Outcome B Flashcards
What are financial institutions?
A company engaged in the business of dealing with financial and monetary transactions such as deposits, loans, investments and currency exchange. They may also offer advice on both business and personal financial matters
Types of financial Institutions
Bank of England
Banks
Building societies
Credit unions
National savings and investments
Insurance companies
Pension companies
Pawnbrokers
Payday loans
Bank of England
The UK’s central bank that ensures the financial stability of the UK. It sets interest rates for the country, prints bank notes and stores over 400,000 gold bars. It does not lend to the general public
Advantages of BOE
Protect the financial stability of the UK economy - The Bank of England oversees and regulates major financial institutions like banks, building societies, and insurers to ensure they operate safely and responsibly. This reduces the risk of financial failures that could harm the economy
Lend to banks - The Bank’s lending helps ensure that payments and transactions between banks continue to operate smoothly, which is crucial for both businesses and individuals relying on financial services
Set interest rates -
Disadvantages of BOE
Do not lend to the general public - people and businesses must depend on commercial banks for credit. This can result in higher borrowing costs, as commercial banks add their own profit margins to interest rates
Can raise interest rates making borrowing such as mortgages more expensive - For those looking to purchase a home, higher mortgage rates can make monthly repayments unaffordable, reducing affordability and access to the housing market
Banks
handles financial transactions and stores money on behalf of the general public. They allow individuals and businesses to make payments, access credit and save
Advantages of banks
Secure place to store money - Banks provide digital platforms, such as online and mobile banking, that allow customers to access their money securely without the need to carry cash. This reduces the risk of theft and fraud
Pays interest on savings - By depositing money into a savings account, customers earn interest over time without having to actively manage their funds. This provides a simple and secure way to grow wealth passively
Variety of services - Banks provide secure options for saving money, including basic savings accounts, fixed deposits, and current accounts. These services help individuals and businesses manage their funds safely while earning interest
Disadvantages of banks
Savings only protected to £85,000 if the bank goes bankrupt- can reduce public confidence in banks, especially during economic uncertainty or financial crises
Owned by shareholders therefore are designed to make profit - To maintain or increase profits, banks may introduce or raise fees for services such as account maintenance, overdrafts, or foreign transactions, which can affect customers with lower incomes
Building societies
Similar to banks, these provide financial services to the public such as day to day banking, mortgages and credit. The key difference is that building societies are owned entirely by their members which means they can set rates that benefit their members and not shareholders
Advantages of building societies
Owned by members - Building societies often emphasize community and member engagement, leading to a more personalized customer experience compared to larger, shareholder-owned banks
Variety of services - Building societies provide a range of savings accounts, including easy-access accounts, fixed-term savings, and ISAs, allowing members to choose options that align with their savings goals and financial needs
Pay interest on savings - By depositing money into a savings account, customers earn interest over time without having to actively manage their funds. This provides a simple and secure way to grow wealth passively
Disadvantages of building societies
May lack business drive if commercial banks as banks are profit driven - They may take longer to respond to changes in market trends or customer demands
Savings only protected up to £85,000 - can reduce public confidence in building societies, especially during economic uncertainty or financial crises
Credit unions
A member owned financial cooperative, controlled by its members and operated on the principle of people helping people, providing its members credit at competitive rates as well as other financial services.
Advantages of credit unions
Variety of services - Some credit unions provide affordable insurance products, including life, auto, and home insurance, often at better rates than traditional insurers
Owned by members - leading to a more personalized customer experience compared to larger, shareholder-owned banks
Offer additional benefits to the community and charities - Because credit unions are not driven by profit, they can offer lower interest rates on loans, higher rates on savings, and fewer fees. This allows members to retain more money, which can then be reinvested in the community
Disadvantages of credit unions
May lack business drive if commercial banks as banks are profit driven - They may take longer to respond to changes in market trends or customer demands
Savings only protected up to £85,000 - can reduce public confidence in credit unions, especially during economic uncertainty or financial crises
NS&I
A gov backed organisation that offers a secure savings option. It offers a range of options including ISA’s, premium bonds and guilts
Advantages of national savings and investments
Savings are 100% secure as its gov backed - Savers can be assured that their funds are completely secure, even during economic uncertainty
Various ways to save such as premium bonds - this is where savers have the chance to win tax-free prizes in a monthly lottery instead of earning interest. This makes saving more exciting, with the potential for large cash prizes, including a £1 million jackpot
Disadvantage of NS&I
Variable rates - making it harder for savers to predict the future value of their investments, complicating budgeting and long-term financial planning
Lack a high street presence - The absence of a physical presence might lead some customers to feel less secure or less confident about the reliability of NS&I compared to traditional banks with visible, established branches
Usually need to give notice on withdrawals - If you have your money locked in an NS&I product with a notice period and a better investment opportunity arises, you may not be able to take advantage of it until the notice period is over
Insurance companies
These are for profit businesses that protect people against loss in return for a monthly premium
Advantages of insurance companies
Protect against unexpected losses/events - Knowing that you have coverage in case of an emergency or unforeseen event helps reduce anxiety and allows you to go about your daily life with more confidence
Cover available on a variety of things - Many insurance companies provide international options, such as travel insurance or global health coverage, ensuring protection even when policyholders are abroad
Pay monthly so easier to budget - Regular monthly payments create a predictable expense, making it easier for individuals to plan and track their finances over time
Disadvantages of insurance companies
Premiums assessed on risk and the higher the risk the higher the premium - The risk-based pricing model can feel unfair to individuals who have limited control over certain risk factors, such as genetics (in health insurance) or natural disasters (in property insurance)
Owned by shareholders therefore need to make a profit - To meet shareholder expectations for profits, insurance companies may charge higher premiums, making coverage more expensive for customers
Pension companies
Sells policies to individuals or companies that enable themselves or their employees to save for future retirement. Pension companies usually invest the money deposited by the individual in hopes of growing it for future use
Advantages of pension companies
Structured way to plan for retirement- Pension companies provide a structured mechanism to convert savings into a steady income during retirement, offering financial security and peace of mind for retirees
Matched contributions by employer - Knowing that your employer will match your contributions can encourage you to save more towards your pension, ensuring better financial security in retirement
Tax benefits - When you retire, most pension schemes allow you to take up to 25% of your pension pot as a tax-free lump sum, giving you access to a significant amount of money without paying tax
Disdvantages of pension companies
Poor investment decisions may mean a poor return on investment - Pension holders usually have little to no control over how their funds are invested. They rely entirely on the expertise and decisions of the pension company, leaving them vulnerable to poor strategies
Cannot access money until the agreed term - For individuals facing financial difficulties, the inability to withdraw money early can create significant hardship, forcing them to rely on loans or other savings to cover immediate needs
Pawnbrokers
Loan money to individuals and secure this loan against an asset. The most well known asset that is pawned is jewellery. If the item is not brought back then the pawnbroker will sell the asset to recoup the cost of the loan
Advantages of pawnbrokers
Quick way of acquiring cash - Pawnbrokers are widely available, and the process is straightforward. This convenience makes them an attractive option for those who need cash quickly without complicated procedures
Interest not charged - The simplicity of a pawnbroker loan ensures there are no surprise charges or complicated repayment structures. As long as you repay the loan within the agreed time, no further costs are incurred
Buy back pawned asset -The ability to retrieve your asset is not influenced by your credit score or financial history, making it an accessible option for individuals who may not qualify for traditional loans
Disdvantages of pawnbrokers
Amount given for the asset is much lower than what it’s worth - Pawnbrokers often set strict terms for the loan amount offered, leaving little room for customers to negotiate for a fairer value
Asset will be sold on loan if not repaid - If you fail to repay the loan, the interest and fees can accumulate quickly, further complicating the situation and making it harder to recover the asset
Payday loans
Short term loans that are intended to bridge the gap between one payday to another in the case of an emergency. Interest rates are extremely high and payday loans should be avoided where possible due to this.
Advantage of payday loans
Quick way of acquiring cash in a short period of time - Payday loan lenders often offer flexible methods for applying, such as via mobile apps or online platforms, making it easy to access the loan from anywhere at any time
Disadvantage of payday loans
Interest charged is very high which results in the amount being paid back being substantially higher - The high repayment amounts can place significant financial strain on borrowers, especially those who are already struggling financially, further enhancing their financial difficulties
Name the 5 methods of communicating with customers
Branch
Online banking
Telephone banking
Mobile banking
Postal banking
Branch
Is a physical place where transactions are carried out face to face. Customers visit the bank to carry out their banking needs. This could be using self service machines or seeking advice from an employee at the bank.
advantages of a branch
Ability to build relationships - Regular in-person engagement creates stronger customer loyalty, as clients feel valued and understood
Encourages brand loyalty - A local branch provides easy access to products or services, improving the customer experience and encouraging repeat visits
A methods thay customers have confidence in - Customers can engage directly with staff, ask questions, and receive tailored advice, which builds trust and confidence in the brand
Disadvantages of a branch
Only available during opening hours - Branches typically operate during standard business hours, which may conflict with customers’ work schedules or other commitments, making it difficult for them to visit
Takes considerably longer - Visiting a branch often involves traveling to the location, which can take significant time, especially if the branch is far away or located in a busy area with traffic congestion
Additional costs involved such as; fuel, parking, public transport, etc - - These costs can accumulate over time, especially for frequent visits
Online
This allows customer the opportunity to manage their banking needs over the internet on a laptop or computer.
Advantages of online
Extremely convenient - Customers can access their accounts from anywhere in the world, as long as they have an internet connection. This is especially useful for travelers or those living in remote areas without easy access to physical branches
24/7 access - Online banking allows customers to manage their accounts, transfer money, pay bills, and perform other transactions at any time of the day or night, without being restricted by branch operating hours
Private - allows customers to manage their finances from the privacy of their home or any secure location. This eliminates the need to discuss financial matters openly in a branch, where conversations could be overheard by others
Disadvantages of online
Cannot withdraw cash - Customers in rural areas or regions with fewer ATMs or branches may face challenges accessing their cash, particularly if they rely heavily on online banking for transactions
May have limited facilities - While online banking offers convenience, it cannot replicate the personalized, face-to-face financial advice provided by branch staff, which is essential for complex situations like mortgages, investment planning, or resolving disputes
Takes time to register and set up - Setting up online banking often requires users to complete several steps, including verifying identity, creating usernames and passwords, and linking accounts, which can be time-consuming
Telephone
Customers carry out banking transactions over the phone. This service is available 24/7 and is usually just for automated services like checking balances and paying bills. Some accounts do allow you to speak to an adviser
Advantages of telephone banking
No additional charges - allowing you to perform various transactions without incurring additional costs.
Convenient - Customers can complete banking tasks without having to travel to a physical branch, saving time, effort, and potentially reducing costs related to transportation or parking
Disadvantages of telephone banking
Only available during set hours - Customers may have to take time off work or adjust their daily routines to fit within the limited hours of telephone banking, which can be inconvenient and disrupt their plans
Limited service provided - Telephone banking generally allows basic transactions, such as checking balances, transferring money between accounts, or paying bills. However, it may not support more complex tasks like loan applications, investment management, or opening new accounts
Risk of fraud/identity theft - If a fraudster manages to gather enough personal information, they could potentially take over a customer’s account by accessing it through telephone banking, leading to unauthorized transactions or withdrawals
Mobile
Similar to online banking but the service is accessed via a mobile device such as smart phone or tablet
Advantages of mobile banking
Convenient - Mobile banking allows users to access their accounts at any time, day or night, without being restricted by banking hours. This provides flexibility to manage finances outside of regular business hours
Easy to use - easy-to-navigate, allows users to perform banking tasks quickly without needing technical expertise
Available 24/7 - Mobile banking allows users to manage their finances at any time, whether it’s during the day, late at night, or on weekends. This eliminates the restrictions of traditional banking hours, making it especially useful for people with busy schedules
Disadvantages of mobile banking
May need to download an app - Not all mobile banking apps are compatible with every device or operating system. For example, some apps may not be available for older smartphones, certain operating systems, or non-smartphone devices, limiting access for some users
Possibility of being hacked - Hackers can use techniques, such as sending fraudulent emails or SMS messages that appear to be from the bank, tricking users into providing login credentials etc
Higher risk due to possibility of being hacked - Hackers can use techniques, such as sending fraudulent emails or SMS messages that appear to be from the bank, tricking users into providing login credentials etc
Postal
Paper based financial transactions. Many banks still send out paper copies of statements and some customers may still pay their bills by cheque
Advantages of postal
Traditional method that customer feels comfortable with - Postal banking has been a long-established service in many countries, and for older generations (or those accustomed to traditional banking methods), it feels more reliable and trustworthy than newer digital banking options
No additional technology needed - making them ideal for individuals who do not have reliable internet access, live in rural areas, or are not comfortable using online banking platforms
Disadvantages of postal
Post can be lost - If sensitive documents are lost in the mail, they may fall into the wrong hands, potentially leading to identity theft or fraud.
Takes significantly longer than other methods - Postal banking relies on traditional mail systems for delivering documents, checks, or funds, which can take several days or even weeks to arrive, especially if there are delays in the postal system.
FCA
An independent organisation that is the conduct regulator for 59,000 financial service firms and financial markets in the UK.
It is funded via fees charged to the financial service providers and their work focuses on 3 key areas:
Authorisation
Supervision
Enforcement
FOS
Appointed by the government to protect and represent consumers who are in disputes with financial service providers. They only get involved if these disputes cannot be settled between the financial provider and the customer.
Funded by compulsory fees charged to all regulated financial institutions
FSCS
An organisation that pays compensation to consumers when the financial service provider is unable to
Protects savers up to £85,000 if the institution goes bust and the saver will be compensated by the FSCS
Legislation - consumer credit
Laws that have been passed to regulate any business offering credit to consumers
These laws are passed by the UK gov to ensure consumers are protected and that financial providers do not take advantage
Name the 6 sources of information and guidance
Citizens advice
Independent financial advisor (IFA)
Price comparison websites
Debt counsellors
Individual voluntary agreements (IVAs)
Bankruptcy
Citizens advice
A charity run organisation that provides advice on a range of financial and non financial issues. This can be done via face to face appointment, over the phone or online
Financial advice covers areas including, debt, benefits, banking, pensions and insurance
Advantages of citizen’s advice
Free - ensures that anyone, regardless of their income or financial situation, can access legal, financial, and personal advice. This makes it especially valuable for individuals who may not be able to afford professional services, such as lawyers or financial consultants
Covers a wide range of areas - Citizen’s Advice offers guidance on a broad spectrum of topics, including financial advice, housing issues, employment rights, consumer rights, family matters, legal concerns, and more. This makes it a one-stop resource for people seeking help with different aspects of their lives
Face to face, online and telephone - ensures that Citizens Advice can reach a wider audience, including people with different preferences, schedules, and accessibility needs. It accommodates those with varying levels of digital literacy or those who may be unable to visit an office due to work, family commitments, or health reasons
Disadvantages of citizen’s advice
Trained volunteers not professionals -
they may not have the same level of specialized knowledge or professional qualifications as experts in fields like law, finance, or health. For complex or technical problems, this could mean that the advice provided might not be as thorough or tailored as that from a qualified professional
Knowledge in finance may be limited -While Citizens Advice is great for providing basic financial advice, such as budgeting tips or dealing with immediate debt problems, it may not be the best resource for long-term financial planning, investment decisions, or advanced financial strategies
Independent financial advisor (IFA)
Professional individuals who provide independent advice and guidance on a range of financial products such as mortgages, pensions, insurance and investing.
They must be qualified and are regulated by the UK government
Advantages of Independent financial advisor
No commission - their recommendations are generally more unbiased. They are more likely to provide advice based solely on the client’s best interests, rather than being influenced by financial incentives to recommend particular products or services
Advice is offered by professionals regulated - such as the Financial Conduct Authority (FCA) in the UK. This regulation ensures that they follow strict standards and rules designed to protect consumers and ensure that the advice provided is in the client’s best interest
Advice is based on individual’s needs and circumstances - IFAs assess each client’s unique financial situation, goals, and risk tolerance before providing advice. This allows them to create financial strategies that are specifically designed to meet the individual’s needs, whether that’s planning for retirement, managing investments, or addressing debt
Disadvantages of Independent financial advisor
Charge fees - High fees might discourage individuals with limited financial resources from seeking professional advice, potentially leaving them without proper guidance
Dependent on the quality of the advisor - The effectiveness of an independent financial advisor depends heavily on their knowledge, experience, and skill set. A less qualified or inexperienced advisor may provide poor advice
Price comparison websites
They compare the price of goods and services from a range of companies. This allows you to make sure you get a deal that’s tailored to you at the best price
Advantages of price comparison websites
Access 24/7 - allowing users to compare prices and services at their convenience, without being restricted by traditional business hours
Free - making them an accessible tool for individuals and businesses looking to save money without additional expenses
Easy to compare - allow users to instantly view and compare prices from multiple retailers or service providers on a single platform, saving time and effort
Disadvantages of price comparison websites
Could be bias - may prioritize businesses that pay higher commissions to the website, rather than those offering the best deals for consumers
Does not always cover all providers - Some websites may exclude certain companies or products that do not pay to be featured, resulting in a biased and incomplete comparison for the user
Debt councellors
A professional service that offers independent advice. It is a common process that is used to help individuals with debt settlement through education, budgeting and the use of a variety of tools with the goal to reduce and ultimately eliminate debt
Advantages of Debt councellors
Professionals who specialise in debt - Debt counsellors are trained professionals with in-depth knowledge of debt management, financial planning, and strategies for reducing or eliminating debt
Regulated by the FCA and FOS - they required to adhere to strict standards of conduct, ensuring that consumers receive fair treatment and are protected from harmful practices
Disadvantages of Debt councellors
It’s not free - which can be a financial burden for individuals already struggling with debt. These fees may include consultation charges, monthly service fees, or a percentage of the debt being managed
Just focuses on debt - they may not provide financial advice on budgeting, savings, or investing, which are also critical for long-term financial health
Individual voluntary arrangements (IVAs)
An agreement with your creditors to pay all or part of your debts. You agree to make regular payments to an insolvency practitioner, who will divide this money between your creditors. An IVA can give you more control of your assets than bankruptcy
Advantages of Individual voluntary arrangements (IVAs)
Help manage debts via regular payments - offers a clear, structured payment plan that allows individuals to pay off their debts in manageable, regular installments over a set period. This helps prevent financial stress by spreading debt repayment over time
Unbiased as advice is independent- ensuring that the recommendations given are based solely on the client’s best interests rather than any external pressures or conflicts of interest
Disadvantages of Individual voluntary arrangements (IVAs)
Fees are charged for the service - IVAs often come with significant fees, including setup costs and monthly management fees, which can be a burden on individuals already struggling with debt
Impact on credit rating - Entering into an IVA typically results in a significant drop in an individual’s credit score, as it indicates to lenders that the person is unable to meet their financial obligations in full. This can make it more difficult to obtain credit in the future
Bankruptcy
A legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions bankruptcy is imposed by a court order.
Advantages of bankruptcy
Suspends any debt collection -This provides individuals with breathing room to resolve their financial situation without the threat of losing assets
Debts are usually fully written off - This provides immediate financial relief and can help individuals regain control of their finances
Disadvantages of bankruptcy
May get all assets repossessed - This means that valuable property such as a home, car, or other personal possessions could be sold off to satisfy outstanding debts, leading to significant personal losses
Stays on your credit report for 7 to 10 years - During this time, it can be much harder to obtain credit or loans, and any credit that is available may come with high interest rates due to the perceived risk
