1.1 Intro To Financial Services

Question 1

What 4 properties must money have in order to be acceptable as a medium of exchange?

Answer 1

1) sufficient in quantity
2) acceptable to all parties
3) divisible into small units
4) portable

Question 2

What is inflation?

Answer 2

A sustained increase in the general level of prices of goods and services

Question 3

Money represents which 3 things?

Answer 3

1) a medium of exchange
2) a unit of account
3) a store of value

Question 4

What is a financial intermediary?

Answer 4

An entity that acts as a middleman between two parties in a financial transaction. Ie. Banks, building society

Question 5

What is disintermediation?

Answer 5

Lenders and borrowers who interact directly with each other without the use of a middleman. Eg. Crowdfunding

Question 6

What are the 4 elements of intermediation?

Answer 6

1) geographic location
2) aggregation
3) maturity transformation
4) risk transformation

Question 7

What are product sales intermediaries?

Answer 7

The intermediation that brings together product providers and potential customers. Eg. Mortgage advisors, insurance brokers, financial advisors

Question 8

What is the difference between retail banks and wholesale banks?

Answer 8

Retail banks provide payment services and savings and loans to personal individuals or smaller businesses.

Wholesale banks provide funding for other financial institutions or very large corporate clients

Question 9

What does the term ‘bancassurance’ mean?

Answer 9

A term coined to describe banks that own insurance companies (or vice versa).

Question 10

What is life assurance?

Answer 10

Insurance that provides payment (as a lump sum or an income) on the death of the person covered by the policy. Also known as life insurance or life cover.

Question 11

What is general insurance?

Answer 11

Insurance designed to cover policyholders from the financial consequences of adverse life events. Eg. Household, motor, travel

Question 12

What are the main 7 functions of the Bank of England?

Answer 12

1) issues banknotes
2) banker to the government
3) banker to the banks
4) advisor to the government
5) foreign exchange market
6) lender of last resort
7) maintains economic stability

Question 13

What is liquidity?

Answer 13

Asserts that can be quickly made available to meet an institutions liabilities without affecting the market price of those assets (eg. Cash)

Question 14

What are Gilt-Edged Securities?

Answer 14

Gilts are loans to the government.

Question 15

Which two authorities are responsible for financial stability alongside the treasury and the Bank of England?

Answer 15

The Financial Conduct Authority (FCA)

Prudential Regulation Authority (PRA)

Question 16

What is a proprietary organisation?

Answer 16

They are limited companies owned by their shareholders who have the right to share in profits in the form of dividends and to vote at shareholders meetings.

Question 17

What is a mutual organisation?

Answer 17

These are not companies and do not have shareholders. They are instead owned by their members. Eg. Building societies, credit unions

Question 18

What is demutualisation?

Answer 18

This is term used to describe the conversion of a mutual company to a proprietary company. Eg. A building society to a bank, life assurance companies

Approval is required from the members but is her really given due to the windfall of free shares. The term ‘carpetbagging’ refers to the opening of accounts in mutual companies expected to demutualise to obtain free shares and restrictions are now in place to help prevent this.

Question 19

What is a credit union?

Answer 19

A mutual organisation in which a member must meet the membership requirements, pay the entrance fee and buy at least one £1 share (ordinary or deferred) in the union. All members are equal regardless of share ownership. Credit unions offer simple savings and loan facilities.

Question 20

What must a credit union show if they wish to pay interest on savings instead of dividends?

Answer 20

Necessary systems and controls in place

At least £50,000 or 5% total assets in reserve (whichever is greater)

Question 21

What is the unique feature of credit unions?

Answer 21

Members savings and loan balances are covered by life assurance. On death any loan balance will be paid off and a lump sum to equal to savings held will be paid subject to overall limits.

Question 22

What is the interbank market?

Answer 22

The market which recycles surplus cash held by banks, either directly between banks or through the services of specialist money brokers.

Building societies may also raise funds on the interbank market but are restricted to 50% of their liabilities.

Question 23

What is Libor?

Answer 23

The rate of interest charged on the interbank market - London Interbank Offered Rate

Question 24

What is the definition of Insurance?

Answer 24

A means of shifting the burden of risk by pooling to minimise financial loss

Question 25

What is Libor being replaced with in 2021?

Answer 25

SONIA - Sterling Overnight Index Average