Chapter 1 - UK Financial Services Overview Flashcards

Question

Brexit

Answer 1

EU Referendum - UK invoked article 50 of the Lisbon Treaty on 29th March 2017. Whilst negotiating leave terms, the UK is still subject to rules and regulations of the EU and firms must abide by their obligations under UK law. Overall impact will depend upon UK Governments relationship with EU. FCA issued the following advice; Close contact with Treasury, BoE & other authorities and continue to monitor development of financial markets. EU legislation will remain in place until changed. Consumers rights and protections are unaffected by the referendum result and remain unchanged until Government changes legislation.

Answer 2

FCA plays a key role in international regulation and views better reg in the EU as a strategic priority. FSAP has had a role in improving European single market for financial services and prompted a comprehensive legislation plan which has been implemented in the UK. Three original FSAP objectives: - Create a single EU wholesale market. - Achieve open and secure retail markets - Create start-of-the -art prudential rules & structure of supervision These three objectives improve Europe’s wider economy through removing barriers and increasing competition among FS firms. This makes markets more efficient and reduces the cost to the wider economy. Since 1999, European Commission has updated or adopted the following; - Amount of capital firms should hold - The rules they must comply with when carrying business with their customers. - Controls that are applied to counter money laundering and terrorist financing - Tests to apply when assessing suitability of new controllers or large shareholders. - Requirements they impose to counter the risk of market abuse - Disclosures that companies must make when seeking new capital.

Answer 3

UK Government department responsible for this is the Treasury under the Chancellor of the Exchequer. CotE responsible for regulation and conduct of business both directly and via legal instruments that they introduce. Subject to change depending on party. Key legal instruments governing reg and conduct of business are; - Financial Services & Markets Act 200 (FSMA) - Financial Services Act 2012 - BoE & Financial Services Act 2016

Answer 4

Prudential Regulation Authority (PRA) - Part of BoE that looks after authorisation and prudential regulation of certain larger firms such as banks and insurers. Prudential Regulation Committee (PRC) - committee of the BoE which operates alongside Financial Policy Committee & Monetary Policy Committee. Financial Policy Committee (FPC) - within BoE & monitors the economy. FCA - conduct & market responsibilities. Authorises financial intermediaries and mortgage brokers. The current model means that banks, insurers and investment firms have two groups of supervisors - PRA & FCA. All other firms are solely supervised by FCA.

Answer 5

Issues such as level of capital, solvency and risk management.

Answer 6

- There are two independent supervisors for banks, insurers and investment firms, PRA & FCA (prudential & conduct) - Supervisors make their own set of regulatory judgements against different objectives. - Designed to allow internal coordination between both supervisors to maximise exchange of relevant information but still acting separately when engaging with firms. - Principle of seeking to ensure that regulatory data is only collected once.

Answer 7

High taxation reduces ability of consumers to spend and businesses to invest which slows down economic growth for the financial sector. Low taxation leaves more money for private expenditure and commercial investment which stimulates economic activity. Primary aim is to raise revenue for the Government but can also be used to re-distribute wealth among society (subject to what party is in power) Government can also encourage savings and investment through tax concessions with the following products: Pension schemes, ISA’s, life assurance policies, friendly society savings plans, capital gains on gilts & corporate bonds & certain NSI products. Removal of tax concessions can cause a change in investment strategy. Income tax on different forms of investment can vary the attractiveness to investors. Examples: - availability of gross interest on bank, gilts & National savings products along with personal savings allowance can make them more attractive. - tax-free interest on National Savings products appeals to higher rate tax payer. - Inability of non-tax payers to recover tax paid on life assurance funds discourages their investment. Tax rates determine level of revenue received by the Treasury, affect economic activity, the ability of people to invest and influences best investment choice for an individual.

Answer 8

Higher taxation reduces the ability of consumers to spend and businesses to invest therefore slowing down the private sector whilst lower taxation means more capital available to invest and private expenditure resulting in stimulating economic activity. Additionally, changes in tax rates will affect the way businesses and people choose to invest their money.

Answer 9

The set of actions a a government proposes to take on expenditure, borrowing & setting interest rates to help control the country’s economy. Fiscal Policy - Control of taxation, borrowing and government spending methods. Monetary Policy - Actions that involve interest rates and money supply. CotE responsibility to define level of Government expenditure and borrowing but it is the Monetary Policy Committee’s (MPC)responsibility to the control interest rates. MPC is a branch of BoE.

Answer 10

Government tend to spend money on UK companies within UK which stimulates the companies concerned and feeds through to the economy. Government spending can exert a more significant effect on the economy that tax cuts.

Answer 11

Government can borrow at low rates by offering financial instruments such as gilts. Gilts are issued by Debt Management Office then subsequently traded on the stock exchange. Government borrowings effects the economy as borrowing takes money out of circulation which could dampen the economy whilst when repaying loans or gilts mature, money is injected back into the economy which can stimulate economic activity. Quantative Easing - Involves BoE buying back gilts and corporate bonds from t he financial sector thereby injecting more liquidity to stabilise the banking and financial sector.

Answer 12

BoE has primarily used the Gilt Repo Market to influence short term interest rates. Repo is short for sale and repurchase agreement, this is where one party sells gilts to another with a legally binding agreement to purchase gilts in the future at an agreed price. Repo rate - interest rate implied by the difference between the sale and the repurchase price. MPC is responsible for setting interest rate - announces bank lending rate which all bank interest rates derive from. Made up on 9 members with four external members to gain extra expertise and ensure balance of opinion. Final decision on interest rates given to independent committee to ensure that it is used to influence current rate of inflation rather than political gain.

Answer 13

Taxation, spending and borrowing all have a significant effect on the overall economy. Increased money supply stimulates the economy and reduced money supply reins it in.

Answer 14

- NHS - Sickness & Disability benefits - Unemployed benefit - Tax credits - State Pension - Pension Credits - NHS funded nursing care

Answer 15

State’s level of provision has decreased over the years e.g. reduction of mortgage support for unemployed. Continual mounting evidence to suggest that there will be a future pensions crisis meaning people will have to work for longer. NHS underfunded and overburdened meaning people cannot rely upon the welfare state for a comfortable life. Amount of State Pension payable is now calculated by how many years of NI contributions - min 10, max 35 (up from 30). State pension age is also being increased to reflect that people live longer and also as a tool for managing the Government’s pension liability. Government is trying to stimulate private pension uptake with intro of auto-enrolment and NEST. Other government actions such as removal of dividend credits and changes to accounting regulations have contributed to final salary pensions to be closed or benefits reduced. Long term care seen as money not well spent and lack of tax relief adds to this. UK has an ageing population which with declining birth rate will lead to fewer taxpayers in the future to support increasing numbers of individuals who are retired or on benefits.

Answer 16

- Extensions of laws requiring compulsory pension contributions by employees and employers. - Introduction of compulsory medical insurance. - Intro of tax breaks for health insurance, medical ins & long-term care. - Further increases in the State pension age. Against the above - Cost of introduction For - overall savings will cover costs of intro in the long term.

Answer 17

No. UK welfare system is generally overestimated - people should look to save into private pensions and get the necessary insurance to cover themselves for the future.