Chapter 1

Question 1

What is the role of the financial services sector in economies?

Answer 1

It links organisations needing capital with those having capital for investment and is crucial in both advanced and developing economies.

Question 2

What are the three core functions of the financial services sector?

Answer 2

Investment Chain, Risk, and Payment Systems.

Question 3

Describe the concept of the investment chain.

Answer 3

It is a framework illustrating the flow of capital from savers to businesses in financial markets, connecting savers with businesses seeking capital.

Question 4

How does the financial services sector manage risk?

Answer 4

Through pooling investment risks, insurance for unforeseen events, and sophisticated derivatives for managing market uncertainties.

Question 5

What is the significance of payment systems in the financial services sector?

Answer 5

They are critical for managing money, facilitating transactions, and enabling international trade and investment.

Question 6

What does the Global Financial Centres Index evaluate?

Answer 6

It assesses the rankings and future competitiveness of financial centers based on business environment, human capital, infrastructure, financial sector development, and reputation.

Question 7

What is the difference between the wholesale and retail sectors in finance?

Answer 7

Wholesale (professional or institutional) sector involves large-scale trading and financial services, while the retail sector focuses on services provided to individual customers.

Question 8

What are equity markets and their significance?

Answer 8

Equity markets, or stock markets, facilitate the trading of company shares and are crucial for raising capital and investment.

Question 9

What role do bond markets play in finance?

Answer 9

They enable governments and companies to raise debt finance directly from investors and facilitate secondary trading of debt securities.

Question 10

Describe the Foreign Exchange (FX) markets.

Answer 10

FX markets are global marketplaces for currency exchange and are vital for international trade and managing currency risks.

Question 11

What are derivatives markets?

Answer 11

Markets where financial products based on underlying assets like currencies, indices, and commodities are traded, used for hedging and speculation.

Question 12

What is the role of insurance markets?

Answer 12

They specialize in managing personal and corporate risks and are significant investors in equity and bond markets.

Question 13

What services are provided by investment banks?

Answer 13

They offer finance-raising and advisory work, securities trading, treasury dealing for corporate clients in currencies, and investment management for investors, pension funds, and high net worth individuals (HNWIs).

Question 14

What are the primary functions of custodian banks?

Answer 14

Custodian banks specialize in safekeeping investments like shares and bonds, arranging settlements of securities transactions, asset servicing, managing cash transactions, performing FX transactions, and providing regular portfolio reporting.

Question 15

What services do retail/commercial banks provide?

Answer 15

They offer deposit and lending services to retail customers, payment and money transmission services, and often other financial products like investments, pensions, and insurance.

Question 16

How do savings institutions differ from traditional banks?

Answer 16

Savings institutions, like credit unions and building societies, are typically member-owned and focus on serving their depositors and borrowers, often described as ‘mutual societies’ or ‘mutual savings banks’.

Question 17

What is peer-to-peer lending and how does it work?

Answer 17

P2P lending connects individuals or businesses seeking loans with investors willing to lend money, bypassing traditional financial institutions and allowing for direct lending and borrowing through online platforms.

Question 18

What is crowdfunding and what are its forms?

Answer 18

Crowdfunding involves raising funds for a project or venture from a large number of people and can take forms like donations, debt crowdfunding, and equity crowdfunding.

Question 19

What roles do insurance companies play in the financial market?

Answer 19

They provide a variety of products for protection planning and risk management, ranging from payment protection policies to fleet insurance, and are major investors in equity and bond markets.

Question 20

What is the role of pension funds in financial markets?

Answer 20

Pension funds are key methods for retirement planning, investing substantial sums in shares, bonds, and cash to provide pensions upon retirement.

Question 21

What do fund managers do?

Answer 21

Fund managers manage portfolios of investments for institutional investors and individuals, aiming to increase the value of their clients’ portfolios through strategic buying and selling of assets.

Question 22

What services do stockbrokers and wealth managers offer?

Answer 22

They arrange stock market trades, offer investment advice, provide wealth management services ranging from execution-only to fully managed services, and cater to diverse investor profiles.

Question 23

What are investment platforms and their benefits?

Answer 23

Investment platforms are online services that enable financial advisers to manage clients’ portfolios, offering tools for analysis, trading, and custody, thus simplifying back office operations and execution.

Question 24

What services do private banks offer?

Answer 24

Private banks provide wealth management, estate planning, tax planning, insurance, lending, and lines of credit, mainly targeted at high net worth individuals (HNWIs).

Question 25

What are sovereign wealth funds and their objectives?

Answer 25

SWFs are state-owned investment funds that manage a variety of assets to achieve financial objectives, focusing on high returns and global diversification, often established from government surpluses or resource exports.

Question 26

What is the role of third party administrators in the investment industry?

Answer 26

TPAs specialize in investment administration on behalf of other firms, allowing these firms to focus on core business areas while TPAs efficiently handle administrative functions.

Question 27

What does financial planning entail?

Answer 27

It involves professional assistance in organizing financial affairs to achieve financial or lifestyle goals, including tax planning, asset management, and debt management.

Question 28

What is the difference between independent and restricted financial advice?

Answer 28

Independent advisers offer unbiased advice based on a comprehensive analysis of all market products, whereas restricted advisers advise on a specific range of products.

Question 29

What are execution-only services in financial advising?

Answer 29

Execution-only services involve carrying out investment transactions without providing advice, and the firm must clarify that no advice was given and it’s not responsible for assessing the product’s suitability.

Question 30

What is robo-advice in financial services?

Answer 30

Robo-advice provides financial advice based on algorithms and data analysis, offering automated, efficient investment strategy implementation without human interaction.

Question 31

How are technological advances impacting the financial services sector?

Answer 31

Advancements in technology and demand for sustainable solutions are making financial services more accessible, with lower barriers to entry and a wider range of products.

Question 32

What is ESG investing and its considerations?

Answer 32

ESG investing involves considering environmental, social, and governance factors in investment decisions, reflecting the ethical, moral, and socially responsible beliefs of the investor.

Question 33

What is the role of industry trade and professional bodies in the financial services sector?

Answer 33

They ensure cooperation between firms, represent industry views to governments and regulators, and facilitate cross-firm developments for market efficiency.

Question 34

What are the functions and characteristics of Sovereign Wealth Funds (SWFs)?

Answer 34

SWFs are state-owned investment funds that manage a variety of assets to achieve financial objectives. They focus on high returns and global diversification and are established from government surpluses or resource exports.

Question 35

What are the challenges and guiding principles associated with SWFs?

Answer 35

SWFs face challenges like lack of transparency and political influence on investments. The Santiago Principles guide them towards increased transparency and ethical investment practices.

Question 36

What does financial planning as an investment distribution channel involve?

Answer 36

It involves professional assistance to individuals, families, and businesses in organizing their financial affairs to achieve financial or lifestyle goals, including tax, asset, and debt management.