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R01 > Chapter 1 > Flashcards

Chapter 1 Flashcards

1
Q

A) What are the four essential functions performed by the financial services industry?

A
  1. Providing a vehicle through which savings are protected and channelled into capital management;
  2. Providing a means by which savers’ desire for ready access to their capital can match borrowers’ requirements for long term funds, and allowing financial institutions to take positions with longer terms and potentially greater return;
  3. Allowing individuals and companies to insure against risks they do not wish to take but which others are prepared to assume in return for payment; and
  4. Allowing investors to disperse risk across a number of different investment products.
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2
Q

A) What is the difference between a bank and a building society?

A

Banks are owned by shareholders.

Building societies are owned by individuals who own share accounts with them and as a result they have no shareholders to pay dividends to.
This leaves more money to be distributed to account holders in the form of interest and allows the building society to charge slightly less interest on the money it lends.

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3
Q

A) Which UK office deals with government lending?

A

The UK Debt Management Office.

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4
Q

A) What investment vehicle represents the majority of UK debt?

A

Conventional gilts.

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5
Q

A) How does a gilt work?

A

The lender is paid a fixed coupon (interest) rate every six months. When the gilt matures, the lender is paid back either a nominal or face value investment. There are also index-linked gilts to protect against the effect of inflation.

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6
Q

A) Which governmental body offers premium bonds?

A

NS&I (National Savings and Investments)

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7
Q

A) Both people and companies can have protection against?

A
  • physical assets;
  • earnings;
  • profit potential; and
  • financial transactions.
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8
Q

A) What is a reinsurance company?

A

Some risks are too big for a normal insurance company. Therefore, a reinsurance company will take on some of the responsibility for a share of the premium.

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9
Q

A) Which two key objectives were capital markets developed to meet?

A
  1. to enable investors to invest in assets that provide the potential for real growth; and
  2. to help companies to raise money without necessarily having to borrow it from a bank.
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10
Q

A) What are shares?

A

Shares are the means in which private investors and corporations can buy ownership of a percentage of a company.

Shareholders will received a portion of the profits which will be paid to them in the form of a dividend.

Shareholders also have sway in company decisions if they control enough of the shares.

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11
Q

A) What are fixed interest stocks (bonds?)

A

They allow private investors and corporations to lend a company money in exchange for for an interest payment. Often interest is higher than a bank loan because of the increased risk that the investor will not get any return on their investment.

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12
Q

B) What are the four key components within the financial sector?

A

1) Financial infrastructure;
2) Financial markets:
3) Financial firms; and
4) Financial authorities.

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13
Q

Who oversees payment systems in the UK?

A

The Bank of England.

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14
Q

Who is the operator of the the UK’s retail payment systems and sets the standards for providers and payment systems?

A

Pay.uk

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15
Q

Who is the economic regulator for the £81 trillion payment systems industry in the UK?

A

The Payment Systems Regulator (PSR)

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16
Q

What are the objectives of the PSR?

A

1) Ensure that payment systems are operated and developed in a way that considers and promotes the interests of all the businesses and consumers that use them;
2) Promote effective competition in the markets for payment systems and services - between operators, payment service providers and infrastructure providers;
3) Promote the development of and innovation in payment systems, in particular the infrastructure used to operate those systems.

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17
Q

What is the Money market?

A

A wholesale market for commercial borrowers and lenders.

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18
Q

What are Capital markets?

A

For trading stocks and shares, fixed interest investments and derivatives (these supply capital for businesses and investments for investors.)

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19
Q

What are Commodity markets?

A

For trading physical goods (i.e. steel, oil, food ect.)

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20
Q

What are Foreign exchange markets?

A

For trading foreign currency.

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21
Q

How do insurance companies make money?

A

They invest surplus funds from their customers’ premiums for long term gain.

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22
Q

What do investment houses do?

A

They issue pooled investments like like unit trusts and open ended investment companies (OEICs.)

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23
Q

What are the core services offered by banks and building societies?

A

1) Current accounts
2) Deposit accounts
3) Mortgages

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24
Q

What are the indirect services offered by banks and building societies?

A

1) Portfolio management (discretionary and advisory services.)
2) Stockbroking services (allows customers to buy and sell securities, gilts and corporate bonds (execution-only service.))
3) Collective investments (often tied or multi tied, as apposed to independent.)
4) Insurance and pensions.

25
Q

What are bancassurers?

A

When a bank or building society offers life insurance with the help of an existing company. Advice is often tied or multi tied as the bank and insurance company are working together.

26
Q

How do life insurance companies distribute their products?

A

Via intermediaries or their own financial services sales team

27
Q

What are friendly societies?

A

Established in the 19th century as mutual self help groups with no shareholders, all profits would be repayable to the society’s members.

A friendly society is a mutual association for the purposes of insurance, pensions, savings or cooperative banking. It is a mutual organization or benefit society composed of a body of people who join together for a common financial or social purpose.

28
Q

What are multi distribution organisations?

A

These are organisations which already have a big name e.g. Tesco, who use their established reputation to expand into the financial services market, e.g. start offering pensions.

29
Q

What are the three European Supervisory Authorities? (ESAs)

A

1) The European Banking Authority (EBA);
2) The European Securities and Markets Authority (ESMA);
3) The European Insurance and Occupational Pensions Authority (EIOPA);

30
Q

What does the European Central Bank (ECB) do?

A

They coordinate and control monetary policy and interest rates in the EU states using the Euro.

31
Q

Which organisation sets the international standards on anti money laundering?

A

The Financial Action Task Force (FATF)

32
Q

Which organisation brings together the world’s securities regulators to set common standards?

A

The International Organization of Securities Commissioners (IOSCO)

33
Q

Which organisation supervises and sets common standards for the international insurance sector?

A

The International Association of Insurance Supervisors (IAIS)

34
Q

Which organisation is the primary standard setter for the prudential regulation of banks and provides a forum for banking supervisory matters?

A

The Basel Committee on Banking Supervision (BCBS)

35
Q

Which organisation represents participants in the privately negotiated derivatives industry, including interest rate, currency, commodity, credit and equity swaps?

A

The International Swaps and Derivatives Association (ISDA)

36
Q

Which organisation represents firms trading fixed income securities?

A

The Bond Market Association (TBMA)

37
Q

Which organisation is a trade association and self regulating organisation, supervising markets in international debt?

A

The International Securities Market Association (ISMA)

38
Q

What percent of the FCA’s policymaking effort has been driven by European initiatives?

A

70%

39
Q

What were the three original objectives of the FSAP (Financial Services Action Plan)?

A

1) To create a single EU wholesale market
2) To achieve open and secure retail markets
3) To create state of the art prudential riles and structures of supervision

40
Q

Which UK Government department is responsible for the regulation of the financial services market?

A

HM Treasury, under direct authority of the Chancellor of the Exchequer

41
Q

Which acts are key in the regulation and conduct of business in the financial services industry?

A

1) The Financial Services and Markets Act 2000 (FSMA)
2) The Financial Services Act 2012
3) The Bank of England and Financial Services Act 2016

42
Q

What does the Prudential Regulation Authority (PRA) do?

A

They are a part of the Bank of England, they regulate large financial institutions such as banks and insurers

43
Q

What does the Prudential Regulation Committee (PRC) do?

A

They are a committee of the Bank of England who work alongside the Financial Policy Committee and the Monetary Policy Committee.

44
Q

What is the Financial Policy Committee(FCP)?

A

A committee set up within the Bank of England to monitor the UK economy

45
Q

What is the Financial Conduct Authority (FCA)?

A

The regulator of smaller firms such as financial intermediaries and mortgage brokers.

46
Q

What are the effects of high taxation?

A

High taxation reduces the ability of consumers to spend and businesses to invest, slowing down economic growth in the private sector.

47
Q

What are the effects of low taxation?

A

Low taxation leaves more money available for private expenditure and commercial investment, stimulating economic activity.

48
Q

What are the primary aims of taxation?

A

1) To help raise revenue for the government;

2) To redistribute wealth from the better off to the less fortunate, through welfare payments and the NHS

49
Q

E) What is economic policy?

A

Economic policy is the set of actions a government proposes to take on expenditure, borrowing and the setting of interest rates to help control the country’s economy.

50
Q

The control of taxation, borrowing and government spending methods is know as?

A

Fiscal Policy

51
Q

The control of interest rates and money supply are known as?

A

Monetary Policy

52
Q

Which organisation is responsible for the control of interest rates?

A

The Monetary Policy Committee (MPC)?

53
Q

Who offers UK Government gilts?

A

The Debt Management Office (an executive agency of HM Treasury)

54
Q

Why does government borrowing have a dampening effect on the economy?

A

Because it reduces the amount of money in circulation. Whereas, once the loan is repaid, money is being pushed back into the economy - boosting it.

55
Q

What does the BoE use to influence short term interest rates?

A

The Gilt Repo Market

56
Q

What does the BoE use to influence short term interest rates?

A

The Gilt Repo Market

57
Q

What is a Repo?

A

Short for ‘sale and repurchase agreement’ where one party ells gilts to another with a legally binding agreement to purchase equivalent gilts for an agreed price at a specified future date. The interest rate implied by the difference between the sale and the repurchase prise is the repo rate.

58
Q

What is the chancellor’s inflation target?

A

2% consumer price inflation

R01 (11 decks)

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