Topic 5 Flashcards
Name 4 key Economic elements
Changes in interest rates
Competition
Inflation rates
Housing market
Name 3 key Social elements
Changing lifestyles
Unemployment rates
Demographic trends
Name 2 key Environmental elements
Sustainability
Green investment
Name 1 key Legal element
Legislation and regulation
What is the political environment
Government policy in relation to finances - extent to which government intervenes in the system to influence how providers sell
What was the political agenda before the financial crisis
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
What are 4 reasons for why financial regulation necessary?
Creates safer, stable and sustainable system
Promotes confidence in the system
Provides people with information
Protects consumers from misselling and financial fraud
3 reasons to justify the existence of financial regulation
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
What are the 3 regulatory costs to providers?
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)
6 benefits of regulation to providers
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
Give 2 examples of HSBCs cost of non compliance
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
Explain the issues of complexity and uncertainty of regulation?
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
Smaller banks find it hard to meet the cost of regulation, how have the FCA tried to reduce the barriers to entry?
Allowed to apply for authorisation earlier
What does the Information Commissioner do for consumer protection?
Supervises the implementation of the Data Protection Act - ensures public information is openly available and that personal information is properly protected
Explain the ‘traditional’ banking culture
Customers were values, relationships built, knew customers personally, understood situations and needs
What are the 2 main codes of practice, each intended to help ensure the good stand as of consumer protection?
The banking conduct of business sourcebook
The lending code
What is the Banking Conduct of Business Sourcebook?
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
What is the Lending Code?
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
What percentage share capital government have in RBS and Lloyds Banking Group?
79% and 25%
How does inflation create uncertainty?
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
Explain the effects of low inflation
Sense of security, confident of future value of assets, firms expect demand to grow, happy to invest and borrow
Explain the effects of high inflation
Less certain, less willing to borrow, look for investments to keep ahead of inflation
How does higher unemployment create lower inflation?
Lower demand for products
Explain the effect of high unemployment
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
Explain the effects of low unemployment
High consumer lifestyle ‘consumer culture’, enables saving of surplus income, confidence for future
What is chronic unemployment?
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
How does high employment effect a businesses staffing costs?
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
Name 2 key Political elements
Competition
Consumer protection
How does high unemployment effect a businesses staffing costs?
Reduces staffing costs, wages rise more slowly
More people available in labour market, but wont necessarily have right skills and experience
Higher inflation during high economic activity, times of low unemployment, when inflation is low, what does that mean for unemployment?
Higher unemployment
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?
That higher interest rates would stabilise and reduce inflation
When did the Governor of the BoE say he would consider increasing interest rates?
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
What are the 6 main effects of rise in interest rates?
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
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?
Rising return for savers - increased demand
Rising cost to borrowers - falling demand
Rising unemployment
Rising exchange rates for sterling
Due to increased international travel and business, what 4 things must financial providers now supply?
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
Rising exchange rates impact banks via effect on business customers, how does rising exchange rates impact imported products?
Makes them cheaper, importers need more payment services, foreign currency loans and trade insurance
Rising exchange rates impact banks via effect on business customers, how does rising exchange rates impact exported products?
More expensive and less competitive, exporters do less well and demand fewer banking services
Explain the housing market situation before the financial crisis
High demand for houses, increased prices and people borrowed against resulting equity (mortgage equity withdrawal)
Explain the housing market situation during/after the crisis
Prices fell, unable to maintain payments so fall into arrears
When interest rises, will be more defaults
Explain the Help to Buy: Mortgage Guarantee Scheme
Provider makes 5% deposit and provider will lend 95% of government guarantees 15% of purchasing price
Explain the Help to Buy: Equity Loan
5% deposit, 20% government loan and provider lends 75%
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?
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
What is full social inclusion?
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
For what 8 key reasons are people socially excluded?
Disability Language difficulties Poor literacy and numeracy skills Living in deprived area Poverty Homelessness Old age Discrimination
What is financial exclusion?
Inability to access even the most basic financial services eg) not having a current account
What are 2 main government initiatives for promoting social inclusion and financial inclusion?
The Money Advice Service provides clear advice on how to manage their money
A basic bank account provides simple free banking facilities
In what 3 ways can financial providers support financial inclusion?
Providing products aimed at the financially excluded
Providing information on products for everyone
Promoting inclusion through education
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?
Their few small transactions cost more than the income they offer to the banks - not much opportunity for cross selling
What is digital exclusion?
Inability to participate in a computer based society due to age, low incomes and no access
Digital inclusions address financial exclusion via what 4 ways?
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
What are cultural trends?
Refers to the attitudes and behaviours that are characteristics of a particular social group/organisation, which derive from values and belief of the group
How does multiculturalism affect providers as employers?
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
Many of the ageing population need help with their pensions and boosting their income, what 2 main ways are there of doing this?
Withdraw equity from property
Want long term savings accounts, equities and bonds, value depends on stock market
Technology changes affect cost and quality of services and can also lead to product innovation, how has technology impacted data processing and storage?
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
Outline the Banking Act 2009
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
Outline the Financial Service Act 2010
Require a bank to have a recovery and resolution plan and outlines consumer protection measures and defines liability of FSCS
Outline the Financial Services Act 2012’s 3 main provisions
BoE had responsibility for protecting financial stability
Created FCA, PRA and FPC instead of FSA
Created regulations for London interbank offered rate
Outline the Financial Services (Banking Reform) Act 2013
Provisions for ring fencing
