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Subject core v2

31856 – Demonstrate and apply knowledge of the financial sector to provide financial advice solution
31857-Demonstrate and apply knowledge of key factors in the economic environment to provide financial advice solutions

By the end of the assignment you will be able to: 

US31856:  (LO1) demonstrate knowledge of financial markets, systems, and market participants
(LO2) demonstrate knowledge of financial products and services;

(LO3)apply knowledge of financial markets, systems, participants, and services and products to provide financial advice solutions in a general financial services context.

US31857: (LO1) demonstrate knowledge of key factors in the economic environment that impact participants in the financial services sector; and

(LO2) apply knowledge of factors in the economic environment to provide financial advice solutions.

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Task 1 (LO1)

This task assesses your understanding of the economic factors and their impact on New Zealand’s economic environment and participants in the financial services sector.

Six key factors are listed in the table below. For each factor,

  •  describe what the factor is, and
  • explain how it can impact participants in New Zealand’s regulatory and financial environment..

Where indicated, please provide the minimum number of examples requested as part of your answer.

Participants may include any or all of the following:

  • FMCA-licensed market participants
  • Insurance companies
  • Reinsurance companies
  • Trustee corporations
  • Licensed supervisors
  • RBNZ licensed and unlicensed participants (e.g. banks and non-bank deposit taking lenders (NBDTLs))
  • FMA
  • AML/CFT supervisors
  • FAPs including FAs and NRs

An example using the Official Cash Rate (OCR) has been completed for you

Key factor Description Explanation of impact Official cash rate (OCR) The Official Cash Rate (OCR) is the interest rate set by the Reserve bank in accordance with the decision made by the Monetary Policy Committee to meet the inflation target specified in the Policy Targets Remit (PTR).

The OCR was introduced in March 1999 and is reviewed seven times a year by the Committee. Monetary Policy Statements are issued with the OCR on four of those occasions.

The OCR is a tool used to help control inflation. Interest rates can go up/down or remain the same in response to the OCR.

Can impact on the level of borrowing a customer can make.

Affects return rates on savings and term deposits Rate of Inflation Economic events

(Under description please provide a minimum of three specific examples of economic events) (Minimum of three examples)

Political events

(Under description please provide a minimum of three specific examples of political events) (Minimum of three examples)

Natural disasters

(Under description please provide a minimum of two specific examples of natural disasters) (Minimum of two examples)

Legislative and regulatory changes

(Under description please provide a minimum of three specific examples of legislative or regulatory changes) (Minimum of three examples)

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Task 2   (US 31857 2.1, 2.2) (LO2)

This task requires you to identify key factors in the economic environment and how those factors might impact on clients and the financial advice solutions that are suitable.

Please read carefully through the scenario below and base your answer on the clients’ circumstances.

Using the given scenario:

  • Identify five (5) key economic factors and how each could change and impact on Simon and Judith’s financial situation, then
  • describe an appropriate financial advice solution you can provide them with, and
  • explain why it is appropriate.

When answering the questions, think about how it impacts on their insurances, mortgages and investments.

Note that the answers to this question may not be found directly in the manual. Candidates are expected to build on the knowledge from the manual and think about its implications on the given scenario. You may need to do some research into the potential impact and possible solutions.

Consider all three financial services areas – insurances, mortgages and investments, to determine the impact of the economic factor. For each economic factor, you must provide a financial advice solution for at least one area.

An example has been provided for you using an increase in the OCR.

Economic factor that could change and impact on Simon and Judith’s situation Financial advice solution (at least in one of the areas below)

Explain your solution and why it is appropriate Economic Factor: Increase in OCR by 0.5% Mortgage: Restructure mortgage asap if repayments are a struggle Analyze if better to use some or all of the $70,000 on term deposit to reduce the loan principle and make the mortgage more affordable.

Insurance: Restructuring their insurance cover to reduce outgoings.

Investment: Look at alternatives for term deposit. Take advantage of current lower interest rates today, to improve affordability – i.e. their ability to service their mortgage.

Look at increasing excesses to reduce premium.

Term deposit rates likely to increase when the OCR increases but may get better return investing elsewhere.

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Task 3   (US 31856 1.1) (LO1)
For this task you are required to demonstrate your knowledge of the different financial markets and systems.

For the financial markets and systems listed in the table below:

  • In your own words, describe the system (what it is) and
  • Explain its role (what it does) – a minimum of two (2) points is required.

An example describing the tax system has been provided for you.

Financial market/system Description Role (what it does) – minimum of two (2) points Tax system The tax system is the set of rules and regulations used by a government to assess and collect tax monies.

This money is redistributed by the government to pay for government services. Provides for collection of monies by the government for re-distribution to pay for government services.

To provide a system of paying for public goods and services that is supposed to ensure that each person/entity is taxed on the basis of their ability to pay and all pay their ‘fair’ share. Share market Bond market  Insurance market Lending services Blockchain.

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Task 4    (31856 1.2) (LO1)
There are a large number of participants in New Zealand’s financial markets and systems – both institutional and individual. The participants work together to support the operation of New Zealand’s financial markets and the economy.

For the participants listed in the table below, using your own words, describe the role (s) of that participant in New Zealand’s financial markets and systems.

An example of a participant, financial advisers, has been completed for you.

Participant Role(s) of the participant Financial advisers Provide financial advice on behalf of a FAP. Advise clients on how to achieve their stated goals, and where appropriate sell financial products and services.

Provide on-going advice and support to the client to ensure the product or service continues to remain fit and appropriate for the client. Meet conduct and disclosure requirements. Educate the client . FMCA licensed market participants

Insurance companies Re-insurance companies Trustee corporations Licensed supervisors RBNZ-licensed participants Banks Non-bank deposit takers Non ]  bank lending institution Financial Markets Authority (FMA) AML/CFT supervisors Financial advice providers Nominated representatives

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Task 5   (31856 2.1) (LO2)

The table below lists the common types of financial services and products used by retail and wholesale customers. Using your own words describe each product/service.

Financial services/products Description
General insurance
Life, disability and health insurance
Direct investments
Managed investments
Banking products (cash, deposit and transaction products)
Residential property lending
Personal consumer lending
Personal trustee services

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Task 6    (31856 2.2) (LO2)

For the estate planning tools listed in the table below, outline (using bullet points):

  • The applicable law, i.e. what is the relevant Act(s) under which the tool is created?
  • The rules that apply, i.e. how the tool is created under the applicable law.
  • How it operates, and
  • What is it used for/why is it used?

An example has been provided for you.

Estate planning tool Applicable law Creation Operation What is it used for/Why is it used?

Asset ownership – individual No applicable law – is a basic right. The Protection of Personal and Property Rights Act 1988 protects rights of ownership.

A policy document/application/purchase is made out in the name of an individual The individual makes any decisions about the acquisition or disposal of the asset.

In the case of insurances, at the expiry of the policy, funds are paid to the individual named on the policy document The assets are owned solely by an individual
⦁ Wills
⦁ Asset ownership
⦁ company
⦁ Trust
⦁ POA/Enduring powers of attorney

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Task 7     (31856 2.3) (LO2)

For the types of tax listed in the table below,

  • outline (using bullet points) the key aspects of that type of tax, and
  • how it applies in relation to financial services.

An example has been provided for you.

Tax measure Key aspects and application relevant to financial services
PAYE PAYE stands for Pay as you earn. It is the system for collecting tax from your earnings during the tax year.

Deducted at source from salary & wage earners – will include deduction for ACC earner’s non work levy.

⦁ Withholding tax
⦁ GST
⦁ Personal tax rates
⦁ Company tax
⦁ Prescribed Investor Rate
⦁ Fringe Benefit Tax

Task 8    (31856 3.1, 3.2) (LO3)

Clients look to financial service providers to provide them with financial advice solutions. This task requires you to apply what you have learned about the financial markets, systems, participants, services and products, to identify a suitable financial advice product or solution based on the scenario provided.

Note that your solutions are only required to be generic and you are NOT required to identify specific products or provider.

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For each scenario given in the table below:

  • identify a suitable financial advice solution(s);
  • explain why you have chosen that solution(s), and
  • list who/what entity would be able to assist the client and would be involved.

An example has been provided for you.

Scenario Financial advice product or solution(s) Reasoning behind selected solution Who/what entity will be able to assist and/or would be involved?

Sonya has finished university and is now working full time and wants to know the best way to save for a deposit on her first house.

Enroll in a Kiwis aver Scheme. Employer and government contributions help the balance to grow.

Wide range of investment options so can choose one based on risk profile and time frame in which wants to buy a house.

Locked-in so cannot be used for other things.

First home deposit subsidy can help towards deposit after number of years of membership.

May qualify for Welcome home loan subject to meeting terms and conditions. Financial adviser.

Her employer, with enrolment.

Kiwis aver Scheme provider.

Inland Revenue, to ensure the correct PIR rate and to receive funds for on payment to Kiwis aver Scheme provider.

Sally has recently bought her first home. She has taken out a mortgage. She has no insurance cover. She wants to protect her house and ensure she can cover her mortgage.

Hone receives an inheritance of $1,000,000. He decides he wants to invest it and receive a regular income. He knows little about investing and has little time to commit to understanding financial markets or managing the paperwork.

Ali has saved $20,000 and is keen to get started investing. He has come to you for advice but wants to be able to ‘DIY’ his investments and is most keen on investing directly where he has control.

Xu heard the OCR has dropped and wants to buy her first home, having been saving for a few years. She thinks she has enough saved but wants help to see what she might be able to buy, based on the mortgage pre-approval.

Jane’s mother is requiring surgery for her hip and she is horrified at the 18-month waiting list. Jane wants to avoid being in the same situation.
Andrei and Tonya are 75 years old and comfortably living off their investments. They want to ensure that when they pass, their property and investments are split evenly between their children but protected so that the grandchildren will benefit the most.

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