2 - External environment Flashcards
Name the factors of the external environment?
Corporate structure Regulation and Legislation Environmental issues and Climate Change Accounting standards Tax Economic outlook (rates, inflation, growth)
Governance Risk management requirements Adequacy of capital and solvency New business environment Demographic changes
Lifestyle considerations International practice State benefits Technology Social and cultural change
What are state benefits and their influence on the financial system?
The state provides benefits to citizens
Level of state benefits will influence the level of personal and employer-provided benefits
There are 2 effects of state benefits:
Individuals may provide less for themselves
There may be no incentive to save
Explain how tax can be charged on benefits from benefit schemes.
Benefits can be received free of tax.
Excess of benefits over contributions may be taxed.
Entire benefit may be taxed as income.
Portion of the benefit may be tax free and the rest is taxed as income.
Explain how regulation and legislation affect financial products.
Regulation influences the types of products sold.
Needs of individuals
Product innovation to avoid paying tax
Responsibility is placed on providers to demonstrate that consumers fully understand products and risks.
This results in complex products not being sold.
Inheritance tax will change the amount of money passed down.
Explain corporate governance with reference to the financial service environment.
Corporate governance is the high-level framework within which a company’s managerial decisions are made.
Aims: efficient action in interests of shareholders.
Strategies: remuneration incentives, non-executive directors, guidance by regulators.
Explain the effect of climate change on the financial service environment.
Risks and opportunities will arise.
Physical effects will influence assets held and investments made.
Decisions made by institutions will affect how the public perceives a company and climate change.
Company will need to be seen as ‘socially responsible’.
Capital demand from the government will rise.
What are the aims of regulators?
GRIP
Give confidence in the financial system
Reduce financial crime
Inefficiencies reduced and promoting orderly markets
Protect consumers
Reduce risk of insurers not being able to pay claims.
Reduce losses by policyholders
Early warning system if capital is not adequate
Ensure public confidence
What is emissions trading?
Market-based approach to reduce pollution
Government sets a limit of emissions to be emitted by sector. This limit is divided among market participants by means of permits. These permits are then traded among participants to distribute emissions.
If one wishes to emit more, buy a permit from a company that is emitting less than their permit.
What is corporate structure?
Providers can be mutual societies or proprietary companies.
Companies can be public or private.
This structure will influence the capital structure of a provider.
What are the relative merits of a proprietary provider?
These providers benefit from: easier access to capital, greater economies of scale and more dynamic management.
These benefits may pay for dividends.
Life insurers have the problem of distributing profits between with-profit policies and dividends.
What technological changes are taking place in the environment?
Distribution channels are changing.
Social media is influencing advertising.
Technological changes are changing the healthcare space with massive effects.
Data tracking is becoming more efficient.
What are the merits of a mutual society?
No shareholders - profits belong entirely to policyholders.
Better benefits for the same costs.
Finance cannot be readily raised.
Pricing is affected by surplus distribution and is done at cost.
In SA, medical schemes are legislated to be mutual societies.
Describe the demographic changes experienced globally.
Rising life expectancy.
Declining fertility.
The population is aging in general.
Consider changes to: Saving and spending habits Social welfare system Cost of healthcare Cost of education
What are some lifestyle considerations for financial product providers that need to be kept in mind when considering financial products?
Younger members:
Higher demand for loans and mortgages
Older members:
Lower demand for credit
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Why does the flow of business experience cycles?
Supply vs demand
Claim experience
Economic climate
