Chapter 1: The UK financial services industry: an overview Flashcards
E-Book 1 - What do banks do with the money they receive in current accounts?
They may place some of it into long-term investments and some is used to provide loans to customers.
E-Book 1 - What is the main purpose of a gilt?
The issue of gilts allows the Government to borrow money from investors in return for a fixed level of interest; it is worth noting however, that there is some variability in the interest (and capital repayment) of index-linked gilts due to their link with the movement in RPI.
E-Book 1 - Apart from physical assets, what else can be insured?
Earnings, profit potential and financial transactions.
E-Book 1 - How can changes in tax rates be used to manipulate the economy?
By changing the tax benefits of certain investments the Government can encourage people to save thus restricting growth in the economy or to unlock capital and spend savings on goods to stimulate the economy.
E-Book 1 - Does the UK welfare system offer sufficient benefits to avoid the need to make private provision?
Typically, most individuals would find that State welfare is at subsistence level, well below the standards that they currently expect.
E-Book 1 - Select which of these statements about the provision of State benefits do you think is true?
Select one answer, then select Submit to confirm.
1) The value of the State pension has increased in line with earnings in the last 20 years
2) Those retiring after 6 April 2016 receive the new State Pension
3) Most of the population now has some private medical insurance
4)State benefits are designed to protect an individual’s standard of living in times of unemployment, sickness or retirement
2) Those retiring after 6 April 2016 receive the new State Pension
E-Book 1 - Select which of the following you think is likely to happen if the Bank of England raises interest rates?
Select one answer, then select Submit to confirm.
1) People will borrow less and save more
2) People will borrow more and save less
1) People will borrow less and save more
E-Book 1 - Which of the following statements are correct when interest rates are falling?
Select one or more answers, then select Submit to confirm.
1) The rates of new guaranteed bonds and annuities will fall, and they will lose the appeal they enjoy when rates are high
2) The price of shares may decrease as companies with high levels of borrowing benefit from lower loan repayments and therefore higher profits
3) Deposit accounts become less attractive and investors may be tempted to move towards riskier investments which might be unsuitable for their risk profile
1 & 3
KC 1 - John is using the services of Jacobs & Co, who is providing advice on life assurance and pensions. The adviser has offered him advice across the whole market. His adviser is most likely to be a[n]:
Select one:
a.multi-tied adviser.
b.tied adviser.
c.restricted adviser.
d.independent adviser.
d
KC 1 - To stimulate the UK economy by using monetary policy, the UK authorities will:
a.
increase levels of Government spending.
b.
reduce interest rates.
c.
reduce income tax.
d.
reduce levels of Government borrowing.
b
KC 1 - The UK Government raises money to fund its growth and spending plans by various means, which do NOT include:
Select one:
a.
National Savings and Investments.
b.
quantitative easing.
c.
Green Gilts.
d.
Premium Bonds.
b
KC 1 - If the Bank of England starts a programme of quantitative easing, liquidity in the market will be:
Question 4Select one:
a.
increased, resulting in less Government spending.
b.
decreased, resulting in a reduction in lending.
c.
increased, resulting in higher inflation.
d.
decreased, resulting in lower levels of economic activity.
c
KC 1 - Who is ultimately responsible for the regulation of UK financial services?
Select one:
a.
The FCA.
b.
The Chancellor of the Exchequer.
c.
The Financial Policy Committee.
d.
The PRA.
b
KC 1 - For what reason was responsibility for making decisions on interest rates passed from the Chancellor of the Exchequer to the Bank of England?
Select one:
a.
So that the Chancellor could ratify decisions on the setting of rates.
b.
To bring UK practice into step with EU protocols.
c.
To remove any potential political influence from interest rate decisions.
d.
So that the Treasury could override interest rate decisions in times of crisis.
c
KC 1 - From the customer’s perspective, the benefit of having a current account with a bank is that it:
Select one:
a.
provides a hedge against inflation.
b.
offers liquidity.
c.
provides a competitive return.
d.
offers access to stock markets.
b
KC 1 - Stocks and shares, fixed interest investments and derivatives form part of which financial market?
Select one:
a.
Capital market.
b.
Foreign exchange market.
c.
Money market.
d.
Commodities marke
a
*KC 1 - One of the essential functions of UK financial services is to provide a vehicle through which savings are protected and channelled into:
Select one:
a.
strategic compatibility.
b.
asset growth.
c.
capital management.
d.
sectoral cohesion.
c
KC 1 - It is the responsibility of the Monetary Policy Committee of the Bank of England to:
Select one:
a.
set the Government’s inflation target by reference to bank liquidity.
b.
set the Government’s inflation target by reference to current interest rates.
c.
set interest rates to meet the Government’s inflation target.
d.
set interest rates to meet the supply and demand for financial products.
c
KC 1 - Which body has the role of reducing interest rates across the Eurozone to stimulate the growth of the economies within it?
Select one:
a.
The European Banking Authority.
b.
The European Securities and Markets Authority.
c.
The European System of Financial Supervisors.
d.
The European Central Bank.
d
KC 1 - A firm might obtain its authorisation from the PRA as well as the FCA if it is a[n]:
Select one:
a.
firm that does not have its registered office in the UK.
b.
major deposit-taker, offering the full range of investment products and services.
c.
intermediary that offers lending services as well as investment services.
d.
firm of independent financial advisers employing 35 or more retail investment advisers.
b
KC 1 - Angela wants to retain control of her investment decisions and be able to buy and sell securities when she wishes. The most appropriate service for her would be a:
Select one:
a.
selection of collective investments.
b.
discretionary management service.
c.
advisory management service.
d.
stockbroking service.
d
KC 1 - Jack has invested in a public company, in which he has voting rights and receives a proportion of distributable profits. He is a:
Select one:
a.
bondholder.
b.
debtor.
c.
creditor.
d.
shareholder.
d
KC 1 - To stimulate the UK economy, the Government can either increase capital expenditure or cut taxes. In the interests of growth, why might the Government choose the former over the latter?
Select one:
a.
Because an increase in capital expenditure is easier to push through parliament than tax cuts.
b.
Because increasing capital expenditure yields results much quicker than cutting taxes.
c.
Because capital expenditure can be spent at home to stimulate employment, whereas tax cuts are most likely to be spent on imports.
d.
Because an increase in capital expenditure is easier to reverse if the economy overheats.
c
KC 1 - The key role of the European Central Bank is:
Select one:
a.
acting as the lender of last resort to commercial banks within the EU Member States.
b.
setting the exchange rate between the euro and other currencies used by EU members that do not use the euro.
c.
identifying and assessing risks to the stability of the global financial system as a whole.
d.
coordinating monetary policy and interest rates in those EU Member States using the euro.
d
KC 1 - Nick works in the City, trading investments such as equities and derivatives via a trading floor. This is known as a[n]:
Select one:
a.
commodity financial market.
b.
real-time financial market.
c.
on-exchange financial market.
d.
over-the-counter financial market.
c
KC 1 - What does it mean when it is said that a firm is ‘dual regulated’?
Select one:
a.
That the firm is regulated and supervised by two different regulators, one focusing on prudential matters and one focusing on conduct.
b.
That the firm is a professional firm that also has to follow the rules of its own professional body.
c.
That the firm has two supervisors, one focusing on conduct and one focusing on data protection.
d.
That the firm offers both lending and investment products and so has to follow two sets of prudential and conduct rules.
a
*KRO 1 - What market does the Bank of England use to influence short-term interest rates in the UK?
a) Over-the-counter market in the sale of derivatives
b) The London Stock Exchange via the sale of corporate bonds
c) Gilt Repo market to facilitate the sale and buy back of UK gilts
d) Derivative and Swap markets traded on overseas recognised investment exchanges
c
*KRO 1 - The Primary role of National Savings & Investments is that it:
a) provides safe savings vehicles for UK retail consumers
b) allows access to ethical investments
c) raises funds for the UK government
d) limits fund charges on all products
c
*KRO 1 - The financial services profession functions in the UK:
a) as a free market within the wider economy
b) under the full control of the Bank of England
c) under the full control of the Financial Conduct Authority
d) as a government-controlled enterprise, designed specifically to support the Balance of Payments
a
The UK has an economic system where the prices of goods and services are determined by supply and demand
*KRO 1 - Two European Union (EU) member states are subject to EU-led legislation. State A has been given longer to interpret and implement the legislation than State B, who are subject to immediate implementation. This is most likely to be because:
a) State B only joined the EU in the last 5 years
b) State A is one of the founding countries of the EU
c) State A is subject to an EU directive, while State B is subject to an EU direction order
d) State B is subject to an EU directive, while State A is subject to an EU direction order
c
An EU directive is binding on all member states, but discretion is given to how the legislation is applied. A deadline is set for each country to implement.
An EU decision is binding on those impacted, which tends to be an individual EU citizen or single member state. It’s effective immediately.
It looks like state A is subject to Directive and State B a decision.
KRO 1 - Borders Insurance, an insurance company based in the UK, is dealing with Lloyd’s of London. This is most likely because:
a) It’s seeking to convert from a mutual to a proprietary corporate structure
b) It’s seeking to raise additional funds in the form of short-term loan
c) It’s regulated by Lloyd’s of London
d) Lloyd’s of London is reinsuring one of the insurance company’s liabilities
d
*KRO 1 - The UK government has opted to pursue an expansionary fiscal policy. This could be evidenced by an increase in:
a) UK income taxes
b) Infrastructure Spending
c) Interest Rates
d) Quantitative easing
b
‘Fiscal’ think Fiscal year, but it’s not only taxes, it’s spending too!
With spending, this could be on an EXPANSIONARY basis, where Government spending, such as on large infrastructure projects or new schools and hospitals, can help stimulate the economy.
*KRO 1 - The contribution made by financial services to the UK’s Balance of Payments is most evident in
(a) the negative impact on the capital account
(b) the increase in tax revenues received
(c) the positive impact on the invisible trade figures
(d) the reduction in the visible trade figures
c
The Balance of Payments (BofP) is a record of the trade and financial transactions made between the consumers, businesses and government of one country with others.
It is split into two main accounts, which are also then sub-split:
The Current Account consists of Visible Trade (tangible items like cars and white goods) and Invisible Trade (intangible, like tourism and financial services); &
The Capital Account, which includes large inflows and outflows across borders.
*KRO 1 - The UK financial services industry helps individuals and companies protect against risks that are, primarily:
a) frequent but with a low impact
b) frequent but with a high impact
c) infrequent but with a low impact
d) infrequent but with a high impact
d
The grouping concept of insurance means a large number of people/ companies contribute premiums to a ‘group pot’ to insure against risk.
The risk is unlikely to impact all (infrequent)and so the total pooled funds cover the potential claims
The impact of an event that could trigger a payment could be significant (high impact)
*KRO 1 - The immediate impact that would be expected following an increase in the rate of Value Added Tax (VAT) is
a) a contraction in the UK economy
b) an increase in the government’s revenue
c) a decrease in the M4 measure of UK money supply
d) an increase in the level of borrowing required by the UK Government
b
a lot of people will be committed to purchasing things already, so the immediate impact would be an increase in government’s revenue, which is why they raise taxes (along with controlling inflation)
a and c are correct but aren’t immediate effects
*KRO 1 - An individual who has been resident in the UK for a number of years is likely to be able to access state benefits that
a) removes the need for personal provision
b) along with employer support, removes the need for personal provision
c) can help reduce the extent of any personal provision required
d) is so negligible it should always be ignored when deciding upon the extent of personal provision required
c
“Personal provision” generally means ensuring or making arrangements to meet one’s own needs or the needs of one’s family, especially regarding financial security or future support
UK state benefits are designed to provide a safety-net as opposed to keeping as individual living off purely benefits
Some personal provision is required as most people would struggle living off state benefits alone
*KRO 1 - The structure of the UK financial services system enables investment risk to be mitigated by
a) providing a compensation scheme to fully reimburse investors
b) providing a structured complaints process should losses be suffered
c) allowing investors to access a wide range of assets at a reasonable cost
d) insisting on higher qualification requirements for all discretionary fund managers
c
Diversification into different asst classes can help mitigate investment risk - the financial services profession enables this by allowing access to a wide range of assets as a reasonable cost.
Compensation scheme (FSCS) mainly applies to deposits which are lost if a bank goes under. The FSCS will cover up to £85K per individual
KRO 1 - The fundamental aim of UK economic policy is to
a) create financial and monetary stability
b) achieve growth in the UK’s Gross Domestic Production by 2% per annum
c) ensure that revenue created through taxation at least matches borrowing expenditure
d) produce steady and sustained economic growth through fiscal and monetary measures
d
KRO 1 - An example of disintermediation is
a) an investor directly purchasing an initial issue of corporate bonds
b) a saver arranging an appropriate notice account with a building society
c) an individual seeking the best insurance costs through the use of a broker
d) an investor purchasing shares via a stockbroker
a
Disintermediation is the reduction/elimination of the use of intermediaries (third parties) between a producer and consumer.
*KRO 1 - Lilibet has £50,000 deposited in a savings account with her local building society. Diana, her sister, has the same amount deposited in a savings account with a major national bank. It is likely that
a) Lilibet will be receiving a better rate of return, but reduced protection against default
b) Lilibet will be receiving a better rate of return, with the same level of protection against default
c) Diana will be receiving a better rate of return, with the same level of protection against default
d) their returns will be the same, with Diana’s account having a greater protection against default
b
A mutual organisation like a building society doesn’t have shareholders to keep happy. Therefore, returns on savings accounts will slightly higher than a bank (but not guaranteed)
Protection against default for both is linked to the FSCS
KRO 1 - A country’s government has decided to use industrial policy methodology within its overall strategy. This is likely to mean that
a) a specified sector of the economy is being encouraged to develop and grow through financial concessions of some kind
b) small manufacturing companies are being encouraged to merge with others to benefit from economies of scale
c) the government has reduced the standard rate of Corporation Tax being applied
d) the central bank are buying corporate bonds issued by manufacturing companies
a
An industrial policy is an official strategic effort to encourage the development and growth of (typically) part of the economy. It’s usually focused on the manufacturing sector
*KRO 1 - The Bank of England is most likely to intervene during a financial crisis by
a) relaxing its financial adequacy requirements
b) stimulating the economy via fiscal policies
c) acting as a lend of last resort
d) increasing the bank base rate
c
Needs to be able to provide liquidity in times of crisis
