CeFS Unit 2 Key Terms

Question	Answer
AER	Annual equivalent rate is the interest that will be earned on the money in one year and takes into account how often the provider pays the interest (for example, monthly or annually), the effect of compounding the interest and any fees and charges
Affinity savings account	An account linked to a particular charity or good cause. The provider makes a cash payment, from its own funds, to this charity or cause based on the average balances held in the affinity group accounts. The more supporters save in their chosen scheme, the bigger the cash payment the charity will receive.
Affordability	An important concept in helping people to choose financial products, based on budgeting and forecasting to help individuals decide what they can afford to spend.
Annual exempt amount	The annual tax-free allowance for capital gains tax.
Annuity	A financial product that pays a regular guaranteed income, in return for a lump sum paid to the product provider. It is used by people when they retire.
APR	Annual percentage rate – the total cost of borrowing over one year, including the interest charged and any fees.
Arrears	An unpaid overdue debt.
Aspirations	Things or experiences that people would like to have in the future, for example owning a home instead of renting, having a luxury holiday or buying a sports car.
Assets	Things that a person or a business owns. For a person their assets might include property, jewellery or financial products such as company shares.
Attitudes	People’s thoughts and feelings, at a given time and place, about another person, an event or an issue. Usually quite general and limited to socially significant issues or events, they can be changed by circumstances, events, experience or advice.
Audit	An evaluation of a person’s finances.
Balance	Income minus expenses.
Bank Rate	The interest rate that the Bank of England uses when it lends money to other banks. Financial services providers take account of the Bank rate when they decide how to set interest rates on their own products.
Bankruptcy	A situation in which a person cannot pay their debts and is the subject of a court order that shares out their assets between their creditors.
Beliefs	Specific and detailed personal convictions about how things are. They can be religious but also otherwise, and can be ‘absolute’ (A is acceptable but B is not) or ‘causal’ (cause A leads to effect B).
Beneficiary	In relation to trusts, a beneficiary is a person whose property is held as part of a trust and looked after by a trustee. See also trust.
Benefit	A government payment made to individuals who meet specific conditions to help them meet their living expenses. For example, people who are unemployed, unable to work because they care for a disabled person, or have a disability may be entitled to benefits if they meet the criteria.
Brand	The name of the provider and what it signifies to the customer – eg security, trustworthiness, innovation, etc.
Broker	A person or organisation that earns commission by arranging transactions between buyers and sellers.
Budget	A plan of expected incomings and outgoings over a set time period such as a month. The Budget is also the term given to the government’s annual spending plan, which the Chancellor (see below) sets out in the House of Commons in March each year.
Budget deficit	A situation in which outgoings exceed income.
Budget surplus	A sum of money available once all the essential expenditure in a given period, eg a month, has been made.
Buy-to-let mortgage	A long-term secured loan taken out by a person who is buying a property with the intention of letting it to tenants.
Capital	The money or other assets owned by an individual or a business. In the case of a financial services provider, it refers to the funds provided by the shareholders, not deposits from customers.
Capital gains tax	A tax payable on the gain (profit) made when you sell or give away an asset, for example property or shares. Each person is allowed to make a certain level of profit before being taxed on it (see annual exempt amount above).
Capital growth	An increase in the market value of an investment, over and above the amount the investor paid for it or paid into it.
Capital sum	The total amount borrowed or saved / invested, before the addition of interest. For instance it can refer to the amount borrowed with a mortgage loan, or the amount paid into an investment product.
Cash flow analysis	Putting a monthly budget together by looking at cash inflows and outflows and calculating the net balance at the end of a specified time period.
Cash flow forecast	A plan of expected incomings and outgoings over several time periods, such as the next three months.
Cash ISA (individual savings account)	An account that pays interest tax-free on cash savings up to a certain level.
Children’s Bond	An investment bond taken out by a parent, legal guardian or (great) grandparent for a child under the age of 16. Investing between £25 and £3,000, the investor is guaranteed interest at a fixed rate for five years, after which the Bond matures. A nominated parent or guardian controls the Bond until the child reaches 16
Child Trust Fund (CTF)	A long-term savings account only available to children born between 1 September 2002 and 2 January 2011. CTFs were set up by the government to encourage people to build up savings for their children
Citizens Advice	A charity providing free, independent, confidential and impartial advice on citizens’ and consumers’ rights and responsibilities.
Civil partnership	A legal union between same-sex couples.
Collective investments	Investment products such as unit trusts or open-ended investment companies (OEICs) that let many retail investors pool their money together.
Commodity	Goods that share the same characteristics wherever they are produced and whoever produces them – unlike a manufactured product, where different manufacturers can add specific features. Examples include raw materials such as iron ore, gold and silver, or agricultural produce such as wheat and rice.
Competitive demand	A situation in which two or more products fulfil the same need or want and therefore are in competition with each other for the customer’s money – eg different types of savings product.
Consolidation loan	A loan used to pay off a number of different debts, meaning that there is then only one payment to make each month, to the loan company.
Consumer credit	This is another term used for borrowing. It is important to understand that ‘taking credit’ or ‘buying on credit’ refers to borrowing. However, a credit into a bank account means paying money in.
Consumer durable	A useful product with an expected long life (eg TV, car).
Corporate bond	A product that companies can use to borrow money over periods of five years or more. The company offers a number of bonds for sale; buyers can then sell the bonds on to other investors if they wish. A key difference between bonds and shares is that bondholders do not own a share in the company.
Corporate social responsibility (CSR)	Any action or project in which a company goes beyond the interests of its shareholders and senior management in order to benefit other stakeholder groups, normally with either a social or an environmental purpose. Also known as citizenship or sustainable responsible business.
Corporation tax	A card that allows the holder to make purchases face to face, online or over the phone, and to withdraw cash from an ATM. Unlike a debit card, where the money is taken from the holder’s own account, transactions are paid by the card provider. The card holder repays the amount owed to the provider either in one payment or in instalments. The provider charges interest on cash withdrawals from the time the withdrawal is made and on purchases after a certain period.
Credit history	A record of money borrowed and repaid by an individual. These records are held by credit reference.
Credit rating	An assessment of an individual’s creditworthiness – their eligibility to borrow money – based on their record of money borrowed and repaid.
Credit reference agency	An independent organisation that maintains records of people’s credit history –that is, what they have applied to borrow, what they have actually borrowed and whether they have paid it back. The data is provided by lenders.
Credit report	Details of money borrowed and repaid by an individual. These records are held by credit reference agencies and providers will check them when a prospective customer applies for a borrowing product.
Credit union	A mutual organisation (that is, owned by its members) that provides a range of financial products eg savings accounts and personal loans to members. Members of a credit union must share a common bond eg all work for the same employer or all work in the same district
Creditworthiness	The extent to which an individual is seen as being likely to pay back any money they borrow.
Critical illness insurance	Insurance that pays out a guaranteed cash lump sum if the insured person dies or is diagnosed with a specific critical illness.
Culture	A society’s set of norms about behaviour and attitudes across social groups. It indicates what society considers to be acceptable and unacceptable.
Culture (organisation)	An organisation’s set of norms and shared values about behaviour and attitudes. It indicates what an organisation considers to be acceptable and unacceptable, and how it expects people to behave
Debt management plan	A detailed plan drawn up by a debt management company (DMC) and sent to an individual’s creditors (people and organisations to which they owe money). It sets out an affordable monthly payment shared between the creditors.
Default	To fail to repay borrowing when the repayment is due.
Dependant	A person who is financially reliant on someone else, eg a child on a parent or guardian.
Deposit	A sum of money placed by a customer with a financial services provider.
Depreciate	To fall in value below the amount paid for it.
Discount mortgage	A variable-rate mortgage that gives the customer a set discount off the provider’s standard variable rate (SVR) for an agreed period. The rate charged can still rise or fall.
Discretionary expenditure	Spending on products and services that people want now, and savings towards items they aspire to buy in the future; it is spending that people choose, rather than have to do.
Distribution channel	The medium through which information is transferred to its intended recipient, eg email, telephone. In financial services, it refers to the way a customer can contact their provider and manage their account. It is also referred to as a communication channel.
Diversification	Spreading investments across a range of different products, funds or types of asset so as to reduce the potential impact of any doing particularly badly.
Dividend	A payment of profits from a company to its shareholders, often at twice-yearly intervals, either as cash or (depending on the plan) as further shares or reacquisition of shares.
Downsize	To reduce in size or number for financial reasons; it is often used to describe people’s decision to move to a smaller home, or a business’s decision to reduce the number of staff it employs
Earnings threshold	A minimum amount of earnings set by a provider, below which it will not allow a person to purchase the related product. HM Revenue & Customs also uses earnings thresholds for various reasons, eg to determine when someone has to start paying back a student loan, or paying Class 4 NI contributions
Economic sustainability	Concerned with reducing the undesirable consequences of economic activity by maintaining consumption on a sustainable scale
Electoral roll	A record of all citizens registered to vote.
Endowment policy	An insurance product that pays out a lump sum after a specified term or if the insured person dies before the end of the term. Endowment policies are often used as a way of saving over the long term
Environmental sustainability	Concerned with reducing the negative human impact on the earth’s ecosystems.
Equity	This has two meanings: a) when talking about investments, an equity is another name for the shares of a company quoted on the Stock Exchange; b) when talking about property, it refers to the difference between the value of a property and the amount of money still outstanding on the mortgage.
Essential expenditure	Spending on items required to live, eg rent or mortgage repayments, food and drink, water supplier, gas and electricity.
Estate	The sum of a person’s assets minus all debts and obligations. Also known as net worth.
Ethical investing	When someone chooses to save in a way that means the money will be used for what that individual considers to be good purposes. Ethics are a set of ideas about what people believe is morally right.
Ethical investment	An investment made in a company that takes into account the wider impact of its activities on society and the environment.
Ethical Investment Association (EIA)	An organisation that brings together and gives support to financial advisers who want to promote green (environmentally friendly) and ethical investment.
Ethics	The moral principles that govern a person’s behaviour or the conducting of an activity. It is particularly important in the financial sector because money and finance depend on trust.
Equity	This has two meanings: a) when talking about investments, an equity is another name for the shares of a company quoted on the Stock Exchange; b) when talking about property, it refers to the difference between the value of a property and the amount of money still outstanding on the mortgage.
Equity withdrawal	Additional borrowing based on the difference between the value of a house and the outstanding mortgage
Exchange rate	The price of one currency in terms of another; for example, it enables people to calculate how many US dollars can be purchased with one pound sterling.
Feedback effect	The notion that thoughts and feelings have a direct influence on behaviour. As expectations can be self-fulfilling, people’s own attitudes affect the outcome of events
Final salary scheme	A type of occupational pension that pays an income related to the amount of the last salary an individual earned before retirement.
Financial Conduct Authority (FCA)	One of the two main regulators of financial services in the UK (the other is the Prudential Regulation Authority).
Financial footprint	The record or ‘footprint’ that every financial transaction, and thus every person, leaves behind them. This includes: outstanding debts; missed payments; loan applications; increases in borrowing; and previous borrowing.
Financial Ombudsman Service (FOS)	An independent body set up by Parliament that settles customer complaints about providers at no charge to consumers.
Financial personality	A person’s attitude to risk and the way they manage their money. The key factor in an individual’s decision-making process when choosing a financial product.
Financial Services Compensation Scheme (FSCS)	A compensation scheme that pays compensation to account holders of up to £85,000 per provider if the provider is in default (in other words cannot pay account holders the money they have in their accounts).
Financial planning	Planning one’s expected incomings and outgoings over the short, medium or long term.
Fixed interest	Paying the same rate of interest until the end of the savings, investment or loan term.
Fixed-rate mortgage	A mortgage loan whereby the interest rate is fixed for a stated number of years at the beginning of the mortgage. This benefits the borrower if interest rates rise during the fixed period, but not if they fall.
Flexibility	In financial terms, an individual’s ability to react to unexpected events. A financial plan should take such events into account, allowing a person to make changes to the plan when necessary.
Friendly society	A mutual organisation that offers its members a wide range of financial products.
FTSE 100	The Financial Times Stock Exchange Index, known as the ‘footsie’. It is an index of the share price of the 100 companies with the highest ‘market capitalisation’ (total value of issued shares) listed on the London Stock Exchange.
Gilt	A bond issued by the UK government – it is a way for the government to borrow money. Most gilts are issued with a redemption date, that is the date at which the government agrees to buy them back. Between their issue and the redemption date the gilts can be traded.
Government bond	A bond issued by a national government – it is a way for the government to borrow money. Gilts (see above) are bonds issued by the UK government.
Hedge fund	An organisation that takes in funds from investors such as pension companies, insurance companies and very wealthy individuals and invests those funds to try to get a high return. Investment in such funds is seen as a high risk.
Hire purchase	A type of secured consumer credit to finance items such as cars and furniture, which involves the borrower repaying over a number of years.
HMRC	Her Majesty’s Revenue and Customs – the organisation that collects taxes on behalf of the government.
Ijara mortgage	A form of Islamic mortgage. The provider purchases the property, takes the legal title and sells the property to the customer at the purchase price. The customer makes repayments over an agreed number of years and also pays rent to the provider for the use of the property. At the end of the agreed term, the ownership of the property is transferred to the customer.
Impact of risk	The effect on someone’s life of sustaining loss or damage.
Income	Earnings, savings and interest payments received.

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CeFS Unit 2 Key Terms

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