Documente Academic
Documente Profesional
Documente Cultură
qxp
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(000)IMC1PC_v11_FP.qxp
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(000)IMC1PC_v11_FP.qxp
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Preface
Contents
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(000)IMC1PC_v11_FP.qxp
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Page iv
Preface
Page
1
2
3
Contents
Page
Legal concepts
109
27
Client advice
119
Financial regulation
33
Taxation
145
(001)IMC1PC_v11_CH01.qxp
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7:24 PM
Page 1
Topic List
Financial institutions
Role of government
Financial markets
Listing & governance
International markets
The agency problem
(001)IMC1PC_v11_CH01.qxp
Financial
institutions
12/4/2013
Role of
government
7:24 PM
Financial
markets
Page 2
Listing &
governance
International
markets
The agency
problem
UK financial intermediaries
Banks
Building societies
Insurance companies, pension funds, collective
funds
National Savings & Investments (NS&I) a
Government agency
Capital markets for raising and investing
largely long-term capital (eg the Stock
Exchange)
Money markets for lending and borrowing
largely short-term capital (eg banks short-term
lending)
As well as its domestic market in equities (company shares) & bonds (interest-bearing securities), the UK is
a major centre for the eurobond markets for debt denominated in non-domestic currencies.
(001)IMC1PC_v11_CH01.qxp
Financial
institutions
12/4/2013
Role of
government
7:24 PM
Financial
markets
Page 3
Listing &
governance
International
markets
The agency
problem
(001)IMC1PC_v11_CH01.qxp
Financial
institutions
12/4/2013
Role of
government
7:24 PM
Page 4
Financial
markets
Listing &
governance
The agency
problem
Banks
International
markets
(001)IMC1PC_v11_CH01.qxp
Financial
institutions
Page 5
12/4/2013
Role of
government
7:24 PM
Financial
markets
Page 5
Listing &
governance
International
markets
The agency
problem
(001)IMC1PC_v11_CH01.qxp
Financial
institutions
12/4/2013
Role of
government
7:24 PM
Financial
markets
Page 6
Listing &
governance
International
markets
The agency
problem
(001)IMC1PC_v11_CH01.qxp
Financial
institutions
12/4/2013
Role of
government
Financial
markets
Page 7
Listing &
governance
International
markets
The agency
problem
Investment managers
Portfolio management
Research and analysis
7:24 PM
(001)IMC1PC_v11_CH01.qxp
Financial
institutions
12/4/2013
Role of
government
7:24 PM
Financial
markets
Page 8
Listing &
governance
International
markets
The agency
problem
Legislation
Fiscal policy
EU law takes precedence over national laws, and UK lawmaking must follow the Treaty of Rome and EU Directives.
Monetary policy
is concerned with:
(001)IMC1PC_v11_CH01.qxp
Financial
institutions
12/4/2013
Role of
government
7:24 PM
Financial
markets
Page 9
Listing &
governance
International
markets
The agency
problem
Page 9
(001)IMC1PC_v11_CH01.qxp
Financial
institutions
12/4/2013
Role of
government
7:24 PM
Financial
markets
Page 10
Listing &
governance
International
markets
The agency
problem
EU law
(001)IMC1PC_v11_CH01.qxp
Financial
institutions
12/4/2013
Role of
government
7:24 PM
Financial
markets
Asset types
Tangible assets eg, property, equipment,
commodities are real assets. Claims on a
return such as interest or dividends are
financial assets. Loans (debt) and shares
(equity) represent the two main types of
financial security.
Ordinary shares (equities) offer the prospect of
dividends and capital growth, if the company
succeeds. Fixed income securities (debt, for
the issuer) are often generally called bonds.
Pooled or collective funds package securities,
allowing diversification and index-tracking.
Page 11
Page 11
Listing &
governance
International
markets
The agency
problem
(001)IMC1PC_v11_CH01.qxp
Financial
institutions
12/4/2013
Role of
government
7:24 PM
Financial
markets
Page 12
Listing &
governance
International
markets
The agency
problem
Financial markets
.... Mobilise peoples savings and put them to use in enabling firms to grow, thus contributing to the
wealth of the economy
.... Enable the transfer of risk. Eg, derivatives markets enable investors, entrepreneurs and market
participants to hedge risks as well as to speculate on the prices for assets
Attributes of an effective & efficient securities market
Cost efficiency electronic order systems lower costs (operational efficiency)
Liquidity the ability to enter or exit the market with reasonable price spread, on a transaction of a
reasonable size (promotes operational efficiency). Contributing factors: effective IT & settlement
systems, diverse membership & stock availability, stock lending facilities
Price discovery the process through which an equilibrium price for a financial instrument is revealed
continuously through bid & offer prices, and trading (enabling informational efficiency)
Transparency investors knowing the price before, during & after a deal in order to be satisfied that they
have a good deal (informational efficiency: prices reflect all relevant information)
(001)IMC1PC_v11_CH01.qxp
Financial
institutions
12/4/2013
Role of
government
7:24 PM
Financial
markets
Page 13
Listing &
governance
International
markets
The agency
problem
Round trip (purchase / sale) transaction costs include: bid / offer spread, brokers commissions, Stamp
Duty Reserve Tax (CREST, dematerialised transactions) or stamp duty (non-CREST), Takeover Panel levy (1,
on transactions over 10k).
A less easily quantified element of transaction costs is the cost effect of the tendency for fluctuating order
sizes to move prices: this is market impact or price impact. For major stocks with deep liquidity, bid-ask
spread and potential price impact can be very low for typical transactions. Smaller issues may have high
liquidity risk or marketability risk, which has to do with the ease with which an issue can be sold. This risk
can become acute at times of market stress, and is built into the price of securities.
Limit orders only filled if price is better than the stated limit compare with market orders, which are filled
at the best available price when the order is placed.The opportunity cost of a limit order is that the price may
move against the trader before the order is filled.
More opaque (less transparent) markets will typically have larger bid-ask spreads because dealers will find it
more difficult to judge demand for stock, and so know the equilibrium price (price discovery). Real-time pretrade & post-trade transparency are required for many securities (especially equities) under MiFID rules.
Over-The-Counter markets are typically less transparent.
Page 13
(001)IMC1PC_v11_CH01.qxp
Financial
institutions
12/4/2013
Role of
government
7:24 PM
Financial
markets
Page 14
Listing &
governance
International
markets
The agency
problem
(001)IMC1PC_v11_CH01.qxp
Financial
institutions
12/4/2013
Role of
government
SETS
SETSqx
SEAQ
Page 15
Listing &
governance
Financial
markets
7:24 PM
International
markets
The agency
problem
(001)IMC1PC_v11_CH01.qxp
Financial
institutions
12/4/2013
Role of
government
7:24 PM
Page 16
Listing &
governance
Financial
markets
International
markets
The agency
problem
Company determines
Dividend
announcement
LSE determines
Ex-div
date
Books
close
2 business days
Dividend
payment
date
(001)IMC1PC_v11_CH01.qxp
Financial
institutions
12/4/2013
Role of
government
7:24 PM
Financial
markets
Page 17
Page 17
Listing &
governance
International
markets
The agency
problem
(001)IMC1PC_v11_CH01.qxp
Financial
institutions
12/4/2013
Role of
government
7:24 PM
Financial
markets
Settlement conventions
Equities
Gilts/ US T-Bonds
Eurobonds/ Corporate bonds
Currencies/ German equities
T+3
T+1
T+3
T+2
Dual listing
Corporations in different jurisdictions act as single
operating business. Consequences:
Access to a wider pool of investors
Increased liquidity may reduce bid/offer spreads
Greater compliance costs
Page 18
Listing &
governance
International
markets
The agency
problem
Gilts market
Gilts settle via Euroclear UK & Ireland (EUI).
Gilt Edged Market Makers (GEMMs) must
quote firm two-way prices in all conventional
gilts and/or all index-linked gilts.
Inter Dealer Brokers (IDBs) arrange matched
principal-to-principal anonymous trades
between GEMMs, allowing GEMMs to unwind
positions.
(001)IMC1PC_v11_CH01.qxp
Financial
institutions
12/4/2013
Role of
government
7:24 PM
Financial
markets
Page 19
Listing &
governance
International
markets
The agency
problem
Issuer: Debt Management Office (DMO), to fund Public Sector Net Cash Requirement (PSNCR)
New issue
Tranche
Large
Auction
Competitive
Page 19
Non-competitive
Tap
If small (tranchette) or
failed auction, issued
into secondary market
(001)IMC1PC_v11_CH01.qxp
Financial
institutions
12/4/2013
Role of
government
7:24 PM
Financial
markets
AIM
3 years*
None
25%*
None
700,000 for
equity; 200,000
for debt
None
Free transferability
Yes
Yes
Prospectus requirement**
Yes
Yes***
UKLA
LSE
Applicable rules
Listing &
governance
AIM
Main List
Trading record
Page 20
International
markets
The agency
problem
Applicants must:
Appoint NOMAD (nominated adviser)
Produce Admission Document
(001)IMC1PC_v11_CH01.qxp
Financial
institutions
12/4/2013
Role of
government
7:24 PM
Financial
markets
Page 21
International
markets
Listing &
governance
The agency
problem
Approve accounts
Approve dividend
(Re)appoint directors
(Re)appoint auditors
Resolutions
Ordinary resolution needs 50% majority /
14 days notice.
Special resolution needs 75% majority /
14 days notice.
1: Financial markets and institutions
(001)IMC1PC_v11_CH01.qxp
Financial
institutions
12/4/2013
Role of
government
7:24 PM
Financial
markets
Disclosure/transparency
Key rules
Holders (including connected parties) of 3% of voting
rights, & where holdings cross a % point up or down,
must notify company by T + 2 (two business days)
Directors and senior executives (PDMRs) must get
clearance to deal in own company shares /
derivatives, & notify company of such transactions by
T+4
Company informs the market via Regulatory
Information Service (RIS)/ Primary Information
Provider (PIP) by T + 1
Page 22
Listing &
governance
International
markets
The agency
problem
The 7 Principles of the FRCs 2010 Stewardship Code aim to make fund managers and institutional investors more
active and engaged in corporate governance, eg by monitoring investee companies and having clear voting policies.
Like the FRCs Corporate Governance Code, the code is based on a comply or explain principle.
(001)IMC1PC_v11_CH01.qxp
Financial
institutions
12/4/2013
Role of
government
7:24 PM
Financial
markets
USA
US Government bonds: issued by Dutch auction,
a form of tender
Market makers on NYSE: known as specialists
Super Display Book System: the NYSEs primary
order processing system
France
French bonds: longer dated OAT (T + 3) &
shorter dated BTAN (T + 1)
OATi: inflation-protected bond
Bonds issued by Dutch auction
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Listing &
governance
International
markets
The agency
problem
Japan
Japanese stocks settle at the Japanese
Securities Depository Centre (JASDEC)
Japanese Government bonds (JGBs): mostly
traded over-the-counter (OTC)
JGBs settle at Bank of Japan
Germany
Government bonds are the Bund: stock
exchange-traded & also OTC
Equities settle T + 2, where counterparties are
both German
(001)IMC1PC_v11_CH01.qxp
Financial
institutions
12/4/2013
Role of
government
Emerging markets
Attractions
Rapid economic growth
Low correlations
Potentially attractive valuations
Inefficient pricing
7:24 PM
Financial
markets
Page 24
Listing &
governance
International
markets
The agency
problem
Possible drawbacks
Transparency
Volatility
Regulation
Liquidity
Taxation
(001)IMC1PC_v11_CH01.qxp
Financial
institutions
12/4/2013
Role of
government
7:24 PM
Financial
markets
Page 25
Listing &
governance
International
markets
The agency
problem
(001)IMC1PC_v11_CH01.qxp
Financial
institutions
12/4/2013
Role of
government
7:24 PM
Financial
markets
Page 26
Listing &
governance
International
markets
The agency
problem
Other measures
Separation of roles one individual not to
have too much power
Accounting standards auditied accounts an
important source of 'post-decision' information
for investors
Corporate governance a check on
management power
Regulation in the financial services industry,
rules & principles aim to ensure that financial
services firms deal properly with conflicts of
interest and treat customers fairly
(002)IMC1PC_v11_CH02.qxp
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Topic List
Ethics and compliance
CFA Code of Ethics
(002)IMC1PC_v11_CH02.qxp
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Ethics and
compliance
Ethics in organisations
Firms must follow law and regulations.
Ethics in organisations relates to social
responsibility & business practices.
Personal ethics derive from a person's beliefs
& opinions.
Professional ethics eg, the CFAs Code of
Ethics.
Corporate culture eg, 'Customer first'.
Organisation systems. Ethics might be
contained in a formal code. Possible problem:
good ethics does not always save money, &
there is a real cost to ethical decisions. Equally,
there can be substantial risk, & costs, if poor
ethics results in loss of reputation.
CFA Code
of Ethics
(002)IMC1PC_v11_CH02.qxp
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Ethics and
compliance
CFA Code
of Ethics
Regulations
Ethics
Page 29
(002)IMC1PC_v11_CH02.qxp
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7:24 PM
Page 30
Ethics and
compliance
&
The first Statement of Principle for Approved Persons is
also Integrity:
An approved person must act with integrity in
carrying out his accountable functions.
CFA Code
of Ethics
Attributes of professional
integrity
Honesty: the person will not deliberately
mislead another
Reliability: the person can be relied upon to
maintain appropriate levels of competence &
skill in practice
Impartiality: treating different people fairly,
where the people involved could be
customers, employees or others
Openness: implying transparency, where
appropriate & where justified confidentiality
is not breached
(002)IMC1PC_v11_CH02.qxp
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Ethics and
compliance
Compliance-based approach
A rules-based compliance approach seeks to ensure
that a firm acts within laws & regulations, & that
violations are prevented, detected & punished.
Some organisations, faced with the legal consequences
of unethical behaviours, take legal precautions such as:
Compliance procedures to detect misconduct
Audits of contracts
Systems for employees to report criminal
misconduct without fear of retribution
Disciplinary procedures to deal with transgressions
A compliance-based approach suggests that
bureaucratic control is necessary; an integrity-based or
principles-based approach relies on cultural control.
Page 31
CFA Code
of Ethics
Integrity-based approach
An integrity-based approach combines a concern
for the law with emphasis on managerial
responsibility for ethical behaviour.
Integrity strategies define companies' guiding values,
aspirations & patterns of thought & conduct:
To prevent damaging ethical lapses, while
Tapping into human impulses for moral thought &
action
This approach echoes the FCAs principles-based
approach to financial regulation eg, the principlesbased approach requires firms to act with integrity
and to treat customers fairly. Unlike rules, such
principles require senior management to apply
higher-level professional values in their business.
2: Ethics and investment professionalism
(002)IMC1PC_v11_CH02.qxp
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Ethics and
compliance
II.
CFA Code
of Ethics
(003)IMC1PC_v11_CH03.qxp
12/4/2013
7:25 PM
Page 33
3: Financial regulation
Topic List
Regulatory framework
FCA high level standards
Exchanges & markets
FCA business standards
Supervision & redress
Financial crime
(003)IMC1PC_v11_CH03.qxp
Regulatory
framework
12/4/2013
7:25 PM
Exchanges &
markets
Page 34
FCA business
standards
Supervision &
redress
Financial crime
Passporting
Passporting (under MiFID rules) enables firms to use
their domestic authorisation to operate not only in their
home state, but also in other host states within the
European Economic Area (EEA) (EU + Norway, Iceland
& Liechtenstein).
(003)IMC1PC_v11_CH03.qxp
Regulatory
framework
12/4/2013
7:25 PM
Page 35
Exchanges &
markets
Role of ESMA
FCA business
standards
Supervision &
redress
Financial crime
MiFID
(003)IMC1PC_v11_CH03.qxp
Regulatory
framework
Scope of MiFID
12/4/2013
7:25 PM
Exchanges &
markets
Page 36
FCA business
standards
Financial crime
Supervision &
redress
(003)IMC1PC_v11_CH03.qxp
Regulatory
framework
12/4/2013
7:25 PM
Exchanges &
markets
Page 37
FCA business
standards
Supervision &
redress
Financial crime
UCITS Directives
Transferable securities
Money market instruments
Forward contracts & financial derivatives
Deposits
Units in other CISs
[Not permitted: Commodity derivatives]
Page 37
3: Financial regulation
(003)IMC1PC_v11_CH03.qxp
Regulatory
framework
12/4/2013
7:25 PM
Exchanges &
markets
Page 38
FCA business
standards
Supervision &
redress
Financial crime
(003)IMC1PC_v11_CH03.qxp
Regulatory
framework
12/4/2013
7:25 PM
Exchanges &
markets
Page 39
FCA business
standards
Supervision &
redress
Financial crime
(003)IMC1PC_v11_CH03.qxp
Regulatory
framework
12/4/2013
7:25 PM
Exchanges &
markets
Page 40
FCA business
standards
Supervision &
redress
Financial crime
HM Treasury
The Minister with overall responsibility for the Treasury, the Chancellor of the Exchequer, is ultimately responsible
for the regulatory system for financial services under FSMA 2000.
HM Treasury, to which the FCA is accountable, will judge the regulator against the requirements laid down in FSMA
2000 which includes a requirement to ensure that the burdens imposed on the regulated community are
proportionate to the benefits it will provide.
Accountability of the FCA to HM Treasury
HM Treasury has the power to appoint or to dismiss the Board and Chairman of the FCA.
HM Treasury requires that the FCA submit an annual report covering such matters as the discharge of its
functions and the extent to which the regulatory objectives have been met.
HM Treasury also has powers to commission and publish an independent review of the economy, efficiency and
effectiveness of the FCA's use of resources and to commission official enquiries into serious regulatory failures.
(003)IMC1PC_v11_CH03.qxp
Regulatory
framework
12/4/2013
7:25 PM
Exchanges &
markets
Page 41
FCA business
standards
Supervision &
redress
Financial crime
Systemic risks attributable to the distribution of risk within the financial sector, and
Page 41
3: Financial regulation
(003)IMC1PC_v11_CH03.qxp
Regulatory
framework
12/4/2013
7:25 PM
Exchanges &
markets
Competition Commission
Ultimate power to block a takeover and fine for
failure to comply with requests
May take up to 24 weeks to investigate
Appeals to rejection of the bid can be made to the
Competition Appeal Tribunal
Page 42
FCA business
standards
Supervision &
redress
Financial crime
Bid is cleared
(003)IMC1PC_v11_CH03.qxp
Regulatory
framework
12/4/2013
7:25 PM
Exchanges &
markets
Takeover Panel
The Takeover Panel administers the Takeover
Code (City Code). The Panel:
Page 43
Page 43
FCA business
standards
Supervision &
redress
Financial crime
3: Financial regulation
(003)IMC1PC_v11_CH03.qxp
Regulatory
framework
12/4/2013
7:25 PM
Exchanges &
markets
Page 44
FCA business
standards
Supervision &
redress
Financial crime
(003)IMC1PC_v11_CH03.qxp
Regulatory
framework
12/4/2013
7:25 PM
Exchanges &
markets
General prohibition
FSMA 2000 establishes the authorisation of firms to
carry out regulated activities and the general
prohibition: no person may carry on a regulated activity
in the UK, unless they are either authorised or exempt.
Sanctions may be civil and/or criminal.
Civil sanctions:
Contracts voidable
Compensation/damages
Restitution Orders
Regulator may seek injunctions
Criminal sanctions:
6 month sentence and/or 5,000 fine
2 year sentence and/or unlimited fine
Page 45
Page 45
FCA business
standards
Supervision &
redress
Financial crime
(003)IMC1PC_v11_CH03.qxp
Regulatory
framework
12/4/2013
7:25 PM
Exchanges &
markets
Is authorisation required?
1
Covered by exceptions?
Covered by exemptions?
Page 46
FCA business
standards
Supervision &
redress
Financial crime
Exceptions
(003)IMC1PC_v11_CH03.qxp
Regulatory
framework
12/4/2013
7:25 PM
Exchanges &
markets
Page 47
FCA business
standards
Safekeeping/administering investments
Lloyds insurance business
Carrying out contracts of insurance
Accepting deposits
Regulated mortgage business
Operating a Multilateral Trading Facility (MTF)
Page 47
Financial crime
Specified investments
Regulated activities
Including:
Dealing in, arranging deals in, managing,
advising on investments
Supervision &
redress
Including:
Deposits and electronic money
Contracts of insurance
Shares, warrants, ADRs etc
Debentures, loan stock, and govt/local authority
securities
3: Financial regulation
(003)IMC1PC_v11_CH03.qxp
Regulatory
framework
12/4/2013
7:25 PM
Exchanges &
markets
Page 48
FCA business
standards
Supervision &
redress
Financial crime
Excluded activities
The following activities are specifically excluded from the requirement for authorisation.
Dealing as principal where the person is not holding themselves out to the market as willing to deal. The requirement
to seek authorisation does not apply to the personal dealings of unauthorised individuals for their own account
Trustees, nominees and personal representatives, if they do not hold themselves out to the general public as
providing the service and are not separately remunerated for the regulated activity, are excluded from the authorisation
requirement
Employee share schemes. This exclusion applies to activities which further an employee share scheme
Media, eg TV, radio and newspapers. Authorisation is not required if investment advice is not the primary purpose of
the publication.
'Tip sheets' (written recommendations of investments) will however require authorisation
Overseas persons firms which do not carry on regulated activity from a permanent place within the UK. This
exclusion covers: first, where the activity requires the direct involvement of an authorised or exempt firm; and, second,
where the activity is carried on as a result of an unsolicited approach by a UK individual. Thus, if a UK individual asks
a fund manager in Tokyo to buy a portfolio of Asian equities for them, the Japanese firm does not need to be
authorised under FSMA 2000
(003)IMC1PC_v11_CH03.qxp
Regulatory
framework
12/4/2013
7:25 PM
Exchanges &
markets
Page 49
FCA business
standards
Supervision &
redress
Financial crime
Whistleblowing
Page 49
3: Financial regulation
(003)IMC1PC_v11_CH03.qxp
Regulatory
framework
12/4/2013
7:25 PM
Exchanges &
markets
Page 50
FCA business
standards
Supervision &
redress
Financial crime
Yes
No
Follow TA 2000
Trustee Act
2000
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Regulatory
framework
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Exchanges &
markets
FCA business
standards
Supervision &
redress
Financial crime
The markets for services that are provided by nonauthorised persons in carrying on regulated
activities without contravening the general
prohibition
Page 51
3: Financial regulation
(003)IMC1PC_v11_CH03.qxp
Regulatory
framework
12/4/2013
7:25 PM
Exchanges &
markets
Page 52
FCA business
standards
Supervision &
redress
Financial crime
FCA Handbook
High Level Standards
Principles for Businesses (PRIN)
Training & Competence (TC)
Statements of Principle & Code of Practice for
Approved Persons (APER)
Business Standards
Conduct of Business Sourcebooks (including COBS)
Client Assets (CASS)
Market Conduct (MAR)
Regulatory Processes
Decision Procedures &
Penalties Manual (DEPP)
Supervision (SUP)
Redress
Dispute Resolution: Complaints
(DISP)
Compensation (COMP)
Prudential Standards
Prudential Sourcebooks for different types of firm
Specialist Sourcebooks
Cover certain specialised sectors of the industry
(003)IMC1PC_v11_CH03.qxp
Regulatory
framework
12/4/2013
7:25 PM
Exchanges &
markets
Page 53
FCA business
standards
Supervision &
redress
Financial crime
1
2
3
3: Financial regulation
(003)IMC1PC_v11_CH03.qxp
Regulatory
framework
12/4/2013
7:25 PM
Exchanges &
markets
Page 54
FCA business
standards
Supervision &
redress
Financial crime
Principles-based regulation
(003)IMC1PC_v11_CH03.qxp
Regulatory
framework
12/4/2013
7:25 PM
Exchanges &
markets
Page 55
FCA business
standards
Supervision &
redress
Financial crime
Approved persons
Section 59 FSMA 2000
says that a person (that is a member of staff at an authorised firm) cannot carry out a controlled function in a firm unless the
individual has been approved by the appropriate regulator
If a person carries out a controlled function but they not approved, this is a
breach of statutory duty
Where such a breach of statutory duty occurs, a private person has the right to sue the
firm for damages if they have suffered loss, using s71 FSMA 2000
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FCA business
standards
2
3
4
Supervision &
redress
Financial crime
Code of Practice
Examples of non-compliance
Statements of Principles
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Supervision &
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Financial crime
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FCA business
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Supervision &
redress
Financial crime
The FCA will apply the Business Model Threshold Condition, which refers to the risk that might be posed for a firm, for
its customers and for the integrity of the UK financial system. The FCA has stated that this new threshold condition
demonstrates the importance that the FCA will place on a firms ability to put forward an appropriate, viable and
sustainable business model, given the nature and scale of business it intends to carry out. The regulator will expect
firms to demonstrate adequate contingency planning in their business models. Firms will be expected to make clear
how their business model meets the needs of clients and customers, not placing them at undue risk, or placing at risk
the integrity of the wider UK financial services industry.
The PRAs Business to be Conducted in a Prudent Manner Threshold Condition is closely equivalent to the FCAs
appropriate resources and business model conditions, which we have described above. PRA-authorised firms must
hold appropriate financial and non-financial resources. Appropriate resources are evaluated by reference to complexity
of activities, the liabilities of the firm, effective management, and the ability to reduce risks to the safety and
soundness of the firm.
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FCA business
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Supervision &
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Financial crime
Individuals carrying out controlled functions must have regulatory approval as fit and proper persons.
Fit and proper assessment
Controlled functions
Governing functions (eg directors)
Required functions (eg Money Laundering
Reporting Officer)
Systems and control functions (eg senior
internal audit staff)
Honesty
Integrity
Reputation
Employment record
Criminal record
Competence
Capability
Experience
Training and exams
Financial
soundness
Court judgements?
Bankruptcy?
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FCA business
standards
Financial crime
Supervision &
redress
Training
Appropriate examinations
Maintaining
competence
Continuing Professional
Development (CPD)
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Exchanges &
markets
FCA business
standards
Are competent
Remain competent
Are appropriately supervised
Have competence reviewed regularly
Have levels of competence appropriate to the
business
Page 61
Supervision &
redress
Financial crime
Professionalism requirements
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Page 62
Exchanges &
markets
FCA business
standards
Supervision &
redress
Financial crime
RIEs
ROIEs
RCHs
DIEs
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FCA business
standards
Exchanges &
markets
Derivative
UK
7:25 PM
Supervision &
redress
Financial crime
USA
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Page 64
FCA business
standards
Supervision &
redress
Financial crime
LCH.Clearnet
LCH.Clearnet:
Acts as guarantor in the derivatives market,
honouring contracts in the event of a party
defaulting
Formerly, London Clearing House
Owned by exchanges and their members
Is central counterparty for all trades
(novation)
Administers all margin cash flows
Registers all matched trades for the market
Initial margin
Variation margin
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FCA business
standards
Supervision &
redress
Financial crime
LCH.Clearnet
Trade
Long oil @ $80
Novation
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Page 66
FCA business
standards
Supervision &
redress
Financial crime
Communications by
electronic media
count as written
communication
7:25 PM
Exclusion of liability
COBS
Communication must be clear, fair
and not misleading (Principle 7)
Advising on investments
Dealing in investments
What? Generally, designated
investment business
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FCA business
standards
Supervision &
redress
Financial crime
Client
Customer
Eligible counterparty*
Per se
Elective
Elect
*Only for
eligible counterparty business:
Receipt & transmission of orders
Execution of orders
Dealing on own account
Page 67
Professional
client
Retail
client
Authorised firms
Large undertakings
Elective
professional clients
Individuals
Elect
Small
businesses
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Client classifications
Page 68
FCA business
standards
Supervision &
redress
Financial crime
Retail clients
(eg individuals, small businesses)
Eligible counterparties
(eg government, other firms)
COBS applies
More protection
Firms must notify clients of:
Categorisation
Rights to request a different categorisation
Resulting limitations to client protection
Retail clients
A retail client is any client who is not a
professional client or an eligible
counterparty.
More knowledge/size
Client agreements
If a firm carries on designated investment business,
other than advising on investments, for a new retail
client (eg, a discretionary investment management
service), the firm must enter into a basic agreement
with the client.
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FCA business
standards
Supervision &
redress
Financial crime
Non-MiFID Business
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Exchanges &
markets
FCA business
standards
Financial crime
Qualitative test
Supervision &
redress
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markets
Page 71
FCA business
standards
Supervision &
redress
Financial crime
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Exchanges &
markets
Financial promotions
Page 72
FCA business
standards
Supervision &
redress
Financial crime
Guidance
A firm should ensure:
It is clear if a clients capital is at risk
Any yield figure quoted gives a balanced
impression of short/long term prospects
Complex charging structures are explained
The regulator is named
A clear impression is given of any third party
packaged/ stakeholder product provider
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FCA business
standards
Supervision &
redress
Financial crime
3: Financial regulation
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markets
Page 74
FCA business
standards
Supervision &
redress
Financial crime
Requirements:
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markets
Record keeping
Records of FPs must be kept:
Indefinitely for pension transfers
6 years for life policies & most pension
schemes
5 years for MiFID business
Three years in other cases
Distance contracts
Firms must give clear information before a
contract is concluded, including:
Identity & address of supplier
Product details (incl. price & fees)
Contract details (incl. cancellation rights)
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FCA business
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Supervision &
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Financial crime
3: Financial regulation
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Page 76
Supervision &
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FCA business
standards
Financial crime
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FCA business
standards
Supervision &
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Financial crime
When the misleading nature of the promotion comes to light, it may be that customers have
lost money, while others may feel cheated. Many may feel aggrieved. Consumers may have
diminished financial prospects and may view the firm unfavourably
Consumers coming to know about the firms actions, as well as those directly affected, may
come to view the firm as unethical, and damage may be done to the reputation of the firm
Customers may become less loyal to the firm and the firm may find it more difficult to retain
and acquire customers
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Page 78
FCA business
standards
Supervision &
redress
Financial crime
Suitability
Assessing appropriateness
Client to provide information about relevant
knowledge/ experience to enable firms to assess
appropriateness.
Life policy
Stakeholder pension scheme, & some other
pensions transactions
Regulated collective investment schemes
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markets
Page 79
FCA business
standards
Supervision &
redress
Financial crime
Best execution
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Exchanges &
markets
Page 80
FCA business
standards
Supervision &
redress
Financial crime
Inducements
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Page 81
FCA business
standards
Supervision &
redress
Financial crime
A series of transactions that are each suitable when viewed in isolation may be unsuitable if the recommendations or the decisions to trade are made with a frequency that is not in the best interests of the client.
A firm should have regard to the client's agreed investment strategy in determining the frequency of transactions.
This would include, for example, the need to switch within or between packaged products.
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Independent advice
7:25 PM
Exchanges &
markets
Page 82
FCA business
standards
Supervision &
redress
Financial crime
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Exchanges &
markets
Page 83
FCA business
standards
Supervision &
redress
Financial crime
Life policies
Life policies
Personal pensions
Stakeholder pensions
Adviser charging
3: Financial regulation
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markets
Page 84
FCA business
standards
Supervision &
redress
Financial crime
Referring to specialists
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Exchanges &
markets
Investment research
Rules:
Apply to investment research which is intended/
likely to be disseminated to clients/public
Cover written & oral material
Firms must manage conflicts of interest:
No personal or firm transactions in unpublished
research until clients have had a reasonable
opportunity to act on it
No personal transactions contrary to current
recommendation
No promises of favourable research
No editorial control for subject of research
No front running of trades by firm or its
employees
Page 85
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FCA business
standards
Supervision &
redress
Financial crime
Required disclosures
Firms should take reasonable care to ensure fair
presentation of information:
Disclose identity of person responsible for
research
Disclose relationships & circumstances which
may impair objectivity
Do not tie remuneration to specific transactions
or recommendations
Fact should be distinguished from opinion,
analysis, interpretation etc
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Page 86
FCA business
standards
Supervision &
redress
Financial crime
Non-independent research
Conflicts of interest
Financial promotions (FP) rules apply to non-independent
research as if it were a marketing communication.
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Page 87
FCA business
standards
Supervision &
redress
Financial crime
Disclosures
From Principle 7 Communications with clients &
Principle 9 Customers: relationships of trust comes
a general obligation to disclose risks. Specific
warnings may be needed eg, for warrants,
derivatives, non-readily realisable investments.
Key Facts Document (KFD) must be given to a
retail client when providing a recommendation on a
packaged product, including:
Details on nature & complexity of the product
Complaints handling procedures
Compensation schemes
Cancellation rights
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markets
Page 88
FCA business
standards
Supervision &
redress
Financial crime
Cancellation rights
The consumer must be informed of a right to
cancel.
The cancellation date is the date of dispatch by
the consumer.
Life policies & pensions (including stakeholder
& personal) 30 calendar days
Other products 14 calendar days
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FCA business
standards
Supervision &
redress
Financial crime
Periodic reporting
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Exchanges &
markets
Page 90
FCA business
standards
Supervision &
redress
Financial crime
Client assets
Client money
Insolvency of firm
Unauthorised use by the firm client must give
prior consent to their use in security transactions
such as stocklending
Firm should have adequate arrangements to
minimise risk of loss or reduction of financial
instruments, misuse, fraud, poor administration,
inadequate record keeping or negligence.
Custody reconciliations:
Reconcile internal records with third parties
regularly
Correct any discrepancies promptly
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Page 91
FCA business
standards
Supervision &
redress
Financial crime
Granting authorisation & permission to firms (under Part 4A FSMA 2000) to undertake regulated activities
Approving individuals to perform controlled functions
Issuing rules which appear to be necessary or expedient to advance regulators objectives (Part 9A FSMA 2000)
Supervision of authorised firm to ensure that they continue to meet the regulators authorisation requirements &
that they comply with the regulatory rules and other obligations
Powers to take enforcement action against authorised firms and approved persons
Powers to discipline authorised firms & approved persons
The FCA & PRA jointly oversee the Financial Services Compensation Scheme (FSCS)
Applications for variations or cancellations of permissions:
Dual-regulated firm will normally apply to PRA, which may determine an application to vary a permission only
with FCA consent, and to cancel a permission only after consulting the FCA.
FCA-only regulated firm will apply to FCA. If the applicant firm is part of a group that includes a dual-regulated
firm, the FCA must consult the PRA in making its decision
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markets
Page 92
FCA business
standards
Supervision &
redress
Financial crime
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Exchanges &
markets
Complaints
What is a complaint?
Any oral or written expression of dissatisfaction
whether justified or not, alleging loss, distress
or inconvenience
Eligible complainants for Ombudsman purposes:
Consumers
Enterprises with fewer than 10 employees and
turnover or annual balance sheet not
exceeding 2 million (micro-enterprises)
Charities with annual income < 1 million
Trusts with net asset value < 1 million
Page 93
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FCA business
standards
Supervision &
redress
Financial crime
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Exchanges &
markets
Complaints handling
Effective and transparent complaints
handling procedures
Allow complaints to be made by any
reasonable means
Recognise complaints as requiring resolution
Complaint must be:
Investigated competently, diligently,
impartially
Assessed fairly, consistently, promptly
Assessment must be explained in a fair,
clear & not misleading way, & any
appropriate redress or remedial action
offered
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FCA business
standards
Supervision &
redress
Financial crime
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Exchanges &
markets
Complaints
Procedures must be in place for complaints
handling by a firm, and a complaints log must
be maintained.
Publish summary of procedure & refer eligible
customers to it at the point of sale.
An FOS decision is binding on the firm.
FCA business
standards
Page 95
Financial crime
Supervision &
redress
Timeline
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markets
Page 96
FCA business
standards
Supervision &
redress
Financial crime
Deterrence
Co-operation
Detection
International
Financial Action Task Force (FATF)
UK
Criminal Justice Act 1993
POCA 2002 (updated CJA 1993)
Anti-drug trafficking & counter-terrorism
financing (CTF) legislation
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Page 97
FCA business
standards
Supervision &
redress
Financial crime
Assistance If any person knowingly helps another person to launder the proceeds of criminal conduct, he or
she will be committing an offence
Failure to report If a person discovers information during the course of his employment that makes him
believe or suspect money laundering is occurring, & he fails to make the report as soon as is reasonably practicable, he is committing a criminal offence
Tipping off (s333A) Even where suspicions are reported, the parties must generally be careful not to alert the
suspicions of the alleged launderer since, within the regulated sector, this is an offence
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Page 98
FCA business
standards
Supervision &
redress
Financial crime
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Page 99
FCA business
standards
Financial crime
Supervision &
redress
report
to
Money
Laundering
Reporting
Officer
may
report to
National
Crime
Agency
The regulator requires annual reporting by MLRO to senior management and training of staff.
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markets
Page 100
FCA business
standards
Supervision &
redress
Financial crime
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Page 101
FCA business
standards
Terrorism
What is terrorism? Terrorism 2000 Act
definition encompasses violent actions designed
to influence a government or intimidate the public.
How does terrorism financing differ from money
laundering?
Page 101
Supervision &
redress
Financial crime
Terrorist offences
Fund raising
Use & possession
Funding arrangements
Money laundering
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Exchanges &
markets
Who is an insider?
Page 102
FCA business
standards
FCA supervision
& redress
Financial crime
Insider
Inside
Source
Inside
Information
Price-sensitive
Unpublished
Specific or precise
Particular issuer or
security
Must not:
Deal
Encourage
Disclose
Company Director
Employee
Office or duties
Direct or indirect
source
Insider dealing is a criminal offence under Part IV of the Criminal Justice Act 1993.
Under CJA 1993, an insider is an individual who has information in her possession that she knows is inside information and
knows is from an inside source either directly from her own profession or indirectly from someone with access due to their
own profession.
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FCA business
standards
Financial crime
Supervision &
redress
Special defences
General defences
Did not expect to profit
Believed on resonable grounds that
information was in public domain
Would have dealt anyway
Page 103
Defences
Market maker
Market information including bid
facilitation
Price stabilisation rules
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Exchanges &
markets
Page 104
FCA business
standards
FCA supervision
& redress
Financial crime
Market abuse
Market manipulation
Manipulating devices
Insider dealing
Insider dealing
Improper disclosure
Misuse of information
Manipulating transactions
Dissemination of false or
misleading information
Misleading behaviour &
distortion
Safe harbours if acting within one of these safe harbours, a person is not
committing market abuse:
Regulators rules
The Takeover Code
Buy-back programmes and stabilisation
Due diligence defence see above
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Insider dealing
Improper disclosure
Misuse of information
Page 105
Exchanges &
markets
Page 105
FCA business
standards
Market abuse
offences
4
Dissemination
Financial crime
Supervision &
redress
7:25 PM
Manipulating devices
Manipulating transactions
Where a transaction or orders to trade (are effected otherwise than for legitimate reasons
and in conformity with accepted market practices) which:
Give, or are likely to give a false or misleading impression as to the supply, demand or
price of one or more qualifying investments; or Secure the price of one or more such
investments at an abnormal or artificial level
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Page 106
FCA business
standards
Supervision &
redress
Financial crime
Enforcement of market abuse The FCA may impose one or more of the following penalties on those
found to have committed market abuse:
An unlimited fine
Issue a public statement
Apply to the court to seek an injunction or restitution order
Disciplinary proceedings, which could result in withdrawal of authorisation/approval where an authorised/approved
person is guilty of market abuse as they will also be guilty of a breach of the Principles for Businesses
Note that the regulator has criminal prosecution powers to enforce insider dealing and Part 7 Financial Services Act
2012 (see below). The regulator has indicated that it will not pursue both the civil and criminal regime.
Part 7 Financial Services Act 2012 has created criminal offences relating to:
Misleading statements
Misleading impressions, and
Misleading statements relating to benchmarks (including LIBOR)
There will also be new provisions relating to regulated activities that are connected with setting benchmarks.
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FCA business
standards
Supervision &
redress
Financial crime
Bribery offences
There are four main offences under BA 2010:
Section 1: Active bribery Offering, promising or giving a bribe
Section 2: Passive bribery Requesting, agreeing to receive or accepting a bribe (passive bribery)
Section 6: Bribing a foreign public official A breach of this section may also breach s1 BA 2010, and prosecutors will need to decide which is the more appropriate offence for the case
Section 7: Failure of firms to prevent bribery Failure by a commercial organisation to prevent persons associated with it from bribing another person on its behalf.
An organisation has a defence against the s7 offence (failure to prevent bribery) if it can prove that, despite a particular
instance of bribery having occurred, the organisation had adequate procedures in place to prevent persons associated
with the organisation from committing bribery.
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Notes
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Page 109
4: Legal concepts
Topic List
Legal persons
Power of attorney
Contracts & agency
Property
Bankruptcy & insolvency
Trusts & wills
(004)IMC1PC_v11_CH04.qxp
Legal
persons
Power of
attorney
12/4/2013
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Contracts
& agency
Page 110
Property
Bankruptcy
& insolvency
Trusts &
wills
Legal personality
Companies
Companies
Nations
Co-operatives
Individuals
Sole traders
For a self-employed trader, there is no legal
distinction between individual & business. The
trader is personally liable for debts of the business.
(004)IMC1PC_v11_CH04.qxp
Legal
persons
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Power of
attorney
7:25 PM
Contracts
& agency
Page 111
Property
Bankruptcy
& insolvency
Trusts &
wills
Powers of attorney
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Power of
attorney
Legal
persons
7:25 PM
Contracts
& agency
Page 112
Property
Bankruptcy
& insolvency
Trusts &
wills
Elements of a contract
A contract is a legally binding agreement between persons in any form (eg, inferred, written or oral).
Offer
Acceptance
Capacity. Some people have restricted capacity to enter into contracts, eg, minors (under 18)
Form. Some contracts must follow a particular form
Content. There may be some implied terms in a contract. Express terms may be unlawful
Genuine consent. There may be undue influence or duress, or misrepresentation or mistake
Legality. The courts will not enforce a contract which is illegal or contrary to public policy
Effect of failure to satisfy the validity tests:
Void contract. This is no contract
Voidable contract. This contract can be avoided by one party
Unenforceable contract. This contract is valid but performance by one party cannot be enforced
(004)IMC1PC_v11_CH04.qxp
Power of
attorney
Legal
persons
12/4/2013
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Page 113
Contracts
& agency
Property
Bankruptcy
& insolvency
Trusts &
wills
Agency
The agent-principal relationship forms a contract
between the principal & a third party.
Principal
Agent (eg broker, appointed representative)
Third party
Contract discharge
Agents obligations
Breach
Performance
Agreement
Frustration
4: Legal concepts
(004)IMC1PC_v11_CH04.qxp
Legal
persons
Power of
attorney
12/4/2013
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Contracts
& agency
Page 114
Property
Bankruptcy
& insolvency
Trusts &
wills
Real property
Co-ownership
Personal property
Personal property (personalty) is anything that
is not real property (freehold land).
(004)IMC1PC_v11_CH04.qxp
Legal
persons
Power of
attorney
12/4/2013
7:25 PM
Contracts
& agency
Bankruptcy
Bankruptcy: when an individual is no longer able
to pay debts and his or her financial affairs are
taken over by a court. The assets are transferred
into a trust.
Bankruptcy proceedings start with a Bankruptcy
Order to the court.
Court will decide whether to declare the individual
bankrupt.
The Official Receiver takes control of assets, as
receiver & manager.
A bankruptcy order is normally discharged
automatically one year after the date of the order,
unless the bankrupt is culpable (Enterprise Act 2002).
Page 115
Page 115
Property
Bankruptcy
& insolvency
Trusts &
wills
4: Legal concepts
(004)IMC1PC_v11_CH04.qxp
Legal
persons
Power of
attorney
12/4/2013
7:25 PM
Contracts
& agency
Insolvency procedures
Three types of corporate insolvency:
Administration to provide a better way of
realising company's assets than could be
achieved by liquidation or receivership
Receivership concerned principally with
interests of secured creditors who want to
take control of charged assets
Liquidation mainly for the interests of
unsecured creditors and members
(shareholders) of the company. The company is
dissolved and its affairs 'wound up'.
Page 116
Property
Bankruptcy
& insolvency
Trusts &
wills
(004)IMC1PC_v11_CH04.qxp
Legal
persons
12/4/2013
Power of
attorney
7:25 PM
Page 117
Contracts
& agency
Property
Bankruptcy
& insolvency
Trusts &
wills
Valid will
Signed by testator
Witnessed by two people
Not made under pressure
Intestacy
Yes
Administrators deal
with the estate.
No
Types of trust
Executors carry out the terms of a will, to distribute estate in
accordance with testators wishes. A witness or their spouse
cannot be a beneficiary. Marriage invalidates a will, unless the
will states it is made in contemplation of marriage.
Trusts
A trust is an equitable obligation in which
trustees are bound to deal with property
they control (as legal owners) for the
benefit of the trust beneficiaries.
Page 117
Bare Trust
Interest in Possession Trust
Discretionary Trust
Charitable Trust
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Notes
Page 118
(005)IMC1PC_v11_CH05.qxp
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Page 119
5: Client advice
Topic List
The retail consumer
Advising clients
Institutional funds
Client interaction
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The retail
consumer
Page 120
Advising
clients
Institutional
funds
Client
interaction
Consumers perceptions
1.
2.
3.
4.
5.
6.
TCF outcomes
(005)IMC1PC_v11_CH05.qxp
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The retail
consumer
RDR
The Retail Distribution Review (RDR) set up
arrangements (since end of 2012) to enhance
consumers confidence in using financial
services.
Page 121
Page 121
Advising
clients
Institutional
funds
Client
interaction
5: Client advice
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Page 122
The retail
consumer
Advising
clients
Institutional
funds
Client
interaction
Fact-find (questionnaire)
Detailed in the fact-find
Factors in formulating
recommendations
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The retail
consumer
Page 123
Advising
clients
Client objectives
Two potential client requirements:
To maximise returns, eg positive net worth individuals looking
for a portfolio to match their risk/return preferences
To match liabilities, eg pension funds, where aim is to match
assets & liabilities or to minimise a mismatch
Private clients could have objectives that mix liability matching (eg
to pay school fees) & returns maximisation (for other funds, say).
Maximising returns. Given the choice, investors would elect for
high performance with minimal risk. In practice, this is not
achievable: a risk/reward trade-off applies.
Matching liabilities. Investments in government bonds can match
income & capital inflows precisely with liabilities. Extending into
more risky assets means that liabilities might not be met.
Page 123
Institutional
funds
Client
interaction
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The retail
consumer
Page 124
Advising
clients
Institutional
funds
Client
interaction
Typical fact-find
Personal details: hard facts
Family details
Employment details
Advisers
Liabilities
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The retail
consumer
Typical fact-find
Income
Expenditure
Protection
Pensions
Customers objectives
Page 125
Advising
clients
Institutional
funds
Client
interaction
5: Client advice
(005)IMC1PC_v11_CH05.qxp
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The retail
consumer
Page 126
Advising
clients
Institutional
funds
Client
interaction
Client needs
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The retail
consumer
Page 127
Advising
clients
Institutional
funds
Client
interaction
Protection products
Protection products help to protect financial stability from
the potential adverse effects of common life events.
Possible adverse events
Death
Illness
Incapacity
Redundancy
Protection needs
If there are
dependants
State benefits are
limited
Page 127
CAPITAL
INCOME
Financial stability
If the unexpected happens:
What is the likely loss of earnings?
What are the housing & mortgage
implications?
For a self-employed person, what are the
likely effects for the business?
5: Client advice
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Page 128
The retail
consumer
Advising
clients
Institutional
funds
Client
interaction
Death
Sickness
Redundancy
Under 18
None
None
None
18-25
If married or in debt
If employed or self-employed
If employed
25-40
Significant
40-50
50-60
60+
Some possible needs are shown above, but every case is different.
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The retail
consumer
Page 129
Advising
clients
Institutional
funds
Client
interaction
Banks
Interest
Lender
Capital
Building societies
Insurance companies
Interest
Lender
Savings
vehicle
On
maturity
Mortgage corporations
Credit companies (mainly unsecured loans)
Islamic mortgages avoid interest, since interest is
against Islamic (Sharia) law. The homebuyer may
pay rent to the bank, with part of it going towards
buying out the banks share in the property.
5: Client advice
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The retail
consumer
Page 130
Advising
clients
Institutional
funds
Client
interaction
Planning points
In retirement
Consider PP or stakeholder
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Page 131
The retail
consumer
Investment risks
The adviser must:
Understand investment risks
Ensure that the client understands
investment risks, before the
recommendation or transaction
Advising
clients
Institutional
funds
Client
interaction
Eg variable interest
Loss of capital
RISK
SAFETY
Risky investments
Safe investments
Page 131
5: Client advice
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The retail
consumer
Diversification
Page 132
Advising
clients
Institutional
funds
Client
interaction
Attitude to risk
(005)IMC1PC_v11_CH05.qxp
12/4/2013
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The retail
consumer
Risk profiles
Rational
Emotional
decision making decision making
High risk
Methodical
Cautious
aversity
Low risk
Individualist
Spontaneous
aversity
Based on Bronson, Scanlan, Squire
Cautious investors
Highly loss averse
Need for security
Want low-risk investments with safe capital
Typically do not like making decisions but do
not listen to others
Tend not to use advisers
Portfolios are low risk & with low turnover
Page 133
Page 133
Advising
clients
Institutional
funds
Client
interaction
Methodical investors
Analytical & factual
Make decisions slowly
Little emotional attachment to investments &
decisions
Tend to be conservative in investment approach
Spontaneous investors
High portfolio turnover
Do not trust the advice of others
Some are successful investors, but most do less
well, given high transaction costs
Make decisions quickly & fearful of missing
opportunities
Individualist investors
Self-confident
Prepared to do analysis and & expect to achieve
their long-term goals
5: Client advice
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The retail
consumer
Page 134
Advising
clients
Maintaining wealth
Institutional
funds
Client
interaction
Passing on wealth
Employees
An employer may meet some protection
needs
Economic conditions affect
What form of
Is the remuneration package flexible?
values of shares and other assets
investment is most
On pensions, salary sacrifice, additional
and investments
tax-efficient?
contributions & stakeholder pensions
Inflation erodes the real value of
Non-housing assets
might be considered
assets expressed in money terms
might be gifted to
Self-employed
reduce IHT liabilities
House price inflation boosts
Spouse might be employed to use
equity but it may need to remain
Life assurance
personal allowance
policies (usually
tied up in housing
No S2P (2nd State pension) entitlement
whole of life) can be
Own pension provision is necessary
Future inheritances may change
used to cover an IHT
a clients position
Non-employed
liability
Are all benefits due being claimed?
Can any expenses be met from capital?
Personal pension contributions can be up
Clients who have actively accumulated their
to 3,600 p.a. for non-earners
wealth typically have higher risk tolerance
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The retail
consumer
Page 135
Advising
clients
Institutional
funds
Client
interaction
Affordability
Client review
Page 135
5: Client advice
Page 136
7:26 PM
12/4/2013
(005)IMC1PC_v11_CH05.qxp
Client
interaction
Institutional
funds
Advising
clients
The retail
consumer
Low/
medium
risk
Low risk
Bank deposits
Building society deposits
Cash ISAs
Annuities
Medium
risk
Unit-linked managed funds
Unit trusts & OEICs/ICVCs (UK funds)
Investment trusts (UK)
Residential and commercial property
(005)IMC1PC_v11_CH05.qxp
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The retail
consumer
Strategies
Advising
clients
Institutional
funds
Client
interaction
Objectives
Establish
investment
policy
Page 137
Stock Selection
5: Client advice
(005)IMC1PC_v11_CH05.qxp
12/4/2013
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The retail
consumer
Indexation
The index fund manager selects an appropriate
index and builds a portfolio to mimic the index.
Index funds typically based on a sampling
approach, and thus exhibit some tracking error.
Transaction costs will typically be low, although
the portfolio must change to accommodate
changes in index constituents.
Page 138
Advising
clients
Institutional
funds
Client
interaction
Fund review
Fund performance should be reviewed at least
annually to evaluate whether fund is achieving its
objectives.
Client circumstances any changes, which
might require a change in strategy?
Performance review monitor against funds
selected benchmark
Portfolio rebalancing consider potential
changes to agreed asset allocations
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The retail
consumer
Page 139
Advising
clients
Institutional
funds
Client
interaction
Benchmarks
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The retail
consumer
Page 140
Advising
clients
Institutional
funds
Client
interaction
Funds:Tax
Reasons for decline in DB schemes and rise of DC schemes Pressure on DB schemes from:
Increased longevity Flling returns on scheme assets Poor financial position of schemes
Requirements to disclose scheme funding position in companys financial statements
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Page 141
The retail
consumer
Advising
clients
Institutional
funds
Client
interaction
Constraints on funds
Asset allocation
Matching liabilities
Meeting any ethical considerations
Remaining within risk tolerances
Maximising fund performance
5: Client advice
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The retail
consumer
Page 142
Advising
clients
Institutional
funds
Client
interaction
Young pension
fund
Long-term
Mature pension
fund
Short-term
Life assurances
fund
Long-term
General insurance
fund
Short-term
Liability
Liquidity
Real
Very low
Real
High
Nominal
Low
Nominal
Very high
Risk tolerance
Tax status
High
Low
Medium/high
Gross fund, no tax on Gross fund, no tax on Tax on income and
income or gains
income or gains
gains
Very low
Tax on income and
gains
Possible asset
allocation
Equities
Property
60% - 80%
5% - 10%
20% - 30%
0% (illiquid)
55% - 65%
0% - 5%
0%
0%
Bonds
15% - 25%
55% - 65%
15% - 30%
100%
Cash
0% - 5%
15% - 25%
5% - 15%
100%
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Page 143
The retail
consumer
Advising
clients
Institutional
funds
Client
interaction
Examples
Closed questions
Factual information
Non-factual statements
Page 143
Open questions
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The retail
consumer
Page 144
Advising
clients
Institutional
funds
Client
interaction
Appendices, if appropriate
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Page 145
6: Taxation
Topic List
Income tax
National insurance
Capital gains tax
IHT & trusts
Other taxes
Tax on investments
(006)IMC1PC_v11_CH06.qxp
Income
tax
12/4/2013
National
insurance
7:26 PM
Capital gains
tax
Page 146
IHT &
trusts
Other
taxes
Tax on
investments
Domicile
An individual is domiciled in the country which is
his permanent home. Someone can only change
domicile by severing ties with old country &
establishing a permanent life in a new one.
(006)IMC1PC_v11_CH06.qxp
Income
tax
National
insurance
12/4/2013
7:26 PM
Capital gains
tax
Page 147
IHT &
trusts
Other
taxes
Tax on
investments
Taxable
income
Basic
0 to
32,010
20%
10%
Higher
32,011 to
150,000
40%
32.5%
Additional
>150,000
45%
37.5%
(006)IMC1PC_v11_CH06.qxp
Income
tax
12/4/2013
National
insurance
7:26 PM
Capital gains
tax
Allowances (2013/14)
There is a personal allowance of 9,440*
The personal allowance is reduced by 1 for
every 2 excess income above 100,000 (thus
falling to zero for incomes over 118,880)
Those born before 6 April 1948 may get a higher
personal allowance, subject to an income limit.
Page 148
IHT &
trusts
Other
taxes
Tax on
investments
Pension contributions
Contributions to personal or stakeholder pension
plan are paid net of basic rate tax, even for eligible
non-taxpayers. Higher/ additional rate taxpayers
can reclaim more, to get tax relief at marginal rate.
Annual allowance cap on tax-relievable
contributions is the lower of 100% of income and
50,000 (2013/14), with carry forward rules. Low or
non-earners can make up to 3,600 gross
contributions and still get tax relief.
Contributions to an occupational pension scheme
are deductible from earnings for tax purposes.
(006)IMC1PC_v11_CH06.qxp
Income
tax
12/4/2013
National
insurance
7:26 PM
Capital gains
tax
Page 149
IHT &
trusts
Other
taxes
Tax on
investments
A basic principle of income tax is the aggregation of income. Income from all sources is aggregated in a
personal tax computation.
Income taxed at source
Exempt income
Taxing income
Bank/building society
interest: received net of 20%
tax
Debenture interest: received
net of 20% tax
Dividends: received net of
10% tax credit
Include GROSS income in
computation
Premium Bond
prizes
Returns on NS&I
Savings Certs.
Income in ISAs
Betting/gaming
winnings
Do not include in
computation
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Income
tax
12/4/2013
National
insurance
7:26 PM
Capital gains
tax
Page 150
IHT &
trusts
Other
taxes
Tax on
investments
Dividends taxation
Planning points
Transfer assets?
Transfer income yielding assets to the
spouse with the lower marginal tax rate. To
be effective, such transfers should be
unfettered rights.
Example
A higher rate taxpayer is paid a gross dividend of 400
He receives 360 after withholding tax (40 collected at source)
He has to pay 25% of 360 = 90 further to meet his liability
Total tax paid = 130
(32.5% of 400 = 130)
Additional rate (45%) taxpayers pay 37.5% on dividends.
Children
If parent gives income
(or assets which
generate income) to a
child, the income is
treated as the parents
if the child is under 18
and unmarried.
(006)IMC1PC_v11_CH06.qxp
Income
tax
National
insurance
Class
Page 151
12/4/2013
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Capital gains
tax
Page 151
IHT &
trusts
Other
taxes
Tax on
investments
1A
1B
6: Taxation
(006)IMC1PC_v11_CH06.qxp
Income
tax
12/4/2013
National
insurance
7:26 PM
Capital gains
tax
Page 152
IHT &
trusts
Other
taxes
Tax on
investments
Annual CGT exemption of 10,900 (2013/14) is deducted when computing individuals total taxable gains.
(006)IMC1PC_v11_CH06.qxp
Income
tax
12/4/2013
National
insurance
7:26 PM
Capital gains
tax
Page 153
Page 153
IHT &
trusts
Other
taxes
Tax on
investments
Exempt assets
Exempt from capital gains tax:
NS&I Savings Certificates & Premium Bonds
Betting & lottery winnings
Foreign currency, for private use
Gilts (Government stocks)
Qualifying corporate bonds
Tangible movable property up to 6,000 per item
Wasting assets (life of 50 years or less)
Private cars
Investments in ISAs, Enterprise Investment
Scheme & Seed EIS
Own home (principal private residence)
6: Taxation
(006)IMC1PC_v11_CH06.qxp
Income
tax
12/4/2013
National
insurance
7:26 PM
Capital gains
tax
Example
Donna has taxable income of 22,000. In 2013/14, she
sold shares for 42,000 that she had bought five years
ago for 28,000. The annual CGT exemption is
10,900. What CGT must Donna pay?
Solution
42,000 28,000 = 14,000 net gain.
14,000 10,900 = 3,100 taxable gain.
22,000 [income] + 3,100 = 25,100, within the basic
rate band.
Donna must pay CGT of 18% x 3,100 = 558.
Page 154
IHT &
trusts
Other
taxes
Tax on
investments
CGT planning
Ways to mitigate extent of CGT liabilities:
Spread ownership of assets among family
members
Phased encashments
Realise paper loss
Sell shares & repurchase other shares as
substitutes
Use ISAs
(006)IMC1PC_v11_CH06.qxp
Income
tax
12/4/2013
National
insurance
7:26 PM
Capital gains
tax
Page 155
IHT &
trusts
Other
taxes
Tax on
investments
Deduct allowable capital losses from chargeable gains in the tax year in which they arise.
Any loss which cannot be set off is carried
forward to set against future chargeable gains.
Allowable losses brought forward are only set
off to reduce current year chargeable gains less
current year allowable losses to the annual
exempt amount.
Example
Zo made chargeable gains of 12,200 in
2013/14. She had brought forward capital losses
of 7,000.
Page 155
6: Taxation
(006)IMC1PC_v11_CH06.qxp
Income
tax
12/4/2013
National
insurance
7:26 PM
Capital gains
tax
Page 156
IHT &
trusts
Other
taxes
Tax on
investments
Marriage exemptions
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Income
tax
National
insurance
12/4/2013
7:26 PM
Capital gains
tax
Page 157
IHT &
trusts
Other
taxes
Tax on
investments
IHT planning
Potentially Exempt Transfers (PETs). Gift made
by individual in lifetime is potentially exempt IHT
provided not made in last 7 years of life
Gifts to trusts. Transfer to a discretionary trust will
attract IHT rate of 20% if transfer not made in last
7 years of life
Gifts with reservation of benefit (GWR) A gift
with strings attached. Still considered part of
individuals estate for IHT purposes.
Page 157
6: Taxation
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Income
tax
12/4/2013
National
insurance
7:26 PM
Capital gains
tax
Page 158
IHT &
trusts
Other
taxes
Tax on
investments
IHT on the estate is found by taking into account all transfers in 7 years before death.
IHT on each lifetime transfer made in 7 years before death is found as follows:
1 Take into account all chargeable transfers (including PETs which have become chargeable) in 7 years
before the transfer
2 Find the tax at full rates: 325,000 at 0% (2013/14); remainder at 40% then deduct any taper relief (percentage reduction in IHT charge given if transfer was made more than 3 years before death)
3 Deduct any tax already paid on the transfer
Non-dividend income
Dividend income
1st 1,000
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Income
tax
12/4/2013
National
insurance
7:26 PM
Capital gains
tax
SDLT rate
0%
1%
3%
4%
5%
7%
SDLT rate
1%
3%
4%
Page 159
IHT &
trusts
Other
taxes
Tax on
investments
(006)IMC1PC_v11_CH06.qxp
Income
tax
12/4/2013
National
insurance
7:26 PM
Capital gains
tax
IHT &
trusts
Other
taxes
Tax on
investments
Main rate
Page 160
Company profits
FY 2013 rate
> 1.5m
23%
< 300k
20%
Companies with profits falling between 300k & 1.5m pay on a
sliding scale to give an effective rate between 20% and 23%.
Losses can be offset against:
This years profits
Last years profits, or
Future years profits from same trade
(006)IMC1PC_v11_CH06.qxp
Income
tax
12/4/2013
National
insurance
Capital gains
tax
Tax on investments
Direct investments are taxed based on
relevant income tax or CGT rate.
Indirect investment
Pension funds
Individual Savings Accounts (ISAs)
Existing Child Trust Funds (CTFs)
Real Estate Investment Trusts (REITs)
Collective Investment Schemes (CISs)
& investment companies
Life insurance funds
Venture Capital Trusts (VCTs)
Enterprise Investment Schemes (EISs)
Page 161
7:26 PM
Page 161
IHT &
trusts
Other
taxes
Tax on
investments
6: Taxation
(006)IMC1PC_v11_CH06.qxp
Income
tax
12/4/2013
National
insurance
7:26 PM
Capital gains
tax
Page 162
IHT &
trusts
Other
taxes
Tax on
investments
ISAs
Junior ISA
Key points
Not an investment, but rather a tax wrapper
Cash ISA or Stocks & Shares ISA
Annual limit on how much can be invested in ISA
(11,520 for 2013/14)
Up to 50% of this can be invested in a Cash ISA
Investments within ISA not subject to income tax
or CGT
Tax paid at source (eg, 10% tax credit on
dividends) is not recoverable
Withdrawals allowed at any time
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Capital gains
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IHT &
trusts
Other
taxes
Tax on
investments
Collective investments
Unit Trusts & OEICs
In general, an authorised unit trust is treated as an investment
company, with its units being treated as shares in the company &
any distribution as a dividend. Basic principle: to make the unit trust
effectively transparent for tax purposes, with no additional tax borne
solely, because assets are held within a unit trust.
Income
Authorised and unauthorised unit trusts and OEICs pay corporation
tax at 20%. Franked income is not subject to corporation tax.
Capital gains
Authorised unit trusts & OEICs are exempt from CGT on disposals of
investments & are thus able to switch investments free of tax.
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IHT &
trusts
Other
taxes
Tax on
investments
Distributions
Life funds
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IHT &
trusts
Other
taxes
Tax on
investments
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Certain unquoted
shares & AIM shares
Gains on disposals
are not taxed (if held
for 3 years)
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IHT &
trusts
Other
taxes
Tax on
investments
Offshore funds
Reporting funds
Non-reporting funds
Income tax**
Income tax on realised gains
** When distributed
Like earlier rules they replace, the current Offshore Funds (Taxation) Regulations 2009 seek (as above) to:
Stop investors accumulating untaxed income offshore while only paying tax on realised capital gains
Apply income tax on gains by investors in funds that roll up income
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