Chapter 1 Summary Points Flashcards
CHAPTER 1
The UK financial services industry in its European and global context
NUMBER OF QUESTIONS 6/100
1.1 The function and operation of financial services within the wider economy
Financial services are said to perform four essential functions:
- Provide access to, and protect, consumers’ savings
- Allow savings to be lent to others, to meet the borrowing demands of consumers
- Provide protection against risks, e.g. death and adverse health
- Disperse risk, by investment into many different products
Key Facts
The main role that deposit-holders play is to provide funds for lending purposes.
Accounts offered by a mutual company are likely to offer higher rates of interest than those
through a proprietary company. As a mutual company has no shareholders to keep happy,
it can offer higher rates to its members.
1.2 The role and structure of the UK and international markets
Summary
The Bank of England oversees the payment systems
The FCA regulates the Bank of England and recognised investment exchanges, and can impose sanctions and fines if necessary
The Payments Systems Regulator (PSR) regulates the entire payments industry
The Payments Council has transformed into Payments UK; a payments industry trade association
APACS is the main industry group for providers of payment systems
Key Fact
Core services are those that the organisation was originally set up to conduct; their
main activities
Indirect services are ‘peripheral to the business’ and have developed to meet
consumer needs.
The financial services industry is always full of change and this also applies to who offers what types of
service.
Core activities or services on offer are areas such as:
Current or cheque accounts
Deposit or bank savings accounts
Wills and executorship services *(an executor overseas a valid will)
Mortgages and loans
Indirect activities or services on offer are areas such as:
Portfolio management (establishing, and then managing, a variety of client investments for a fee)
Discretionary management service (buying and selling investments for a client within an agreed remit,
as part of managing a portfolio of investments)
Advisory management service (making suggestions regarding how the client’s own portfolio should be
managed, which the client must approve before any changes are made)
Execution-only service (carrying out investment portfolio changes requested by the client, so not givin
any investment advice)
Stockbroking services (buying and selling services) Offering access to collective investment schemes such as units trusts and OEICS
The impact of The financial services industry is always full of change and this also applies to who offers what types of
service.
Core activities or services on offer are areas such as:
Current or cheque accounts
Deposit or bank savings accounts
Wills and executorship services *(an executor overseas a valid will)
Mortgages and loans
Indirect activities or services on offer are areas such as:
Portfolio management (establishing, and then managing, a variety of client investments for a fee)
Discretionary management service (buying and selling investments for a client within an agreed remit,
as part of managing a portfolio of investments)
Advisory management service (making suggestions regarding how the client’s own portfolio should be
managed, which the client must approve before any changes are made)
Execution-only service (carrying out investment portfolio changes requested by the client, so not givin
any investment advice)
Stockbroking services (buying and selling services) Offering access to collective investment schemes such as units trusts and OEICS EU on UK regulation
Key Fact
It is important to note that all member states of the EU will have their own regulatory
bodies. Here in the UK we have the FCA as our conduct regulator, along with the Bank of
England (who have the PRA and FPC under their wing) and the Treasury.
UK regulation of financial services
The Treasury, under direct authority of the Chancellor of the Exchequer, is ultimately responsible for the regulation of the UK financial services market.
Two acts of parliament significantly influenced the regulation of our industry and changed its landscape:
Financial Services and Marketing Act (FSMA) 2000-
This simplified the UK regulatory framework, and created 3 new bodies:
- the Financial Services Authority (FSA) as the UK’s sole regulator and the responsibility of the Chancellor and the Treasury
- the Financial Ombudsman Service (FOS) as the sole ombudsman (handling mainly advice complaints)
- the Financial Services Compensation Scheme (FSCS) as the sole compensation scheme where a provider goes bust, is in default, becomes insolvent, etc
2nd act of parliament
• Financial Services Act 2012
This replaced the FSA as the sole UK regulator, with the creation of several new bodies, including the FCA, as part of the regulation that came into force on 1 April 2013.
This Act created three new bodies:
Financial Policy Committee (FPC)
• This is an expert authority within the Bank of England, responsible for the stability and resilience of
the system as a whole.
• It is responsible for reducing and removing systemic risk.
Prudential Regulation Authority (PRA)
• Sits within the Bank of England and regulates ‘prudentially’ large authorised firms & providers, so,
banks, building societies, investment and insurance companies, promoting their safety and
soundness.
• It has responsibility for the authorisation and financial monitoring of large firms such as banks and
insurance companies, as they represent the biggest risk to the soundness of the UK financial
services market as a whole.
•There is a Prudential Regulation Committee (PRC) within the PRA that replaced its board in 2017.
Financial Conduct Authority (FCA)
• The FCA is responsible for regulating conduct in retail and wholesale financial markets, and the infrastructure that supports those markets. It is in charge of conduct and responsibility issues that were previously undertaken by the FSA, and also authorises smaller firms.
• It is responsible for the prudential regulation of all firms not covered by the PRA (smaller, lower-
risk firms).
• It also regulates consumer credit, since 2014.
Responsible for FOS, the FSCS and the Money Advice Service all of which are funded through levies.
The current regulatory model means that some organisations have two groups of supervisors:
The PRA for their financial prudence and the FCA for their conduct.
CHAPTER 1 SUMMARY
1.1: The function and operation of financial services within the wider economy
• Banks and building societies provide ‘safer’ havens for
consumers’ money
• They use the money saved to invest and lend to others
• The UK Government raises money for spending by
attracting investors, via the issue of GILTS and NS&I
products
• As well as saving, the public need protection against
both foreseen and unforeseen risks
- Re-insurers (e.g. Lloyds of London) will insure insurers if a risk is too great for the original insurer to bear
- Capital markets have developed, with London being a major player
• This has generated a globally-recognised, efficient system, allowing institutions and individuals to invest
their money
1.2: The role and structure of the UK and international markets
• There are four key components within the financial sector; FIRM: Firms, Infrastructure, Regulatory
authorities, Markets
• There are four types of adviser: Independent, Restricted (Whole of market), Restricted (Multi-tied),
Restricted (Tied)
• There are new entrants to the industry offering non-advised access to financial products, e.g.
supermarkets
3: The impact of the EU on UK regulation
• The Financial Services Action Plan (FSAP), adopted by the European Commission in May 1999, was key to
the EU-wide regulation of the industry
- 70% of the FCA’s policymaking is driven by EU initiatives
- The EU seeks to create a single market for wholesale financial services
- The impact of Brexit is yet to be fully determined
• The Treasury is ultimately responsible for the regulation
of the financial services industry
• The PRA authorises and regulates larger firms, from a financial stability perspective
• The FCA also authorises and regulates firms, but these are the smaller companies with less impact on the
financial system
• The FCA’s main responsibility is conduct, as its name suggests
4: The role of government
• Governments use fiscal (tax, borrowing and spending) and monetary (interest rates and money supply)
policies to provide for a stable economy
• Growth is encouraged in the UK manufacturing industry, by controlling factory gate taxation
• The Monetary Policy Committee, within the Bank of England, sets interest rates, using the REPO market,
to meet the government’s inflation targets
• The UK has a welfare and benefits culture to act as a safety-net for the population
• Department for Work and Pensions (DWP) benefits are designed as a financial safety-net, not as an
individual’s primary source of income
