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Financial Planning > Topic 1 Key Influences In UK Financial Services industry > Flashcards

Topic 1 Key Influences In UK Financial Services industry Flashcards

1
Q

What are two functions of money?

A

Medium of Exchange

Unit of Account (common denominator against which value of goods can be measured.)

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2
Q

To be accepted as medium of exchange money must be …

(4 items).

A
  • Sufficient in quantity
  • Acceptable to all parties in all transactions
  • divisible into small units
  • portable

Remember money also acts as a store of value.

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3
Q

How does money act as a store of value?

2 items

A

It can be saved because -

It can be used to separate transactions in time.

It must retain its value or purchasing power.

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4
Q

How does financial Services “oil the wheels of commerce and government”?

What products do they offer to achieve this goal? (4)

A

Channels money from those with a surplus and wish to lend for profit

TO

Borrows willing to pay for the privilege.

To do this they offer…

Convenience products (current accounts, card)

Access to funds (loans, mortgages)

Protection from risk (insurance)

Peace of mind (pensions etc)

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5
Q

What is a financial intermediary?

A

An Organisation that -

Borrows from the cash rich surplus sector of the economy.

Lends to the cash poor deficit sector.

Profits by difference in interest rates.

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6
Q

Why is there a need for financial intermediation?

4 items

A

Geographic location.

Aggregation. (Adding funds from several lenders together to finance a bigger project).

Maturity Transformation (lenders and borrowers work to different timescales).

Risk transformation (spreads the risk of default amongst many borrowers)

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7
Q

Risk mitigation/ management is a form of intermediation.

This is done via insurance “a means of shifting the burden of risk by pooling to minimise financial loss”.

Another type of Intermediation are Product Sale Intermediaries. Explain?

List examples …

A

Oil the wheels of financial services industry. Bring providers and customers together.

Examples …

IFAs
Brokers
Stockbrokers
Mortgage advisors

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8
Q

What are the types of Financial Institution?

7 items

What are amalgamated companies called?

A 
Retail Bank
Mortgage Services
Cards
Wealth Management 
Fund management for institutional customers 
Investment banking
Insurance

Companies that morph and merge these functions are increasing and are called ‘bancassurance”.

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9
Q

List some central banks …

3 examples

A

USA - Federal Reserve
Eurozone - European Central Bank (ECB)
UK - Bank of England

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10
Q

What are the main functions of the Bank of England?

6 items plus one former role.

A 
Issuer of Bank Notes
The Government’s Bank
Banker to banks
Government advisor
FX market
Lender of last resort.

Previously managed issuing of gilts for govt this is now done by Debt Management Office of the Treasury.

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11
Q

How does the Bank of England act as an advisor to the government?

A

It advises on Monetary policy.

Sets interest rates in the UK. Via the Monetary Policy Committee.

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12
Q

What is the MPC?

How does it function.

(3 items. )

A

The MPC -

Is the Money Policy Committee of the Bank of England.

Meets 8 times a year.
Determines base rates.
To ensure inflation target set by chancellor is met.

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13
Q

What organisations took over the Bank of England’s banking regulation role?

1 then 3 names.

A

Financial Services Authority

from 1998 to April 2013

Then

Financial Policy Committee (FPC) subsidiary of Bank of England.
Prudential Regulation Authority(PRA)
Financial Conduct Authority (FCA)

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14
Q

What are Proprietary and Mutual organisations?

A

Proprietary - companies owned by shareholders, who share in the profits.

Mutual - not companies. Owned by members - depositors, borrowers, with profit policyholders. ie building societies, some insurance companies

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15
Q

What is demutualisation?

A

Conversion of a mutual into a plc.

Legal since Building Society Act 1986

Members received windfall shares.

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16
Q

Describe Credit Unions

5 items

A

Mutual organisation.

Financial Cooperative run for benefit of members.

Formed in geographic or social group.

Formed by autonomous groups of members to meet shared economic, cultural and social needs.

Jointly owned democratic organisation.

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17
Q

How do credit unions work?

3 elements

A

Members buy £1 shares which pay 2 to 3 % pa.

This creates a pool of money that is lent to other members. Loans have a rate of 1-2 per cent of the reducing balance.

Savings and loans are covered by life insurance.

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18
Q

Describe the management structure of Credit Unions?

A

Owned by members

Run by elected volunteer board of directors

Directors are members

Day to day administration by paid staff.

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19
Q

What’s the difference between Retail and Wholesale financial institutions?

Tell me about both.

A

Size

Retail - high street institutions providing services to consumers and companies through branches, call centres, internet.

Wholesale- the process of raising money through money markets in which financial institutions and large companies buy and sell assets.

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20
Q

The Financial Services (Banking Reform )Act 2013

Was enacted after the Vickers report of the Independent Commission on Banking (ICB)

It’s key recommendations were?

(5 Items)

A

UK Retail Ring Fencing - separate UK banks from riskier wholesale parts of the business.

Capital - largest ring-fenced UK banks need greater levels of capital in reserve. To ride out economic downturns.

Bail-in & Depositor preference - investors, creditors and unprotected depositors bare the responsibility for insolvency. Rather than rely on government bailouts.

Competition- easier for consumers to switch accounts and greater transparency on costs.

Structural Reform - ring fenced banks are separate standalone subsidiaries with own governance arrangements- ring fenced bodies (rfb)

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21
Q

The Financial Services (Banking Reform )Act 2013 applies to what organisations?

A

All banks with retail deposits of £25bn plus

22
Q

What does The Financial Services (Banking Reform )Act 2013 seek to improve?

(2 items)

A

Improve the resilience and resolvability of banks.

Resilience - ability to deal with adverse economic conditions

Resolvability - problems in one area of a bank impact minimally on other areas

23
Q

The Financial Services (Banking Reform )Act 2013

What are core services?

Who is responsible for implementing changes to protect them?

A

Accepting deposits
Making payments
Provision of o/d facilities

The Bank of England via the PRA.

24
Q

Uk ring-fenced banks should hold reserves of?

A

At least 13.5 % of their risk weighted assets.

Globally significant banks have more stringent requirements.

25
Q

The Financial Services (Banking Reform )Act 2013

A new senior manager’s regime was introduced March 2016.

What does it do?

(4 items)

A

Establishes approval process for senior management.

Creates certification process for junior staff.

New conduct regime

New criminal offence of “recklessly leading a bank into insolvency”. Max 7 years imprisonment.

26
Q

What are the London Stock Exchange and AIM?

A

LSE - main market from stocks and shares. (100s of years old)

AIM - Alternative Investment Market (est 1995)

27
Q

For a listing on LSE what’s required?

3 items

A

Meet stringent rules laid down by FCA (acting as UKLA Uk listings Authority)

Trading three years

At least 25% of share capital must be in the public’s hands.

28
Q

What companies is AIM aimed at?

A

New small companies with potential for growth.

It allows them to raise capital by issuing tradable shares.

29
Q

What are the benefits of an AIM listing?

3 items

A

Access to public finance.

Bigger profile

Rules less rigorous than main market.

30
Q

Who participates in stock markets?

4 items.

A

Governments, public institutions, corporations - Raise money through traded securities.

Investment banks etc - facilitate the issuing of new securities

Banks and traders that buy and sell stock

Investors - individuals and financial institutions such as life and pension providers.

31
Q

What is off-market trading?

A

Over the counter trading. Buyer and seller arrange deal and price in private.

32
Q

What are gilts?

A

Government bonds. Issued to raise funds to cover the gap between revenue and spending.

Issued by the Treasury’s Debt Management Office (DMO).

33
Q

How do gilts work?

A

Government pays holder a fixed interest payment every 6 months until maturity when full value is repaid.

34
Q

What two rights do governments seek to balance?

A

Right of business to make a fair profit.

Right of consumers to a fair deal.

In the context of UK Financial Services it does this via its regulatory framework.

35
Q

What are the 5 tiers of the regulation of the Uk Financial Services sector?

A

1st level - European Legislation
2nd - Acts of Parliament and statutory instruments
3rd - regulatory bodies mainly PRA and FCA
4th - institution’s polices, practices and internal departments that monitor
5th - Arbitrators like FOS

36
Q

What’s the difference between an EU directive and regulations

A

Regulations are binding and apply to all member states

Directives are also binding but the EU leaves it up to each country how they are implemented. The objective of the directive needs to be achieved within a set time but not how that is done.

37
Q

What is Basel?

A

The Basel Committee on Banking Supervision

An international committee of banking regulators.

38
Q

What is Basel’s mandate?

A

Strengthen regulation, supervision and banking practices worldwide. To enhance financial stability through supervisory standards and guidance.

39
Q

Basel ii published in 2004 sought to provide consistency to what?

A

Regulation of capital levels held by banks to mitigate risk.

40
Q

What are Basel 2’s 3 pillars?

A
  1. Details capital requirements to meet
  • credit risk
  • operational risk
  • market risk
  1. Gives regulators supervisory tools.
  2. Sets out disclosure requirements for that institutions to ensure they can be properly assessed.
41
Q

Basel 2 introduced stress tests. What are they?

A

Computer simulations showing the effect of certain events on a firm.

Will the firm have sufficient capital if unexpected adverse economic conditions prevail.

42
Q

Basel 3 must be implemented by March 2019.

What two main areas does it cover?

A

Regulatory Capital

Asset and liability management.

43
Q

What is Regulatory Capital?

A

The amount of capital a bank is required to hold to meet its regulatory requirements.

The higher the risk a bank undertakes; the higher the level of capital it is required to hold.

44
Q

In respect of Regulatory Capital, what does Basel 3 require.

A

Minimum solvency ratio of 7% by 2019.

45
Q

How is solvency ratio defined?

A

An institution’s Regulatory Capital as a percentage of the risk adjusted value of its assets.

It is a buffer so that depositors are protected against defaulted loans.

46
Q

Basel III

Introduced two new ratios that banks must comply with in respect of assets and liabilities management, what are they?

A

Liquidity Coverage Ratio (LCR)

Net-Stable Funding Ratio (NSFR)

47
Q

How are Basel 1,2 and 3 implemented in the EU?

What’s the latest? When is it implemented?

A

Capital Requirements Directives.

CRD IV

Latest came into effect on 1 Jan 2014 with phased implementation to 2019.

48
Q

What does the CRD IV establish?

How?

A

Supervisory Framework aiming to minimise the negative effects of a firm failing.

By ensuring firms hold enough funds to cover the risks present in their business.

49
Q

What does the clearing process do?

A

Enables money transmission through the financial system.

Examples -

Provision of cash
Cheque clearing
DDRs and STOs
Credit
Electronic transfers
Cards

Clearing is the process at the end of each day of reconciling between banks each day’s transactions.

50
Q

What are the main UK payment clearing systems -

A

Cheque and Credit Clearing Company - 3 day cheque processing cycle.

BACS - bulk electronic clearing. Eg DDRs

CHAPS - electronic same day transfer.

Financial Planning (5 decks)

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