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Finance Unit 4 > Topic 5 > Flashcards

Topic 5 Flashcards

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1
Q

Name 4 key Economic elements

A

Changes in interest rates
Competition
Inflation rates
Housing market

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2
Q

Name 3 key Social elements

A

Changing lifestyles
Unemployment rates
Demographic trends

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3
Q

Name 2 key Environmental elements

A

Sustainability

Green investment

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4
Q

Name 1 key Legal element

A

Legislation and regulation

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5
Q

What is the political environment

A

Government policy in relation to finances - extent to which government intervenes in the system to influence how providers sell

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6
Q

What was the political agenda before the financial crisis

A

The ‘light touch’ approach was a key feature which enabled UK to become a global financial centre as it enables banks to set their own rules without too much interference from government

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7
Q

What are 4 reasons for why financial regulation necessary?

A

Creates safer, stable and sustainable system
Promotes confidence in the system
Provides people with information
Protects consumers from misselling and financial fraud

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8
Q

3 reasons to justify the existence of financial regulation

A

Institutions must have confidence in each other due to extensive interaction
Financial system contributes lots to economy and supports jobs, if failed economy would suffer
Good regulation reduces burden on the state

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9
Q

What are the 3 regulatory costs to providers?

A

Direct cost to be paid in fees to FCA and PRA - levies to FOS and FSCS
Process of complying, means redesigning computer systems, implementing and staff time is a cost
- cost of human resources (qualified staff, retraining, training)
- system costs (changes to manuals and IT systems)
Sets limits on operation and structure of balance sheet (opportunity cost)

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10
Q

6 benefits of regulation to providers

A

Compliance means safer and sustainable system - good reputation - can borrow money in markets cheaper if high credit rating
Providers appear more ethical and more attractive
Creates law abiding culture, less fines and bad publicity
Creates culture of ethical behaviour towards customers - reduces civil law action
Providers can compete on equal terms
Benefits large banks - creates barrier to entry

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11
Q

Give 2 examples of HSBCs cost of non compliance

A

2011: £10.5million for misselling investment bonds to elderly customers - 87% of sales were unsuitable due to 5 year terms and life expectancy
2012: fined $1.9billion when found to have allowed money laundering via Mexican subsidiary

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12
Q

Explain the issues of complexity and uncertainty of regulation?

A

Rules have to be constantly updated due to large area of business covered, creates challenges for staff

Too much regulation causes stress and impacts on staff motivation
Better to improve quality, than increase quantity

Creates financial climate of uncertainty due to frequency of changes, harder to plan

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13
Q

Smaller banks find it hard to meet the cost of regulation, how have the FCA tried to reduce the barriers to entry?

A

Allowed to apply for authorisation earlier

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14
Q

What does the Information Commissioner do for consumer protection?

A

Supervises the implementation of the Data Protection Act - ensures public information is openly available and that personal information is properly protected

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15
Q

Explain the ‘traditional’ banking culture

A

Customers were values, relationships built, knew customers personally, understood situations and needs

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16
Q

What are the 2 main codes of practice, each intended to help ensure the good stand as of consumer protection?

A

The banking conduct of business sourcebook

The lending code

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17
Q

What is the Banking Conduct of Business Sourcebook?

A

Comprises rules and guidance for providers to accept deposits

Rules apply to information which must be communicated, must provide prompt, efficient and fair after sales service, and the right to cancel a product

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18
Q

What is the Lending Code?

A

Is voluntary and covers the sale of credit, but not mortgages
Sets minimum standards for dealing with borrowing customers
Such as fair advertising and regular statements of information

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19
Q

What percentage share capital government have in RBS and Lloyds Banking Group?

A

79% and 25%

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20
Q

How does inflation create uncertainty?

A

Affects real return of savings and real cost of borrowing

Higher inflation makes it harder to sell exports to a country with low interest rates

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21
Q

Explain the effects of low inflation

A

Sense of security, confident of future value of assets, firms expect demand to grow, happy to invest and borrow

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22
Q

Explain the effects of high inflation

A

Less certain, less willing to borrow, look for investments to keep ahead of inflation

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23
Q

How does higher unemployment create lower inflation?

A

Lower demand for products

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24
Q

Explain the effect of high unemployment

A

Less money spent, less demand for loans and less money saved, bad for banks, higher levels of lender debt, those who lose their jobs are more at risk of defaulting, focus on protection products

25
Q

Explain the effects of low unemployment

A

High consumer lifestyle ‘consumer culture’, enables saving of surplus income, confidence for future

26
Q

What is chronic unemployment?

A

Unemployed for 12 months, rely on state benefits and do not have resources to buy financial products, cannot easily borrow money, unable to buy consumer products, little demand for insurance

27
Q

How does high employment effect a businesses staffing costs?

A

High employment means higher costs, need to find way to minimise costs
Staffing costs are higher if service provider due to being labour intensive
Automation is increasing but still need for personal service in some industries

28
Q

Name 2 key Political elements

A

Competition

Consumer protection

29
Q

How does high unemployment effect a businesses staffing costs?

A

Reduces staffing costs, wages rise more slowly

More people available in labour market, but wont necessarily have right skills and experience

30
Q

Higher inflation during high economic activity, times of low unemployment, when inflation is low, what does that mean for unemployment?

A

Higher unemployment

31
Q

Interest rates are determined by the interaction of demand for and supply of money, The Monetary Policy Committee would raise the bank rate if they were anticipating rising inflation, what is hoped for this?

A

That higher interest rates would stabilise and reduce inflation

32
Q

When did the Governor of the BoE say he would consider increasing interest rates?

A

If unemployment fell to 7%, however, nearly at this level but no plans to raise interest as governor remains unconvinced that there has been sufficient economic growth

33
Q

What are the 6 main effects of rise in interest rates?

A

Those with variable rate mortgages will have increased repayments, difficult to manage, increased defaults

Discourages many form borrowing/banks less willing to lend, banks make less money, must find new ways to be competitive

Savers deposit more as higher returns

Rise in interest means rise in exchange rates for the pound

Businesses borrow less as high interest will squeeze profit margins, hold investment plans

Lower borrowing means less money spent in the economy - reduces rates of economic growth - rising unemployment - increased defaults

34
Q

What are 2 effects of rising interests which result in falling levels of spending and reduced economic growth and inflation, which then results in what 2 things?

A

Rising return for savers - increased demand
Rising cost to borrowers - falling demand

Rising unemployment
Rising exchange rates for sterling

35
Q

Due to increased international travel and business, what 4 things must financial providers now supply?

A

Foreign exchange services
Buy-back guarantee
Credit and cash cards which will be accepted abroad
Products to help businesses to manage exchange rate risks so they will not lose out if exchange rates move against them

36
Q

Rising exchange rates impact banks via effect on business customers, how does rising exchange rates impact imported products?

A

Makes them cheaper, importers need more payment services, foreign currency loans and trade insurance

37
Q

Rising exchange rates impact banks via effect on business customers, how does rising exchange rates impact exported products?

A

More expensive and less competitive, exporters do less well and demand fewer banking services

38
Q

Explain the housing market situation before the financial crisis

A

High demand for houses, increased prices and people borrowed against resulting equity (mortgage equity withdrawal)

39
Q

Explain the housing market situation during/after the crisis

A

Prices fell, unable to maintain payments so fall into arrears
When interest rises, will be more defaults

40
Q

Explain the Help to Buy: Mortgage Guarantee Scheme

A

Provider makes 5% deposit and provider will lend 95% of government guarantees 15% of purchasing price

41
Q

Explain the Help to Buy: Equity Loan

A

5% deposit, 20% government loan and provider lends 75%

42
Q

When the stock markets crashed in 2000, highlighted the risk and need to be careful, with this providers responded to changes by developing what 2 ideas?

A

Guaranteed products: Eg) endowment policies and other investments that promise a certain return within a set number of years

Alternative investments: investing in ways in which ordinary funds cannot - sophisticated investors, offer positive return when markets are falling but not guaranteed

43
Q

What is full social inclusion?

A

Where all members can take some responsibility for what goes on in their communities, can exercise a right of access to the information and support that they need, and have equal access to services and facilities

44
Q

For what 8 key reasons are people socially excluded?

A 
Disability
Language difficulties
Poor literacy and numeracy skills
Living in deprived area
Poverty
Homelessness
Old age
Discrimination
45
Q

What is financial exclusion?

A

Inability to access even the most basic financial services eg) not having a current account

46
Q

What are 2 main government initiatives for promoting social inclusion and financial inclusion?

A

The Money Advice Service provides clear advice on how to manage their money

A basic bank account provides simple free banking facilities

47
Q

In what 3 ways can financial providers support financial inclusion?

A

Providing products aimed at the financially excluded
Providing information on products for everyone
Promoting inclusion through education

48
Q

Financial exclusion policies often have to become part of CSR, providers must balance these demands against its obligation to earn a good return, why are financially excluded people not economically viable?

A

Their few small transactions cost more than the income they offer to the banks - not much opportunity for cross selling

49
Q

What is digital exclusion?

A

Inability to participate in a computer based society due to age, low incomes and no access

50
Q

Digital inclusions address financial exclusion via what 4 ways?

A

Allows housebound people to access online
Disabled people can get information in various suitable formats
Access for those who work unsociable hours
Access for those intimidated by sales people

51
Q

What are cultural trends?

A

Refers to the attitudes and behaviours that are characteristics of a particular social group/organisation, which derive from values and belief of the group

52
Q

How does multiculturalism affect providers as employers?

A

Have to adapt work practices to accommodate the traditions of different cultures and religions
Employing a diverse workforce helps to understand what services to use to meet their needs

53
Q

Many of the ageing population need help with their pensions and boosting their income, what 2 main ways are there of doing this?

A

Withdraw equity from property

Want long term savings accounts, equities and bonds, value depends on stock market

54
Q

Technology changes affect cost and quality of services and can also lead to product innovation, how has technology impacted data processing and storage?

A

Computers store all data, used to make decisions
Providers can implement loan criteria consistently and streamline processes, saving time and reducing cost

Consumers can manage accounts online
Help providers Increases efficiency and helps them meet responsible lending criteria

55
Q

Outline the Banking Act 2009

A

Allows regulatory authorities to resolve a distressed provider in an orderly way - reduces impact of bank failure on stability and consumers
Increased responsibilities and created Special Resolution Regime

56
Q

Outline the Financial Service Act 2010

A

Require a bank to have a recovery and resolution plan and outlines consumer protection measures and defines liability of FSCS

57
Q

Outline the Financial Services Act 2012’s 3 main provisions

A

BoE had responsibility for protecting financial stability
Created FCA, PRA and FPC instead of FSA
Created regulations for London interbank offered rate

58
Q

Outline the Financial Services (Banking Reform) Act 2013

A

Provisions for ring fencing

Finance Unit 4 (8 decks)

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