Personal Finance (U21065/S21065) Lecture 3 The Economic and Regulatory Environment

Transcription

1 Personal Finance (U21065/S21065) Lecture 3 The Economic and Regulatory Environment

2 Protecting yourself with Insurance Introduction to Personal Finance Researching PF Products Financing a Home The Economic & Regulatory Environment Management of Credit Personal Finance Semester 1 The Financial Planning Process Management of Cash Preparing a personal budget Tax Planning Time Value of Money

3 The Economic and Regulatory Environment Historical context of personal finance Current Regulation Regime The financial ombudsman service (FOS) The financial services compensation scheme (FSCS) Mis-selling

4 Historical context of personal finance One of the major milestones regarding the subject of personal finance in the UK was the introduction of the welfare state in 1942 under the Beveridge system. It was proposed that people of working age should pay a weekly contribution. In return, benefits would be paid to people who were sick, unemployed, retired or widowed

5 Historical context of personal finance This contribution is made today in the form of National Insurance Contributions (NICs) it is made by both those in employment and the self employed. This is an addition tax on earnings. The NICs help to fund social service benefit and state pensions.

6 Historical context of personal finance The cost of the welfare system in the UK has become burdensome and more recently governments have attempted to reduce the role of the state in the welfare system. Where possible they have driven the provision (in part) into the private sector.

7 State Benefit System 1995 the Government changed the definition of qualifying disability for long term sickness from Can t do own job to Can t do any job This was an effective way of reducing the bill for long term sickness benefits.

8 State Benefit System Some schemes have also been watered down to save money. The State earnings related pension (SERPS) was closed in April This had enabled claimants to receive an earnings related top-up on the basic state pension. This was replaced by a less valuable State second pension (S2P).

9 Current Regulation Regime The financial services authority (FSA) is an independent nongovernmental body that was granted statutory power by the Financial Services and Markets Act When the Act came into force in December 2001 the FSA became the single regulator for the financial services in the UK.

10 Current Regulation Regime The FSA regulates the companies and individuals involved in such activities as investment banking, stock broking and financial advice. They also regulate professional firms such as Lawyers and Accountants that offer investment business. The FSA is also responsible for regulating exchanges such as the London Stock Exchange and Lloyds Insurance Market.

11 Current Regulation Regime The FSA's aim is to promote efficient, orderly and fair financial markets and help retail financial service consumers get a fair deal

12 Financial Services Authority The Financial Services and Markets Act 2000 imposed four statutory objectives upon the FSA: market confidence: maintaining confidence in the financial system; public awareness: promoting public understanding of the financial system; consumer protection: securing the appropriate degree of protection for consumers; and reduction of financial crime: reducing the extent to which it is possible for a business carried on by a regulated person to be used for a purpose connected with financial crime.

13 The financial ombudsman service (FOS) The financial ombudsman service (FOS) is the body that resolves disputes between consumers and regulated companies. This service is free to consumers. FOS covers : Banking services; Credit cards; Financial and investment advice; Insurance policies; Life assurance; Mortgages; Personal pensions; Savings; Stocks and shares; and Unit trusts.

14 Do I have a complaint? Problems with a financial product or service may include: Unexpected or excessive charges. Losing money due to a firm s slow administration. A dispute over who is at fault if money is stolen from an account. Incorrect or misleading information about a product.

15 Problems with a financial product or service A firm s failure to draw attention to a particularly strict condition in the contract; A firm s failure to carry out your instructions, and Not being given adequate notice about changes to a contract.

16 How to make a complaint Write to the company stating the facts of the complaint; The company has 8 weeks to investigate the complaint and respond; If you are not satisfied with the explanation you now have 6 months to go to the financial ombudsman.

17 What happens if the company that you wish to make a complaint about has gone out of business? Then you must seek compensation from the Financial Services Compensation Scheme.

18 The financial services compensation scheme (FSCS) The FSCS pays compensation if a firm is unable, or likely to be unable, to pay claims against it. This will generally be because it has stopped trading and has insufficient assets to meet claims, or is in insolvency. The firm is described as being in default.

19 The financial services compensation scheme (FSCS) In the light of the recent banking crises the compensation scheme limits for deposits were revised, the latest rates are effective from January The current limits for compensation are: 1. Deposit takers (Banks, Building Societies etc.): 85,000 per Authorised Institution 2. Investment firms: 50,000

20 The financial services compensation 3. Insurance firms: scheme (FSCS) Non compulsory insurance 90% of claim with no upper limit; Compulsory Insurance 100% protection with no upper limit. 4. Home finance advice (arranging mortgages) 50,000.

21 Authorised Institution Santander (UK) Includes: Abbey Alliance and Leicester Asda Bradford and Bingley Cahoot These banks/building societies all share one lot of 85,000 protection!

22 Non UK Banks Outside of the financial services compensation scheme (FSCS); All member states of the European Economic Area (EEA) are required to establish a deposit guarantee scheme of a minimum of 100,000.

23 Mis-selling The term mis-selling refers to the sale of a financial product which does not meet the FSA s standards. This is a regulatory offence and the FSA has the statutory powers to investigate and impose fines. The most common problem is where the product involved has a much higher level of risk than the consumer realised or where the product was sold with assurances or guarantees that the product was not designed to meet.

24 Mis-selling Widely publicised examples of mis-selling are that of endowment mortgages and Payment Protection Insurance (PPI). The endowment is an insurance policy where the premiums are invested in order to pay off the capital sum at the end of the mortgage period. The borrower pays interest only to the bank or building society over the life of the loan.

25 Repayment Vs Endowment

26 Mis-selling Many of these products sold in the 1980s also offered bonuses at the end of the term. These products are now coming to full term and are failing to pay off even the capital sum.

27 Mis-selling - PPI Payment Protection Insurance (PPI) is an insurance policy that has been sold alongside loans, credit cards, car finance and mortgages. The insurance is designed to cover your repayments on the borrowing should you be unable to do so as a result of illness, injury or unemployment. It has been included in credit agreements by banks, lenders and brokers for the last 20 years.

28 Mis-selling - PPI Why Can People Claim Back PPI Payments? People are able to make PPI claims because their policies were mis-sold to them, PPI policies have been mis-sold in a number of ways and all of them come under one major infringement professional negligence.

29 Mis-selling - PPI Ways PPI have been mis-sold include: - The cover wasn t adequately explained to the client - The policy was over-priced - The policy was sold to a customer who didn t need it because they were already covered - The cover was compulsory in order to get the loan - The policy was hidden inside the loan without telling the customer - The customer couldn t use the policy even if they wanted to, due to age, employment or illness circumstances

30 Mis-selling - PPI Currently (August 2012) 60% of all new cases reported to the FOS involve matters relate to Payment Protection Insurance (PPI).

31 Seminar Work Prepare answer to Questions given in the pack prior to your seminar session.