Chapter 1: Introduction - The Financial Services Sector

Question 1

What is covered by the Financial Services sector?

Answer 1

FS covers many different types of transactions in such areas as real estate, consumer finance, banking and insurance, as well as investment funding (i.e. securities)

Question 2

Why does the Financial Services sector plays an important role in the economy?

Answer 2

FS sector is a major contributor to the economies of developed countries (i.e. employment), provides the link between organisations needing capital (i.e. a company seeking to expand) and those with the capital available for investment (i.e. pension fund), and channels money invested to those organisations.

It provides execution, payment, advisory and management services.

Question 3

What are TOP 5 Global Financial Centres?

Answer 3

1. New York
2. London
3. Singapore
4. Hong Kong
5. San Francisco

Question 4

What is a Market?

Answer 4

All exchanges are markets - electronic or physical meeting places where assets are bought or sold.

Question 5

What are the MAIN activities undertaken by the wholesale/professional financial sector?

Answer 5

1. Equity markets
2. Bond markets
3. Foreign exchange
4. Derivatives
5. Insurance markets

Question 6

What are OTHER activities undertaken by the wholesale/professional sector?

Answer 6

• Fund investment
• Investment banking
• Custodian banking

Question 7

What are the MAIN activities undertaken by the retail financial sector?

Answer 7

1. Retail banking
2. Insurance
3. Pensions
4. Investment services
5. Financial planning and financial advice

Question 8

What is an Equity Market?

Answer 8

The name given to stock markets where the shares of companies, quoted or listed (i.e. Amazon) are traded.

Best known financial markets.

Question 9

What is Market Capitalisation?

Answer 9

Total market value of a company’s shares. The share price multiplied by the number of shares in issue.

Question 10

What are a Multilateral Trading Facilities (MTFs)?

Answer 10

Systems that bring together multiple parties that are interested in buying and selling financial instruments including shares, bonds and derivatives.

Known as crossing networks/ matching engines and are operated by an investment firm or another market operator.

Question 11

What are Bond Markets?

Answer 11

Allow governments and companies to raise loans or debt finance directly from investors and then facilitate the subsequent secondary trading of the debt securities created.

They are larger both in size and the volume of trading then equity markets.

Question 12

What instruments can be traded via Bond Markets?

Answer 12

Instruments traded range from domestic bonds, issued by companies and governments, to international bonds issued by companies, governments and supranational agencies (i.e. World Bank).

Question 13

What does Derivatives Markets trade?

Answer 13

Trades a range of complex products based on underlying instruments that include currencies, indices, interest rates, equities, commodities and credit risk.

Question 14

What are TWO most well-known derivatives?

Answer 14

Futures and Options

Question 15

What is the role of retail banks?

Answer 15

Provide services such as taking deposits from and lending funds to retail customers; provide payment and money transmissions services; can also offer similar services to business customers.

Larger retail banks offer other financial products such as investments, pensions and insurance.

Question 16

What is the role of Savings Institutions?

Answer 16

In the UK, known as building societies and now tend to offer similar services to those offered by banks.

Question 17

What is National Savings & Investment (NS&I)?

Answer 17

The largest single savings organisation in the UK.

It offers a range of savings products, including premium savings bonds, national savings certificates, and traditional savings products.

Question 18

What are premium bonds?

Answer 18

National Savings & Investment (NS&I) bonds that pay prizes each month. Winnings are tax-free.

Question 19

How does mutual savings institution differ from retail bank?

Answer 19

Mutual savings institutions refer to building societies that are jointly owned by the individuals who have deposited money with or borrowed money from them - “the members”

Question 20

What are ‘challenger banks”?

Answer 20

Smaller banks specialising in areas underserved by large, traditional banks by deploying modern financial technology with no community branches.

Question 21

What is Individual Savings Account (ISA)?

Answer 21

An investment option, the P2P deposit can be sheltered in a tax-free wrapper.

Question 22

What is Crowdfunding?

Answer 22

The practice of funding a project/ venture by raising small amounts of money from a large number of people.

Question 23

What are the forms of Crowdfunding?

Answer 23

• A donation
• Debt crowdfunding
• Equity crowdfunding

Question 24

What is the role of investment banks?

Answer 24

Provide advice and arrange finance for companies that want to float on a stock market, raise additional finance by issuing further shares/ bonds, and carry out mergers and acquisitions.

Also provide services for pension funds and asset managers.

Question 25

What services are provided by Investment Banks?

Answer 25

• Corporate finance and advisory work (i.e. mergers and acquisitions)
• Banking for governments, insitutions and companies
• Treasury dealing for corporate clients in foreign currencies
• Investment management for sizeable investors (i.e. corporate pensions funds)
• Securities trading in equities, bonds and derivatives

Question 26

What are Pension Funds?

Answer 26

One of the key ways by which individuals can make provision for retirement.

Pension funds are large, long-term investors in shares, bonds and cash.

Their aim is to provide a pension on retirement.

Question 27

What are Insurance Companies?

Answer 27

Insurance industry offers a wide range of protection planning products.

Insurance companies collect premiums in exchange for the cover period which are then used to buy investments such as bonds or shares.

Question 28

What is Fund Management?

Answer 28

The professional management of investment portfolios for a variety of institutions and private investors.