6.3 - Major World Events Flashcards
Factors that affects all economies:
- Recession
- Price of commodities
Commodity definition
A resource that is bought and sold on commodity markets e.g. oil
A fall in oil prices is good for who and bad for who?
- Good for countries such as the UK, who imports most of its oil and gas
- Bad for exporters such as Saudi Arabia
How do governments find money to pay for a war?
- Raise taxes
- Borrow more
What is the effect of increasing taxes?
- Reduces the take-home pay of employees earning more than the annual tax-free allowance
- Increases rate of inflation
How can governments borrow money to finance a war?
Issuing government bonds
What are government bonds known as in the UK?
Gilt-edged security
How do the government ensure that investors buy enough bonds?
By offering higher interest rates
What does war result in investors doing?
Investing in safer products
How do providers respond to war?
By developing new financial products designed to appeal to a nervous public e.g. products with built-in guarantees
What terms do many insurers have in their policies to do with war?
They will not pay out compensation for damaged to property resulted from war.
How is the insurance industry being affected by the weather?
More frequent and larger claims for extreme weather events
Why are UK insurance premiums for house insurance likely to increase?
As a direct result of serious floods
What are some insurance companies doing in response to serious floods?
No longer insuring certain properties or pushing premiums up so that they are unaffordable
How are houses near the coast effected by weather?
Coastal erosion means that the property value decreases as the houses become closer to cliffs.
What have big businesses been plagued by in relation to accounting?
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
When ill-advised mergers happen and the problem-hit company’s shares fall, what can this mean?
- Sudden loss in wealth for shareholders
- Stock market uncertainty - other companies may be affected
- Calls for better controls on companies and what they do
What is a result of problems coming from ill-advised mergers?
- 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
What is the responsibility of the company’s compliance department?
To ensure that a company acts fairly and ethically, and abides by all relevant laws.
Who is the compliance department under the direction of?
Directors and auditors
What is the duty of directors?
To care to the shareholders in the company but they have recently taken on duty to care for the interest of all stakeholders
What happens if directors do a bad job of caring to stakeholders?
The shareholders can sue them for ‘breach of fiduciary duty’
What is the duty of auditors?
To check the accuracy of published accounts, for the protection of shareholders and other stakeholders
What has happened in cases where auditors have failed to identify problems with accounts that they should have found?
They have been sued and had to pay compensation to people who have lost money as a result
Why can auditors be sued?
Because people trust the accuracy of the accounts that have been audited.
What is the European Commission working towards?
The application of:
- A single set of accounting standards across the EU (the International Accounting Standards)
- A single set of auditing standards
What will a single set of accounting and auditing standards across the EU mean?
That investors in companies subject to these standards should at least know that the rules being applied are consistent.
Why are institutional investors supportive of improved regulations?
If individuals believe that they cannot invest safely in shares and collective investments, they will not buy these products.
What are the three approaches of different governments?
- 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
Why might the government encourage people to set up their own pensions?
To reduce the pressure on state pension funding
Example of government activity not having the desired effect
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
Example of a carefully planned change
Expansion of the EU
How has the EU changed?
It began in 1958 as the European Economic Community (EEC) comprising of just six member states and has grown to 28 members
Why did the value of the euro fall?
- 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.
What does it mean for a new country joining the EU?
The providers from these countries will be able to offer products to consumers in other EU countries.
Example of a fund that invests in European emerging markets
The Jupiter Emerging European Opportunities Fund
Effects of people moving from new EU member countries to other EU member countries:
- 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.
