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Finance Unit 4 > Topic 1 > Flashcards

Topic 1 Flashcards

1
Q

Name the 10 financial institutions

A

Banks
Building societies
Credit unions
Financial advisers
Central banks
Friendly societies
Financial regulators
Pension funds
Insurers
Other organisations (eg FOS,FSCS,HM treasury)

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2
Q

What is financial intermediation

A

Financial intermediation refers to organizations taking in money to provide financial services while making a profit or surplus

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3
Q

What are the key roles of financial intermediation

A

Key roles include:
• Providing methods for making payments.
• Acting as a safe store for savings.
• Lending money.
• Insuring against financial risks

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4
Q

Why must financial service providers operate sustainably?

A

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

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5
Q

What are the characteristics of a sustainable financial system

A

A sustainable system consists of institutions that behave wisely by:
• Designing and selling products that meet customer needs.
• Practicing responsible lending.
• Treating customers fairly

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6
Q

Who oversees the sustainability of the UK’s financial system?

A

A:
• Bank of England (UK’s central bank).
• Regulatory bodies.
• HM Treasury (government department for the economy and financial system)

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7
Q

How does competition help maintain financial standards?

A

A: Competition ensures high standards by encouraging financial providers to operate efficiently and responsibly

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8
Q

What are the main characteristics of large banks in the UK?

A

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

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9
Q

What are the two main subdivisions of banking business?

A

A:
1. Retail Banking: Focused on individual and small business customers.
2. Investment Banking (Wholesale): Focused on larger corporate and institutional clients

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10
Q

What are universal banks?

A

A: Banks that provide both retail and wholesale banking services

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11
Q

What were the key discussions and actions following the financial crisis of 2007–08

A

• 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

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12
Q

What are retail banks, and what services do they provide

A

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

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13
Q

What are the main retail banking firms in the UK

A
  1. 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.
    1. 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.
    2. Barclays and HSBC:
      • Both are large multinationals with subsidiaries and branches in many countries
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14
Q

What significant events shaped the NatWest Group’s history

A

• 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%.

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15
Q

What key acquisitions and changes occurred in Lloyds Banking Group’s history

A

• 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

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16
Q

What is notable about Barclays and HSBC?

A

A: They are large multinational banks with a significant number of subsidiaries and branches across the world.

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17
Q

There are also some smaller players in the market. List them

A

The co-operative banking groups
Virgin bank ltd
Metro bank
Handelsbanken
M&S bank
Tesco bank
Sainsbury’s bank

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18
Q

What is The Co-operative Banking Group?

A

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

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19
Q

What bank did Virgin Money purchase in January 2010, and what did it become?

A

A: Virgin Money purchased Church House Trust, which became Virgin Bank Ltd, a subsidiary of Virgin Money Holdings (UK) Ltd

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20
Q

What major acquisition did Virgin Bank Ltd make in 2012?

A

A: It bought Northern Rock plc (the ‘good’ part of Northern Rock), and the Northern Rock brand was phased out in 2012

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21
Q

When did Metro Bank receive its banking license, and how many branches does it have?

A

A: It received its license in March 2010 and has over 75 branches

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22
Q

What is Handelsbanken, and what is its focus?

A

A: It is a Swedish bank with over 200 branches in the UK, specializing in developing long-term relationships with customers

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23
Q

Name three retailers with banking subsidiaries in the UK.

A

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.

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24
Q

What is another name for investment banks?

A

A: They are also known as wholesale banks

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25
Q

How do investment banks differ from retail banks?

A

A: They do not accept deposits but raise funds on financial markets to provide services to large corporations and governments

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26
Q

What are four key functions of investment banks?

A

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

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27
Q

What are two well-known investment banks?

A

A:
1. Goldman Sachs
2. JP Morgan Chase

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28
Q

What type of banks engage in both retail and investment banking?

A

A: Large UK banks, along with some global financial firms, offer both retail and investment banking services.

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29
Q

What are building societies?

A

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

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30
Q

How do building societies compete with banks?

A

A: They offer a full range of personal financial services similar to banks

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31
Q

Which is the largest building society in the UK?

A

A: Nationwide is the largest building society in the UK

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32
Q

When and where was the first building society founded?

A

A: It was founded in Birmingham in 1775

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33
Q

How many building societies were there in 1910, and how has this number changed?

A

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)

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34
Q

What caused the decline in the number of building societies?

A

A: Many building societies either:
1. Became banks from the late 1980s onwards.
2. Merged with or were taken over by other financial institutions

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35
Q

Give an example of a building society merger.

A

A: The Yorkshire and Chelsea Building Societies merged in 2010

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36
Q

Impact of the 2007–08 Financial Crisis on Building Societies
How were building societies affected by the 2007–08 financial crisis

A
  1. Many made losses due to their investment in property and exposure to falling property prices.
    1. They suffered from defaults in their less creditworthy mortgage business.
    2. They were impacted by mortgage fraud, where fraudulent brokers and valuers overstated property values, leading to unsustainable mortgage loans
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37
Q

The Co-operative Bank

What is The Co-operative Bank, and what was it known for?

A

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

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38
Q

What financial trouble did The Co-operative Bank face in 2013?

A

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

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39
Q

How did the 2013 rescue impact The Co-operative Bank’s status?

A

A: It lost its mutual status, and doubts arose about its ethical values. Since then, it has raised further capital by issuing new shares

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40
Q

How has The Co-operative Bank been described since its financial troubles?

A

A: It has been called a ‘troubled mutual’

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41
Q

How does Nationwide differ from The Co-operative Bank?

A

A: Nationwide is a mutual building society, meaning it focuses on serving members’ interests rather than making profits for shareholders

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42
Q

Insurers

Q: What are the two main categories of insurance providers?

A

A:
1. Insurance companies
2. The Lloyd’s specialist insurance market

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43
Q

Insurance Companies

Q: What are insurance companies?

A

A: They provide insurance to individuals and companies to protect against financial risks

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44
Q

Q: What types of companies exist in the UK insurance market?

A

A: Insurance companies can be either corporates or mutuals, but most in the UK are corporates

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45
Q

Name two major insurance companies in the UK.

A

A: Aviva and AXA

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46
Q

How are some insurance companies linked to other financial services?

A

A: Many belong to large financial groups that also provide banking and other financial services

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47
Q

What types of financial risks do insurance companies cover?

A

A:
1. Loss or damage to houses, cars, and property.
2. Life insurance to support dependents after a customer’s death

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48
Q

The Lloyd’s Insurance Market

Q: Where is the Lloyd’s insurance market based, and how does it operate?

A

A: It is based in the City of London and consists of syndicates (groups of investors)

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49
Q

Who are the members of the Lloyd’s insurance market, and what do they do?

A

A: The members employ specialists called underwriters to accept insurance risk and divide it between them

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50
Q

What types of insurance does the Lloyd’s market provide?

A

A: It covers a wide range of risks, including life insurance

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51
Q

Credit Unions

Q: What are credit unions?

A

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

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52
Q

Q: What is the ‘common bond’ requirement for joining a credit union?

A

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

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53
Q

How did UK legislation change credit union membership rules in 2012?

A

A: It allowed credit unions to extend their services to new groups, including community groups and businesses

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54
Q

How many credit unions are there in the UK, and how do they vary?

A

A: There are over 300 credit unions in the UK, varying in size and range of services offered

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55
Q

What financial services do credit unions provide?

A

A: - Savings accounts
• Loans
• Some offer current accounts
• Some provide mortgages, cash ISAs (Individual Savings Accounts), and insurance product

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56
Q

What is the ethical philosophy of credit unions?

A

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

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57
Q

What is the ethical philosophy of credit unions?

A

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

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58
Q

Under which law are credit unions registered?

A

A: Credit unions are registered under the Co-operative and Community Benefit Societies and Credit Unions Act 1965

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59
Q

Which organisations regulate UK credit unions?

A
  • Prudential Regulation Authority
  • Financial Conduct Authority
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60
Q

What is the main membership organisation for UK credit unions?

A

A: The Association of British Credit Unions Ltd (ABCUL).

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61
Q

Friendly Societies

Q: What are friendly societies?

A

A: Friendly societies are mutual organisations offering members a range of financial products, such as savings, investments, insurance, pensions, and annuities

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62
Q

Why were friendly societies originally formed?

A

A: They were formed when people grouped together to contribute to a mutual fund and receive benefits in times of need

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63
Q

What does the name of a friendly society often indicate?

A

A: The name often hints at its history, a place (e.g., Wiltshire Friendly Society), or an occupation (e.g., Shepherds’ Friendly Society)

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64
Q

How have friendly societies evolved in the UK?

A

A: Some serve limited geographical areas, while others have grown into national organisations offering a range of financial services

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65
Q

What are some examples of occupation-based friendly societies?

A

A: Examples include friendly societies for firefighters, dentists, and shepherds.

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66
Q

Pension Funds
What is the purpose of pension funds?

A

A: Pension funds invest people’s pension contributions to provide them with an income upon retirement

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67
Q

How do pension funds generate returns?

A

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

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68
Q

Financial Advisers

What is the role of an Independent Financial Adviser (IFA)?

A

A: IFAs provide personal financial services by helping individuals choose from a wide range of financial products available on the market

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69
Q

How do IFAs differ from restricted advisers?

A

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

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70
Q

The Bank of England
What is the Bank of England?

A

A: The Bank of England is the UK’s central bank, responsible for maintaining monetary and financial stability

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71
Q

When was the Bank of England founded and nationalized?

A

A: - Founded in 1694
• Taken over by the state in 1946

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72
Q

What are the two core purposes of the Bank of England?

A

A:
1. Achieving monetary stability (stable prices and confidence in the currency).
2. Achieving financial stability (ensuring the financial system remains stable)

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73
Q

What is the role of the Monetary Policy Committee (MPC)?

A

A: The MPC is responsible for carrying out government monetary policy by adjusting interest rates to:
• Maintain stable prices.
• Encourage economic growth.
• Control inflation

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74
Q

What was introduced in 2013 to enhance the Bank of England’s financial stability role?

A

A: The Financial Policy Committee (FPC) and the Prudential Regulation Authority (PRA) were introduced to regulate the financial system

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75
Q

What is the Bank of England’s role as a “banker’s bank”?

A

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

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76
Q

Who is responsible for issuing UK banknotes?

A

A: The Bank of England is the only institution legally allowed to issue UK banknotes as legal tender

77
Q

How does the Bank of England manage the UK’s international reserves?

A

A: It looks after the UK’s gold and foreign exchange reserves, which are used to finance international trade

78
Q

What was the Bank of England’s relationship with the European System of Central Banks (ESCB)?

A

A: The Bank of England was part of the ESCB until the UK left the European Union (Brexit)

79
Q

The Financial Regulators

Q14: Why are financial regulators needed?

A

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

80
Q

What do financial regulators do?

A

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

81
Q

What is the impact of regulations on financial institutions?

A

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

82
Q

How many financial regulatory bodies exist in the UK, and when did they become operational?

A

A: There are three financial regulatory bodies, which became fully operational in April 2013, following the Financial Services Act 2012.

83
Q

The Financial Policy Committee (FPC)

Q18: What is the role of the Financial Policy Committee (FPC)?

A

A: The FPC is responsible for ensuring the survival and stability of the UK’s financial system

84
Q

What are the two statutory objectives of the FPC?

A

A:
1. Identifying and reducing systemic risks to enhance the resilience of the financial system.
2. Supporting the Government’s economic policy

85
Q

The Prudential Regulation Authority (PRA)

Q1: What is the Prudential Regulation Authority (PRA)?

A

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

86
Q

What is the PRA’s role in financial stability?

A

A: It contributes to the stability of the UK financial system by promoting the safety and soundness of the firms it regulates

87
Q

What are the three main statutory objectives of the PRA?

A
  1. 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.
    1. Insurance-specific objective: Secure appropriate protection for policyholders.
    2. Competition objective: Facilitate effective competition in financial services
88
Q

The Financial Conduct Authority (FCA)

Q4: What is the Financial Conduct Authority (FCA)?

A

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

89
Q

What are the three statutory objectives of the FCA?

A
  1. Consumer Protection: Ensure that consumers have an appropriate level of protection in financial services.
    1. Market Integrity: Protect and enhance the integrity of the UK financial system.
    2. Promoting Competition: Encourage healthy competition in financial services to benefit consumers
90
Q

How does the FCA differ from the PRA?

A

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

91
Q

What is the role of the Financial Conduct Authority (FCA) in fighting financial crime and protecting consumers?

A

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

92
Q

HM Treasury – Role & Responsibilities

Front: What is the role of HM Treasury in financial regulation?

A

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

93
Q

MoneyHelper – Purpose & Services

Front: What is MoneyHelper, and how does it support financial education?

A

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
94
Q

CMA – Competition & Markets Authority

Front: What is the Competition and Markets Authority (CMA), and what is its remit?

A

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)

95
Q

Financial Ombudsman Service (FOS)

Front: What is the role of the Financial Ombudsman Service (FOS)?

A

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.

96
Q

Financial Services Compensation Scheme (FSCS)

Front: What is the Financial Services Compensation Scheme (FSCS), and what are its compensation limits?

A

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).

97
Q

Trade Associations – UK Finance, BSA, ABI

Front: What are the main trade associations in the UK financial sector

A

UK finance
Building Societies Association
Association of British Insurers

98
Q

Front: What are the main trade associations in the UK financial sector? (Detail)

A

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

99
Q

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?

A

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

100
Q

The Run on Northern Rock (2007)

Front: What happened to Northern Rock in 2007, and how did the government respond?

A

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

101
Q

How did the UK government restructure Northern Rock after taking ownership?

A

Back:
• Split into a ‘Good Bank’ and a ‘Bad Bank’

102
Q

How did the UK government restructure Northern Rock after taking ownership? (Detail)

A

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.

103
Q

Increased Concentration

Q: What is meant by “increased concentration” in the banking sector?

A

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

104
Q

Why have banks merged or acquired others?

A

A: To increase market share, eliminate competition, and diversify product ranges

105
Q

How did the financial crisis impact banking concentration? And What has happened to building societies as a result of this trend

A

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

106
Q

Competition

Q: How does increased concentration affect competition in retail banking?

A

A: With fewer banks in the market, competition is reduced, which can limit choices for consumers and businesses

107
Q

Divestment

Why were Lloyds and RBS required to sell some of their branches and assets?

A

A: As a condition for being rescued by the public sector, the European Union required them to divest certain assets

108
Q

What divestments did RBS make?

A

A:
• Sold stakes in Direct Line Insurance Group in 2014.
• Sold more than 300 branches in 2013

109
Q

What was the Lloyds Banking Group (LBG) divestment plan?

A

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

110
Q

What did Lloyds do after the Co-operative Bank deal failed?

A

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

111
Q

Ring-Fencing Retail Banking

What does the Financial Services (Banking Reform) Act 2013 require?

A

A: It mandates the ring-fencing (separation) of certain retail banking activities from wholesale or investment banking

112
Q

What is a ring-fenced body?

A

A: A bank that carries out core activities essential for retail banking

113
Q

What activities are defined as “core” at the time of writing?

A

A:
1. Accepting deposits
2. Opening accounts
3. Providing withdrawal, payment, and overdraft services

114
Q

Can the government modify the definition of core activities?

A

A: Yes, the government can add more core activities if it believes that an interruption in these services could threaten UK financial stability

115
Q

What happens to the part of a bank that is not ring-fenced?

A

A: It continues to provide its full range of services, including riskier investment banking transactions

116
Q

What is the purpose of ring-fencing in the event of a bank’s insolvency?

A

A: The ring-fenced body will still be able to continue core retail banking activities, ensuring that current and savings accounts still function

117
Q

What is one benefit of ring-fencing for retail depositors?

A

A: Their money will not be used to cover the debts of the riskier investment section of the bank

118
Q

What is a disadvantage of ring-fencing for the retail arm of the bank?

A

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

119
Q

How did UK banks respond to ring-fencing regulations?

A

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

120
Q

Financial Intermediation

What is financial intermediation?

A

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

121
Q

Why is financial intermediation important?

A

A: It allows funds to flow between those with surplus money and those who need to borrow, supporting economic activity

122
Q

What are the three financial positions of individuals and businesses in an economy

A

The Surplus Sector
The Deficit Sector
The Balanced Sector

123
Q

What are the three financial positions of individuals and businesses in an economy? (Detail)

A
  1. 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.
    1. 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.
    2. 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
124
Q

Do individuals or businesses always stay in the same financial position?

A

A: No, most people and businesses fluctuate between surplus and deficit positions over time

125
Q

Why are financial intermediaries necessary?

A

A: It is not always easy for people with surpluses and people with deficits to find each other and agree on lending terms

126
Q

How do financial intermediaries help?

A

A: Banks and similar institutions facilitate and expand this process by efficiently bringing together lenders and borrowers

127
Q

Financial Intermediation Process

Q: How do financial intermediaries link the surplus and deficit sectors?

A

A: Financial institutions borrow money from people with a surplus and lend it out to people with a deficit

128
Q

How do banks act as principals in financial intermediation?

A

A:
• Banks owe the money they borrow (liabilities).
• Banks own the debt on the money they lend out (assets)

129
Q

How do banks make a profit in financial intermediation?

A

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

130
Q

What risk do financial intermediaries face?

A

A: The risk of default, where debtors (borrowers) might not repay their loans, leading to the bank’s inability to repay its own creditors

131
Q

What is the surplus sector?

A

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

132
Q

What is the deficit sector?

A

A:
• People or businesses with more money going out than coming in.
• They need to borrow money to cover their expenses or investments

133
Q

What role do financial intermediaries play between these two sectors?

A

A: They borrow from the surplus sector (savers) and lend to the deficit sector (borrowers), ensuring efficient capital flow in the economy

134
Q

Counterparties in Financial Intermediation

Q: What is a counterparty in financial intermediation?

A

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

135
Q

What financial activities do counterparties engage in?

A

A: Counterparties deposit and borrow money, invest in financial services such as insurance, and use banks for various transactions

136
Q

Give an example of how counterparties function in financial transactions.

A

A: If a bank lends money to a company, the bank and the company are the two counterparties involved in the transaction

137
Q

What are the main categories of counterparties in the financial sector?

A

A:
1. The personal sector
2. The retail sector
3. The commercial and corporate sectors
4. The public sector
5. The financial sector

138
Q

What defines the personal sector in financial intermediation?

A

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

139
Q

What financial activities do individuals in the personal sector engage in?

A

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

140
Q

What is included in the retail sector?

A

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

141
Q

How do businesses and companies function as counterparties?

A

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

142
Q

What financial activities do commercial and corporate counterparties engage in?

A

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

143
Q

What defines the public sector in financial intermediation?

A

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

144
Q

What are the financial activities of the public sector?

A

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

145
Q

What is the financial sector’s role in financial intermediation?

A

A: Financial institutions lend and borrow money among themselves to manage liquidity, adjust profit positions, and mitigate risk.

146
Q

What are some common financial sector transactions?

A

A:
• Borrowing and lending money to manage liquidity
• Adjusting financial positions to maximize profits
• Investing in securities through life insurance companies and fund manager

147
Q

Sources and Applications of Funds

What are customer deposits, and why are they important for banks?

A

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

148
Q

What are short-term money markets, and how do banks use them?

A

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

149
Q

How do banks use long-term capital markets to raise funds?

A

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

150
Q

What is the role of asset sales in raising funds for banks?

A

A: Some banks sell parts of their business to generate money, especially in financial trouble

151
Q

How do banks use funds for lending?

A

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

152
Q

How do banks use funds in financial markets?

A

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

153
Q

What types of physical assets do banks invest in?

A

A: Banks invest in:
• Buildings
• Computer systems
• Training programs
• New product and market development

154
Q

Why do banks need funds for operational costs?

A

A: Banks are businesses and must cover expenses like staff salaries and administration costs

155
Q

New Types of Financial Services Provision

What are the three major trends in financial services provision?

A

A:
1. New types of institutions
2. New products
3. New channels of delivery

156
Q

What is the role of new types of institutions in financial services?

A

A: New financial providers have emerged to meet evolving customer needs, adapting to industry changes.

157
Q

Peer-to-Peer (P2P) Lender
What is peer-to-peer (P2P) lending?

A

A: P2P lending is an online marketplace that connects borrowers directly with lenders, bypassing traditional banks

158
Q

How do P2P lenders make money?

A

A: They charge borrowers a fee for using their platform and facilitating legally binding loan agreements

159
Q

Advantages of P2P

A
  1. Access to finance when banks are not lending eg after financial crash
  2. Less overload than banks so may offer better rates
  3. Maybe quicker to access finance as less bank procedures
  4. Regulated by the FCA since 2014
160
Q

Disadvantages of P2P lending

A
  1. No protection from the FSCS for depositors
  2. May not find a suitable lender
  3. Mis - selling of loans? Due to being a new platform
161
Q

What are the risks of P2P lending?

A

A: Deposits are not protected under the FSCS, meaning savers could lose money if borrowers default

162
Q

How is risk reduced in P2P lending?

A

A: Through strict credit scoring and diversification—savers’ money is split into small amounts and loaned to multiple borrowers

163
Q

Since when has P2P lending been regulated in the UK?

A

A: Since April 2014, by the Financial Conduct Authority (FCA)

164
Q

Name an example of a P2P lender and its specialization.

A

: Funding Circle – specializes in business loans

165
Q

How does P2P lending compete with traditional banks?

A

A: By offering alternative ways to save and borrow, often with better interest rates

166
Q

What milestone did P2P lending reach in 2017?

A

A: It became the largest form of alternative finance in the UK

167
Q

Payday Loan Companies

Q10: What is a payday loan?

A

A: A short-term, high-interest cash advance designed for people who need money urgently

168
Q

Who typically uses payday loans?

A

A: Customers in employment who need instant cash and have payroll records

169
Q

What is the main drawback of payday loans?

A

A: Extremely high-interest rates – for example, Lending Stream has an APR of 1,333%

170
Q

Disadvantages of payday loans

A
  1. Trap people in mounting debt
  2. Affects credit rating
  3. Remain on your credit history for 6 years
  4. May effect access to future borrowing from more reputable sources
171
Q

What problem do borrowers face with payday loans?

A

A: Many roll over loans when they can’t repay, leading to debt traps where they owe much more than originally borrowed

172
Q

How do payday loans affect credit scores?

A

A: They remain on a credit record for 6 years, making it harder to get mortgages or traditional loans

173
Q

What are the typical default fees charged by payday lenders?

A

A: Between £20-£30 per missed payment, potentially costing £240-£360 per year if repayments are consistently late

174
Q

What were payday lenders criticized for?

A

A: Aggressive collection tactics and pressuring borrowers to repay

175
Q

What regulatory changes did the FCA introduce in 2015?

A

A:
• Fixed default fee cap: £15
• Initial cost cap: 0.8% per day
• Total cost cap: 100% of the loan

176
Q

Financial Crisis (2007-08) and Its Impact
How did the 2007-08 financial crisis affect lending?

A

A: Banks tightened lending criteria, making it harder for people to get loans

177
Q

Why did payday loans become more popular after the crisis?

A

A: Because traditional banks were reluctant to lend, so people turned to payday lenders for quick cash

178
Q

What was one major criticism of banks post-crisis?

A

A: Selling complicated financial products with unclear terms, such as Payment Protection Insurance (PPI)

179
Q

New Financial Products Post-Crisi

How did banks respond to criticism after the financial crisis?

A

A: They simplified their products and focused on consolidating existing ones instead of introducing new, complex products

180
Q

What change was noticeable in bank loan products post-crisis?

A

A: Banks made their loan conditions stricter, making it harder to borrow

181
Q

Impact of the 2007-08 Financial Crisis on Lending
What was a major cause of the financial struggles post-2007?

A

A: Many people borrowed too much before 2007, leading to widespread debt problems

182
Q

How did banks respond to high levels of bad debt?

A

A: They became more risk-averse, meaning they were more selective about who they lend to and how much they lend

183
Q

What new mortgage requirements were introduced due to stricter lending criteria?

A

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

184
Q

What phrase is commonly associated with the tightening of lending criteria post-2007?

A

A: “Credit crunch” – referring to the difficulty in borrowing money after the financial crisis

185
Q

New Delivery Channels in Banking

Q5: How have banking services changed in recent years?

A

A: There has been a shift from in-person banking (branches) to digital banking, including online and mobile banking

186
Q

Why has there been a move towards internet banking?

A

A:
• More people own computers and smartphones.
• Customers prefer to manage financial products online rather than visiting a branch

187
Q

How has mobile banking extended accessibility to financial services?

A

A: People can now access their bank accounts using smartphone apps

188
Q

Q8: What are the key features of Barclays’ mobile banking services?

A

A:
• Pay people and check account balance.
• Change cash machine limits, view PIN, and freeze a lost card.
• Earn rewards on mobile transactions

Finance Unit 4 (1 decks)

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