6.3 - Major World Events

Question 1

Factors that affects all economies:

Answer 1

• Recession

- Price of commodities

Question 2

Commodity definition

Answer 2

A resource that is bought and sold on commodity markets e.g. oil

Question 3

A fall in oil prices is good for who and bad for who?

Answer 3

• Good for countries such as the UK, who imports most of its oil and gas
• Bad for exporters such as Saudi Arabia

Question 4

How do governments find money to pay for a war?

Answer 4

• Raise taxes

- Borrow more

Question 5

What is the effect of increasing taxes?

Answer 5

• Reduces the take-home pay of employees earning more than the annual tax-free allowance
• Increases rate of inflation

Question 6

How can governments borrow money to finance a war?

Answer 6

Issuing government bonds

Question 7

What are government bonds known as in the UK?

Answer 7

Gilt-edged security

Question 8

How do the government ensure that investors buy enough bonds?

Answer 8

By offering higher interest rates

Question 9

What does war result in investors doing?

Answer 9

Investing in safer products

Question 10

How do providers respond to war?

Answer 10

By developing new financial products designed to appeal to a nervous public e.g. products with built-in guarantees

Question 11

What terms do many insurers have in their policies to do with war?

Answer 11

They will not pay out compensation for damaged to property resulted from war.

Question 12

How is the insurance industry being affected by the weather?

Answer 12

More frequent and larger claims for extreme weather events

Question 13

Why are UK insurance premiums for house insurance likely to increase?

Answer 13

As a direct result of serious floods

Question 14

What are some insurance companies doing in response to serious floods?

Answer 14

No longer insuring certain properties or pushing premiums up so that they are unaffordable

Question 15

How are houses near the coast effected by weather?

Answer 15

Coastal erosion means that the property value decreases as the houses become closer to cliffs.

Question 16

What have big businesses been plagued by in relation to accounting?

Answer 16

False, or ‘creative’ account in which an individual has falsified or hidden records, so that senior management does not know how bad the business’s finances are until it is too late

Question 17

When ill-advised mergers happen and the problem-hit company’s shares fall, what can this mean?

Answer 17

• Sudden loss in wealth for shareholders
• Stock market uncertainty - other companies may be affected
• Calls for better controls on companies and what they do

Question 18

What is a result of problems coming from ill-advised mergers?

Answer 18

• A tightening of financial regulation under the FCA, the PRA, and the bank of England
• Banks have increased amount of capital they hold to cushion them against future financial problems

Question 19

What is the responsibility of the company’s compliance department?

Answer 19

To ensure that a company acts fairly and ethically, and abides by all relevant laws.

Question 20

Who is the compliance department under the direction of?

Answer 20

Directors and auditors

Question 21

What is the duty of directors?

Answer 21

To care to the shareholders in the company but they have recently taken on duty to care for the interest of all stakeholders

Question 22

What happens if directors do a bad job of caring to stakeholders?

Answer 22

The shareholders can sue them for ‘breach of fiduciary duty’

Question 23

What is the duty of auditors?

Answer 23

To check the accuracy of published accounts, for the protection of shareholders and other stakeholders

Question 24

What has happened in cases where auditors have failed to identify problems with accounts that they should have found?

Answer 24

They have been sued and had to pay compensation to people who have lost money as a result

Question 25

Why can auditors be sued?

Answer 25

Because people trust the accuracy of the accounts that have been audited.

Question 26

What is the European Commission working towards?

Answer 26

The application of:

• A single set of accounting standards across the EU (the International Accounting Standards)
• A single set of auditing standards

Question 27

What will a single set of accounting and auditing standards across the EU mean?

Answer 27

That investors in companies subject to these standards should at least know that the rules being applied are consistent.

Question 28

Why are institutional investors supportive of improved regulations?

Answer 28

If individuals believe that they cannot invest safely in shares and collective investments, they will not buy these products.

Question 29

What are the three approaches of different governments?

Answer 29

• Protecting the consumers of financial services as much as they can
• ‘Business-friendly’ - relaxing regulation and reducing the taxes that financial services businesses have to pay
• Encouraging financial activity in the general population

Question 30

Why might the government encourage people to set up their own pensions?

Answer 30

To reduce the pressure on state pension funding

Question 31

Example of government activity not having the desired effect

Answer 31

Few providers have spent money on marketing stakeholder pensions, because the government charges on them at 1%, which makes it hard for the providers to make a profit

Question 32

Example of a carefully planned change

Answer 32

Expansion of the EU

Question 33

How has the EU changed?

Answer 33

It began in 1958 as the European Economic Community (EEC) comprising of just six member states and has grown to 28 members

Question 34

Why did the value of the euro fall?

Answer 34

• Because of the emerging economic crises in Greece, Ireland, Italy, Portugal and Spain
• Because of the cost of the stronger members of the euro area of bailing out the governments of these countries.

Question 35

What does it mean for a new country joining the EU?

Answer 35

The providers from these countries will be able to offer products to consumers in other EU countries.

Question 36

Example of a fund that invests in European emerging markets

Answer 36

The Jupiter Emerging European Opportunities Fund

Question 37

Effects of people moving from new EU member countries to other EU member countries:

Answer 37

• Financial providers may be able to recruit new employees who can speak languages that help it to sell products abroad
• Providers may develop products to suit these immigrants.