CIIN Certificate CF1 flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Net worth formula

Total assets minus total liabilities, calculated at a point in time. It measures accumulated wealth rather than income or cash flow and excludes future income expectations.

Capacity for loss

A client's financial ability to absorb a fall in value without derailing goals. It differs from risk tolerance, which is the willingness to accept risk.

Suitability report

A written statement explaining why a recommendation suits the client, including costs, risks, disadvantages and alternatives considered. It must be provided before or at the point of advice.

Real return

Nominal return minus inflation. It expresses the change in purchasing power and is the relevant measure when comparing investments against rising living costs.

Compound interest formula

Future value equals present value multiplied by one plus the periodic rate raised to the number of periods. It assumes reinvestment of all returns.

Diversification

Spreading money across assets, sectors and regions. It reduces asset-specific risk but cannot remove systematic market risk affecting all investments.

Emergency fund

Accessible cash held to cover unexpected expenses, typically three to six months of essential spending. It prevents forced selling of investments or reliance on credit.

Current ratio

Liquid assets divided by current liabilities. A low figure indicates weak short-term liquidity and a limited ability to meet bills falling due within a year.

Savings ratio

Savings divided by gross income, showing the proportion of income retained rather than spent. It is a key indicator of progress toward financial goals.

Cash flow statement

A record of income received and expenditure paid over a period. The difference is net cash flow; a deficit must be funded from assets or borrowing.

Financial Ombudsman Service

The independent UK dispute-resolution body for complaints against regulated financial firms. It can order redress up to a published monetary limit per complaint.

Financial Services Compensation Scheme

The UK safety net paying compensation if a regulated firm fails. Separate limits apply to deposits, investments and insurance, generally per person per firm.

Consumer Duty

An FCA rule requiring firms to act in good faith, avoid foreseeable harm and enable customers to pursue their financial objectives, with outcomes monitored.

Personal recommendation

A recommendation to a specific person on a specific transaction, giving regulated advice. Generic information without a recommendation is guidance, not advice.

Risk tolerance vs capacity

Risk tolerance is the client's willingness to accept investment risk; capacity for loss is their financial ability to bear it. Both must be assessed and reconciled.

Vulnerable customer

A customer whose health, life events, resilience or capability raises the risk of harm. Firms must identify them and adapt communications and service accordingly.

Fixed versus variable costs

Fixed costs stay constant regardless of activity, such as rent. Variable costs change with usage, such as fuel. Budget variance analysis separates the two.

Insurable interest

A requirement that the policyholder benefits from the subject's continued existence or suffers financial loss from its loss, preventing speculative insurance.

Indemnity principle

Insurance restores the insured to their pre-loss financial position, no better and no worse. It prevents profit from a claim and underpins most general insurance.

Utmost good faith

A duty to disclose all material facts accurately when applying for or renewing insurance. Non-disclosure can allow the insurer to reduce or refuse a claim.

Term assurance

Life cover paying a lump sum only if death occurs within a fixed term. It has no maturity value and is typically cheaper than whole-of-life cover.

Income protection

Insurance paying a proportion of income while the insured is unable to work through illness or injury, usually after a deferred period until recovery or retirement.

Annual allowance

The cap on tax-relieved pension contributions per tax year. Unused allowance from up to three prior years may be carried forward under conditions.

Defined benefit scheme

A workplace pension promising income based on salary and length of service, with investment risk borne by the scheme rather than the member.

Annuity

A contract converting a pension pot into guaranteed income for life. Income depends on age, interest rates, health and the options chosen at purchase.

Personal allowance

The amount of income a UK taxpayer can receive before income tax is charged. It is reduced for higher earners above an income threshold.

Inheritance tax nil-rate band

The threshold below which an estate pays no inheritance tax. Transfers between spouses are exempt, and unused band can transfer to a surviving spouse.

Potentially exempt transfer

A lifetime gift that becomes exempt from inheritance tax if the donor survives seven years. Taper relief may reduce tax on the excess above the nil-rate band.

Gifts out of income

Regular gifts funded from surplus income that do not reduce the donor's normal standard of living. They are exempt from inheritance tax without a seven-year wait.

Capital gains tax

Tax on the profit when an asset is disposed of above the annual exempt amount. The rate depends on the asset type and the taxpayer's income band.

Client money segregation

Client funds must be held in a designated account separate from the firm's own money, protecting clients if the firm becomes insolvent.

Conflicts of interest

Situations where a firm's or adviser's interests could harm a client's. They must be identified, managed and disclosed so the client can judge the advice.