interaction between these parties can have for financial services and/or their customers. Choose two from the following three topics to write about. Select one of the industries from the list above and describe how current interest rates impact on that industry. Select one of the industries from the list above and describe how the current value of the Australian dollar impacts on that industry. Select one of the industries from the list above and describe how the current Australian political climate impacts on that industry. 112 FNSINC401A Apply principles of professional practice to work in the financial services industry

11 Note to candidate For the remaining tasks in this assessment you are required to write about a specific job in the financial services industry. You have two options: If you are currently employed in the financial services industry, you can write about your current position. If you are not currently employed in the financial services industry, you can write about a job you would like to hold in the future. If you are writing about a job you do not currently hold, you may have to do some research on this career first. Consulting job advertisements may be one avenue. FNSINC401A Apply principles of professional practice to work in the financial services industry 113