Topic 3 Continued Flashcards
What are some of the consequences of not having a bank account
• Restricted access to financial services, including some savings accounts that require a current account.
• Inability to pay for personal loans, credit cards, hire purchase, or insurance policies that require direct debit payments.
• Loss of discounts offered by utility companies for direct debit payments.
• Some employers require bank accounts to pay wages and salaries
How did changes in government benefit payments in 2003 create challenges for those without bank accounts
• Before 2003, claimants without bank accounts received fortnightly cheques, which they could cash at the Post Office.
• From 2003, benefits were paid directly into bank accounts via automatic credit transfer, creating issues for claimants without bank accounts
What solution did the government implement for claimants without bank accounts?
A:
• Introduced the “universal banking” policy, requiring banks and building societies to offer basic bank accounts with limited features:
• No overdraft or cheque book.
• Some accounts not accessible online or usable for direct debit payments
Q: What is a Post Office Card Account, and how does it differ from a basic bank account?
A:
• Operates like a basic bank account but allows access through local post offices.
• Beneficiaries could withdraw cash without needing a traditional bank or building society account
What happened to Post Office Card Accounts in April 2022?
A:
• These accounts were discontinued.
• Claimants were advised to close their accounts and switch to alternative methods, such as opening basic bank accounts
What is the purpose of basic bank accounts?
A:
• To reduce financial exclusion by providing more people with access to banking services.
• Allows those without full access to financial accounts to participate in essential transactions such as receiving benefits or making payments.
What trend is observed over the years in financial exclusion
The percentage of low-income households without access to financial accounts decreases steadily
What do consumer rights campaigners believe is a key reason for the lack of basic bank account access?
A: Many providers fail to publicize basic bank accounts
Why are basic bank accounts not well-promoted according to campaigners?
A: Providers find them costly to operate and see no compensating profits from cross-selling other products
What policy actions have governments taken to combat financial exclusion?
A: Governments have introduced multiple initiatives aimed at promoting both social inclusion and financial inclusion
Can you name a specific initiative to address financial exclusion?
A: MoneyHelper
How is MoneyHelper funded, and what does it aim to do?
A: It is funded by a levy on financial services firms and pension schemes and aims to provide clear financial advice and information to help people manage their money
Why is financial inclusion important?
A: It helps prevent social and financial exclusion, enabling low-income households to participate in the broader economy and access essential financial services
What is a major consequence of financial exclusion?
A: Individuals face difficulties managing money and accessing financial products, which can perpetuate poverty and inequality
What initiatives has the government encouraged banks and providers to adopt to combat financial exclusion
- Offering targeted financial products: Low-cost, low-deposit products designed to be simple, straightforward, and accessible to financially excluded individuals.
- Providing accessible product information: Making information available in different languages, Braille, or formats suitable for those with visual impairments.
- Promoting financial education: Educating people on financial products to help them understand their benefits and encourage their use
What is NatWest’s contribution to financial education
• MoneySense Programme: Offers free, interactive resources for 5–18-year-olds online, covering guides, videos, and more, tailored to school-aged children
What initiative has Barclays introduced?
A:
• Life Skills Programme: Provides free downloadable resource packs online, focusing on personal finance and career-related skills
How has the internet helped reduce financial exclusion
- Enables people who are housebound or have limited mobility to access financial services.
- Provides tools like screen readers and voice synthesizers for people with disabilities.
- Supports those who work unsocial hours by allowing access outside of normal business times.
- Reduces intimidation by letting users research financial products at home without interacting with sales staff
What broader government policy supports the role of the internet in financial inclusion?
A: Policies aimed at making broadband accessible to the majority of the population
Why are low-cost and low-deposit products essential for financial inclusion?
A: They lower entry barriers, making financial products more accessible to the economically disadvantaged
How does financial education contribute to inclusion?
A: It equips individuals with knowledge, enabling them to make informed decisions and utilize appropriate financial products
How can political decisions relating to financial services impact individuals’ personal finances?
especially when they influence regulations related to financial services
Why do many economists argue for minimal regulation in a market close to a ‘perfect market’?
Economists believe that minimal regulation is necessary if a market operates like a ‘perfect market,’ where competition and consumer choice naturally prevent excessive pricing and malpractice
What is a ‘perfect market’?
is one where large numbers of competing manufacturers and retailers prevent any single entity from charging excessive prices, as consumers can find similar products more cheaply elsewhere
Why do consumers have no reason to buy higher-priced products in a perfect market?
Answer: Consumers in a perfect market know they can find similar products at lower prices elsewhere due to competition, which prevents excessive pricing by any one supplier
What are the three key aspects a consumer must be informed about to achieve a perfect market condition?
Answer:
1. The product itself (features, benefits, initial and future costs).
2. The best way to buy it (finding the retailer with the best balance of price, quality, and service).
3. Your own needs and the products available to meet them
What is the role of competition in achieving a perfect market?
High competition ensures that no single supplier can dominate the market or set excessive prices, as consumers will opt for cheaper alternatives from other suppliers
What is the ideal level of knowledge a consumer should have in a perfect market?
Consumers should have ‘perfect knowledge’ about the product, the market, and their personal needs to make the best purchasing decisions
What is ‘information failure’ and how does it lead to ‘market failure’?
Information failure occurs when consumers lack sufficient knowledge about a product, such as its features or quality. This prevents free competition and market forces from delivering the best products at the best prices, leading to market failure
What are some factors that influence a consumer’s choice when buying shoes?
Answer:
1. The type of shoes needed (e.g., everyday or special occasion).
2. Past buying experiences that inform the purchase.
3. Preferences for size, color, quality, price, and customer service
What do scandals in the financial services industry reveal about the effectiveness of regulations?
Answer: Scandals highlight that even strong regulatory systems cannot guarantee a perfect market. Regulations must be continuously revised and updated to address emerging issues
How did the Payment Protection Insurance (PPI) scandal contribute to regulatory reform?
Answer: The widespread mis-selling of PPI over more than ten years caused significant harm to consumers and providers. Regulators’ delayed response highlighted flaws in the system, leading to reforms in 2013 to prevent similar issues
What was the goal of the 2013 regulatory reform in financial services?
Answer: The reform aimed to restore consumer confidence in the regulatory system, rebuild trust in financial service providers, and ensure personal financial stability.
Why is restoring consumer confidence in financial services important?
Answer: Consumer trust in financial services is essential for maintaining personal financial stability and ensuring the effectiveness of the regulatory system
What are the costs associated with compliance in financial services?
Answer:
Compliance costs include:
1. Training staff and maintaining compliance departments.
2. Administrative expenses, registration fees, and levies for regulatory bodies.
3. Fines, compensation payments, and redesigning products if required by legislation.
4. Retaining sales and administrative staff
How might companies offset the costs of compliance?
Answer:
Companies may:
1. Accept lower profits, reducing dividends for shareholders.
2. Cut staffing costs by restructuring and redundancies.
3. Freeze salaries and bonuses for staff.
4. Exit the industry if they cannot maintain profitability under new regulations
How do compliance costs impact consumers?
Answer:
Consumers may:
1. Pay higher prices for financial products.
2. Have limited access to products they need or go without.
3. Experience reduced product variety and choices in the market
Why are regulation and consumer protection essential, despite their costs?
Answer:
They are necessary to ensure consumers can enjoy the benefits of financial products. However, governments must balance these costs to ensure they do not outweigh the benefits
What are the main economic factors that affect financial services?
Answer:
Economic factors include:
1. Interest rates, which influence:
• Inflation.
• House prices and housing market activity.
• Savings and investments.
2. Economic activity, government spending, and unemployment.
3. The global economy and exchange rates
How do economic factors affect businesses and consumers?
Answer:
These factors influence how businesses, including financial services providers, operate and make decisions. They directly or indirectly impact consumers and sustainable personal finances
What are interest rates and how are they defined
Interest rates are the “price of money.” They represent:
1. The price banks charge borrowers for loans.
2. The price banks pay savers for depositing money
How are interest rates used as a tool in economic policy?
Answer: Interest rates are used as a central tool of government and central bank economic policy to influence economic conditions
How did UK interest rates behave in the 1970s and 1980s?
Answer:
• Interest rates were high, generally over 10%.
• They started falling in the early 1990s, dropping to just over 5% by 1994
What caused a significant drop in interest rates in 2008?
Answer:
The financial crisis of 2007–08 and the subsequent recession prompted the Bank of England to lower the Bank Rate dramatically to 0.5% in March 2009, where it remained for over seven years.
What happened to the Bank Rate in August 2016?
Answer:
It was lowered further to 0.25% due to uncertainty following the UK’s decision to leave the European Union (Brexit)
What institution manages the UK’s Bank Rate and its changes?
Answer:
The Bank of England’s Monetary Policy Committee (MPC) manages the Bank Rate
How does the Bank of England use changes in the Bank Rate to manage inflation?
Answer: By adjusting the Bank Rate, the Bank of England influences consumer spending and demand:
• Higher Bank Rate: Reduces borrowing and spending, lowering inflation.
• Lower Bank Rate: Encourages borrowing and spending, potentially increasing inflation.
What does basic economic theory say about inflation and spending?
Answer:
• Too much spending leads to higher demand than businesses can supply.
• Businesses raise prices to take advantage of this demand, resulting in a general trend of rising prices, known as inflation.
When was the Bank of England given the power to set the Bank Rate independently, and what was the purpose?
Answer:
• The Bank of England was granted this power in May 1997, formalized under the Bank of England Act 1998.
• Purpose: To ensure price stability by maintaining an annual inflation rate around 2%
What happens if the Monetary Policy Committee (MPC) believes inflation will remain higher than the target rate?
Answer: The MPC raises the Bank Rate to reduce inflation.
What is the impact of a higher Bank Rate on consumers and borrowers?
Answer:
1. Lenders increase interest rates on loans, mortgages, overdrafts, etc.
2. Borrowers face higher monthly payments, leaving less money for discretionary spending.
3. Consumers may delay expensive purchases (e.g., cars or furniture)
How does raising the Bank Rate help reduce inflation?
Answer:
• Reduces consumer spending, lowering demand for goods and services.
• This forces businesses to lower prices, reducing inflationary pressures
What are the effects of inflation on individuals with fixed incomes versus those with high levels of debt?
Answer:
1. Fixed income or no debt:
• High inflation forces them to spend a larger portion of their income on necessities.
• Raising interest rates helps maintain purchasing power.
2. High debt levels:
• Low interest rates reduce the cost of servicing debt.
• Rising inflation reduces the real value of their debt over time
How can individuals manage higher interest rates and inflation effectively?
Answer:
• Having short-term, medium-term, and long-term financial plans, including contingency plans.
• Adjusting spending habits to manage higher monthly payments
How does higher inflation affect financial planning for individuals?
Answer:
• It reduces the real value of money available for spending.
• Forces individuals to save more to maintain their purchasing power
What happens when interest rates rise in relation to mortgages?
Answer:
• Many people struggle to meet their monthly mortgage payments.
• Some may fall into arrears, default on their mortgages, and face home repossession
How does a rise in interest rates impact the demand for housing?
Answer:
• The higher cost of mortgages reduces demand for houses and flats.
• Potential buyers may decide they can no longer afford a mortgage
What is the impact of falling demand for housing on property prices and builders?
Answer:
• Falling demand causes property prices to decline across the housing market.
• Builders may choose to construct fewer new properties
Why is the housing market important to the national economy?
Answer:
• Changes in house prices and demand for housing have a significant impact on economic activity
How does the UK housing market compare to other European countries?
Answer:
• Similar to many European countries, the UK emphasizes homeownership.
• Since the 1960s, it has been a goal for many people to own their own homes
What proportion of the UK population are owner-occupiers?
Answer:
Around two-thirds of the UK population own the homes they live in
Q: What was the general trend in interest rates before the financial crisis of 2007-08?
A: Interest rates were relatively low since the mid-1990s, as inflation was perceived to be under control and not a serious threat to the economy
How did low interest rates affect borrowing for houses before 2007-08?
A: Banks and building societies could borrow money cheaply, making mortgage loans inexpensive and easily available, with little or no deposit required from borrowers
What impact did the availability of cheap loans have on the housing market?
A: It increased demand for houses, leading to a rapid rise in house prices
How did higher house prices affect first-time buyers?
A: First-time buyers had to save more for deposits and faced higher monthly mortgage repayments
How did homeowners benefit from rising house prices?
A: They used the increased value of their homes to secure larger deposits on new homes or to withdraw equity
What is meant by “equity” in the context of housing?
A: Equity is the difference between the market value of a property and the outstanding mortgage balance
How did homeowners access their equity?
A: Through “equity loans” or “mortgage equity withdrawals” secured on the increased value of their property
Why were banks and building societies willing to lend based on house equity?
A: They believed the risk of loss was low, as they could repossess and sell the house at an increased price if the borrower defaulted
What role did property investment play in people’s financial planning?
A: Buying a house became a way to provide financial security for retirement and to pass wealth to future generations
How did some people use equity loans, and why was this considered risky
Some used equity loans to improve their properties, which could increase property value. Others used them for non-essential expenses like holidays, furniture, or cars. This was risky because paying interest on a secured loan over 15-25 years often made these purchases much more expensive in the long run
Why were equity loans popular compared to unsecured loans?
A: Interest rates on equity loans were lower than those for unsecured loans like personal loans or hire purchase agreements, making them a cheaper way to borrow money
What additional financial products became popular during the housing boom?
A: Borrowers often purchased life assurance to protect their families financially and took out building and contents insurance to secure their homes
What triggered the global financial crisis of 2007-08?
A: The collapse of the US sub-prime housing market, where mortgages were offered to those least likely to repay, leading to widespread defaults. This caused a dramatic fall in house prices in the US, UK, and Europe from 2006 to 2009
How did central banks respond to the 2007-08 financial crisis?
A: Central banks in the US, UK, and Europe drastically cut interest rates to mitigate the crisis and reduce the cost of borrowing, aiming to avoid a deep economic recession
Why didn’t falling house prices after the crisis increase demand?
A: Despite lower prices, stricter lending criteria (the “credit crunch”) made it difficult for people to obtain mortgages, reducing their ability to buy houses
What measures did lenders introduce during the “credit crunch”?
A: - Reduced loan-to-value ratios to 75% or less.
• Limited mortgage income multiples to three times gross salary.
• Tightened credit scoring procedures
What was the impact of the “credit crunch” on prospective homebuyers?
A: People who could no longer secure mortgages either had to withdraw from buying houses or delay their plans until lending criteria eased in 2013
How did the COVID-19 pandemic impact UK house prices in 2020?
A: UK house prices rose at the fastest rate in four years due to the government temporarily scrapping stamp duty land tax for most buyers
What factors were expected to cause house prices to fall again after 2020?
A: The reinstatement of stamp duty and continued economic uncertainty caused by COVID-19 and enforced lockdowns
How were low borrowing costs expected to influence the housing market during the pandemic?
A: Low interest rates were intended to counterbalance falling prices and boost the housing market
How does a decline in house buying affect the broader economy?
A: It reduces demand for new builds, furniture, and services provided by professionals like builders, plumbers, electricians, estate agents, and surveyors, potentially leading to job losses
What is “negative equity,” and how does it affect homeowners?
A: Negative equity occurs when the amount owed on a mortgage exceeds the market value of the property. Homeowners in this situation face significant financial strain, especially if they default and are forced to sell their property at a loss.
How did the Bank of England help borrowers during the financial crisis?
A: By cutting interest rates significantly, enabling many mortgage holders to stay up-to-date with payments and avoid arrears
What was a typical reaction of people to financial crises, especially regarding their personal finances?
A: Most people aimed to reduce personal debts (mortgages, loans, credit cards), build emergency funds, avoid taking on new debts, and reassess their spending priorities
What happens when a homeowner defaults on their mortgage in a negative equity situation?
A: They may lose their home through repossession and still owe money to the lender if the forced sale doesn’t cover the outstanding debt
What are the consequences of repossession on individuals?
Answer:
1. Loss of homes.
2. Negative equity impact: If property values drop, individuals may owe more than the property’s worth.
3. Credit history damage: Identifies individuals as a bad credit risk, making it harder to secure future loans or mortgages
How do rising interest rates affect borrowers?
Answer:
1. Banks and building societies increase borrowing rates, leading to higher mortgage and loan payments.
2. Borrowers face greater financial strain, particularly if they have significant debt
How do rising interest rates affect savers?
Answer:
1. Higher interest rates benefit savers as banks offer increased returns on deposits.
2. Retired individuals often benefit since they rely on savings for income
How do higher interest rates influence people’s financial behavior?
Answer:
• Encourages saving over spending, reducing overall consumer demand and prices.
• This supports the Bank of England’s goal of controlling inflation through monetary policy
What is the effect of rising interest rates on investors?
Answer:
1. Stock market prices may fall as borrowing becomes more expensive for companies.
2. Investment returns might be less attractive compared to the rising interest rates on savings
What is the Bank of England’s objective when raising interest rates?
Answer:
To reduce borrowing costs, thereby decreasing consumer and corporate spending. This helps control inflation and stabilize the economy
How do rising interest rates influence share prices?
Answer:
1. Higher interest rates increase borrowing costs:
• Reduces consumer spending and demand.
2. Corporate profits are squeezed:
• Lower sales revenues and higher costs reduce profitability.
3. Impact on share demand:
• Investors prefer savings products with better interest returns.
• Demand for shares falls, causing share prices to drop
How does a fall in the stock market affect individuals and businesses?
Answer:
1. Direct impact on investors:
• Those with shares or collective investments (e.g., unit trusts, OEICs) experience a reduction in wealth.
2. Indirect impact on others:
• Pension funds and insurance company investments are negatively affected.
• This can influence the broader economy and financial security
What are guaranteed growth or guaranteed capital plans, and how do they work
- Investment structure:
• Linked to stock market performance over a set period.- Stock market rises:
• Investors get their money back plus growth based on how much the stock market increases. - Stock market falls:
• Investors either get back their original investment (guaranteed capital) or original investment plus a small guaranteed growth amount (e.g., 4%).
- Stock market rises:
Key Risk:
• These plans are not covered by the Financial Services Compensation Scheme (FSCS).
• If the bank fails, investors risk losing their money.
What are the four main sources of demand in the UK economy?
Answer:
1. Consumer Demand:
• Spending by individuals on goods and services.
• Funded by incomes, savings, and borrowings.
2. Corporate Demand:
• Spending by businesses on goods and services.
• Funded by revenue, savings, borrowing, and capital injections from investors.
3. Government Spending:
• Spending by national and local governments on goods and services.
• Funded by tax revenues and government borrowing.
4. Demand for Exports:
• Goods and services produced in the UK but sold overseas
Answer:
1. Consumer Demand:
• Spending by individuals on goods and services.
• Funded by incomes, savings, and borrowings.
2. Corporate Demand:
• Spending by businesses on goods and services.
• Funded by revenue, savings, borrowing, and capital injections from investors.
3. Government Spending:
• Spending by national and local governments on goods and services.
• Funded by tax revenues and government borrowing.
4. Demand for Exports:
• Goods and services produced in the UK but sold overseas
What is one of the government’s key roles in managing the economy?
Answer:
• Objective: Maintain full employment and low inflation.
• Actions:
• When inflation rises above the 2% target, interest rates are increased to reduce consumer and corporate spending, putting downward pressure on prices.
• When prices are stable, but unemployment rises, interest rates are reduced to encourage borrowing and spending, increasing demand in the economy.
• This process is known as monetary policy
How does the government use monetary policy to influence the economy?
Answer:
1. Inflation control:
• Higher interest rates reduce spending, lowering inflation.
2. Economic stimulation:
• Lower interest rates encourage borrowing and spending, boosting demand and reducing unemployment.
Why do rising interest rates cause problems for borrowers?
A: Rising interest rates increase the cost of borrowing, making mortgage payments and other loans more expensive
How do rising interest rates benefit savers?
A: Banks and building societies increase the interest rates paid on savings, providing savers with better returns
Who benefits the most from rising interest rates on savings, and why?
A: Retired people and those relying on savings for income benefit the most, as they gain higher returns on their savings
What is the effect of higher interest rates on people’s attitudes toward saving and borrowing?
A: Higher interest rates encourage people to save more and borrow less, reducing spending and contributing to downward pressure on demand and prices
How can changes in interest rates affect investors and the stock market?
A: A rise in interest rates can lead to a fall in stock market prices, as borrowing costs increase and companies face higher expenses
What is the Monetary Policy Committee’s (MPC) aim when it increases the Bank Rate?
A: The MPC aims to reduce consumer spending and corporate borrowing, helping to control inflation and economic growth
What happens to corporate profits and share prices when sales revenues fall and costs rise?
A: Corporate profits decrease, making shares less attractive to investors, especially when savings products offer good interest rates. This leads to a fall in demand for shares and lower share prices across the board
How does a fall in the stock market affect individuals and businesses?
A: A stock market decline reduces the wealth of individuals and businesses, particularly those with direct investments in shares or collective investments
How are pension funds and insurance company fund investments affected by stock market declines?
A: Indirect exposure to stock market declines through pension funds and insurance company fund investments can lead to significant wealth reduction for many individuals.
What effect did the global financial crisis have on investors’ attitudes toward risk and investment?
A: Many people lost faith in investment products and began seeking safer options like savings accounts that offered secure returns and reduced exposure to market volatility
How did financial providers respond to changes in consumer attitudes following the financial crisis?
A: Providers developed “structured products,” designed to offer a safer home for savings while still allowing individuals to benefit from share price growth
Why might investors find savings products more attractive than shares during periods of high interest rates?
A: Savings products offer higher returns with lower risk compared to the potential losses in the stock market when interest rates rise and share prices fall
What are guaranteed growth or guaranteed capital plans, and how do they work?
A: These are complex investments using derivatives that offer returns linked to the stock market over a set period:
• If the stock market rises: Investors get their money back plus growth based on the stock market increase.
• If the stock market falls: Investors get their original investment back or a minimum growth amount, e.g., 4%
What is a key risk of guaranteed capital or growth plans?
A: These plans are not covered by the
FSCS, so investors risk losing their money if the bank providing the product goes bust
What is economic activity, and why is it important?
A: Economic activity refers to the level of demand for goods and services in an economy. It is vital for maintaining low unemployment, balanced growth, and acceptable inflation levels
What are the four main sources of demand that fuel economic activity in the UK
- Consumer demand: Spending by individuals, funded by incomes, savings, and borrowings.
- Corporate demand: Spending by businesses, funded by revenue, savings, borrowing, and capital injections.
- Government spending: Expenditure by national/local governments on goods and services, funded by taxes and borrowing.
- Demand for exports: Goods and services produced in the UK and sold overseas
What are the government’s key economic objectives?
A: To achieve and maintain:
• Full employment
• Low inflation
How does the government use interest rates to control inflation and unemployment?
A:
• To control inflation: When inflation exceeds the 2% target, interest rates are increased to reduce spending and corporate demand, putting downward pressure on prices.
• To reduce unemployment: When prices are stable, interest rates may be lowered to make borrowing cheaper, encouraging consumer and corporate spending
How does the government use interest rates to control inflation and unemployment?
A:
• To control inflation: When inflation exceeds the 2% target, interest rates are increased to reduce spending and corporate demand, putting downward pressure on prices.
• To reduce unemployment: When prices are stable, interest rates may be lowered to make borrowing cheaper, encouraging consumer and corporate spending
What is “monetary policy”?
A: It is the manipulation of interest rates to manage inflation, consumer demand, and unemployment levels.
Who was Mark Carney, and what significant action did he take as Governor of the Bank of England in 2013?
A: Mark Carney, former Governor of the Bank of Canada, became the Governor of the Bank of England in July 2013. One of his first actions was issuing a “forward guidance” statement to clarify the Bank’s expectations for future interest rates
What did the Bank of England’s “forward guidance” statement link interest rates to?
A: It linked interest rates to the unemployment rate and inflation. Carney stated that the Bank rate would not increase until unemployment fell to 7%, provided inflation remained stable and close to the 2% target
What happened in January 2014 regarding the “forward guidance”?
A: The Bank of England chose not to increase the Bank rate even though unemployment had fallen to 7% and inflation was at the 2% target. This demonstrated the Bank’s flexibility in considering broader economic conditions.
What is fiscal policy, and why is it important?
A: Fiscal policy involves managing government taxation, borrowing, and spending. It’s crucial for influencing economic activity, addressing deficits, and managing debt
What does it mean for a government to run a budget deficit?
A: A budget deficit occurs when the government spends more than it collects in taxes. The shortfall is financed through borrowing, often by selling government bonds or gilts
How do government borrowings contribute to overall debt?
A: Borrowings not immediately repaid are added to the government’s overall debt, which accumulates over time if deficits persist
What are the typical aims of government fiscal policies?
A: Governments usually aim to balance the budget (equal spending and tax revenue) or achieve a surplus (tax revenue exceeding spending).
How did low interest rates influence government borrowing before the financial crisis?
A: Governments, like consumers, were encouraged by low interest rates and easy credit to borrow more, which led to increasing budget deficits and higher debt levels
What areas were significantly financed by government borrowings during this period?
A: Borrowings were heavily used to expand spending in areas like education, public transport, and healthcare
What was the Labour government’s stance on borrowing and public spending from 1997 to 2010?
A: The Labour government believed it was right to increase borrowing and debt to improve public services and maintain full employment. Borrowing accelerated after the global financial crisis and recession of 2007
What were the main factors driving increased government borrowing during the financial crisis under Labour
A:
1. The need to “bail out” failing banks to prevent systemic collapse.
2. Rising unemployment, leading to higher claims for state benefits like Jobseeker’s Allowance and Housing Benefit.
3. Decreased government revenues due to reduced income tax, National Insurance contributions, VAT, and stamp duty
What was Labour’s economic plan during the 2010 general election?
A: Labour planned to:
1. Gradually reduce borrowing while maintaining public spending to combat recession.
2. Boost employment to lower welfare dependency and increase tax revenues
Q: What was the outcome of the 2010 general election, and how did it affect government policy?
A: No party won outright, leading to a alliance between the Conservatives and Liberal Democrats. The coalition adopted Conservative-led austerity measures
What were the consequences of austerity policies introduced by the coalition government?
A:
1. Substantial spending cuts, leading to job losses in the public sector.
2. Total government debt continued to grow, as cuts were insufficient to reduce deficits significantly
Why can’t debt levels be reduced without a surplus?
A: Debt can only decrease when the government achieves an annual budget surplus, which provides funds to pay off existing debts
How does high employment influence individuals’ lifestyles and financial behaviors?
A: High employment promotes a high-consuming lifestyle and consumer culture. People with secure jobs are more likely to save money if they have surplus income after meeting their needs and wants. They feel confident, making their aspirations less influenced by fear for the future
What financial products are people more likely to seek when they have secure jobs?
A: People with secure jobs often explore financial products such as savings accounts, overdrafts, credit cards, mortgages, pensions, and insurance
What defines “high unemployment,” according to the Office for National Statistics (ONS)?
A: High unemployment includes those who have been unemployed for over 12 months, relying on state benefits for income and unable to afford financial products despite needing them
How does high unemployment affect financial priorities?
A: During high unemployment, financial priorities shift toward:
1. Protection: Insurance against risks such as losing a job.
2. Security: Low-risk savings products to build a “rainy day” fund
What impact does high unemployment have on the financial confidence of individuals?
A: Even those with jobs feel uncertain about the future, leading them to avoid risky investments and focus on financial safety and stability.
Why are changes in the global economy and exchange rates more significant now than 100 years ago?
Answer: Changes are more significant due to globalisation, which has integrated the economies of individual countries worldwide, leading to greater interdependence in financial markets and exchange rates.
How did the 2007–08 global financial crisis illustrate the impact of globalisation?
Answer: The collapse of the US sub-prime mortgage market affected not only US banks but also international financial institutions due to interconnected investments in collateralised mortgage obligations (CMOs). This showcased how globalisation links financial systems worldwide
How were European banks affected by the financial crisis?
Answer: Many required government bailouts due to severe losses, as governments had to borrow heavily to support them. This increased public debt and triggered a crisis in countries using the euro
What was the impact of the financial crisis on Eurozone countries?
Answer: Countries like Greece, Ireland, Spain, Italy, and Portugal faced massive public sector debts, with some needing EU and international loans to stabilize their economies. Greece, in particular, faced near bankruptcy
How do economic policies adopted by foreign governments and financial institutions affect personal financial planning?
Answer: Such policies can impact national economies and individuals’ personal finances by influencing public sector debts, exchange rates, and the stability of financial institutions
How does globalisation illustrate the impact of exchange rates?
Answer: Globalisation increases the regularity of cross-border transactions, including travel, imports, and exports of goods and materials. Exchange rate fluctuations, particularly between currencies like the euro (€), the US dollar ($), and the pound sterling (£), significantly impact the cost of such transactions for individuals and businesses.
What services do financial providers offer to individuals and businesses to manage exchange rates
- Foreign exchange services: For holiday spending or prepaid currency cards.
- Buy-back guarantees: Allow customers to sell unspent currency at the same rate they purchased it.
- Global credit and debit cards: Accepted abroad for convenience.
- Business products: To manage exchange rate risks
How do fixed and floating exchange rates differ
• Fixed exchange rates: Governments set currency values and intervene to maintain them.
• Floating exchange rates: Currency values are determined by market demand and supply. Most countries now use floating exchange rates
How can governments use currency devaluation during economic downturns?
Answer: Governments may devalue their currency by selling it at a lower price in international markets. This increases export competitiveness by reducing costs for foreign buyers
What are the main drawbacks of currency devaluation
- Increased costs for imports, leading to inflation.
- Reduced purchasing power of domestic currency abroad.
- Potential for long-term economic instability if overused
How do interest rates interact with exchange rates in a floating system
When UK interest rates are higher than in other countries, foreign investors are incentivised to buy UK government and corporate bonds. To invest, they must exchange foreign currencies for pounds, increasing demand for the pound and strengthening its value in the exchange market
Why should individuals be cautious when taking on debt in a foreign currency
Foreign currency debt carries significant exchange rate risks. If exchange rates fluctuate, repayment amounts can increase. Individuals must include contingency plans in their financial strategies to address potential changes in currency strength
What considerations should individuals make when investing in foreign currencies
- Profits from investments (e.g., shares bought on foreign stock exchanges) could be negated by adverse exchange rate movements.
- Investments must account for future fluctuations in the exchange rate to avoid financial losses
What are social factors in the context of financial services?
Answer: Social factors include demographic changes, employment levels, homeownership rates, and cultural shifts. These trends influence the demand for goods, services, and financial products among individuals
How do cultural factors affect financial behaviour
• Cultural backgrounds shape individuals’ beliefs, values, and attitudes, which guide their needs, wants, and aspirations.
• Peer group influences and societal norms determine purchasing decisions, including the choice of financial products and suppliers
Why are cultural changes significant for financial service providers?
Answer: Cultural changes impact consumer preferences and behaviour, necessitating adaptations in the products and services offered by financial institutions to meet evolving needs and demands
Why must financial service providers consider multiculturalism in the UK
Large sections of the UK population have family origins outside the UK, leading to values, attitudes, and beliefs that differ from the mainstream cultural norms. People with such backgrounds may struggle to identify with traditional UK practices, and they risk being excluded from financial products and services. Providers must account for cultural differences in designing, marketing, and delivering these products
How do religious views influence perspectives on lending and borrowing
• Many religions accept lending and borrowing if lenders treat borrowers fairly and help them avoid unsustainable debt.
• Others see debt as something to avoid entirely, believing it is wrong to lend money with interest or to pay interest on borrowed money.
What does Islamic law (Sharia) say about interest (Riba) and borrowing
• Under Sharia law, charging or paying interest (Riba) is forbidden.
• If an urgent need arises for someone to pay for something and they cannot afford it, they may:
• Borrow from family or friends.
• Use Sharia-compliant financial products that do not involve interest
How have Islamic banks operated in the UK to meet Sharia-compliant needs
• There are five stand-alone Islamic banks offering Sharia-compliant home purchase plans, loans, and savings.
• Some mainstream banks, like Lloyds and HSBC, attempted to develop Sharia-compliant products but discontinued them due to a lack of commercial success
How do Sharia-compliant home purchase plans work
• Instead of technically borrowing money, the bank purchases the property on behalf of the customer.
• The customer then repays the bank in instalments.
• Two common types of Sharia-compliant home purchase plans are:
• Ijara: The bank leases the property to the customer.
• Murabaha: The bank sells the property to the customer at a marked-up price
What financial and non-financial activities are prohibited in Islam
• Islam prohibits drinking alcohol and gambling in all forms.
• This extends to investing in the stock market if it involves gambling-like risks.
• Muslims must also avoid investment products that link to gambling, such as:
• Investment funds
• Pensions
• Life assurance policies
What trend in fertility rates in Europe, including the UK, has been observed?
Answer: Fertility rates are falling, with women having fewer children than before. By 2009, women born in 1964 in the UK had an average of 1.9 children, compared to 2.4 children for their mothers’ generation (women born in 1937)
How does the childlessness rate differ between women born in 1964 and 1937?
Answer: 20% of women born in 1964 remained childless, compared to only 12% of women born in 1937
Why is the decline in fertility rates significant for population stability?
Answer: The declining fertility rates, with fewer children per woman and higher childlessness, result in a figure too low to maintain a stable population size
What has been the role of net migration in the UK’s population growth, despite falling birth rates?
Answer: Since the late 1990s, net international migration to the UK has become increasingly important for population growth, compensating for the declining birth rates
How has the role of mothers in the workforce impacted financial planning?
Answer: Most mothers now work, leading to a demand for financial products and services tailored to their needs. Independent financial adviser (IFA) practices, often run by women, specialize in addressing these needs in modern society
What impact do smaller family sizes have on children and teenagers’ financial habits
With smaller families, parents can spend more on each child. Children and teenagers consume more goods and services and often have income from pocket money or part-time jobs. This requires specialized financial education to help them manage budgets and cash flow effectively over different time horizons
What are technological factors, and how do they influence financial services?
Answer: Technological factors include automation, technological change, and outsourcing. These shifts can reduce costs, improve service quality, and enable product innovation in financial services
What is automation in the context of technological factors, and how does it function?
Answer: Automation refers to computers performing tasks automatically that were previously done by people. It uses software to follow a set of rules and is best suited for rule-based tasks that do not require judgment or discretion.
How do computers handle borderline decisions in automated processes?
Answer: Computers can make straightforward decisions based on rules and flag borderline cases for human judgment. For example, credit scoring systems automate decisions about lending but refer borderline cases to senior management for final approval
How do some computers “learn,” and what is the benefit of this capability?
Answer: Computers can “learn” by using past data to make better future decisions. This is particularly valuable in industries like financial services, where systems process large amounts of data and build experience to improve customer relationship management (CRM) and risk management systems
What is the significance of credit scoring systems in financial services automation?
Answer: Credit scoring systems automate lending decisions by separating clear-cut cases from complex ones. They streamline processes, reduce human workload, and ensure that only complicated cases are escalated for human decision-making
How do financial institutions use customer data?
A: They process large amounts of information about customers’ transactions and balances to detect potential issues like declining account balances or increasing overdraft amounts. These systems can alert banks before an account falls into arrears
What are two key results of automation in the finance industry
- Increased speed and efficiency: Customers can access real-time updates about their accounts or share markets 24/7 at a low cost.
- Less face-to-face advice and sales: Automated systems reduce personal interactions, limiting opportunities for customers to discuss financial needs with advisers. Many customers never meet or even speak directly with bank staff
How has technology changed relationships between financial institutions and customers?
A: Relationships now seem less personal due to the use of the internet, email, and smartphones. However, providers gather large amounts of data on customers’ needs and habits, allowing them to offer tailored products and services
What is the “digital divide,” and what percentage of UK households had internet access in 2020?
A: The “digital divide” refers to the gap between those who are computer literate and have internet access and those who do not. In 2020, 96% of households in Great Britain had internet access, leaving 4% without everyday access.
How has technological development influenced customer-provider relationships in finance?
A: E-commerce has revolutionized these relationships by enabling electronic links between providers and customers, often through smartphones or tablets. It has also facilitated globalization and strengthened the interdependence of financial providers and markets
What has been the single most fundamental factor in the globalization of finance?
A: The computer revolution, which has driven technological advancements in financial services and the way people manage their finances
What are some environmental problems caused by human activity
Human activities such as product manufacturing, energy consumption, and resource extraction lead to:
• Pollution from waste production.
• Greenhouse gas emissions contributing to global warming.
• Melting ice caps, rising sea levels, and destruction of rainforests.
• Depletion of non-renewable resources
Why must environmental factors be considered in personal finance?
A: Financial products and services have environmental impacts. Regulators, governments, and NGOs encourage providers to:
• Offer environmentally friendly products.
• Consider Environmental, Social, and Governance (ESG) issues when lending and investing
How are financial providers addressing environmental concerns
• Banks are under pressure to favor companies using green technology or sustainable practices.
• Insurance companies may charge lower premiums for fuel-efficient or low-carbon vehicles.
• Fund managers and investment bankers evaluate the environmental records of the companies they invest in.
What is greenwashing, and what criticisms does it face
Greenwashing is when companies falsely market products as environmentally friendly. Critics argue:
• It is often just superficial branding.
• It raises costs for providers, potentially leading to higher prices for consumers.
• Investing in green companies doesn’t always guarantee the best returns for clients
How did sustainable funds perform compared to traditional funds in 2020
Despite economic uncertainty during COVID-19, sustainable funds outperformed traditional funds, showing reduced investment risks
How have perceptions of environmental issues affected personal finances recently?
A:
• They have had both positive and negative impacts.
• Increased focus on sustainability has driven changes in how financial products are designed and marketed
What legal factors affect financial providers and consumers
Legal factors include laws on:
• Discrimination
• Consumer protection
• Employment
• Health and safety
These laws impact how financial companies operate, their costs, pricing, and demand for their products.
Name the key pieces of UK legislation affecting financial providers
- Financial Services and Markets Act 2000
- Consumer Credit Acts 1974 and 2006
- Banking Act 2009
- Financial Services Act 2012
What does the Banking Act 2009 establish?
A: It created a permanent statutory regime for managing failing banks and introduced new governance provisions for the Bank of England
What is the Financial Services Act 2012, and what does it amend?
A: It amends the:
• Bank of England Act 1998
• Financial Services and Markets Act 2000
• Banking Act 2009
It also introduced provisions for financial services and markets regulation
What other legal areas must financial providers comply with
- Company Law: Governs how companies are set up, run, and report their affairs.
- Employment Legislation: Covers rules on treating workers and their rights.
- Tax Laws: Governs taxes for individuals and businesses, including how they are calculated.
- Proceeds of Crime and Anti-Terrorism Legislation: Prevents money laundering and terrorism financing.
- Accounting Standards: Ensures compliance with International Financial Reporting Standards (IFRS)
How are consumers protected under UK law?
A: Consumer protection laws grant individuals rights, such as returning faulty goods for a refund
Name at least five key pieces of primary and secondary legislation relevant to financial services
- Courts and Legal Services Act 1990
- Competition Act 1998
- Consumer Credit Acts 1974 and 2006
- Consumer Protection from Unfair Trading Regulations 2008
- Financial Services and Markets Act 2000
List five more relevant acts or regulations in the context of financial services
- Consumer Protection (Distance Selling) Regulations 2000
- Enterprise Act 2002
- Sale of Goods Acts 1979 and 2002
- Consumer Rights Act 2015
- Finance Act 2016
What major change happened to the Office of Fair Trading (OFT) and the Competition Commission in April 2014?
A: Both the OFT and the Competition Commission were replaced by the Financial Conduct Authority (FCA) and the Competition and Markets Authority (CMA). This was part of reforms under the Enterprise and Regulatory Reform Act 2013
What are the primary responsibilities of the CMA
- Investigating mergers that could restrict competition.
- Conducting studies and investigations in entire markets with competition or consumer problems.
- Bringing criminal proceedings against businesses or individuals involved in anti-competitive behavior.
- Enforcing consumer protection legislation to protect against unfair trading practices.
- Cooperating with sector regulators and encouraging them to use competition powers
What are the Consumer Protection (Distance Selling) Regulations commonly referred to as?
A: The Distance Selling Regulations
Which two new agencies took over responsibilities from the Office of Fair Trading in 2014?
A:
1. Financial Conduct Authority (FCA)
2. Competition and Markets Authority (CMA)
Why is the Financial Services and Markets Act 2000 significant in financial legislation?
A: It is one of the most comprehensive acts regulating financial services, covering the authorization and conduct of businesses within the sector.
What key change did the Enterprise and Regulatory Reform Act 2013 bring?
A: It led to the creation of the Competition and Markets Authority (CMA) and redistributed enforcement responsibilities previously held by the OFT
How does the CMA protect consumers?
A: By enforcing consumer protection legislation against unfair trading practices and ensuring fair competition in the market
What aspect of consumer protection is directly addressed by the Consumer Protection from Unfair Trading Regulations 2008?
A: They address practices and market conditions that make it difficult for consumers to choose products that meet their needs. This includes investigating cases where consumers suffer due to a lack of effective competition in the market
What aspect of consumer protection is directly addressed by the Consumer Protection from Unfair Trading Regulations 2008?
A: They address practices and market conditions that make it difficult for consumers to choose products that meet their needs. This includes investigating cases where consumers suffer due to a lack of effective competition in the market
What can consumers do if sold a financial product or service in breach of the Distance Selling Regulations or Consumer Rights Act?
A: They can file complaints, benefit from “cooling-off” periods to change their minds about purchases, and seek assistance from local trading standards offices for individual cases of bad practice
What financial protection services are available to consumers of financial services?
A:
1. Financial Services Compensation Scheme (FSCS)
2. Financial Conduct Authority (FCA)
3. Financial Ombudsman Service (FOS)
What recourse do consumers have if all else fails in resolving issues with financial providers?
A: Consumers can bring a civil action against the provider. The outcome of initial cases establishes judicial authority, increasing the chances of success for other dissatisfied consumers
How did deregulation in the 1980s change financial services?
A: It removed legal constraints that prevented building societies and banks from competing in the same markets. Building societies could only provide mortgages and savings accounts, while banks handled loans and current accounts
What were the major changes brought about by deregulation?
A:
1. Building societies could borrow money from money markets and compete with banks.
2. Many building societies converted into banks.
3. Banks and building societies now offer similar services like mortgages, loans, savings, and current accounts
Why was deregulation considered beneficial in financial markets?
A: It increased competition, which generally helped lower prices for consumers
How did deregulation contribute to financial instability?
A:
1. It allowed aggressive sales tactics and riskier investment activities.
2. Deregulation was linked to mis-selling financial products and the global financial crisis of 2007–08.
What distinguishes today’s financial services marketplace compared to before deregulation?
A: There is little difference between the services offered by banks and building societies, with both providing a wide range of financial products
How did the global financial crisis highlight issues with deregulation?
A: Mis-selling of financial products, fixing interest rates, and risky banking practices were seen as consequences of deregulation, leading to calls for stricter regulation.
How did the global financial crisis highlight issues with deregulation?
A: Mis-selling of financial products, fixing interest rates, and risky banking practices were seen as consequences of deregulation, leading to calls for stricter regulation
What is the significance of the Banking Act 2009 and the Financial Services Act 2012 in financial regulation?
A: These laws marked a shift back to stricter regulation after recognizing that deregulation had been damaging, ensuring that banks and financial service providers are effectively regulated to protect consumers
When did the UK officially leave the European Union, and what are the implications for financial legislation?
A:
• The UK left the EU on 31 January 2020 (Brexit).
• The long-term effects on UK legislation remain uncertain as changes post-Brexit could modify financial and consumer protections
What forms of legislation does the European Union use, and how do they differ
- Regulations:
• Directly applicable in all EU member states as soon as they come into force.
• No variations are allowed between member states.- Directives:
• Provide a goal that each member state must achieve but allow flexibility in how the goal is implemented.
• Must be enacted into national law within a set period, usually two years
- Directives:
How do EU regulations impact member states’ legal systems?
A: Regulations are binding and uniformly applicable across all EU member countries without any need for further legislative action by individual states.
How do EU member states handle directives compared to regulations?
A:
• Directives require member states to pass their own laws to meet the directive’s goals.
• Implementation timelines and specific laws can vary between countries, but the minimum standards must be met across all states
What was the process of implementing EU legislation in the UK before Brexit?
A:
• EU regulations were directly applied in the UK.
• EU directives were incorporated into UK domestic legislation through specific laws passed by Parliament
Why did EU membership have significant implications for the UK’s financial and consumer legislation?
A:
• EU institutions made laws (regulations and directives) that member states were obligated to follow, shaping consumer protections and financial practices in the UK
What challenges exist in predicting the effects of Brexit on UK legislation?
A: Post-Brexit changes to laws are not fully known, and there may be differences in how regulations and consumer protections evolve outside of EU frameworks
Which UK laws originated from the European Union?
• The Data Protection Act 1998 and the Consumer Credit Act 2006
What change occurred to the UK’s deposit compensation limit in December 2010?
• The limit was aligned with the euro deposit compensation limit, covering all members of the European Economic Area (EEA), including EU member states, Iceland, Liechtenstein, and Norway.
What regulation replaced the UK Data Protection Act 1998 in 2018
The General Data Protection Regulation (GDPR) led to the creation of the Data Protection Act 2018
Why does European law significantly impact the financial services industry?
• The EU aims to harmonize financial regulations to protect consumers and create a single market for financial services
What is the goal of EU financial regulation?
• To allow consumers in one EU country to confidently buy financial products/services from another, knowing the provider is regulated and supervised to the same standard across the EU
How might Brexit affect UK financial services businesses?
• UK businesses dealing with EU customers may face challenges due to the new regulations and separation from the EU harmonized framework
What is a potential benefit for UK consumers after Brexit?
• Increased competition from European banks and investment firms could lead to more products and services in the UK
What are PESTEL factors?
• Political, Economic, Social, Technological, Environmental, and Legal factors that are quantifiable and measurable
What kind of data can be measured and analyzed under PESTEL?
• Interest rates, inflation/unemployment levels, house ownership, budget deficits, and debts
Who collects and publishes statistical data in the UK?
• The Office for National Statistics (ONS)
What types of data presentation methods are commonly used?
• Tables, graphs, histograms, bar charts, and pie charts
Why is analyzing data sources important?
• It helps to draw appropriate conclusions from changes or trends in quantifiable values
