Topic 1 Flashcards
Name the 10 financial institutions
Banks
Building societies
Credit unions
Financial advisers
Central banks
Friendly societies
Financial regulators
Pension funds
Insurers
Other organisations (eg FOS,FSCS,HM treasury)
What is financial intermediation
Financial intermediation refers to organizations taking in money to provide financial services while making a profit or surplus
What are the key roles of financial intermediation
Key roles include:
• Providing methods for making payments.
• Acting as a safe store for savings.
• Lending money.
• Insuring against financial risks
Why must financial service providers operate sustainably?
A: To ensure customers can rely on them long-term. Sustainability involves:
• Offering products tailored to customers’ needs (e.g., responsible lending).
• Treating customers fairly.
• Safeguarding the system’s survival
What are the characteristics of a sustainable financial system
A sustainable system consists of institutions that behave wisely by:
• Designing and selling products that meet customer needs.
• Practicing responsible lending.
• Treating customers fairly
Who oversees the sustainability of the UK’s financial system?
A:
• Bank of England (UK’s central bank).
• Regulatory bodies.
• HM Treasury (government department for the economy and financial system)
How does competition help maintain financial standards?
A: Competition ensures high standards by encouraging financial providers to operate efficiently and responsibly
What are the main characteristics of large banks in the UK?
A:
• Most are multinational groups offering financial services to personal and business sectors.
• They are typically public limited companies (plcs) owned by shareholders, aiming to make a profit.
• Some smaller banks operate solely in the UK
What are the two main subdivisions of banking business?
A:
1. Retail Banking: Focused on individual and small business customers.
2. Investment Banking (Wholesale): Focused on larger corporate and institutional clients
What are universal banks?
A: Banks that provide both retail and wholesale banking services
What were the key discussions and actions following the financial crisis of 2007–08
• Concerns arose about the riskier nature of wholesale banking compared to retail banking.
• There were calls for banks to separate retail and wholesale operations.
• The UK government introduced legislation to “ring-fence” retail banking services
What are retail banks, and what services do they provide
Retail banks provide services to individuals and small-to-medium-sized businesses, grouped under these categories:
• Money transmission: Methods for paying and receiving money (e.g., electronic transfers, debit cards, and cheques).
• Savings and investment: Ways to save money safely and earn interest.
• Lending: Loans for purchasing assets (e.g., houses, consumer items) or covering cash shortages.
• Insurance: Policies that help people transfer risks
What are the main retail banking firms in the UK
- NatWest Group (formerly Royal Bank of Scotland Group):
• Acquired NatWest in 2000.
• Includes specialist subsidiaries such as some insurance providers.
• Rescued by the UK government during the financial crisis.
• In May 2021, the government reduced its ownership to 54.8% by selling 580 million shares.- Lloyds Banking Group (LBG):
• Lloyds Bank acquired Trustee Savings Bank (TSB) in 1995.
• Purchased Scottish Widows (insurance company) in 2000.
• Acquired HBOS in 2008 during the financial crisis.
• Government invested money in Lloyds during the financial crisis, owning 24.9% of its share capital by 2014.
• Split into Lloyds and TSB in 2009 due to an EU court ruling to increase competition.
• Government sold all remaining shares by May 2017. - Barclays and HSBC:
• Both are large multinationals with subsidiaries and branches in many countries
- Lloyds Banking Group (LBG):
What significant events shaped the NatWest Group’s history
• Royal Bank of Scotland acquired NatWest in 2000.
• The UK government rescued the bank during the financial crisis.
• In 2021, 580 million shares were sold by the government, reducing its ownership to 54.8%.
What key acquisitions and changes occurred in Lloyds Banking Group’s history
• Acquired Trustee Savings Bank (TSB) in 1995 and Scottish Widows in 2000.
• Bought HBOS during the 2008 financial crisis.
• Split into Lloyds and TSB in 2009 after an EU ruling to increase competition.
• By 2017, the government sold all shares after owning 24.9% during the financial crisis
What is notable about Barclays and HSBC?
A: They are large multinational banks with a significant number of subsidiaries and branches across the world.
There are also some smaller players in the market. List them
The co-operative banking groups
Virgin bank ltd
Metro bank
Handelsbanken
M&S bank
Tesco bank
Sainsbury’s bank
What is The Co-operative Banking Group?
A: It is part of The Co-operative Group and includes The Co-operative Insurance, The Co-operative Investments, and The Co-operative Bank, which owns the online bank smile
What bank did Virgin Money purchase in January 2010, and what did it become?
A: Virgin Money purchased Church House Trust, which became Virgin Bank Ltd, a subsidiary of Virgin Money Holdings (UK) Ltd
What major acquisition did Virgin Bank Ltd make in 2012?
A: It bought Northern Rock plc (the ‘good’ part of Northern Rock), and the Northern Rock brand was phased out in 2012
When did Metro Bank receive its banking license, and how many branches does it have?
A: It received its license in March 2010 and has over 75 branches
What is Handelsbanken, and what is its focus?
A: It is a Swedish bank with over 200 branches in the UK, specializing in developing long-term relationships with customers
Name three retailers with banking subsidiaries in the UK.
A:
1. M&S Bank – Subsidiary of HSBC Bank plc.
2. Tesco Bank – Subsidiary of Tesco Personal Finance plc.
3. Sainsbury’s Bank – Owned by J Sainsbury plc.
What is another name for investment banks?
A: They are also known as wholesale banks
How do investment banks differ from retail banks?
A: They do not accept deposits but raise funds on financial markets to provide services to large corporations and governments
What are four key functions of investment banks?
A:
1. Lending large amounts of money to companies.
2. Helping companies raise funds by issuing shares and bonds.
3. Advising companies on mergers and takeovers.
4. Trading in financial markets to make profits
What are two well-known investment banks?
A:
1. Goldman Sachs
2. JP Morgan Chase
What type of banks engage in both retail and investment banking?
A: Large UK banks, along with some global financial firms, offer both retail and investment banking services.
What are building societies?
A: Building societies are mutual organisations, meaning they do not have share capital and are owned by their members (savers and borrowers). They operate not-for-profit, and any surplus earned is retained within the business for the members’ benefit
How do building societies compete with banks?
A: They offer a full range of personal financial services similar to banks
Which is the largest building society in the UK?
A: Nationwide is the largest building society in the UK
When and where was the first building society founded?
A: It was founded in Birmingham in 1775
How many building societies were there in 1910, and how has this number changed?
A: There were 1,723 building societies in 1910, but the number has fallen significantly, with just over 50 remaining in the UK today (as of BSA, 2022)
What caused the decline in the number of building societies?
A: Many building societies either:
1. Became banks from the late 1980s onwards.
2. Merged with or were taken over by other financial institutions
Give an example of a building society merger.
A: The Yorkshire and Chelsea Building Societies merged in 2010
Impact of the 2007–08 Financial Crisis on Building Societies
How were building societies affected by the 2007–08 financial crisis
- Many made losses due to their investment in property and exposure to falling property prices.
- They suffered from defaults in their less creditworthy mortgage business.
- They were impacted by mortgage fraud, where fraudulent brokers and valuers overstated property values, leading to unsustainable mortgage loans
The Co-operative Bank
What is The Co-operative Bank, and what was it known for?
A: It is part of The Co-operative Group, the UK’s largest consumer co-operative. It was originally a member-owned mutual bank and was known for its ethical values and policies
What financial trouble did The Co-operative Bank face in 2013?
A: It had a gap in its finances and had to be rescued by hedge funds, which invested nearly £1 billion in return for 70% ownership
How did the 2013 rescue impact The Co-operative Bank’s status?
A: It lost its mutual status, and doubts arose about its ethical values. Since then, it has raised further capital by issuing new shares
How has The Co-operative Bank been described since its financial troubles?
A: It has been called a ‘troubled mutual’
How does Nationwide differ from The Co-operative Bank?
A: Nationwide is a mutual building society, meaning it focuses on serving members’ interests rather than making profits for shareholders
Insurers
Q: What are the two main categories of insurance providers?
A:
1. Insurance companies
2. The Lloyd’s specialist insurance market
Insurance Companies
Q: What are insurance companies?
A: They provide insurance to individuals and companies to protect against financial risks
Q: What types of companies exist in the UK insurance market?
A: Insurance companies can be either corporates or mutuals, but most in the UK are corporates
Name two major insurance companies in the UK.
A: Aviva and AXA
How are some insurance companies linked to other financial services?
A: Many belong to large financial groups that also provide banking and other financial services
What types of financial risks do insurance companies cover?
A:
1. Loss or damage to houses, cars, and property.
2. Life insurance to support dependents after a customer’s death
The Lloyd’s Insurance Market
Q: Where is the Lloyd’s insurance market based, and how does it operate?
A: It is based in the City of London and consists of syndicates (groups of investors)
Who are the members of the Lloyd’s insurance market, and what do they do?
A: The members employ specialists called underwriters to accept insurance risk and divide it between them
What types of insurance does the Lloyd’s market provide?
A: It covers a wide range of risks, including life insurance
Credit Unions
Q: What are credit unions?
A: Credit unions are co-operatives (mutuals) owned and controlled by their members. They are part of an international movement with over 86,000 credit unions in nearly 120 countries
Q: What is the ‘common bond’ requirement for joining a credit union?
A: A person must meet certain criteria, such as living or working in a particular area, or working for a specific employer or type of employer
How did UK legislation change credit union membership rules in 2012?
A: It allowed credit unions to extend their services to new groups, including community groups and businesses
How many credit unions are there in the UK, and how do they vary?
A: There are over 300 credit unions in the UK, varying in size and range of services offered
What financial services do credit unions provide?
A: - Savings accounts
• Loans
• Some offer current accounts
• Some provide mortgages, cash ISAs (Individual Savings Accounts), and insurance product
What is the ethical philosophy of credit unions?
A: Credit unions aim to:
• Promote the economic and social well-being of members
• Encourage responsible lending and affordable borrowing
• Promote thrift by encouraging savings
• Charge fair and reasonable interest rates
What is the ethical philosophy of credit unions?
A: Credit unions aim to:
• Promote the economic and social well-being of members
• Encourage responsible lending and affordable borrowing
• Promote thrift by encouraging savings
• Charge fair and reasonable interest rates
Under which law are credit unions registered?
A: Credit unions are registered under the Co-operative and Community Benefit Societies and Credit Unions Act 1965
Which organisations regulate UK credit unions?
- Prudential Regulation Authority
- Financial Conduct Authority
What is the main membership organisation for UK credit unions?
A: The Association of British Credit Unions Ltd (ABCUL).
Friendly Societies
Q: What are friendly societies?
A: Friendly societies are mutual organisations offering members a range of financial products, such as savings, investments, insurance, pensions, and annuities
Why were friendly societies originally formed?
A: They were formed when people grouped together to contribute to a mutual fund and receive benefits in times of need
What does the name of a friendly society often indicate?
A: The name often hints at its history, a place (e.g., Wiltshire Friendly Society), or an occupation (e.g., Shepherds’ Friendly Society)
How have friendly societies evolved in the UK?
A: Some serve limited geographical areas, while others have grown into national organisations offering a range of financial services
What are some examples of occupation-based friendly societies?
A: Examples include friendly societies for firefighters, dentists, and shepherds.
Pension Funds
What is the purpose of pension funds?
A: Pension funds invest people’s pension contributions to provide them with an income upon retirement
How do pension funds generate returns?
A: They use long-term savings from millions of people to invest in a variety of assets in financial markets, aiming to achieve the best possible returns
Financial Advisers
What is the role of an Independent Financial Adviser (IFA)?
A: IFAs provide personal financial services by helping individuals choose from a wide range of financial products available on the market
How do IFAs differ from restricted advisers?
A: - IFAs are independent and not tied to a particular provider.
• Restricted advisers work for financial service providers and can only offer advice on that company’s products
The Bank of England
What is the Bank of England?
A: The Bank of England is the UK’s central bank, responsible for maintaining monetary and financial stability
When was the Bank of England founded and nationalized?
A: - Founded in 1694
• Taken over by the state in 1946
What are the two core purposes of the Bank of England?
A:
1. Achieving monetary stability (stable prices and confidence in the currency).
2. Achieving financial stability (ensuring the financial system remains stable)
What is the role of the Monetary Policy Committee (MPC)?
A: The MPC is responsible for carrying out government monetary policy by adjusting interest rates to:
• Maintain stable prices.
• Encourage economic growth.
• Control inflation
What was introduced in 2013 to enhance the Bank of England’s financial stability role?
A: The Financial Policy Committee (FPC) and the Prudential Regulation Authority (PRA) were introduced to regulate the financial system
What is the Bank of England’s role as a “banker’s bank”?
A: - Large banks hold accounts at the Bank of England.
• It clears payments and receipts for banks.
• It lends money to banks when they run short of cash
Who is responsible for issuing UK banknotes?
A: The Bank of England is the only institution legally allowed to issue UK banknotes as legal tender
How does the Bank of England manage the UK’s international reserves?
A: It looks after the UK’s gold and foreign exchange reserves, which are used to finance international trade
What was the Bank of England’s relationship with the European System of Central Banks (ESCB)?
A: The Bank of England was part of the ESCB until the UK left the European Union (Brexit)
The Financial Regulators
Q14: Why are financial regulators needed?
A: Individuals and businesses hand over money to financial institutions, so regulators ensure these institutions:
• Operate fairly and transparently.
• Follow financial laws.
• Do not engage in misconduct
What do financial regulators do?
A:
1. Set rules that banks and financial institutions must follow.
2. Monitor compliance to ensure institutions act responsibly.
3. Ensure customers are treated fairly
What is the impact of regulations on financial institutions?
A: - They impose costs and restrictions on financial institutions.
• Institutions must work within these rules, but regulators allow them freedom to innovate, provided they do not harm the economy or consumers
How many financial regulatory bodies exist in the UK, and when did they become operational?
A: There are three financial regulatory bodies, which became fully operational in April 2013, following the Financial Services Act 2012.
The Financial Policy Committee (FPC)
Q18: What is the role of the Financial Policy Committee (FPC)?
A: The FPC is responsible for ensuring the survival and stability of the UK’s financial system
What are the two statutory objectives of the FPC?
A:
1. Identifying and reducing systemic risks to enhance the resilience of the financial system.
2. Supporting the Government’s economic policy
The Prudential Regulation Authority (PRA)
Q1: What is the Prudential Regulation Authority (PRA)?
A: The PRA is part of the Bank of England, responsible for regulating and supervising financial service providers such as:
• Banks
• Building societies
• Credit unions
• Insurers
• Major investment firms
What is the PRA’s role in financial stability?
A: It contributes to the stability of the UK financial system by promoting the safety and soundness of the firms it regulates
What are the three main statutory objectives of the PRA?
- General objective: Ensure the safety and soundness of financial service providers by making them act prudently. This prevents financial instability if a provider fails and ensures continued service to customers.
- Insurance-specific objective: Secure appropriate protection for policyholders.
- Competition objective: Facilitate effective competition in financial services
The Financial Conduct Authority (FCA)
Q4: What is the Financial Conduct Authority (FCA)?
A: The FCA is a separate institution from the Bank of England. It ensures that financial markets function effectively and that consumers get a fair deal
What are the three statutory objectives of the FCA?
- Consumer Protection: Ensure that consumers have an appropriate level of protection in financial services.
- Market Integrity: Protect and enhance the integrity of the UK financial system.
- Promoting Competition: Encourage healthy competition in financial services to benefit consumers
How does the FCA differ from the PRA?
A: - The PRA focuses on the safety and soundness of firms.
• The FCA focuses on conduct regulation, ensuring fair treatment of consumers and market integrity
What is the role of the Financial Conduct Authority (FCA) in fighting financial crime and protecting consumers?
Back:
• Ensures firms protect against financial crime, including:
• Detecting and preventing money laundering.
• Taking action against corrupt or unethical firms.
• Grants licences to businesses that:
• Offer goods/services on credit (e.g., overdrafts, credit cards).
• Lend money to consumers.
• Enforces action against rogue businesses and regulates:
• Irresponsible lending
• Debt collection practices
• Debt management
HM Treasury – Role & Responsibilities
Front: What is the role of HM Treasury in financial regulation?
Back:
• UK’s economics and finance ministry.
• Responsible for lawmaking and forming the regulatory framework.
• Overall financial stability responsibility.
• Promotes the UK as a world-class financial centre.
• Deals with consumer issues.
• Works to counter money laundering and terrorist finance
MoneyHelper – Purpose & Services
Front: What is MoneyHelper, and how does it support financial education?
Back:
• A part of the Money and Pensions Service.
• Provides independent, free, and unbiased financial information. Aims: • Enhance people’s financial knowledge and understanding. • Help individuals manage their own financial affairs. Services include: • Online financial health check • Debt advice coordination • Promoting financial education
CMA – Competition & Markets Authority
Front: What is the Competition and Markets Authority (CMA), and what is its remit?
Back:
Began operation in April 2014 after the disbanding of:
• Office of Fair Trading
• Competition Commission
Ensures markets work well for consumers by:
• Investigating mergers and anti-competitive activities.
• Prosecuting businesses that operate cartels.
• Preventing barriers to competition (e.g., ensuring consumers can choose between suppliers)
Financial Ombudsman Service (FOS)
Front: What is the role of the Financial Ombudsman Service (FOS)?
Back:
• Settles complaints between consumers and financial businesses.
• Covers banking and insurance disputes.
Acts as an independent and impartial arbitrator:
• Does not represent either party.
• Bases decisions on facts and evidence.
Decisions are based on what is fair and reasonable rather than strict legal rules.
Financial Services Compensation Scheme (FSCS)
Front: What is the Financial Services Compensation Scheme (FSCS), and what are its compensation limits?
Back:
• A fund that compensates customers if a bank or institution fails (e.g., bankruptcy).
• Covers debt repayment, insurance policies, and investment businesses.
Compensation Limits (2022):
• 100% of savings deposits up to £85,000 per person, per authorised firm.
• If savings are split across banks under the same banking licence, they are treated as one institution (max £85,000 total).
Trade Associations – UK Finance, BSA, ABI
Front: What are the main trade associations in the UK financial sector
UK finance
Building Societies Association
Association of British Insurers
Front: What are the main trade associations in the UK financial sector? (Detail)
UK Finance:
• Took over from the British Bankers’ Association (BBA).
• Represents 250 banking members.
• Focuses on competitiveness, customer support, and innovation.
Building Societies Association (BSA):
• Trade association for UK building societies.
Association of British Insurers (ABI):
• Represents insurance companies.
• Covers general insurance, investment, and long-term savings
Temporary Public Ownership (2007-08 Financial Crisis)
Front: What was the role of the UK government in temporary public ownership during the 2007-08 financial crisis?
Back:
• Several UK banks (RBS, Lloyds) nearly collapsed.
• Government rescued banks by injecting large sums of cash in return for substantial shareholding.
• Prevented total system collapse by taking temporary ownership of major banks.
• UK Financial Investments (UKFI) Ltd was set up to manage these shareholdings.
• In March 2018, UKFI merged with Shareholder Executive (ShEx) to form UK Government Investments (UKGI).
• Banks continued to run independently, but the government:
• Encouraged lending to small and medium-sized businesses.
• Sold RBS and Lloyds shares back to the private sector as planned
The Run on Northern Rock (2007)
Front: What happened to Northern Rock in 2007, and how did the government respond?
Back:
• Northern Rock failed due to poor financial management.
• Could not raise funds to meet its obligations.
• Problems publicised in the media, causing panic.
• Led to a bank run:
• Long queues of people trying to withdraw savings.
• Government feared a wider banking crisis, so it:
• Guaranteed savings to restore confidence.
• Bought Northern Rock, placing it under temporary public ownership
How did the UK government restructure Northern Rock after taking ownership?
Back:
• Split into a ‘Good Bank’ and a ‘Bad Bank’
How did the UK government restructure Northern Rock after taking ownership? (Detail)
Good Bank:
• Pre-existing savings accounts.
• Best mortgage accounts (loans expected to be repaid).
• Sold to Virgin Money in 2012 and rebranded.
Bad Bank:
• Mortgage accounts with arrears or defaults.
• Repaid £48.7 billion bailout loan to the government by 2019.
Increased Concentration
Q: What is meant by “increased concentration” in the banking sector?
A: Increased concentration refers to the trend of banks becoming larger and fewer in number due to mergers and acquisitions. This leads to a market dominated by a few large firms, a situation known as an oligopoly
Why have banks merged or acquired others?
A: To increase market share, eliminate competition, and diversify product ranges
How did the financial crisis impact banking concentration? And What has happened to building societies as a result of this trend
A: Weak banks were acquired by stronger ones, further strengthening the dominance of larger banks.
A: They have also become fewer in number for similar reasons
Competition
Q: How does increased concentration affect competition in retail banking?
A: With fewer banks in the market, competition is reduced, which can limit choices for consumers and businesses
Divestment
Why were Lloyds and RBS required to sell some of their branches and assets?
A: As a condition for being rescued by the public sector, the European Union required them to divest certain assets
What divestments did RBS make?
A:
• Sold stakes in Direct Line Insurance Group in 2014.
• Sold more than 300 branches in 2013
What was the Lloyds Banking Group (LBG) divestment plan?
A:
• Agreed to divest 631 branches under a plan called Project Verde.
• The Co-operative Bank was supposed to buy these branches, but the deal fell through in April 2013 due to deficiencies in The Co-operative Bank’s balance sheet
What did Lloyds do after the Co-operative Bank deal failed?
A:
• Formed a new bank called TSB (formerly Trustee Savings Bank, which had merged with Lloyds in 1995).
• TSB was floated on the stock market in 2014, meaning its shares were purchased by investors, making it a separate company from LBG
Ring-Fencing Retail Banking
What does the Financial Services (Banking Reform) Act 2013 require?
A: It mandates the ring-fencing (separation) of certain retail banking activities from wholesale or investment banking
What is a ring-fenced body?
A: A bank that carries out core activities essential for retail banking
What activities are defined as “core” at the time of writing?
A:
1. Accepting deposits
2. Opening accounts
3. Providing withdrawal, payment, and overdraft services
Can the government modify the definition of core activities?
A: Yes, the government can add more core activities if it believes that an interruption in these services could threaten UK financial stability
What happens to the part of a bank that is not ring-fenced?
A: It continues to provide its full range of services, including riskier investment banking transactions
What is the purpose of ring-fencing in the event of a bank’s insolvency?
A: The ring-fenced body will still be able to continue core retail banking activities, ensuring that current and savings accounts still function
What is one benefit of ring-fencing for retail depositors?
A: Their money will not be used to cover the debts of the riskier investment section of the bank
What is a disadvantage of ring-fencing for the retail arm of the bank?
A:
• The retail division may not be able to access funds from the wholesale arm.
• This could lead to higher borrowing costs in financial markets.
• The retail bank may compensate by offering lower interest rates on savings and imposing charges on current account customers
How did UK banks respond to ring-fencing regulations?
A:
• RBS split its retail and investment banking in 2016.
• HSBC separated its retail banking (M&S Bank, First Direct) from its investment banking.
• Similar measures were taken by Barclays, Lloyds, and Santander, and were completed by January 2019
Financial Intermediation
What is financial intermediation?
A: It is the process of bringing together people who need to save and those who need to borrow, typically facilitated by institutions like banks and building societies
Why is financial intermediation important?
A: It allows funds to flow between those with surplus money and those who need to borrow, supporting economic activity
What are the three financial positions of individuals and businesses in an economy
The Surplus Sector
The Deficit Sector
The Balanced Sector
What are the three financial positions of individuals and businesses in an economy? (Detail)
- The Surplus Sector
• Individuals or businesses in a positive financial situation.
• They have more money coming in than going out.
• They need to save by lending their surplus funds to others to earn income.- The Deficit Sector
• Individuals or businesses in a negative financial situation.
• They have more money going out than coming in.
• They need to borrow to cover their deficit. - The Balanced Sector
• Their income and outgoing funds are equal.
• They do not need to borrow or lend but still require banking services for transactions
- The Deficit Sector
Do individuals or businesses always stay in the same financial position?
A: No, most people and businesses fluctuate between surplus and deficit positions over time
Why are financial intermediaries necessary?
A: It is not always easy for people with surpluses and people with deficits to find each other and agree on lending terms
How do financial intermediaries help?
A: Banks and similar institutions facilitate and expand this process by efficiently bringing together lenders and borrowers
Financial Intermediation Process
Q: How do financial intermediaries link the surplus and deficit sectors?
A: Financial institutions borrow money from people with a surplus and lend it out to people with a deficit
How do banks act as principals in financial intermediation?
A:
• Banks owe the money they borrow (liabilities).
• Banks own the debt on the money they lend out (assets)
How do banks make a profit in financial intermediation?
A:
• They pay a lower interest rate on deposits from the surplus sector.
• They charge a higher interest rate on loans to the deficit sector.
• The interest rate spread (difference) is the bank’s profit
What risk do financial intermediaries face?
A: The risk of default, where debtors (borrowers) might not repay their loans, leading to the bank’s inability to repay its own creditors
What is the surplus sector?
A:
• People or businesses with more money coming in than going out.
• They save money by depositing it in banks or lending it out to earn income
What is the deficit sector?
A:
• People or businesses with more money going out than coming in.
• They need to borrow money to cover their expenses or investments
What role do financial intermediaries play between these two sectors?
A: They borrow from the surplus sector (savers) and lend to the deficit sector (borrowers), ensuring efficient capital flow in the economy
Counterparties in Financial Intermediation
Q: What is a counterparty in financial intermediation?
A: A counterparty is someone who uses a financial intermediary, either by lending money to it (depositing) or borrowing from it. They are also known as ‘end-customers’ and can include individuals, businesses, governments, and financial institutions
What financial activities do counterparties engage in?
A: Counterparties deposit and borrow money, invest in financial services such as insurance, and use banks for various transactions
Give an example of how counterparties function in financial transactions.
A: If a bank lends money to a company, the bank and the company are the two counterparties involved in the transaction
What are the main categories of counterparties in the financial sector?
A:
1. The personal sector
2. The retail sector
3. The commercial and corporate sectors
4. The public sector
5. The financial sector
What defines the personal sector in financial intermediation?
A: The personal sector consists of individuals who save money in different types of accounts, invest in pensions and insurance, borrow for home purchases (mortgages), and take out loans for personal consumption
What financial activities do individuals in the personal sector engage in?
A:
• Saving in instant-access or long-term accounts
• Investing in pensions and insurance funds for retirement
• Borrowing via mortgages, credit cards, personal loans, and hire purchase
• Using banks for money payments
• Insuring lives and property against risks
What is included in the retail sector?
A: The retail sector consists of the personal sector plus small and medium-sized businesses that save and borrow small or medium-sized amounts of money
How do businesses and companies function as counterparties?
A: Larger businesses deposit and borrow significant amounts of money for different periods, use fund management services, and engage in financial transactions such as loans for working capital, equipment purchases, and expansion
What financial activities do commercial and corporate counterparties engage in?
A:
• Taking loans for working capital and inventory
• Financing long-term investments like equipment and expansion
• Insuring assets
• Using foreign exchange for imports and exports
• Accessing capital and equity markets
What defines the public sector in financial intermediation?
A: The public sector consists of the government and public bodies that receive and pay money via bank accounts, borrow from the public, and issue stocks to finance deficits
What are the financial activities of the public sector?
A:
• Receiving and making payments through bank accounts
• Borrowing from the public via the stock market
• Financing budget deficits that arise from higher public spending than tax revenue
What is the financial sector’s role in financial intermediation?
A: Financial institutions lend and borrow money among themselves to manage liquidity, adjust profit positions, and mitigate risk.
What are some common financial sector transactions?
A:
• Borrowing and lending money to manage liquidity
• Adjusting financial positions to maximize profits
• Investing in securities through life insurance companies and fund manager
Sources and Applications of Funds
What are customer deposits, and why are they important for banks?
A: Customer deposits are the money customers keep in their current and savings accounts. Despite constant movement, there is a steady core of funding, making it a reliable source for banks. Banks compete for deposits by offering interest and additional services
What are short-term money markets, and how do banks use them?
A: Banks borrow for short periods (days to months) in money markets, mainly through the interbank market. Banks with short-term surpluses lend to those with deficits. Example: A bank that spends more in a trading day than it receives borrows the difference from another bank
How do banks use long-term capital markets to raise funds?
A: Banks raise long-term funds through bonds and equities:
• Bonds: Long-term debt instruments where investors lend money to the bank.
• Equities: Shares issued by banks, making shareholders partial owners
What is the role of asset sales in raising funds for banks?
A: Some banks sell parts of their business to generate money, especially in financial trouble
How do banks use funds for lending?
A: Banks provide short-, medium-, and long-term loans to individuals and businesses to finance expenditures and cover cash shortages. Examples include:
• Mortgage loans
• Personal loans
• Asset finance
• Business overdrafts
How do banks use funds in financial markets?
A: Banks trade in global financial markets by buying and selling securities to profit from price differences. This is a high-risk but potentially profitable activity
What types of physical assets do banks invest in?
A: Banks invest in:
• Buildings
• Computer systems
• Training programs
• New product and market development
Why do banks need funds for operational costs?
A: Banks are businesses and must cover expenses like staff salaries and administration costs
New Types of Financial Services Provision
What are the three major trends in financial services provision?
A:
1. New types of institutions
2. New products
3. New channels of delivery
What is the role of new types of institutions in financial services?
A: New financial providers have emerged to meet evolving customer needs, adapting to industry changes.
Peer-to-Peer (P2P) Lender
What is peer-to-peer (P2P) lending?
A: P2P lending is an online marketplace that connects borrowers directly with lenders, bypassing traditional banks
How do P2P lenders make money?
A: They charge borrowers a fee for using their platform and facilitating legally binding loan agreements
Advantages of P2P
- Access to finance when banks are not lending eg after financial crash
- Less overload than banks so may offer better rates
- Maybe quicker to access finance as less bank procedures
- Regulated by the FCA since 2014
Disadvantages of P2P lending
- No protection from the FSCS for depositors
- May not find a suitable lender
- Mis - selling of loans? Due to being a new platform
What are the risks of P2P lending?
A: Deposits are not protected under the FSCS, meaning savers could lose money if borrowers default
How is risk reduced in P2P lending?
A: Through strict credit scoring and diversification—savers’ money is split into small amounts and loaned to multiple borrowers
Since when has P2P lending been regulated in the UK?
A: Since April 2014, by the Financial Conduct Authority (FCA)
Name an example of a P2P lender and its specialization.
: Funding Circle – specializes in business loans
How does P2P lending compete with traditional banks?
A: By offering alternative ways to save and borrow, often with better interest rates
What milestone did P2P lending reach in 2017?
A: It became the largest form of alternative finance in the UK
Payday Loan Companies
Q10: What is a payday loan?
A: A short-term, high-interest cash advance designed for people who need money urgently
Who typically uses payday loans?
A: Customers in employment who need instant cash and have payroll records
What is the main drawback of payday loans?
A: Extremely high-interest rates – for example, Lending Stream has an APR of 1,333%
Disadvantages of payday loans
- Trap people in mounting debt
- Affects credit rating
- Remain on your credit history for 6 years
- May effect access to future borrowing from more reputable sources
What problem do borrowers face with payday loans?
A: Many roll over loans when they can’t repay, leading to debt traps where they owe much more than originally borrowed
How do payday loans affect credit scores?
A: They remain on a credit record for 6 years, making it harder to get mortgages or traditional loans
What are the typical default fees charged by payday lenders?
A: Between £20-£30 per missed payment, potentially costing £240-£360 per year if repayments are consistently late
What were payday lenders criticized for?
A: Aggressive collection tactics and pressuring borrowers to repay
What regulatory changes did the FCA introduce in 2015?
A:
• Fixed default fee cap: £15
• Initial cost cap: 0.8% per day
• Total cost cap: 100% of the loan
Financial Crisis (2007-08) and Its Impact
How did the 2007-08 financial crisis affect lending?
A: Banks tightened lending criteria, making it harder for people to get loans
Why did payday loans become more popular after the crisis?
A: Because traditional banks were reluctant to lend, so people turned to payday lenders for quick cash
What was one major criticism of banks post-crisis?
A: Selling complicated financial products with unclear terms, such as Payment Protection Insurance (PPI)
New Financial Products Post-Crisi
How did banks respond to criticism after the financial crisis?
A: They simplified their products and focused on consolidating existing ones instead of introducing new, complex products
What change was noticeable in bank loan products post-crisis?
A: Banks made their loan conditions stricter, making it harder to borrow
Impact of the 2007-08 Financial Crisis on Lending
What was a major cause of the financial struggles post-2007?
A: Many people borrowed too much before 2007, leading to widespread debt problems
How did banks respond to high levels of bad debt?
A: They became more risk-averse, meaning they were more selective about who they lend to and how much they lend
What new mortgage requirements were introduced due to stricter lending criteria?
A:
• Larger deposits were required for mortgage loans.
• Stronger affordability checks were introduced to ensure borrowers could meet repayments.
• Applicants had to prove they could afford the mortgage in addition to essential expenses
What phrase is commonly associated with the tightening of lending criteria post-2007?
A: “Credit crunch” – referring to the difficulty in borrowing money after the financial crisis
New Delivery Channels in Banking
Q5: How have banking services changed in recent years?
A: There has been a shift from in-person banking (branches) to digital banking, including online and mobile banking
Why has there been a move towards internet banking?
A:
• More people own computers and smartphones.
• Customers prefer to manage financial products online rather than visiting a branch
How has mobile banking extended accessibility to financial services?
A: People can now access their bank accounts using smartphone apps
Q8: What are the key features of Barclays’ mobile banking services?
A:
• Pay people and check account balance.
• Change cash machine limits, view PIN, and freeze a lost card.
• Earn rewards on mobile transactions
What is crowdfunding?
A: Crowdfunding is a method of financing businesses by collecting small amounts of money from a large number of people, typically via the internet.
How has crowdfunding changed traditional business financing?
A: Traditionally, financing involved asking a few investors for large sums, whereas crowdfunding allows entrepreneurs to reach thousands or millions of people contributing small amounts
What are the benefits of crowdfunding for small businesses?
A: - Provides an alternative to traditional bank loans.
• Enables direct appeals to small investors.
• Allows anyone, not just the wealthy, to invest in start-ups
What challenges does crowdfunding face?
A: - Industry regulation is still developing.
• Balancing investor protection with entrepreneurial freedom.
• Many small businesses fail early on
Will crowdfunding replace traditional funding methods like venture capital?
A: No, companies requiring large amounts of capital may still rely on venture capital, but crowdfunding significantly contributes to the entrepreneurial ecosystem
How does crowdfunding work in practice?
A: - Typically conducted through online platforms.
• Platforms coordinate and administer fundraising.
• Projects range from non-financial returns (community projects) to financial gains (investments in start-ups)
What are the three main types of crowdfunding according to the UK Crowdfunding Association (CFA)?
A: 1. Donation crowdfunding
2. Debt crowdfunding
3. Equity crowdfunding
What is donation crowdfunding?
A: - Investors contribute because they believe in the cause.
• Returns are intangible (e.g., acknowledgements, tickets, gifts).
• No financial return expected.
What is debt crowdfunding?
A: - Investors lend money and receive it back with interest.
• Also called peer-to-peer lending or lend-to-save.
• Bypasses traditional banks.
How does debt crowdfunding work in developing countries?
A: - Loans are often given to very poor borrowers.
• No interest is charged.
• Lenders are rewarded in non-financial ways (e.g., social impact)
What is equity crowdfunding?
A: Equity crowdfunding allows people to invest money in exchange for a share in a business, project, or venture. If the business succeeds, the value of shares increases; if it fails, investors may lose their money
What are the risks of investing in equity crowdfunding?
A: - The business may fail, leading to a loss of money.
• Shares may be diluted if more shares are issued.
• It could take a long time to get a return.
• It is difficult to sell shares from crowdfunding investments
How is crowdfunding regulated in the UK?
A: - The Financial Conduct Authority (FCA) regulates debt-based and investment-based crowdfunding.
• Investment-based crowdfunding includes financial products like mini-bonds, debentures, and equity investments.
• Platforms are regulated based on the type of product they offer rather than the business risk
What forms of crowdfunding are not covered by the new FCA regulations?
A: - Donation-based crowdfunding.
• Reward-based crowdfunding.
• Community share issues
What key investor protections are in place under crowdfunding regulations?
A: - Risks must be highlighted in marketing.
• Systems must ensure investors’ money is kept separate from the platform’s finances.
• Platforms must maintain adequate capital reserves
What is the 14-day cooling-off period in crowdfunding?
A: A rule allowing investors to withdraw their money within 14 days if they change their mind after making a crowdfunding investment
Who is allowed to invest in crowdfunding under FCA rules?
A: Investors must meet one of the following criteria:
• Retail clients who receive financial advice.
• Retail clients classified as corporate finance or venture capital contacts.
• Retail clients certified as sophisticated or high-net-worth individuals.
• Retail clients confirming they will not invest more than 10% of their net investible assets
What is the investor’s responsibility before investing in crowdfunding?
A: - Investors must confirm they fit into one of the FCA-approved categories.
• They must pass an online appropriateness test to prove they understand the risks
Does FCA regulation guarantee investor safety in crowdfunding?
A: No, even if a platform is FCA-regulated, investments are still high-risk and not guaranteed to be safe
What role does the UK Crowdfunding Association (CFA) play?
A: - It sets industry standards and a code of conduct for crowdfunding platforms.
• It ensures investor money is protected from company finances in case of bankruptcy.
• It enforces the 14-day cooling-off period for investments
The Bank Of England’s Monetary Policy Committee is responsible for:
A. Carrying out government welfare policy
B. Carrying out government budgetary policy
C. Carrying out government fiscal policy
D. Carrying out government monetary policy
D
The providers of insurance can be subdivided into two main categories:
A. Life insurance and general insurance companies
B. Car insurance and home insurance
C. Protection companies and investment markets
D. Individual insurance companies and Lloyd’s insurance market
D
People who lend money to intermediaries and borrow from them are known as counterparties:
A. True
B. False
A
The largest building society in the UK is:
A. Derbyshire
B. Cov
C. Nationwide
D. Skipton building
C
Which of the following is an example of a large public limited company?
Bank
Building society
Credit union
Friendly society
Bank
Retail Banks:
A. Provide services to individuals and to small and medium sized businesses
B. Do not accept deposits but they raise funds on financial markets
C. Use their funds to provide special services to large
D. Advise companies on mergers and takeovers
A
An example of a payday loan company is:
Quickquid
Dosh
Funding circle
Zopa
Quickquid
An objective of the Financial Policy Committee is to:
A. Contribute to securing protection for insurance policyholders
B. Enhance the integrity of the UK financial system
C. Support the gov’s economic policy
D. Regulate banks
C
Credit unions are regulated by:
A. The Prudential Regulation Authority and the FCA
B. The Association of British Credit Unions Limited
C. The Financial Services Authority
D. The Gov
A
The gov department that has overall responsibility for financial stability in the UK is:
HM Revenue & Customs
The BOE
HM Treasury
Department for work and pensions
HM TREASURY
An independent financial adviser is permitted to sell the products of:
A limited number of providers
A single provider
No providers
Any provider
Any provider
UK Financial Investments was set up to manage the shareholdings of banks rescued by the gov
False
True
True
