1.3 Financial Services - Participants Flashcards
What is the definition of a Retail Bank?
Taking deposits from and lending to
retail customers.
Payment and money transmission services to retail customers.
They may also provide similar services to business customers.
What is the definition of a Savings Institution?
Most countries also have savings institutions.
Small numbers of people group together and pool their savings, allowing some members to build
or buy houses.
In the UK these are known as Building Societies which are jointly owned by the individuals who have deposited money with or borrowed money from them often described as ‘mutual societies’.
What is the National Savings & Investment (NS&I)?
In the UK the National Savings & Investment (NS&I) is the largest single savings organisation in the UK and can trace its origins back over 150 years. It offers a range of savings products, including premium savings bonds and national savings certificates, as well as traditional savings products. It is operated by the Government and so, when customers invest in NS&I products, they are lending to the Government. In return, the Government pays interest or prizes for premium bonds and offers 100% security on all deposits.
What is a Challenger Bank?
Competition to traditional banks has emerged from ‘challenger banks’. These are smaller
banks, specialising in areas underserved by large, traditional banks, and which distinguish themselves
from historic banking by deploying modern financial technology with no community branches.
What is Peer-to-Peer (P2P) Lending
In the traditional banking model, banks take in deposits on which they pay interest and then lend out
at a higher rate. The spread between the two is where they earn their profit. P2P lending cuts out the
banks, so borrowers often get slightly lower rates, while savers get far improved headline rates, with the
P2P firms themselves profiting via a fee. In exchange for accepting greater risk, savers can earn higher returns.
Can P2P deposit be included in an ISA?
Since April 2016, an Innovative Finance Individual Savings Account (ISA) has been available as an
investment option so that the P2P deposit can be sheltered in a tax-free wrapper.
What is crowdfunding?
- A donation – people simply believe in the cause or innovation.
- Debt crowdfunding – investors receive their money back with interest.
- Equity crowdfunding – people invest in exchange for equity or shares in the venture.
What does an investment bank do?
Corporate finance and advisory work, normally in connection with new issues of securities for
raising finance, takeovers, mergers and acquisitions.
• Banking for governments, institutions and companies.
• Treasury dealing for corporate clients in foreign currencies, with financial engineering services to
protect them from interest rate and exchange rate fluctuations.
• Investment management for sizeable investors, such as corporate pension funds, charities and
high net worth private clients. This may be either via direct investment for the wealthier, or by way
of collective investment schemes (CISs) (see chapter 7).
• Securities trading
What do pension funds do?
Pension funds are large, long-term investors in shares, bonds and cash. Some also invest in physical
assets, like property. To meet their aim of providing a pension on retirement, the sums of money
invested in pensions are substantial.
What do insurance companies do?
Insurance companies collect premiums in exchange for the cover provided. This premium income is
used to buy investments such as shares and bonds and as a result, the insurance industry is a major
player in the stock market. Insurance companies will subsequently realise these investments to pay any
claims that may arise on the various policies. The UK insurance industry is the largest in Europe and the
fourth largest in the world after the US, China and Japan.
What do fund managers do?
The UK is the largest centre for fund management in Europe, second in size globally only to the US.
The fund management industry in the UK serves a large number of domestic and overseas clients and
attracts significant overseas funds. Fund managers, also known as investment or asset managers, run portfolios of investments for others.
They invest money held by institutions, such as pension funds and insurance companies, as well as
for collective investment schemes (CISs), such as unit trusts and open-ended investment companies
(OEICs) for wealthier individuals. Some are organisations that focus solely on this activity; others are divisions of larger entities, such as insurance companies or banks.
What are Stockbrokers and Wealth Managers?
Stockbrokers traditionally arranged trades in financial instruments on behalf of their clients, which
include investment institutions, fund managers and private clients. Today, most of these are institutional
brokers who make their money by using their discretion and skill to execute large trades in the market.
Others are execution-only brokers (see section 4.3) that offer trading services to retail clients. These
firms earn their profits by charging commissions on transactions.
What do Custodian Banks do ?
Custodians are banks that specialise in safe custody services, looking after portfolios of shares and
bonds on behalf of others, such as fund managers, pension funds and insurance companies.
The core activities they undertake include:
• holding assets in safekeeping, such as equities and bonds
• arranging settlement of any purchases and sales of securities
• processing corporate actions, including collecting income from assets, namely dividends in the
case of equities and interest in the case of bonds
• providing information on the underlying companies and their annual general meetings
• managing cash transactions
• performing foreign exchange transactions when required, and
• providing regular reporting on all their activities to their clients.
Competition has driven down the charges that a custodian can make for its traditional custody services
and has resulted in consolidation within the industry. The custody business is now dominated by a small
number of global custodians, which are often divisions of investment banks.
What are Platforms?
Platforms are online services used by intermediaries, such as independent financial advisers (IFAs), to
view and administer their clients’ investment portfolios.
They offer a range of tools which allow advisers to see and analyse a client’s overall portfolio and
to choose products for them. As well as providing facilities for investments to be bought and sold,
platforms generally arrange custody for clients’ assets. Examples of platforms include those offered by
Cofunds and Hargreaves Lansdown.
The term ‘platform’ refers to both wraps and fund supermarkets. These are similar, but while fund
supermarkets tend to offer wide ranges of unit trusts and OEICs, wraps often offer greater access to
other products too, such as ISAs, pension plans and insurance bonds. Wrap accounts enable advisers to
take a holistic view of the various assets that a client has in a variety of accounts. Advisers also benefit
from using wrap accounts to simplify and bring some level of automation to their back office using
internet technology.
Platform providers also make their services available direct to investors, and platforms earn their income
by charging for their services. The advantage of platforms for fund management groups is the ability of
the platform to distribute their products to financial advisers.
What are Third Party Administrators (TPAs)?
Third-party administrators (TPAs) undertake investment administration on behalf of other firms, and
specialise in this area of the investment industry.
The number of TPA firms and the scale of their operations has grown with the increasing use of
outsourcing. The rationale behind outsourcing is that it enables a firm to focus on the core areas of its
business (for example, investment management and stock selection, or the provision of appropriate
financial planning) and fix its costs, and leaves a specialist firm to carry out the administrative functions,
which it can process more efficiently and cost effectively.
