3.3 Product Types and Their Functions

Financial products are the building blocks through which consumer needs are met. Each product type performs one or more core functions: capital preservation, income generation, capital growth, risk transfer, or borrowing. The CeMAP FSRE syllabus requires candidates to know the main UK product types, their function, and the distinction between retail and institutional products.

Cash and Savings Products

Current accounts provide instant access to deposits and support day-to-day transactions. They are the foundation of most consumers' financial relationship with a bank. They typically pay little or no interest, but offer payment services (cheque, direct debit, Faster Payments) and are protected by the Financial Services Compensation Scheme (FSCS) up to £120,000 per eligible depositor per authorised firm (from 1 December 2025).

Savings accounts pay interest on deposits and range from instant access to fixed-term notice accounts. Individual Savings Accounts (ISAs) provide a tax wrapper: returns within the ISA are free of UK income and capital gains tax. The annual subscription limit is £20,000 for 2026/27 (frozen until April 2031). Cash ISAs, stocks and shares ISAs, lifetime ISAs (for under-40s saving for a first home or retirement), and innovative finance ISAs make up the main types.

Investment Products

Government bonds (gilts) are UK government debt instruments. They are conventionally considered low risk because the UK government has never defaulted on a sterling gilt. Yields are quoted gross; returns are subject to income tax unless held in an ISA or pension.

Corporate bonds are debt issued by companies. They typically offer higher yields than gilts to compensate for default risk. Investment-grade bonds (rated BBB- or above) are lower risk; high-yield (sub-investment-grade) bonds pay higher yields but carry higher default risk.

Equities (ordinary shares) represent ownership in a company. Returns come from dividends and capital gains. Equities carry the highest risk among mainstream asset classes but offer the best long-term growth potential. Returns are not guaranteed.

Open-Ended Investment Companies (OEICs) pool investors' money and invest in a managed portfolio. OEICs issue and redeem shares on demand, with the price equal to the net asset value per share. Unit trusts are an older but similar structure, still marketed.

Investment trusts are closed-end companies whose shares trade on the London Stock Exchange. They can trade at a premium or discount to net asset value, often issue debt (gearing), and are typically cheaper than open-ended funds.

Pensions

Pensions are long-term, tax-advantaged wrappers designed to fund retirement income. Defined benefit (DB) pensions promise a pension based on salary and service, with the employer bearing the investment and longevity risk. Defined contribution (DC) pensions (including workplace and personal pensions) accumulate a pot whose value depends on contributions and investment performance; the member bears the risk.

From age 55 (rising to 57 in 2028), the consumer can typically access a DC pension: 25% tax-free, the balance taxed as income. The Lifetime Allowance was abolished in April 2024, replaced by the Lump Sum Allowance (£268,275) and the Lump Sum and Death Benefit Allowance (£1,073,100).

Protection Insurance

Life insurance pays out on death, supporting dependants. Income protection replaces a portion of income if the policyholder cannot work through illness or injury. Critical illness cover pays a tax-free lump sum on diagnosis of a listed condition. Buildings and contents insurance covers physical property.

Mortgages

A mortgage is a loan secured on residential property. The main types are:

• Repayment — capital and interest paid each month; the loan is fully repaid at the end of the term.
• Interest-only — only interest is paid each month; the capital is repaid at the end via a separate repayment vehicle.
• Fixed rate — the interest rate is fixed for a period (typically 2–5 years).
• Variable or tracker — the rate moves with the lender's standard variable rate or a benchmark such as the Bank of England base rate.

Mortgages are regulated under MCOB (the FCA's Mortgage and Home Finance: Conduct of Business sourcebook). Advisers giving mortgage advice must hold a suitable qualification (for example, CeMAP).

Cash vs Investments

Retail vs Institutional Products

Retail products are designed for individual consumers and marketed under retail conduct rules (COBS, MCOB). They include ISAs, personal pensions, mortgages, retail bonds, and most collectives. Institutional products are sold to professional clients and Eligible Counterparties — pension funds, insurers, asset managers — and are subject to lighter conduct rules on the assumption that the buyer is sophisticated.

Some products span both markets — for example, gilts can be bought by retail investors through a broker and by institutions directly from the Debt Management Office. Where a product is offered to retail investors, retail rules apply regardless of the underlying instrument.

Tying It Together: Matching Product to Need

The adviser's role is to translate needs into products:

For FSRE, the candidate should be able to identify the function of each product, recognise which needs it addresses, and explain its main risks. Deeper product mechanics, charging structures, and tax treatment are covered in later chapters.