Financial services, regulation and ethics

The UK legal system has a significant influence on the financial services industry and specifically impact...

Shortened demo course. See details at foot of page.

...trating on the main aspects of knowledge in each area that are essential for those providing financial advice.

A business in the UK can be set up in one of three ways:

Sole Trader

Partnership

Limited Company

Sole trader

The simplest way to operate a business is as a sole trader. In the eyes of the law, there is no difference between the legal personality of a sole trader and his business.

Individuals operating as sole traders have complete control over their business and all profits after tax go to them. However, this business structure comes with a risk that the owner will be personally accountable for any liabilities that their business incurs, i.e. any business debts will be their personal debts. In effect, they could lose everything!

Sole traders are liable to income tax on their net business profits (the business’s turnover less allowable expenditure). They are also liable to Class 2 and Class 4 National Insurance contributions (NICs). Any capital gains made on the sale of ‘business’ assets are treated as gains belonging to the sole trader and they are personally liable for any capital gains tax that may fall due.

As far as administrative burdens are concerned, sole traders must file an annual self-assessment tax return to HMRC and keep records of their business income and expenses.

There is nothing to prevent a sole trader employing people to work for them. In this case, the employees are paid an income or wage by the sole trader and pay income tax PAYE. If employees are liable for Class 1 NICs, the sole trader will also pay secondary Class 1 NICs.

The ...

Shortened demo course. See details at foot of page.

...ividend, which holds the advantage of not being subject to NICs.

Public limited companies (PLCs)

A public limited company (PLC) is a company which has share capital, and whose memorandum of association states it to be a public company. The shares of a PLC may be offered for sale to the public. Hence, companies listed on a recognised stock exchange, such as the London Stock Exchange, must be PLCs. A PLC must comply with the following requirements:

There must be a minimum of two directors, two shareholders and a company secretary

They must state that they are public and their name must end with the words ‘public limited company’ or ‘plc’

The authorised share capital must be a minimum of £50,000, of which 25% is paid up (i.e. £12,500 must be placed in a bank account for the shares)

A PLC is not entitled to commence business or exercise any borrowing powers until the Registrar of Companies has issued a certificate of compliance with the capital requirements as set above

Accounts must be filed within six months of the year end

The Company Secretary must be a qualified person, i.e. a Chartered Secretary, Chartered or Certified Accountant, Solicitor or other suitably qualified person

They must disclose the shareholdings in the company and any other information that could impact on the share price

Eve and Joanne are partners in a hairdressing salon. Explain their liability towards any debts of the partnership.

Answer : Purchase course for answer

Contract law

All packaged investments are contracts in a similar way to a contract for any other trade or business transaction. A life assurance policy is a legal contract between the individual(s) buying it and the company selling it.

For a contract of insurance to be valid and legally enforceable, the following must exist:

An offer and acceptance

Insurable interest

Consideration

The parties to the contract must have the capacity to enter into the contract

There is a duty for the proposer/insured to disclose all material facts

Offer and acceptance

In the context of a life assurance policy, the ‘offer’ is the insurance company offering to insure the life in question through the completion of an application form. If the insurer accepts the proposal, it issues what is called an ‘offer of acceptance’, although this does not constitute ‘acceptance’. In law, this is seen as a ‘counter offer’, since the letter will set out specific terms for the policy, such as the level of premium. ‘Acceptance’ takes place when the policyholder accepts the terms by paying the first premium, or when the life office receives a properly completed direct debit or standing order form.

Insurable interest

When a person (the ‘proposer’) applies for a life policy, they must show they have a financial interest in the life assured and that, should the life assured die, there would be an immediate financial loss to the proposer. For exampl...

Shortened demo course. See details at foot of page.

...h minors are designed to protect them from being led into agreements which may be disadvantageous to them. Contracts made by minors fall into three categories:

Binding

Binding unless repudiated

Not binding

Binding contracts include those which are, on the whole, for their benefit, e.g. an employment contract. Binding unless repudiated covers such agreements as a lease they may hold on a flat, for example, which can be cancelled during their minority or within a reasonable time thereafter. They are then freed from any ongoing liability. Not binding contracts are all other types and, although they do not bind the minor, they do bind the other party, who could then be sued by the minor if they did not keep to the terms.

Mentally disordered persons who enter into contracts are normally bound by the terms unless they did not understand the terms and the other party was unaware of this. A mentally disordered person can ratify a contract which previously did not bind them, once they are cured from their illness.

The rules for drunken persons are the same as those for the mentally disordered. They can also approve the contract after the drunken effects have worn off.

In addition to this - and specifically to life assurance - an insurer must be authorised to transact long-term insurance business within the rules of the Financial Services & Markets Act 2000.

Explain what is meant by the term ‘insurable interest’.

Answer : Purchase course for answer

Where two parties establish an agency agreement, one party - the ‘agent’ - agrees to carry out certain work on behalf of the other - known as the ‘principal’.

Where clients seek financial advice, they have a few choices. If they decide to seek assistance from a financial adviser then, under agency law, the adviser is...

Shortened demo course. See details at foot of page.

...nsurer is responsible for the adviser’s acts and omissions. Therefore, if a material fact is disclosed to an insurer’s agent and the agent does not then pass it on to the underwriters, there has been no non-disclosure and the contract is valid.

Explain what is meant by an agency agreement.

Answer : Purchase course for answer

The ownership of property in England, Wales and Northern Ireland can be in one of three ways:

Freehold

A freehold property is one that is wholly owned by a person, along with the land on which it stands, until that person decides to sell it or they die. In Scotland, all property is held on an absolute tenure basis, which is like freehold in the rest of the UK.

Leasehold

The land on which a leasehold property stands is not owned outright by its buyer. Instead, it is leased from the individual who owns the freeholder rights as a rent for a specific period. Leases often run for periods of 99 years or 125 years, although they can be for as longer. At the end of the lease term, the property reverts to the freeholder. Leaseholders of flats and houses have the right to buy the freehold or extend the terms of their lease if they have lived in the property full-time for the last two years and the original lease was granted for a period of more than 21 years.

Commonhold

Commonhold is a recent phenomenon introduced by the Commonhold and Leasehold Reform Act 2002. It is a form of ownership for flats and is an alternative to leaseholds. Flat ow...

Shortened demo course. See details at foot of page.

...

First Homes Scheme

Eligible first time buyers receive 30% to 50% discount of the price of a home valued at no more than £250,000 (£420,000 in London). The discount is not repaid as such; it is passed on to the next buyer when they eventually sell the property, based on the value at that time. The resale is also restricted to first time buyers. Applicants’ household income cannot exceed £80,000 (£90,000 in London), and they must take a mortgage for at least 50% of the purchase price.

Mortgage guarantee scheme

The aim of this scheme is increasing the availability of 91% to 95% loan-to-value mortgages. The Government guarantees the portion over 80% and the maximum purchase price is £600,000. The mortgage must be on a repayment basis and can be secured on new-build or existing properties. Second homes are excluded from the scheme. Availability was from April 2021 until December 2022, but has since been extended to December 2023.

Explain why tenancy in common is the best option for joint property ownership where the owners are not a married couple or in a civil partnership.

Answer : Purchase course for answer

Under the Powers of Attorney Act 1971, an individual (known as the donor) can give powers to another individual (known as the attorney). The attorney can then make decisions on their behalf on matters such as their property and money. Any power of attorney established is automatically revoked on death, bankruptcy or the expiry of a specified time, although the donor can revoke it at their choosing.

In relation to any financial advice or product purchases, where powers of attorney are in place, advisers, life offices and other product providers need to be aware of them and the powers they confer. The original document will clarify the period of time for which the powers are valid and the limits of the attorney’s authority.

There are various types to cater for different situations and needs:

Ordinary powers of attorney

An ordinary power of attorney is a legal document executed by the donor, which gives the attorney authority to act on their behalf. The power of attorney may be restricted to a specific matter or could give the attorney the power to deal with all the donor's affairs (general power). An ordinary power of attorney, however, will come to an end if the donor becomes mentally incapable, which frequently removes the powers at the time they are most needed. ...

Shortened demo course. See details at foot of page.

...owers of attorney in Scotland

The Enduring Powers of Attorney Act does not apply in Scotland. Under the Law Reform (Miscellaneous Provisions) (Scotland) Act 1990, every power of attorney given after 1 January 1991 continues in force after the donor’s incapacity, unless it is otherwise stated within the deed. This is known as a continuing power of attorney.

However, under the Adults with Incapacity (Scotland) Act 2000, no power of attorney made after 2 April 2001 is a continuing power of attorney unless the deed expressly states that the attorney’s powers should continue after the donor’s incapacity. Continuing powers must be registered with the Office of the Public Guardian once the donor has lost capacity.

A power of attorney established before 1 January 1991 will become invalid on mental incapacity, although the attorney may continue to act under ‘negotiorum gestio’. This is an informal arrangement that allows someone to act on behalf of another on the basis that they would have given authority to do so and they are capable. There is, however, no obligation to accept the actions of an individual acting under negotiorum gestio.

What additional area of an individual's affairs is included under Lasting Powers of Attorney?

Answer : Purchase course for answer

The law of succession applies when someone obtains property on the death of another. A deceased individual cannot continue to own property so it must be passed to others. This law governs how it can be transferred and who it can be transferred to. If an individual has made a will, this should state exactly which assets of the deceased are left to which beneficiaries, and how the residual estate (after any debts have been repaid) should be distributed.

Wills

Making a will allows a person to leave specific instructions on how their estate should be disposed of and who should benefit following their death.

No one likes to think about what will happen when they die, but if they do not make a will, they could leave their dependants with delays, hardship and worry while their estate is sorted out. There could also be heavy legal costs if the estate and the range of beneficiaries are complex. In short, by not making a will, an individual’s estate could be passed on to beneficiaries that they did not intend to benefit.

If a will exists, the law recognises the deceased’s right to dispose of their assets as they wish, subject to the provisions of the Inheritance (Provisions for Family and Dependants Act 1975), which gives certain family members the right to claim for ‘reasonable provision’.

Dying and not leaving a will is called intestacy and this will be covered in more detail later.

There are several advantages to writing a will - not just ensuring that an individual’s assets go to the people they want to have them. If a deceased’s estate is more than the ‘nil-rate’ band, their estate will be liable to pay IHT of 40% on the excess, but by leaving everything to a wife or civil partner this is avoided.

Where couples are not married, without a will the surviving partner may end up with nothing, as the law dictates who will receive the assets. The estate should be wound up more quickly where there is a will in place and beneficiaries would normally receive their inheritance sooner. The deceased can also make specific provision for minors within their will....

Shortened demo course. See details at foot of page.

...will share your estate. If your parents, grandparents, siblings, nephews and nieces are all dead, any living uncles or aunts will inherit equal shares in your estate. If you have no living relatives as listed above, all your estate goes to the Crown.

Personal representatives and the administration of estates

Those persons named in a will as the ‘executors’ are responsible for dealing with the deceased’s estate. Where no will is made, the estate is normally handled by the next of kin who is known as the ‘administrator’. These two terms are known collectively as the ‘legal personal representatives’.

The duties of the legal personal representatives are to gather the assets of the estate together, pay any debts, pay any inheritance tax liability and distribute the remaining assets. Solicitors can provide assistance to legal personal representatives.

If the total assets of the deceased’s estate exceed a small minimum figure, they must obtain a grant of representation which is issued by the Probate Registry. There are two types of grant of representation.

Grant of probate

The executors must ‘prove’ the will in the Probate Registry to obtain the grant. Once issued, the grant enables them to administer the estate. Before receiving the grant, executors of large estates, those worth over £240,000, must complete an account for HMRC showing all assets of the deceased plus any gifts made in the last seven years. If this amount exceeds the inheritance tax nil rate band, the tax due (or at least a proportion of it) must be paid before the grant is issued.

In some circumstances, if the deceased only had savings or premium bonds, or had land or other assets owned as joint tenants that pass automatically to the survivor, probate may not be needed.

Letters of administration

Where no will exists, the Probate Registry will issue Letters of Administration, with the same provisions for calculating and paying tax as for Grants of Probate.

State the three requirements for a will to be valid.

Answer : Purchase course for answer

Although no individual or company intends to get into financial difficulties, there will be times when financial advice is sought to understand the implications for existing policies and investments. Although advisers may need to refer the individuals for specialist advice, it is still important to have an overall awareness of the issues and implications.

Bankruptcy

The term ‘ bankruptcy ’ refers to individuals who are in a financial situation where they have an inability to repay their debts. Bankruptcy can either be undertaken voluntarily by the debtor (borrower), or procedures could be instigated against them by their creditors (lenders).

It is important to understand when bankruptcy could occur and the affects it could have on a person’s assets, as they could all be liquidated including any financial products or investments they own.

Bankruptcy procedures

Bankruptcy procedures start where a creditor or creditors (or the debtor himself) petition the court for a bankruptcy order. The court will not entertain a petition where the debtor owes the creditor less than £5,000 in unsecured debt. The court will need to have proof that the debtor cannot pay the debt or has little prospect of doing so. This can be demonstrated by showing that a statutory demand for payment has not been adhered to within 21 days.

If the court decides to make a bankruptcy order on the individual, he or she will be declared ban...

Shortened demo course. See details at foot of page.

...IVA ends. The IVA will appear on the debtor’s credit file for six years after the start date.

An advantage to this over bankruptcy is that the debtor will not lose their home, though they can be asked to re-mortgage it. This may be beneficial to those in business, who can persuade their creditors that they will recoup more of their money by this option.

Corporate insolvency

Insolvency applies to companies who are unable to meet their debts or financial commitments. Where a company is insolvent, it can be put into ‘liquidation’ with the Official Receiver (OR) becoming the liquidator unless the creditors appoint an insolvency practitioner. The company’s residual assets are then used firstly to repay creditors, with any balance left over going to shareholders. As a result of this process, the company is dissolved by the liquidators, struck off the Register of Companies and will no longer exist.

There are a few alternatives to liquidation:

Administration – whereby administrators appointed as officers of the court (or by the company’s directors) run the company with the intention of retaining it as a going concern whilst realising sufficient assets to repay debts

Voluntary arrangements – whereby insolvency is avoided by substituting it with an agreed settlement between the creditors and the company

Explain how bankruptcy procedures are started.

Answer : Purchase course for answer

Trusts are an extremely complex area and the laws differ between Scotland and England. The full scope of trust law is too great for the requirements of this course, so we will be concentrating on the main elements of the law and their relationship to financial planning and advice.

Law of trusts

A trust is a legal obligation where one person (the ‘ settlor ’) gives away an asset to benefit others (the ‘ beneficiaries ’) without passing over immediate full control to them. The asset is instead legally owned by another person or persons, known as the ‘ trustees ’, who hold the asset for the benefit of the beneficiaries in accordance with the specific terms set out in the trust. Creating a trust therefore means that the property is legally owned by the trustees, but the beneficiaries have the beneficial interest. The trustees cannot use the trust property as their own and must use it for the benefit of the beneficiaries as dictated in the terms of the trust. The beneficiaries can enforce their rights by legal action if necessary. The settlor can be a trustee, and often is, because this gives them a continuing element of control over the trust property. However, it is advisable for them not to be a beneficiary, as this can give rise to an inheritance tax liability on the assets in the trust.

Once a trust has been created it is a legally binding obligation that cannot be revoked. The ‘trust deed’ will specify the terms and conditions for the trust’s operation and the duties of the trustees. Although a trust is legally binding, it differs from a contract in that there does not need to be an agreement between the settlor and the beneficiaries and there does not have to be any consideration.

The different ways that trusts come into existence.

Express trusts

An express trust is a trust intentionally and expressly created, usually by a written document, for example a deed or a will.

Implied trusts

This trust is not created expressly but is implied by the circumstances or actions of the parties involved.

Presumptive trusts

Where one person purchases a property in the name of another, similar to an implied trust. The person buying the property holds it in trust.

Successive trusts

Where a property is held in trust for a succession of interests, taking effect one after the other, such as where a property is to b...

Shortened demo course. See details at foot of page.

... avoid loss and if they do not apply a standard of care, the law will hold them liable. Where a trustee is exercising discretion rather than a duty, they must act with the diligence that a prudent man of business would in handling their own affairs.

Proper accounts of the trust property must be maintained and shown to the beneficiaries if so requested. The beneficiaries are also entitled to receive reasonable information about the dealings of the trust property.

Appointment and removal of trustees

Anyone aged over 18 can be a trustee. A trustee can be removed from their position, or it can end by:

Their resignation or death

Their automatic retrial under the terms of the trust deed

The decision of the other trustees (if the deed so permits)

The terms of the Trustee Act 1925

Their removal under a court order

Beneficiaries

A beneficiary under a trust can have different types of interest in the trust property. These types are:

Absolute interest

Life interest

Reversionary interest

Contingent interest

An absolute interest indicates that the beneficiary is fully entitled to receive the trust property at the specified time. A life interest means that the beneficiary is entitled to receive income from the trust property for life but not the capital. This type of beneficiary is known as a life tenant. When a life tenant dies, their interest ceases and the property passes to the holder of the reversionary interest (the remainderman). A reversionary interest is therefore the right to trust property after the end of the life interest. A contingent interest is one that is subject to a contingency taking place and therefore this type of beneficiary may never receive any benefits from the trust.

Where there is more than one potential beneficiary to the trust property, unless specifically stated otherwise, they will benefit in equal shares.

Although trustees are generally unable to exercise any control over the trustees during the life of the trust, they can ensure that the property is being managed properly.

Under the rule contained in Saunders v Vautier (1841), if the beneficiaries are all known, aged over 18 and there is no possibility of any further beneficiaries, they can put at end to the trust and instruct the trustees to hand the property over to them.

State the three certainties required for a trust to be valid.

Answer : Purchase course for answer

This revision test (opens in a new window) has 16 questions an...

Shortened demo course. See details at foot of page.

... time 5.5 hours

9 standard multiple choice questions in the R01 exam