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LF1 > The Financial Services Industry > Flashcards

The Financial Services Industry Flashcards

1
Q

What is the financial services industry? (5)

A

It includes:
1. Banks and building societies
2. Credit unions
3. Life and pension providers
4. General insurance companies
5. Intermediaries

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2
Q

What is a financial market?

A

A market where anyone can buy and sell financial assets

  1. bonds (finxed-interest insecurities)
  2. shares (equities)
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3
Q

What is the UKs main financial market?

A

London Stock Exchange

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4
Q

What are the two functions of the LSE? (2)

A
  1. allows companies to raise or borrow money by issuing bonds and shares (PRIMARY MARKET)
  2. allows investors to buy and sell bonds and shares that have already been issued (SECONDARY MARKET)
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5
Q

What is a primary market?

A

allows companies to raise or *borrow *money by issuing bonds and shares

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6
Q

How does issuing bonds work in a primary market?

**E.g. **UK Government use the DMO (Debt Management Office) to act as a primary market for gilts (bonds)

A
  1. gilts are issued by the DMO
  2. the investor recieves regular interest payments
  3. investor should recieve money back at end of predetermined period

Interest Payments - cost of borrwing money form someone else

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7
Q

How does issuing shares work in a primary market?

A
  • investors who buy shares = shareholders = part owner of company
  • entitled to share of companies profits
  • when company calculates profits/yr = dividend payment (proportion or profit)
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8
Q

What does the term ‘capital’ mean?

A

amount fo money originally invested ina financial asset

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9
Q

What is a secondary market?

A

enable investors to sell their bonds and shares

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10
Q

Why might someone want to their shareholding? (3)

A
  1. share price has risen = make profit
  2. concerned share price will fall (avoid losing capital)
  3. need to get hold of original capital for another purpose
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11
Q

What markets make up the UKs financial market? (4)

A
  1. capital market
  2. money market
  3. foreign exchange market
  4. insurance market
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12
Q

What is the capital market?

A

market in bonds and shares

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13
Q

What is the money market?

A

market for commerical borrowers and* lenders* to **invest **or borrow cash over periods (short or long term)

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14
Q

What is the foreign exchange market?

A

a global market for buying and sellign currencies

largest in the world

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15
Q

What is the insurance market?

A

covers insurance companies and life and pensions companies

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16
Q

What are the main types of financial services organisations? (5)

A
  1. banks and building societies
  2. credit unions
  3. general insurance companies
  4. life and pension providers
  5. intermedaries
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17
Q

What are banks and building societies?

A

provide services such as current accounts, savings and loads, as well as payment services

also offer financial products e.g. insurance, investments and pensions, stockbroking services

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18
Q

What are credit unions?

A
  • small, non-profit orgs
  • members tend to have a common connection
  • accessible and affordable savings and loan products for their members
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19
Q

What are general insurance companies?

A

specialise in managing risk and provide products that allow individual customers and businesses to insure against a wide range of risk

e.g. car or property insurance

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20
Q

What are life and pensions providers?

A
  • sell products that protect against the financial consequences of death and ill health
  • give customers access to long term saving vehicles e.g. investment schemes and pensions
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21
Q

What are intermediaries?

A
  • sell and give advice on products created by general insurance companies and life and pension providers
  • E.g. in life and pension companies - financial advisers must make clear to customers (clients) whether they are providing ‘independent’ or ‘restricted’ advice
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22
Q

What are the four essential customer needs? (4)

A
  1. payment systems - the means to recieve money and pay it out to others
  2. insurance - protection against the financial consequnes of risk
  3. short term financial products - bank accounts, credit cards, loans
  4. long term financial products - mortgages, life and pension produts, investments
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23
Q

What do payment systems allow you to do? (3)

A
  1. send and recieve money
  2. accessible cash
  3. traiditona methods replaced ith debit and credit cards and contactless apps
24
Q

What is the purpose of insurance?

A

transfer the financial burden of risk away from the customer and onto the insurance provider

25
Q

What is risk?

A

possibility of financial loss

26
Q

How does insurance work? (4)

A
  1. losses of the few and met by contributions of the many
  2. gathers small sums of money from people who want to be financially protected again particular risk
  3. contributions = premiums and go into the insurance pool
  4. from pool - payments are made to compensste those who actually experience financial loss because of risk
27
Q

What are examples of insurance products?

A
  • car
  • home
  • life
  • health
  • businesses
28
Q

How do short-term financial products work? Give examples (3)

A

place for customers to keep their money safe and easily accessible

e.g. current accounts - manage money on everyday basis
e.g. savings - save money on longterm basis
e.g. loans - use money customers have deposited with them to meet the needs of other customers who wish to borrow money

29
Q

What are the range of interest rates offered by banks and building societies ? (3)

A
  1. high enough to attract enough savers to meet demand for borrowing
  2. low enough to attract borrowers
  3. for banks to leave enough room to make a profit
30
Q

How do life and pension products work?

(Long term financial products)

A

customer contributions into product are pooled and paid over to professional fund managers - invest the pooled fund in bonds, shares and other types of financial assets via financial markets

31
Q

How do mortgages work?

(long term financial product)

A

use funds of short-term savers to make long-term lans to fun home purchases

32
Q

What is the investment chain? (2)

A
  1. way for customers to save for the future and
  2. a way for gov, businessess and customer to achieve their financial needs by borrowing
33
Q

What are the four stages of the investment chain?

A
  1. customers
  2. financial services organisations
  3. financial markets
  4. borrowers
34
Q

What do life and pension providers allow customers to protect themselves against the financial risks of? (3)

A
  1. dying earlier than expected
  2. ill health
  3. living longer than expected
35
Q

What are the life and pension products for **dying earlier than expected **and how does it work? (1)

A
  1. life insurance
  • pay out of lump sum on the death of the life insured
  • lump sum can be used by those previously financially dependent on deceased
  • can help pay household bills, childcare costs, pay outstanding debts
36
Q

What are the life and pension products for ill health and how do they work? (2)

A
  1. income protection
  • paid out montly to policyholder unable to work
  • replaces policyholders earnings
  1. critical illness cover
  • lump sum in event of policyholder being diagnosed with a serious illness
  • fund lifestyle changes e.g. private care
37
Q

What are the life and pension products for living longer than expected? (2)

A
  1. pensions
  • help customers build up amount of money to let them live comfortably in retirement
  • start early and contribute regularly
  1. long-term care insurance
  • help customers pay costs of care
38
Q

Do businesses also need protecting against risk? And how do they do this? (1)

A

Yes

Key person insurance

39
Q

What is key person insurance?

A
  • insurance taken out my a company on the life of an employee who is vital to the business making a profit
  • lump sum
  • can be used to pay for immediate drop in profit or to recruit
40
Q

Why might someone not take out life or health insurance? (2)

A
  1. do not understand the financial impact of their death or illness
  2. dying earlier than expected or being diagnosed only happens to other people
41
Q

What are state benefits?

A

paid by Uk gov

42
Q

What are the three types of state benefit and when are they paid? (3)

A
  1. bereavement support payment
    * up to 18 months from date of death of a spouse
  2. statuatory sick pay
    * paid to employees unable to work due to illness
  3. new state pension
    * on reaching state pension age
43
Q

What is the maximum amount payable for bereavement support?

A

up to £3,500 first payment
up to £350/month thereafter

44
Q

What is the maximum statuatory sick pay?

A

£99.35 / week

45
Q

What is the maximum amount payable for new state pension?

A

£185.15 / week

46
Q

What are the restrictions put on state benefits (2)?

A
  1. the NSP is only available to those of state pension age who have paid 35 yrs worth into their NICs
  2. means tested - someone claiming the benefit but has savings - this will be taken into account when entitled to benefit
47
Q

What are three negatives of state benefits? (3)

A
  1. low amounts payable
  2. strict eligibility requirements
  3. short-term
48
Q

What is the downside of people relying on state benefits?

A

the amount paid may not meet all of their needs

49
Q

Is having employee benefits enough protection? And why?

A

No - what happens when the employee leaves the business. For example, if the company offers income protection and life insurance, if the person leaves they will be completely unprotected

= seek additional cover

50
Q

Who replaces the Financial Services Authority (FSA) (2)

A

Financial Conduct Authority (FCA)
Prudential Regulation Authority (PRA)

51
Q

What are the three principles of the FCA in protecting its customers (3)?

A
  1. treat customers fairly
  2. deliver appropriate products and services
  3. put customer protection above own profits or income
52
Q

What other bodies are in place to protect customers? (2)

A
  1. Financial Ombudsman Service (FOS)
  2. Financial Services Compensation Scheme (FSCS)
53
Q

How does the FOS protect customers?

A

deals with customers who are not happy with how their complaints have been dealt with by a regulated firm

54
Q

How does the FSCS protect customers?

A

compensates customers where a regulated firm is unable to pay them what they are owed due to going out of business

55
Q

What two initiatives were set up to ensure needs of the customers were places first in the FSI?

A
  1. treating customers fairly (TCF)
  2. retail distribution review (RDR)
56
Q

What was the TCF initiative?

A

scheme proposes the firm have a duty to ensue the fair treatment of customers is embedded in values, cultures and way it does business

57
Q

What does the RDR do and what two key changes did it implement?

A

regulator led initiative that identified and addressed root cause to problems faced by customers receiving advice on and buying products from life and pension providers

  1. financial advisers no longer allowed to receive commission from providers (conflict of interest, mis-selling…)
  2. minimum qualification for financial adviser rose to QCA level 4 (equiv to CII regulated diploma) and have to become members of accredited bodies

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