topic 3

Question 1

Conduct of business

Answer 1

The way in which a business is run. In financial services, the FCA enforces conduct of business regulations, which include requirements for providers to carry out their operations with integrity, skill and diligence, treat customers fairly and communicate with them clearly

Question 2

Deleveraging

Answer 2

Reducing the amount of debt in relation to assets. In personal terms, this might mean paying off loans, credit cards, etc.

Question 3

Economic sustainability

Answer 3

Ensuring that economic activity is carried out in a way that ensures it can continue in the long term, eg by taking account of the capacity of natural and human resources to sustain it.

Question 4

Environmental sustainability

Answer 4

Reducing the negative impacts of human activity on the environment so that natural resources can be sustained into the future, eg by reducing atmospheric pollution and making more use of renewable
resources

Question 5

Equator Principles

Answer 5

A set of ethical benchmarks for banks to follow when taking decisions to finance infrastructure projects, such as dams or pipelines

Question 6

Ethical lending

Answer 6

Lending money to, for example, companies that invest in green technology, or charging lower insurance premiums to people with more carbon-efficient cars

Question 7

Financial contagion

Answer 7

a situation in which debt works its way through the global financial system; the problems of one group of institutions spread to other institutions, threatening confidence in and the sustainability of financial systems. See systemic risk

Question 8

Leverage

Answer 8

The amount of borrowing a company has in relation to its assets

Question 9

Liquid assets

Answer 9

Cash or assets that can be easily converted into cash without losing any of their value

Question 10

Liquidation

Answer 10

The process by which a company (or part of a company) is brought to an end, and the assets and property of the company are redistributed

Question 11

Moral hazard

Answer 11

A situation in which there is lack of incentive to guard against risk because the risk-taker believes that they will be protected from any negative consequences. For example, the banks believing that the
government would bail them out if they got into financial difficulty and so they would not have to face the consequences of imprudent actions

Question 12

Mortgage Market Review (MMR)

Answer 12

Reforms made to the mortgage market in April 2014 to ensure it is sustainable and works better for consumers

Question 13

Perilous debt

Answer 13

A situation in which someone is spending more than half of their monthly income on debt repayments

Question 14

Provider sustainability

Answer 14

A company with a sustainable business model. For example, a bank that is willing to take less risk even if this means giving up the chance of making additional profits. If providers are run sustainably, they will be less likely to fail and, therefore, less likely to trigger a systemic failure.

Question 15

Prudential regulation

Answer 15

Regulation that is designed to ensure financial services providers do not fail or, if they do, that their failure does not have an impact on the wider financial system. One of the ways that this is done is by requiring providers to hold a certain level of capital and also a certain level of liquid assets, so that they can meet demand from customers
seeking to withdraw funds.

Question 16

Social sustainability

Answer 16

A concern with creating communities that foster well-being, peace,security and justice for the people who live in them

Question 17

Speculators

Answer 17

People who buy and sell the shares of many companies in order to make quick profits on the deals

Question 18

Stakeholder groups

Answer 18

The groups of people upon whom financial services providers have an impact – including employees, customers and shareholders.

Question 19

Sustainable development

Answer 19

Development that meets the needs of the present without compromising the ability of future generations to meet their own needs

Question 20

Sustainable financial product

Answer 20

A financial product that is designed to meet the long-term requirements of those who buy it

Question 21

Sustainable financial system

Answer 21

A system in which financial services are delivered in a way that means they can continue to be delivered and meet the needs of customers over the long term

Question 22

Systemic risk

Answer 22

Risk that affects an entire system. In financial services terms, it is risk that begins with one provider or group of providers and spreads because different parts of the financial system are interconnected.

Question 23

Systemically important financial institutions

Answer 23

The large firms within the financial services sector that would cause serious problems for the whole economy if they were to fail.

Question 24

‘Too big to fail’

Answer 24

Believing that the consequences of one or more of the big banks failing would be too great for any government to allow it to happen.

Question 25

The three pillars of sustainability are

Answer 25

environmental, social and economic

Question 26

Systemic risk is highest when financial providers are:

Answer 26

large companies

Question 27

When the government purchased the failed banks in 2007/8, the banks were placed in

Answer 27

temporary public ownership

Question 28

The procedure that takes place when a bank is in trouble is known as bank

Answer 28

resolution

Question 29

As a result of regulations put in place since the banking crisis a failing bank

Answer 29

may receive help from the government and the Bank of England but may be allowed to fail

Question 30

Directors are

Answer 30

those who make the company’s strategic decisions

Question 31

A sustainable financial product is one that is designed to meet the

Answer 31

long-term requirements of consumers

Question 32

Regularly setting aside a sum of money to cover unexpected expenses such as vet bills, instead of paying insurance premiums, is known as:

Answer 32

self-insurance

Question 33

Deleveraging is when

Answer 33

people stop spending and start saving to pay off existing debts

Question 34

As a result of the Mortgage Market Review who is now fully responsible for assessing whether a potential mortgage customer can afford the loan and for verifying the customer’s income?

Answer 34

The lender

Question 35

Sustainable development is ‘development that meets the needs of the present without compromising the ability of future generations to meet their own needs’

Answer 35

true

Question 36

It is not necessary to address unsustainable trends as they will die out by themselves.

Answer 36

false