Topic 1 An Introduction To The Financial Services Industry

Question 1

What are the 2 main functions of Money?

Answer 1

1. Medium of Exchange for good/services
2. Unit of Account common denomination for products to be measured

Question 2

What properties does money need to have to be acceptable as a medium of Exchange?

Answer 2

1. Portable
2. Divisible
3. Acceptable to all parties
4. Sufficient in quantity

Question 3

What does store of value mean?

Answer 3

Money can be saved for future transactions

Question 4

Sustained increase of good and services over time is called?

Answer 4

Inflation

Question 5

What is Intermediation?

Answer 5

Intermediary borrowing funds from depositor and lending it to borrower

Question 6

What is Disintermediation?

Answer 6

Where a borrow and a depositor interact direct

Question 7

What are the 4 elements of intermediation?

Answer 7

1. Maturity Transformation
2. Risk Transformation
3. Location
4. Aggregation

Question 8

Paying into an insurance premium is a example of what?

Answer 8

Risk Management

Question 9

What does a Product Service Intermediary do?

Answer 9

Bring together potentially borrows and the provider of financial products (e.g a bank)

Question 10

“To promote the good of the people in the UK by maintaining monetary and Financial stability” is the role of who?

Answer 10

The Bank of England

Question 11

Roles of the Bank Of England

Answer 11

1. Maintaining Economic Stability
2. Issuer of Bank Notes
3. Banker to the Banks
4. Banker to the Government
5. Advisor to the Government
6. Foreign Exchange Market
7. Lender of the last resort

Question 12

What roles did the Bank of England use to perform?

Answer 12

1. Gild-Edged Securities
2. Regulator

Question 13

What is a Proprietary Organisation?

Answer 13

• Limited Company
• Owned by shareholders
• Distribute profits as dividends
• Shareholders contribute decisions about the companies’ running

Question 14

What is a Mutual Organisation?

Answer 14

• Not a company
• owned by members
• Managed by AGM meetings

Question 15

Building Societies, Friendly Society and Credit Unions are examples of what?

Answer 15

Mutual Organisations

Question 16

What is Demutualisation?

Answer 16

Process of a Building Society changing status to a bank

Question 17

What is a Credit Union?

Answer 17

• Mutual Organisation
• Voluntarily run
• Members must buy £1 in shares to join
• Regulated by the FCA
• Protected by FSCS

Question 18

What do Credit Unions offer?

Answer 18

• Loans and savings to members
• Offer yearly dividend to members
• loans have 1-3% interest on the reducing balance
• Lending to member cover by Life Assurance

Question 19

What type of bank is responsible for individuals and small businesses?

Answer 19

Retail Banks

Question 20

Interbank Market and Financial Institutions use what type of banking?

Answer 20

Wholesale Banking

Question 21

Can Building Societies trade on the wholesale market?

Answer 21

Yes but are limited to 50% of their liabilities

Question 22

What was LIBOR?

Answer 22

• Reference Point for corporate lending
• Calculated from information submitted from bank to bank

Question 23

What is SONIA?

Answer 23

-Replacement to LIBOR
-Based on actual transaction
-Average of interest rates banks lend to each other at

Question 24

What prompted the move to SONIA?

Answer 24

LIBOR Scandal 2012

Question 25

Can Credit Unions pay interest to members?

Answer 25

Yes if they have savings of £50,000 or assets of 5%

Question 26

What administrators SONIA?

Answer 26

Bank of England

Question 27

The Financial Services and Markets Act 2023 allows Credit Unions to offer more products what are these?

Answer 27

• Hire Purchase Agreements
• Conditional Sales Agreements
• Insurance

Question 28

How much is value is used by financial institutions through Sonia each year

Answer 28

£30 Trillion

Question 29

What are Swap Transactions?

Answer 29

Is where financial institutions swap different forms of cash flows or liabilities for another

Question 30

What is a Floating Rate Note?

Answer 30

Where the interest rate on a fixed interest security is variable from the benchmark (Sonia)

Question 31

What is a Central Bank Digital Currency (CBDC)?

Answer 31

A digital form of the pound that could potentially be used