Module 14 - Financial Services Sector Flashcards
Commercial bank
Usually ltd companies that collects deposits from individuals and companies and lends money to them when they wish to borrow money - go between for those who have extra money and those who are short on funds
Financial intermediation
Pooling funds from different sources and using these funds to provide loans and make investments
Building society
operate in a similar manner to a bank but have no external shareholders: borrowers and lenders are members who vote on how the society is run
NS&I
takes deposits from HM Treasury but is not a bank and doesn’t provide lending services
peer-to-peer lending
Borrow money directly from investors - usually cheaper than going through a bank
Investment banks
- provide advice to corporate customers who want to raise finance and assist in the issue of securities
- managing corporate M&A
- buying and selling shares and bonds on behalf of both corporate and private customers
Securitisation
takes assets which are illiquid and pools them together and transforms them in to a more liquid security e.g. MBS
What does the underwriter do in an insurance company
Assesses the risks and quotes the premium
When is an insurance business viable
As long as the total premiums received is more than the claims paid out
What do insurance companies do with the premiums
They are steady, predictable inflows of cash which are invested by the insurance company with the aim of providing the maximum possible return balanced with the need to be able to pay out when required
What are the two general categories of insurance
- general
2. long-term savings and life insurance
What is life insurance vs life assurance
Life insurance is fixed term whereas life assurance is not for a fixed term
Term insurance
An individual’s life is insured for a specific period or term
Whole of life policies
A capital sum will be paid upon the death of the policyholder - can be used to meet inheritance tax liabilities
Endowment policies
Combining life insurance and savings
Investment management
Involves the investment of a client’s assets to meet pre-determined objectives - usually to either maximise returns or to match liabilities
Collective investment schemes
Large funds which can be invested in on behalf of investor by professional fund managers
Adv of collective investment schemes
- can invest small amounts regularly
- funds managed by professional
- pooling allows purchases at lower costs
- risk reduced by diversification
- no CGT when a fund trades in shares
- exposure to foreign stocks
- specialisation possible
Disadv of collective investment schemes
- cannot choose investments
- management is less certain
- larger funds find it difficult to invest in shares with small capitalisation
- layer of charges payable
What are the three alternative investment management styles that may be adopted
active
passive
hybrid
active management
changes portfolio on regular basis attempting to improve returns of funds
- do not believe in efficient market hypothesis
passive management
believe in efficient market hypothesis so design their funds to mirror specific indices
hybrid management
try to outperform indices rather than track them - mix of active and passive
collective funds may be either ____
onshore or offshore
Three forms of onshore funds
- unit trusts
- open-ended investment companies
- investment trusts
Unit trusts
- investor’s holdings in units
- monitored by trustees
- open-ended
- pricing is at valuation point
- dual price
- no stock exchange listing
- charges set out in trust deed
Open-ended investment companies
- company structure
- shares
- depositary looks after funds which must be independent
- dual pricing but usually single price
- valuation point for pricing
- listing is optional
Investment trusts
- plc
- listed on stock exchange
- closed ended (fixed amount of shares)
- more flexibility in gearing/ risk
- single price
- real time pricing
NAV
net assets attributable to OS / number of ordinary shares in issue
which type of funds are priced based on the NAV
- unit trusts
- OEIC
Monetary stability
Prices are stable and confidence in local currency - stable prices defined by inflation target
Financial stability
detecting and reducing threats to the financial system as a whole
FPC
- committee of BoE
- looks for risks and weaknesses in the financial system
- 13 expert members (6 from BoE) who meet quarterly at times of crisis
tools:
- setting minimal capital requirement for banks to hold
- set limits on gearing levels of banks
- setting limits on borrowing
- using regs to set limits on lending
PRA
- part of BoE
- prudential regulation and supervision of banks etc
- monitoring adequacy of internal systems and controls
three objectives:
- safety and soundness of firm it regulated
- contribute to the securing of appropriate degree of protection for insurance policy holders
- facilitate effective competition between firms
What is the main difference between PRA and FPC
FPC looks at financial system as a whole whereas PRA focuses at firm level
FCA
- independent public body
- accountable to treasury
- purpose defined by FS and Markets act 2000
objectives:
- secure an appropriate degree of protection for consumers
- protect and enhance integrity of UK financial system
- promote effective competition in the interests of consumers
Four of the FCAs key responsibilities
- conduct regulator
- prudential regulation
- admission to LSE
- tackling financial crime
Regulated activies:
- entering into a regulated credit agreement as a lender
- debt collection
- advising on or managing investments etc
Exemptions from the requirement to be authorised by FCA
- professional firms e.g. solicitors, accountants, actuaries
- firms offering payments by instalments
- appointed representatives working on behalf of firms that are already authorised
What makes up the ESFS
- ESRB
- EBA
- ESMA
- EIOPA
City Fraud
Wrongful or criminal deception intended to result in financial or personal gain - involves dishonesty, misrep and legally recognised harm
In terms of money laundering regulations all relevant businesses must:
- conduct a money laundering and terrorist financing written risk assessment
- have an appropriate anti-ML and terrorist financing systems in place
The Bribery act 2010
Increases max jail term by an individual from 7 to 10 years and an unlimited fine for a company
four offences:
- paying bribes
- receiving bribes
- bribery of foreign public officials
- failure of commercial organisations to prevent bribery
