Chapter 1 Understand the UK financial services industry

Question 1

A Financial service can be said to perform four essential functions.

Answer 1

1. Providing a vehicle through which savings are protected and channelled into capital management.
2. Providing a means by which savers desire for ready access to their capital can be match borrowers’ requirement for long-term funds and allowing financial institutions to take positions with longer terms and potentially greater return.
3. Allowing individuals and companies to insure against risks they do not wish to take but which others are prepared to assume in return for payment.
4. Allowing investors to disperse risk across a number of different investment products.

Question 2

Who owns the building societies ?

Answer 2

Building societies are owned by account holders, not shareholders
The banks or building society offers protection of its customers’ money while benefiting from the relationship by using that money to make a return for itself

Question 3

How does the government facilitate it’s borrowing?

Answer 3

The government has traditionally used the savings of private individuals to fund its own borrowing.

Its main way of achieving this is to act as a financial institution in its own right and issue fixed interest investments via the bank of England.

Gilts are one of the best-known types of this investment.

The other government financial institution is National saving and investments – saving and deposits into this institution are also used to fund government borrowing.

Question 4

what is the purpose of insurance and risk management ?

Answer 4

Insurance and risk management protect and safeguard assets from the financial effects of damage of loss.
Both individuals and companies can have protection needs on their:
• Physical assets
• Earnings
• Profit potential
• Financial transaction

Question 5

what is a life assurance and what dies it protect ?

Answer 5

can be used to protect earnings from the death of a breadwinner, while other types of policy can be used to protect against the inability to work through injury or development of a serious illness.

Question 6

what are the 2 key capital market objectives ?

Answer 6

1) The need for investors to be able to invest in assets that provide the potential for real growth (growth over and above the general increase in prices)
2) The need for companies to raise money without necessarily having to borrow it form the bank.

Question 7

what is shares and fixed interest stocks (bonds)?

Answer 7

Shares – are the means by which private investors and corporations can buy ownership of a percentage of a company. And will receive a proportion of the profit in form of dividend.

Bondsallow private investors and corporations to lend a company, subject to certain predefined terms, in exchange for an interest payment. The interest will be higher than you would get in banks and building societies ( similar lending to governments)

Question 8

UK financial services structure

Answer 8

Financial infrastructure – the payment, settlement, clearing and trading systems

Financial market – both on exchange and over the counter (OTC)

Financial firms – including banks (retail or investment) , pension funds and insurance firms

The financial authorise – he bank of England, the Prudential Regulation Authority (PRA), the Financial Conduct Authority (FCA), and HM Treasury

Question 9

Payment system

Answer 9

Payment systems are used Widely and are integrated to wider economy so their failure could impact substantiality on normal economic activity.

The bank of England oversees payment systems in the UK; it monitors and facilitates the functioning of the sterling money markets and payments systems by having close links with clearing companies such as CHAPs Clearing company and credit clearing company.
Payments Systems Regulators (PSR) – is the economic regulator for the £81 trillion payment systems industry in the UK. The statutory objectives o the PSR are to:

• considers and promotes the interests of all the businesses and consumers that use them.
• promote effective competition in the markets for payments systems and services.
• promote the development of and innovation in payment system (infrastructure)

The PSR’s purpose is to make payment systems that are accessible, reliable, secure and value for money.
Clearing houses and settlement systems provide the infrastructure for cleaning and settlement of the securities and derivatives markets

Question 10

financial markets

Answer 10

Member firms use on-exchange markets to trade investments such as equities and derivates via the trading floor, whether electronic or physical.

Question 11

B3 financial firms

Answer 11

Money market – A wholesale market for commercial borrowers and lenders

Capital markets – for trading stocks and shares, fixed interest investments and derivatives.

Commodity market- for trading physical goods ( i.e steel, oil etc)

Foreign exchange (FX) markets- for trading foreign currency

Insurance companies – for insuring

Investment companies – these invest surplus funds.

Life assurance and pension companies – these invest their assets to meet long-term policyholder obligations.

Reinsurance companies – companies that provide security to diversify risk from insurance companies.

Investment houses – these issue pooled investments like unit trusts and open-ended investment companies (OEICs)

Question 12

Banks and building societies core services

Answer 12

Core services

Current accounts – they provide security for customers’ money easy access to it and many other services i.e direct debits, standing orders.

Deposit accounts – these accounts, also known as bank savings accounts or building society share accounts, are less accessible than current accounts.

Mortgages and loans – to purchase properties i.e., houses and cars

Question 13

How does life assurance companies distribute their products ?

Answer 13

Life assurance companies distribute their product via:
• Intermediaries (independent or restricted advisers) or
• Own financial services sales team

Question 14

what are friendly societies

Answer 14

friendly societies – As mutual self-help groups with no shareholders taking any part of the society’s profits: all profits (after expenses) would be repayable to the society’s members.

Question 15

what are the 3 European Supervisory Authorities (ESAs) ?

Answer 15

• European Banking Authority (EBA)
• European Securities and Markets Authority (ESMA)
• European insurance and occupational pensions authority (EIOPA)

Question 16

what is European Central Bank (ECB) role ?

Answer 16

European Central Bank (ECB) – its role is to coordinate and control monetary policy and interest rates in the EU stats using the company euro currency.

Question 17

the role and structure of international markets

Answer 17

• The financial stability board coordinates national financial authorises and make recommendations about the global financial system.
• The financial Action task Force (FATF) – sets international standards on anti-money laundering.
• The international organisation of securities commissioners (IOSCO) - brings together the world’s securities regulators to set common standards.
• The international association of insurance supervisors
• Basel committee on Banking Supervision (BCBS) – is the primary standard setter for the prudential regulation of bank and provides a forum for banking supervisory matters.
• The international swap and derivatives Association – includes interest rate, currency, commodity, credit and equity swaps.
• the bond market association represents firms trading fixed - income securities
• the international securities Market Association (ISMA) – self-regulating organisation, supervising markets in international debt

Question 18

how the EU impacts UK regulation

Answer 18

Around 70% of the FCA’s policymaking effect is driven by European initiatives, including the Financial services Action Plan (FSAP). Many of these rules have been written into UK law so will continue to apply post Brexit.

Question 19

Current Regulatory structure within the EU.

Answer 19

• The European Baking Authority (EBA)
• The Insurance and Occupational Pensions Authority (EIOPA)
• The European Securities and Markets Authority (ESMA)

Question 20

what are the Objectives of FSAP (financial services action plan)?

Answer 20

• Create a single EU wholesale market.
• Achieve open and secure retail markets.
• Create state-of-the-art prudential rules and structures of supervision.

Question 21

who is responsible for the regulation of financial services market in the UK?

Answer 21

The UK government department responsible for the regulation of the financial services market is the Treasury, under the direct authority of the Chancellor of the Exchequer.
Prudential Regulation Authority (PRA) – (prudential means issues such as levels of capital, solvency, and risk management)

Question 22

what is fiscal policy ?

Answer 22

The control of taxation, borrowing and government spending methods are collectively known as fiscal policy.

Question 23

what is monetary policy ?

Answer 23

Actions involving interest rates and the money supply are known as monetary policy.

Question 24

who controls the interest rate in the UK?

Answer 24

Chancellor of the Exchequer controls the level of government expenditure and borrowing,

The responsibility for the control of interest rates now lies with Bank of England’s independent Monetary Policy Committee (MPC)

Question 25

what affect does the government have on the economy when it borrows ?

Answer 25

When the government borrows money, it effectively reduces the amount in circulation, and this can have a dampening effect on the economy. Conversely, when the government repays the loan, it injects money back into circulation and this can stimulate economic activity.

Question 26

what is quantitative easing ?

Answer 26

The 2007/08 banking crisis first saw the use of quantitative easing on a massive scale (totalling £435bn). Broadly, this involves the Bank of England buying back gilts and corporate bonds from the financial sector, thereby, injecting more liquidity into the system to stabilise the banking and financial sector.

The bank of England again committed to quantitative easing during 2020 COVID-19 pandemic (£200bn at the time of publication) to lessen its financial impact.

Question 27

what does the The welfare and benefit system covers ?

Answer 27

• NHS
• Sickness and disability benefits
• Unemployment benefit
• Tax credit
• The state pension
• Pension credits
• NHS funded nursing care

Question 28

what are the 2 prudential regulation authority’s objectives ?

Answer 28

2 main objectives:

• Regulation: it sets standards or policies that it expect firms to meet
• Supervision: it assess the risks that firms pose to the PRA’s objectives and, where necessary, take action to reduce them

Question 29

what is the role of Financial policy committee (FPC) ?

Answer 29

Financial policy committee (FPC) – run by the Bank of England, the FPC responsibility for macro-prudential supervision. It is responsible for spotting the systemic risks ‘attributable to structural features of financial markets or to the distribution of risk within the financial sector. It is responsible for identifying unsustainable level of leverage, debt, or credit growth.

Question 30

1.1 what do banks do with money they Receive into the current accounts

Answer 30

1.1 They place it into other long-term investments and some is lend back to customers in the form of loans

Question 31

1.2 what is the main purpose of a gilt ?

Answer 31

1.2 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 movement in RPI

Question 32

1.3 Apart from physical assets, what else can be insured ?

Answer 32

Earnings, profit potential and financial transactions

Question 33

1.4 how can changes in tax rates be used to manipulate the economy

Answer 33

1.4by 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 saving on goods to stimulate the economy

Question 34

1.5 does the UK welfare system offer sufficient benefits to avoid the need to make private provision ?

Answer 34

typically, most individuals would find that state welfare is at subsistence level, well below the standard that they currency expect